Goldman has half a defense in 1MDB mess

WASHINGTON (Reuters Breakingviews) – Goldman Sachs has been dragged into Malaysia’s 1MDB scandal – but might still drag itself out. Two former executives accused in the Malaysian corruption scheme openly lied to the bank, U.S. authorities say. Nonetheless, an indictment also cites a culture that favored deals over compliance, which suggests Goldman is unlikely to emerge entirely unscathed.

Prosecutors say Tim Leissner, former chairman of the investment bank’s Southeast Asia operations, and his deputy lied to their employer about who was involved in $6.5 billion of bond offerings by 1MDB, a sovereign fund implicated in bribery and money laundering. They also hid information about kickbacks and other misdeeds. Meanwhile, Goldman rejected efforts to make indicted Malaysian financier Jho Low a client because of concerns about the sources of his wealth.

Those things work in the firm’s favor. It further helps that the Department of Justice has to be careful not to punish firms simply for being deceived by employees – because it depends on their cooperation to bring a decent case. That’s especially true for shady dealings overseas.

Morgan Stanley MS.N offers a precedent: It was spared in 2012 when an executive pleaded guilty to corruption related to a Shanghai real-estate deal. In that case, prosecutors noted the bank’s extensive compliance systems. The DOJ also said Morgan Stanley randomly audited employees and transactions, and conducted thorough background checks on new business partners.

Authorities haven’t been so generous in describing Goldman, which reaped $600 million in revenue by arranging bonds for 1MDB. Prosecutors said the bank’s culture, particularly in Southeast Asia, focused on getting deals, sometimes at the expense of proper compliance, while Leissner believed internal accounting controls could be “easily circumvented” to hide Low’s involvement. He and others had tried at least three times to make Low a client. Goldman’s compliance caught Leissner in 2016, but that was years after the last 1MDB bond offering.

A company can’t stop all bad behavior by employees, but it is responsible for having robust controls that discourage abuse. Goldman did set up a standards committee after a financial crisis-related scandal. But if the bank is found to have shoddy compliance, a possible outcome is that it gets a deferred-prosecution agreement – equivalent to probation. It also may have to forfeit its fees and pay a fine too. Think of it as half a punishment for a firm with half a defense.

CONTEXT NEWS

– Malaysian Prime Minister Mahathir Mohamad said bankers at Goldman Sachs “cheated” the country as part of its work for 1MDB. He told CNBC on Nov. 13 that U.S. authorities have promised to help return the fees that the bank earned in those deals.

– The U.S. investment bank received around $600 million in revenue for its work with the Malaysian sovereign fund, which included three bond offerings in 2012 and 2013 that raised $6.5 billion. The bank denies any wrongdoing.

– The U.S. Department of Justice has said about $4.5 billion was misappropriated from 1MBD between 2009 and 2014. Earlier this month, U.S. prosecutors filed criminal charges against two former Goldman bankers. Tim Leissner pleaded guilty to conspiracy to launder money and conspiracy to violate the Foreign Corrupt Practices Act, and agreed to forfeit $43.7 million.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by John Foley and Martin Langfield) (([email protected]; Reuters Messaging: [email protected]))