Friday, April 23, 2021

Hong Kong fines Goldman Sachs $350 million over 1MDB scandal

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Goldman Sachs ignored multiple red flags over the multibillion-dollar fundraisings it arranged for state fund 1Malaysia Development Berhad, Hong Kong’s financial regulator said on Thursday, as it hit a local subsidiary of the Wall Street bank with a record $350m fine.

The penalty from Hong Kong’s Securities and Futures Commission is the first in more than $2bn set to be announced, as regulators from the US to the UK and Singapore penalise Goldman for its alleged role in a scandal that led to the looting of $6.5bn from 1MDB, a fund intended to spur Malaysia’s economic development.

The US Department of Justice is expected to be the biggest of the settlements announced on Thursday. A Goldman subsidiary in Asia has agreed to plead guilty to wrongdoing in relation to the 1MDB scandal, marking the first criminal conviction in Goldman’s 150-year history, people familiar with the matter have told the Financial Times.

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In a statement on Thursday, the SFC reprimanded Goldman Sachs Asia, which it described as the “compliance and control hub for Goldman Sachs in Asia”, for “serious lapses and deficiencies in its management supervisory, risk, compliance and anti-money laundering controls that contributed to the misappropriation” of funds raised by Goldman for 1MDB through three bond offerings in 2012 and 2013.

Goldman Sachs Asia had “significant involvement in the origination, approval, execution and sales process of the three 1MDB bond offerings” and was paid about $210m of the $615m Goldman earned for the deal, the biggest share of any Goldman subsidiary, the SFC said.

Tim Leissner, the former Goldman banker who executed the 1MDB bond deals and has pleaded guilty to US money laundering charges, was given “free rein” and not “adequately challenged” by Goldman, the SFC added.

“The penalty in this case — assessed solely in accordance with Hong Kong’s own fining framework — reflects our findings that Goldman Sachs Asia failed to deal properly with numerous suspicious circumstances surrounding the 1MDB bond offerings,” said Ashley Alder, chief executive of the SFC.

Malaysian and US authorities have both questioned the fee that Goldman was paid for the bond sales, far above industry norms. Goldman agreed a settlement of up to $3.9bn with Malaysian authorities in late July.

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The money-laundering scandal involves the use of money from 1MDB to fund a lavish spending spree, including expensive art and the financing of the Oscar-nominated film The Wolf of Wall Street.

Jho Low, the Malaysian financier who allegedly masterminded the elaborate scheme, is still at large. He has denied wrongdoing. The SFC said Mr Leissner was given a free rein despite Mr Low having “twice been rejected as a private wealth management client as his source of wealth could not be verified”.

The scandal has already led to a 12-year jail sentence for Malaysia’s former prime minister Najib Razak, who pleaded not guilty to all charges and is appealing against the verdict.

The SFC said Goldman Sachs Asia “lacked adequate controls in place to monitor staff and detect misconduct in its day-to-day operation, and allowed the 1MDB bond offerings to proceed when numerous red flags surrounding the offerings had not been properly scrutinised”.

The SFC statement emphasised that the penalty was decided upon independently of the DoJ initiative. “The disciplinary action is not part of the US-led global settlement,” said a person familiar with the regulator’s thinking.

The 1MDB saga has hung heavily over David Solomon’s first two years as Goldman’s chief executive, but the bank’s share price gave little reaction when the broad terms of its wide-ranging settlements became public earlier this week.

“This is already priced in. The stock price is already reflecting this kind of action,” said Sumit Agarwal, finance professor at the National University of Singapore’s business school.

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Goldman declined to comment. The bank is expected to issue a statement when the US settlement is announced.

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