Superintendent Lacewell Announces that DFS Imposes $150 Million Penalty On Goldman Sachs Group In Connection With Goldman Sachs Bank USA’s Investments In 1MDB
October 22, 2020
SUPERINTENDENT LACEWELL ANNOUNCES THAT DFS IMPOSES $150 MILLION PENALTY ON GOLDMAN SACHS GROUP IN CONNECTION WITH GOLDMAN SACHS BANK USA’S INVESTMENTS IN 1MDB
DFS settlement is a component of global resolution of investigations involving Goldman’s role in massive 1MDB bribery scandal
Superintendent of Financial Services Linda A. Lacewell announced today that Goldman Sachs Group (Goldman) has agreed to pay $150 million in penalties as part of a Consent Order entered into with the New York State Department of Financial Services (DFS or the Department). The Consent Order resolves an investigation concerning Goldman’s failure to detect or adequately address red flags suggesting wrongdoing in connection with bond transactions for 1Malaysia Development Berhad (1MDB), failures that exposed its affiliate, Goldman Sachs Bank USA (GSBUSA), to undue financial and reputational risk and caused unsafe and unsound conduct and reporting deficiencies.
Goldman is a global banking and financial services institution, with total assets exceeding $1 trillion and more than 38,000 employees worldwide. Goldman’s wholly owned affiliate, GSBUSA, is a New York-chartered bank that is licensed and regulated by the Department.
“Earning and maintaining public trust in our financial system is imperative especially at this time of multiple crises. When a global financial institution has a significant control failure anywhere in the world, it sends shock waves to its affiliates and counter parties throughout the financial system,” said Superintendent Lacewell. “Compliance and due diligence start with the tone at the top and senior leadership must set the bar so that affiliates can operate safely and soundly for its customers and the integrity of the financial markets.”
This agreement is part of a global settlement with the U.S. Department of Justice, Securities and Exchange Commission, Federal Reserve Board, and various foreign regulators to resolve violations of federal, state and foreign laws in relation to Goldman’s provision of services to 1MDB in 2012 and 2013, resulting in fees of over $580 million. In three separate bond offerings occurring within 10 months in 2012 and 2013, Goldman facilitated the issuance of $6.5 billion in bonds for 1MDB.
The 1MDB transactions, however, involved a criminal scheme to divert funds from the bond offerings to pay huge bribes to government officials in Malaysia and elsewhere. According to the criminal charges brought by the Department of Justice, of the total $6.5 billion raised in the three 1MDB bond offerings, more than $2.7 billion was misappropriated by two Goldman employees and others to pay bribes and kickbacks to government officials in Malaysia and Abu Dhabi and for the personal benefit of the conspirators.
GSBUSA was impacted by the 1MDB misconduct because in March 2013, GSBUSA purchased $250 million of bonds in the third 1MDB bond offering to hold as an investment for its long-term investment portfolio. In May 2013, GSBUSA extended a $50 million loan to a special purchase vehicle that was collateralized with the bonds from the second 1MDB bond offering. In making these investments, GSBUSA substantially relied on due diligence that Goldman conducted in connection with the 1MDB bond transactions. Such reliance was misplaced, however, since red flags concerning misconduct were either ignored, not detected, and/or not adequately addressed.
These failures included:
- A failure to investigate and address adequately the involvement of an intermediary, FINANCIER-1, in the bond transactions.
- A failure to prevent or detect the wrongdoing of one of its partners, GS PARTNER-1, who in 2018 pleaded guilty to criminal charges in connection with such misconduct.
- A failure to prevent or detect the alleged wrongdoing of one of its managing directors, GS MANAGING DIRECTOR-1, who was charged criminally in connection with such misconduct in 2018.
Goldman further failed to escalate or adequately address allegations of misconduct that were expressly communicated to certain senior business personnel following the completion of the 1MDB bond offerings. Such communications occurred in phone calls in May 2013 and October 2015. By July 2015, media reports exposed that Malaysian authorities had traced the source of nearly $700 million from the then-Malaysian Prime Minister’s personal accounts to entities and government authorities linked to 1MDB. In early 2016, GS PARTNER-1 resigned after Goldman discovered he had submitted a letter of reference to another bank on behalf of FINANCIER-1 which contained false information.
Despite this mounting evidence of widespread misconduct related to 1MDB, evidence that would have been of interest to other licensees of the Department, at no time did Goldman convey to GSBUSA the red flags detailed above so that GSBUSA could affirmatively report the incidence to the Department, as required by regulation.
In addition to the $150 million penalty, the settlement with DFS requires Goldman to create a written plan, acceptable to the Department, detailing enhancements to the policies and procedures that control how Goldman provides services to GSBUSA. At a minimum, the written plan shall require the creation and implementation of policies and procedures: (a) to ensure adequate staffing and independence within the compliance department at Goldman; (b) to ensure that investment decisions made by and for GSBUSA are in its independent, best interests; and (c) to promote appropriate intra-affiliate information sharing including sharing of material negative information.