How Goldman Sachs is being held accountable for its role in the 1MDB scandal
Between 2012 and 2013 Goldman Sachs helped raise US$ 6.5 billion over three bond sales for 1Malaysia Development Berhad (1MDB). 1MDB was the strategic investment and development company that was wholly-owned and controlled by the Government of Malaysia through its Ministry of Finance.
Goldman Sachs claimed US$ 593 million in fees and revenues from these deals. As a direct consequence, the accused executives of Goldman Sachs made large bonuses. However, more than US$2.7 billion was misappropriated and diverted from the fund to bribe and provide kickbacks to government officials in Malaysia and Abu Dhabi and to personal accounts and shell companies. The proceeds were laundered and used to purchase among other things, real estate, art work, jewellery and other luxury items including the funding of the Hollywood film “The Wolf of Wall Street”.
At least three current or former senior executives of Goldman Sachs were implicated in the first charges filed by the US Justice Department in November 2018. Former Goldman chairman of Southeast Asia and participating managing director, Tim Leissner pleaded guilty to conspiring to launder, through the US financial systems, money embezzled from 1MDB amounting to more than US$2.7 million, over US$ 1.2 billion alone from the third bond deal.
He also admitted to violating the internal Foreign Corrupt Practices Act (FCPA) and accounting controls of Goldman Sachs by falsely stating on a number of occasions, to the compliance and legal teams that his team was not working with Malaysian financier, Low Taek Jho (also known as Jho Low), or at times only making selective disclosure to others so as to secure and retain business deals for Goldman Sachs. Jho Low had been a close adviser to 1MDB’s predecessor Terengganu Investment Authority (TIA) and an intermediary between 1MDB and high ranking foreign government officials. Earlier attempts, in 2009 – 2011, to make Jho Low a formal client had been rejected by Goldman’s compliance and intelligence groups in part due to concerns regarding Low’s source of wealth. Full knowledge therefore of the true business relationship between Jho Low, Goldman Sachs and 1MDB would have hampered or even prevented these lucrative financing deals.
Leissner also admitted to concealing from Goldman’s compliance and legal teams the fact that Low Taek Jho, using his close relations to high ranking officials in Malaysia & Abu Dhabi, had made promises to bribe and provide kickbacks to them in lieu of Goldman Sachs being awarded the deal as well as other information. He also admitted to structuring the deals as bond offerings instead of other forms of financing to obtain higher fees, even though this was a more expensive financing option from 1MDB; to embezzling funds from 1MDB to bribe government officials for the deals, money laundering the funds through various shell and holding companies and funnelling US$200 million in proceeds from bond sales into accounts controlled by him and a relative.
Roger Ng, Leissner’s deputy was charged with conspiring with Low Taek Jho, to launder US$2.7 billion embezzled from 1MDB as well as circumventing internal FPCA and accounting controls of Goldman Sachs.
Leissner claimed that the culture of secrecy at Goldman Sachs Southeast Asia, “was highly focused on consummating deals, at times prioritizing this goal ahead of the proper operation of its compliance functions.” This made it easy to circumvent the internal controls to obtain the business as well as divert money to pay bribes to garner unfair advantage for Goldman Sachs in business financing deals, and launder money to shell companies and personal accounts and other monetary transactions used to purchase luxury items.
Time Line of Events
Recently Goldman Sachs’s role in raising money for the Malaysian state investment fund, known as 1MDB has come under renewed scrutiny. A time line of events that has led to the first charges by U.S. prosecutors in November 2018 against at least three former or current senior Goldman employees is given below:
July 2009: 1Malaysia Development Berhad (1 MDB) sovereign fund is launched to attract foreign investments for development projects to modernize Malaysia and invest in its energy, real estate and other industries.
30 September 2009: 1MBD enters into a US$2.5 billion joint venture with private Saudi oil company, PetroSaudi International.
November 2009: An introductory meeting is held between Goldman Sachs former CEO Lloyd Blankfein, Low Taek Jho and Prime Minister of Malaysia Najib Raza who is also the chairman of the advisory board of 1 MDB. Low Taek Jho (a.k.a Jho Low) is a close family friend of the Prime Minister.
March 2010: Ernest & Young is sacked as auditor after it refused to sign off on 1MDB’s 2010 accounts unless provided with certain documentation on the fund’s joint venture with PetroSaudi International.
1MDB declares RM 425 million in profit. A contributing factor to the profit is that PetroSaudi buys back its investment of RM3.5 billion for RM4.1 billion on the 31-March-2010. This would be paid for through an 11-year loan scheme that would fully repay in 31 March 2021. KPMG is hired after EY’s sacking and signs off on accounts for the financial years ended March 31 in 2010, 2011 and 2012.
2012-2013: Goldman Sachs arranges three bond deals to fund investment in 1MDB, raising US$6.5 billion. Project Magnolia and Project Maximusin May 2012 & October 2012 respectively generated US$1.75 billion each for the purpose of acquiring power assets while Project Catalyze in March 2013 raised US$3 billion for the purpose of making joint strategic economic initiatives between Malaysia & Abu Dhabi.
Lloyd Blankfein has an introductory, high-level meeting in December 2012 with the CEO of Aabar, an existing client of 1MDB. Malaysian financier Low Taek Jho is also present at the meeting at the request of Aabar. KPMG is replaced with Deloitte as 1MDB’s auditor as a result of differences in opinion on the fair value of 1MDB’s investment in Bridge Global SPC through Brazen Sky Ltd.
Blankfein moderates a discussion with Najib held with private equity firms in New York in 2013. While Low was scheduled to attend that meeting, he isn’t there.
March 2014: 1MDB’s reported debt commitments total RM42 billion.
January 2015: 1MDB misses a loan payment of about US$550 million.
March 2015: U.S. authorities accuse Low of siphoning billions of dollars from the fund, leveraging the cash to pay bribes to officials and attempting to launder billions stolen from the fund. Prime Minister Najib said that Low did not have any involvement with 1MDB and that all decisions and transactions were made by the company’s management and board of directors.
May 2015: 1MDB gets a US$1 billion injection from Abu Dhabi’s International Petroleum Investment Company. This will be used to repay a US$975 million loan to a syndicate of international bank lenders. It also forgives an undisclosed amount of debt in exchange for assets which have not been named.
July 2015: The Wall Street Journal reports that up to US$700 million was wired to Najib’s personal accounts from various companies linked to the fund.
August 2015:Malaysian Anti-Corruption Commission states that the money deposited into Najib’s account was a donation and not from 1MDB. Criminal proceeds linked to 1 MDB are opened by Swiss authorities.
January 2016: Najib is cleared of charges. Claims that US$681 million was a donation by the Saudi royal family of which US$620 million was paid back.
July 2016: The U.S. Department of Justice files civil lawsuits seeking to seize assets bought with money allegedly stolen from 1MDB, saying that over US$3.5 billion was misappropriated from the fund. Further that the US$681 million transferred to Najib’s account is alleged to be from the 2013 bond sale. Deloitte Malaysia issues a statement saying that their audit reports of 1MDB financial statements, dated 28 March 2014 and 5 November 2014 covering financial years 2013 and 2014 respectively, should no longer be relied upon.
August 2016: International Petroleum Investment Company (IPIC) in a filing to the London stock exchange states that it has terminated the debt restructuring agreement with 1MDB as the latter defaulted in its obligations of US$1.1 billion in debt and interest.
March 2017: Red Granite, the company behind the 2013 film, “The Wolf of Wall Street”, agrees to pay the U.S. government US$60 million to settle a civil lawsuit that sought to seize assets allegedly bought with money stolen from 1MDB.
June 2017: US Justice department files complaints alleging that more than US$ 4.5 billion was diverted from 1MDB by Jho Low and other conspirators including officials from Malaysia, Saudi Arabia and the United Arab Emirates.
August 2017:US Justice department pursues criminal investigations into 1MDB focused on possible embezzlement or money laundering in at least 10 countries.
May 2018:Najib is ousted as prime minister. Debt commitments of 1MDB are revealed to be RM74.6 billion, inclusive of interest and borrowing costs, from November 2015 to 2039.
July 2018: Najib is arrested and charged with money laundering and corruption charges tied to 1MDB following a probe reopened by the newly elected Prime Minister, Mahathir Mohamad into the 1MDB scandal. 400 bank accounts believed to have received funds from 1MDB are also frozen.
November 2018: On 1st November, US Justice Department unveils indictments against two former Goldman Sachs employee, Tim Leissner & Roger Ng, who are charged as key players in the 1MDB scandal. They are charged with conspiring to launder billions of dollars from the sovereign wealth fund and bribe officials in Malaysia and Abu Dhabi to hire Goldman for lucrative consulting contracts.
In a securities filing on 2nd November, the Justice Department alleges that Goldman Sachs’ system of internal accounting controls could be easily circumvented and that the firm’s business culture, particularly in South-east Asia, at times prioritised consummation of deals ahead of the proper operation of its compliance functions by concealing facts from its legal and compliance employees.
The Malaysian government on 12 November has announced that it is seeking the return of the entire US$593 million in fees that Goldman Sachs generated in helping set up the debt offerings.
Goldman Sachs is downgraded by rival investment bank Morgan Stanley on 21 November. Share prices were down 14% following the news that:
a) The former Goldman chairman of Southeast Asia, Tim Leissner who left Goldman in 2016 pleaded guilty to the scheme that embezzled US$2.7 million from 1MDB. He admitted to bribing officials in order to get the bond deals, structuring the deals as bond offerings to obtain higher fees and funnelling US$200 million in proceeds from bond sales into accounts controlled by him and a relative.
b) Goldman also faces significant fines from a U.S. Department of Justice investigation into its role in the 1MDB scandal.
c) Two of Abu Dhabi’s investment funds (by Abu Dhabi’s International Petroleum Investment Company (IPIC) and International Petroleum Investment Co. and Aabar Investments) are suing Goldman Sachs over the 1MDB scandal for unspecified damages, alleging that its executives paid bribes to former fund officials, who in exchange agreed to manipulate and mislead IPIC and Aabar, and to misuse the companies’ names, networks, and infrastructures to further the criminal schemes and for personally benefit.
Investigation into Deloitte’s audit of 1MDB by the Malaysian Institute of Accounts has been escalated for hearing at its Disciplinary Committee.