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HONG KONG: The Hong Kong markets watchdog on Thursday fined the Asian company Goldman Sachs $ 350 million for its role in Malaysia’s 1MDB scandal, the largest fine ever imposed by the regulator downtown Asian financier.
The Securities and Futures Commission (SFC) said serious lapses and deficiencies in management controls at Goldman Sachs (Asia) LLC had contributed to the embezzlement of $ 2.6 billion of funds raised by 1Malaysia Development Berhad (1MDB) in three offerings. of bonds in 2012 and 2013.
A Goldman Sachs spokesman said the Wall Street bank will issue a statement in due course.
The three bond offerings, which raised a total of $ 6.5 billion, were organized and underwritten by UK-based Goldman Sachs International, with work done by members of the trading team in multiple jurisdictions, who shared the proceeds. generated.
The SFC said that Goldman Sachs Asia, Goldman Sachs’ Asia monitoring and compliance center based in Hong Kong, was significantly involved in the origination, approval, execution and sale of the three bond offerings.
The bank’s Asia unit had earned $ 210 million from the deals, the largest stake among the various Goldman Sachs entities.
“Goldman Sachs Asia did not meet the standards expected of a licensed broker in the 1MDB case and not only suffered reputational damage from its own failures, it also brought the securities industry into disrepute,” said Thomas Atkinson, Chief Executive Officer Compliance with the SFC. in the statement.- Reuters
Below is the statement:
SFC reprimands and fines Goldman Sachs (Asia) LLC US $ 350 million for serious regulatory flaws on 1Malaysia Development Berhad’s bond offerings
22 october 2020
The Securities and Futures Commission (SFC) has reprimanded and fined Goldman Sachs (Asia) LLC (Goldman Sachs Asia) $ 350 million (Hong Kong $ 271 billion) for failures and serious deficiencies in its supervisory controls management, risk, compliance and anti-money laundering. which contributed to the misappropriation of $ 2.6 billion of the $ 6.5 billion that 1Malaysia Development Berhad (1MDB) raised in three bond offerings in 2012 and 2013 (Notes 1 and 2).
The 1MDB bond offerings were organized and underwritten by Goldman Sachs International, but the actual work was done by members of the trading team in multiple jurisdictions, and the revenue generated from the transactions was shared among Goldman Sachs entities in different jurisdictions ( Note 3).
In particular, Goldman Sachs Asia, Goldman Sachs’ Asia monitoring and fulfillment center based in Hong Kong, played a significant role in the origination, approval, execution and sale of the three 1MDB bond offerings. Finally, Goldman Sachs Asia received 37% of the total revenues of US $ 567 million generated by the bond offerings, in the sum of US $ 210 million, the largest share among the various Goldman Sachs entities.
The SFC believes that Goldman Sachs Asia lacked adequate controls to monitor staff and detect misconduct in its day-to-day operation, and allowed 1MDB bond offerings to proceed when numerous red flags around the offerings had not been properly scrutinized and no satisfactory responses had been received. such red flags had not been obtained.
Ashley Alder, Executive Director of the SFC, said: “This enforcement action is the result of a rigorous and independent investigation by the SFC into whether Goldman Sachs Asia’s involvement with 1MDB in 2012 and 2013 contravened expected company standards. in Hong Kong. regulations “.
“The penalty in this case, assessed solely in accordance with Hong Kong’s own penalty framework, reflects our findings that Goldman Sachs Asia failed to adequately address the many suspicious circumstances surrounding the 1MDB bond offerings. These failures resulted in multiple serious breaches of the rules that establish the high standards of behavior expected of all companies supervised by the SFC, ”added Mr. Alder.
Thomas Atkinson, SFC Chief Compliance Officer, said: “The 1MDB fraud is a stark reminder to financial intermediaries involved in multi-jurisdictional transactions of the importance of having strong internal controls and taking all reasonable steps to protect integrity. your operations and your customers from fraud and other dishonest acts. Goldman Sachs Asia failed to meet the standards expected of a licensed broker in the 1MDB case and not only suffered reputational damage from its own failures, it also brought the securities industry into disrepute. “
The 1MDB bond agreements were obtained for Goldman Sachs by Mr. Tim Leissner, a responsible officer of Goldman Sachs Asia and participating managing director of the investment banking division at the relevant time.
In August 2018, Leissner pleaded guilty to criminal charges brought by the United States Department of Justice (DOJ) against him for conspiring to commit money laundering and violating the Foreign Corrupt Practices Act.
Leissner admitted that he had conspired with a Malaysian financier, Mr. Low Taek Jho, also known as Jho Low, and others to pay kickbacks and kickbacks to Malaysian and Abu Dhabi officials to obtain and retain the 1MDB business for Goldman Sachs, including the voucher. offerings (Notes 4 to 6).
The SFC investigation found that Leissner was essentially given free rein in executing the 1MDB bond offerings, allowing him to provide misleading information to Goldman Sachs or hide it without being properly challenged.
In particular, despite:
evidence pointing to Low’s involvement in making the first bond offering;
Goldman Sachs’ knowledge that Low and Leissner were acquaintances and Low was very close to 1MDB and government officials in Malaysia and Abu Dhabi; Y
Low, after being rejected twice as a private wealth management client as his source of wealth could not be verified, resulting in a potential money laundering risk.
The Goldman Sachs firm-wide and regional committees that examined the bond offerings accepted Leissner’s false claims that Low had no role in the bond offerings without asking further questions.
There were also numerous red flags that raised questions about the business justification of the bond offerings and the serious risks of money laundering and bribery, but these were not critically scrutinized by various regional and firm-wide committees of Goldman Sachs, allowing to Leissner and his conspirators to escape scrutiny. These included the following:
Despite being in a weak financial position with questionable ability to pay off existing debts, 1MDB raised US $ 6.5 billion in a short 10-month period, but the amounts raised far exceeded 1MDB’s actual needs.
Less than 50% of the funds raised in the first two bond offerings were for the acquisition of energy assets that had been identified. In just four months after the second offering, 1MDB raised another $ 3 billion to fund a joint venture that had no concrete investment plans yet. At the time, more than $ 1.6 billion of the proceeds from the first two transactions were still unused.
Goldman Sachs received about $ 581.5 million in commissions from 1MDB, about 9% of the funds raised in these deals.
The revenue Goldman Sachs earned from these three offerings alone was more than double the total revenue it generated from acting as organizer and / or underwriter on 213 other Asian bond offerings, except Japan, in the five years between 2011 and 2015.
1MDB’s willingness to pay such high fees to Goldman Sachs as sole organizer and insurer, and the hiring of Goldman Sachs for all three offerings without going through a competitive process should have raised questions about how 1MDB’s business was obtained, the reasonableness of the mandates. and if the circumstances that led to such business raised suspicions of bribery or other illicit conduct.
1MDB’s repeated emphasis on confidentiality and speed of execution, and its use of foreign private banks rather than Malaysian commercial banks to deposit the bond proceeds are other red flags present in all three bond offerings.
In the course of reviewing the bond offerings, Goldman Sachs Asia had found many negative media reports indicating high corruption risks associated with 1MDB and raising questions about the integrity of 1MDB and the transactions it had made.
The SFC investigation also found that while the settlement team and oversight functions took note of many of the red flags and appeared to have taken some steps to discuss and address them, Goldman Sachs took a gradual approach to resolving the issues and it had not adequately considered the broader and “bigger picture” concerns about the business justification of the bond offers and was satisfied that such concerns have been successfully addressed.
The SFC considers that Goldman Sachs Asia had failed to:
diligently supervise its senior personnel who were involved in the execution of the bonus offers and ensure that they maintain appropriate standards of conduct;
identify and appropriately address concerns about money laundering and bribery when there were numerous red flags;
exercise due skill, care and diligence, and act in the best interest of its clients and the integrity of the market when examining and approving the bond offers; Y
Implement adequate and effective internal control procedures to protect clients from financial losses arising from fraud and other dishonest acts or professional misconduct.
In deciding disciplinary sanctions, the SFC took into account all relevant circumstances, including:
Goldman Sachs Asia participated extensively in the 1MDB bond offerings and received more than a third of the total revenue generated by the three bond offerings;
there were serious lapses and deficiencies in Goldman Sachs Asia’s risk, compliance and anti-money laundering controls and management oversight that allowed Leissner’s bribery of foreign government officials to completely escape scrutiny;
Goldman Sachs Asia allowed the bond offerings to proceed when numerous red flags suggesting money laundering and / or bribery had not been adequately addressed;
Goldman Sachs has reached a criminal settlement with the Malaysian government for US $ 2.5 billion plus a guarantee of US $ 1.4 billion (Note 7);
Since the securities industry is of fundamental importance to Hong Kong’s role as an international financial center, it is essential to maintain among members of the investing public a well-founded trust in the securities industry, as well as in the integrity and professional competence of those who are employed in industry;
a strong message needs to be sent to the market to discourage other market participants from allowing similar failures to occur;
Goldman Sachs Asia’s acceptance of the SFC’s findings and disciplinary action facilitated a prompt resolution of the matter; Y
Goldman Sachs Asia committed to providing the SFC with annual reports prepared by its internal audit function for three consecutive years, confirming, among other things, that effective remedial measures have been implemented to address the regulatory concerns identified by the SFC in this matter.
End
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