Criminal charges in 1MDB case is a warning for banks

The criminal charges announced by the US Department of Justice in the scandal surrounding 1MDB is a cautionary tale for banks operating in Asia.
Tim Leissner, former Southeast Asia chairman of Goldman Sachs, pleaded guilty in 1MDB case
Tim Leissner, former Southeast Asia chairman of Goldman Sachs, pleaded guilty in 1MDB case

The first criminal charges announced by the US Department of Justice (DOJ) in the scandal surrounding a defunct Malaysian state fund is a cautionary tale for banks operating in Asia. The frequent allusions to Goldman Sachs in the latest DOJ documents on this fund - 1MDB - should be seen as a warning to banks not to put profits ahead of corporate governance. 

In an indictment posted on the website of the DOJ on November 1, the DOJ said: “The business culture at US Financial Institution 1, particularly in Southeast Asia, was highly focused on consummating deals, at times prioritizing this goal ahead of the proper operation of its compliance functions.”

"US Financial Institution 1" obviously refers to Goldman Sachs. 

International banks with a go-getting culture that operate in Asian countries with a reputation for corruption is a toxic combination, as the example of Goldman Sachs in Malaysia illustrates. 

The first criminal charges against its two former employees, Tim Leissner and Roger Ng, in connection with 1MDB, were announced by the DOJ in a separate statement on November 1. 

Ng, a Malaysian citizen, was arrested in his country that same day, at the request of the US. Ng is charged both with conspiring to launder money from 1MDB, and conspiring to violate the US Foreign Corrupt Practices Act (FCPA) by bribing several Malaysian and Abu Dhabi officials. Leissner, a former Southeast Asia chairman of Goldman Sachs, has pleaded guilty to two charges of money laundering and violating FCPA. 

This is the first time that the DOJ has mentioned FCPA in connection with 1MDB. The DOJ released civil complaints related to 1MDB in 2016 and 2017, but they mostly concerned alleged embezzlement, fraud and money laundering. The FCPA enables US authorities to prosecute individuals and companies for bribing officials of countries outside the US. Even non-US banks should beware of FCPA. The act covers non-US banks if they have facilities or conduct transactions in the US.  

Although Goldman Sachs has not been accused of wrongdoing, the huge scale of the bribes alleged by the DOJ will likely dent this leading bank’s reputation. The DOJ has alleged that “the promise and payment of hundreds of millions of dollars of bribes” were deployed to “obtain and retain lucrative business” for Goldman Sachs. It has also claimed that Ng, Leissner and a Malaysian financier, Low Taek Jho, popularly called Jho Low, “and others” conspired to bribe government officials in Malaysia and Abu Dhabi.

The lucrative business included 1MDB awarding Goldman Sachs the role to underwrite three issues of 1MDB bonds totaling US$6.5 billion. For this Goldman Sachs was paid US$600 million. The market regarded Goldman Sachs' fees for arranging these bond issues as unusually high, but the bank has argued that the special services required for these bonds justified the fees. 

"Banks have to be especially careful of doing deals where the fees are unusuallly high. This is bound to attract a lot of attention," said Khor Yu Leng, an independent economic consultant based in Singapore. 

“Low’s close relationships with high-ranking government officials in Malaysia and Abu Dhabi were central to the scheme.  Ng, Leissner, and others at the Financial Institution allegedly knew Low was close to these government officials, including a high-ranking Malaysian government official (Malaysian Official 1),” said the DOJ's statement.

Malaysian Official 1 refers to former Malaysian prime minister Najib Razak who now faces multiple charges related to 1MDB in his country’s courts. The fact that the DOJ documents have not named Najib and Goldman Sachs, referring to them instead as Malaysian Official 1 and US Financial Institution 1 respectively, suggests that they may not be charged by the US authorities. According to the DOJ custom, if an entity is not named, the probability of a charge is lower, but cannot be ruled out.

In a statement issued on his behalf by a public relations firms in Sydney, Australia, Jho Low continues to maintain his innocence. Najib has also publically denied any wrongdoing. 

The DOJ indictment of Leissner, also on November 1, alleges that Leissner and others concealed incriminating information from Goldman Sachs’ compliance and legal departments. This was so that these departments would not prevent Goldman Sachs from participating in lucrative transactions with 1MDB . 

Leissner conspired with other employees and agents of Goldman Sachs, including Ng and an Italian national, to “knowingly and willfully circumvent” the bank’s FCPA and accounting controls in order to do business for 1MDB. This allegation suggests more current or former Goldman Sachs executives may possibly be charged in connection with 1MDB.

A Goldman Sachs spokesman said: “The firm continues to cooperate with all authorities investigating this matter.” 

Here lies a lession for banks. It is not enough for their compliance and legal teams only to refuse to approve dubious transactions. Banks' compliance and legal teams should also double-check if their bankers are misleading them. 

To date, Goldman Sachs has not been charged in relation to 1MDB. But the scandal's effect on the bank's reputation has caused it to lose business in Malaysia. Other banks would not want to suffer a similar fate. 


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