Goldman Sachs Cops $3 Billion Deal to Avoid Charges on Massive 1MDB Fraud

Skirting any criminal liability for the notorious 1MDB scandal, Goldman Sachs will pay $2.9 billion to settle charges over its involvement.

Chairman and CEO of Goldman Sachs David Solomon speaks during the World Bank/IMF Annual Meetings in Washington last year. (AP Photo/Jose Luis Magana, File)

MANHATTAN (CN) — After years of claiming innocence in the face of potential litigation, Goldman Sachs agreed Thursday to pay nearly $3 billion to close the book on its involvement in the massive 1MDB scandal.

The deal, which reportedly includes $600 million in disgorgement and a whopping $2.3 billion in fines sprinkled among various federal agencies, allows Goldman Sachs and its executives evade additional criminal prosecution in the United States. 

In pleading guilty, the investment bank publicly admitted Thursday that its subsidiary “knowingly and willingly” violated the Foreign Corrupt Practices Act by paying $1.6 billion in bribes to foreign officials. The deferred prosecution agreement with the Justice Department does not touch the parent company, with only Goldman Sachs’ subsidiary in Malaysia forced to admit guilt.

During a press conference immediately after the plea, Acting Assistant Attorney General Brian Rabbit noted that the scheme was “focused on Malaysia,” and that it made sense to focus on the Goldman Sachs’ subsidiary because of that.

Rabbit called the settlement “historic” and the largest monetary penalty ever paid to the U.S. government in a foreign bribery matter. 

“Senior Goldman bankers played an essential role in this scheme,” while other bank personnel “allowed the scheme by overlooking or ignoring a number of clear, red flags,” the prosecutor said.

“On paper,” he added, the plea agreement includes “serious and significant consequences for the offense.”

While the Justice Department acknowledged “other personnel” at Goldman Sachs allowed the scheme to proceed, Rabbit would not comment on whether additional criminal cases would be made against those employees.

A spokesman for the U.S. Attorney General for the Eastern District of New York, which had spearheaded the investigation, did not immediately clarify whether future criminal prosecutions are off the table.

Goldman Sachs CEO David Solomon said in a statement that “we are pleased to be putting these matters behind us.” 

The bank’s board has announced it will claw back $174 million in compensation to current and former senior managers. Solomon, as well as the current CFO and COO, will also have their compensation reduced by $31 million for 2020.

Solomon took over Goldman Sachs two years ago, well after the 1MDB scandal had already occurred.

The $2.9 billion fine is not the only punishment Goldman Sachs faces. On Thursday, Hong Kong fined one of the bank’s subsidiaries $350 million for its role in the scandal, the highest fine ever imposed by the city’s securities regulator.

“1MDB’s willingness to pay such high fees to Goldman Sachs as sole arranger and underwriter, and the engagement of Goldman Sachs for all three offerings without going through a competitive process, should have raised questions about how the business was obtained from 1MDB, the reasonableness of the mandates, and whether the circumstances leading to such business raised any suspicions of bribery or other illicit conduct,” Hong Kong’s Securities and Futures Commission said in a statement

In Abu Dhabi, however, Goldman Sachs was able to skirt liability after a state-owned petroleum company dropped a bribery complaint against the investment bank related to the 1IMDB fraud on Wednesday.

Billions of dollars were stolen from the sovereign wealth fund 1Malaysia Development Berhad in the underlying 1MDB fraud, which involved the country’s ex-prime minister, Najib Razak, as well as members of his inner circle.

Goldman’s role in the scheme involved helping to arrange $6.5 billion of bond issues, reportedly reaping up to $600 million in fees from the bogus deals. More than $2.7 billion of the money were siphoned out of the fund into the pockets of Najib and other well-connected Malaysians.

The fallout from the scandal did more than take down Najib as prime minister. It also put three of Goldman Sachs’ subsidiaries in regulators’ sights and tarnished the investment bank’s reputation.

A former Goldman executive, Tim Leissner, pleaded guilty to bribery and money laundering conspiracy charges. He is banned for life from Singapore’s securities industry, and he has forfeited more than $43 million.

Najib, who had served as the fund’s chairman during the fraud, was sentenced to 12 years in jail after being convicted of all seven charges against him. 

The alleged mastermind behind the scheme, Malaysian businessman Low Take Jho, is an international fugitive and is thought to have personally stolen more than $4 billion from the fund. 

Goldman initially pleaded not guilty to charges in Malaysia. After preparing to fight the case in court starting next month, however, the bank settled over the summer.

All told, the investment bank has now paid or agreed to pay more than $5 billion in fines related to the scandal. In August, Goldman paid $3.9 billion to the Malaysian government — including $2.5 billion in fines — in exchange for all criminal proceedings against the firm and its executives being dropped.

Singapore reportedly is still seeking additional fines against Goldman Sachs.

The 1MDB scandal, one of the biggest in the history of the financial services industry, involved salacious details. Some of the money was allegedly spent on posh apartments in Beverly Hills, a Picasso painting given to Leonardo DiCaprio and a lavish celebrity-filled birthday party at which Britney Spears jumped out of a cake.

Some of the money also helped fund “The Wolf of Wall Street” film.

Goldman Sachs allegedly became involved with the fund in 2012, when it met with 1MDB officials in Hong Kong to hash out the lucrative bond deal. 

Emphasizing the bank’s limited cooperation, officials said the penalties for Goldman Sachs were reduced only slightly from what they could have been.

To wit, the bank “significantly delayed producing relevant evidence, including recorded phone calls” where executives and control function personnel discussed bribery and other misconduct, the Justice Department said.

Thursday’s resolution includes deferred prosecution for three years and six months. During that time, Goldman Sachs must comply with numerous disclosure requirements, including immediately reporting any violations any money laundering laws or FCPA provisions.

Solomon noted that Goldman Sachs has nearly doubled its global compliance division in the last eight years since the 1MDB transactions. “When a colleague knowingly violates a firm policy, or much worse, the law, we — as a firm — have to accept responsibility and recognize the broader failure that individual behavior represents for our firm,” he said.

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