Goldman Sachs cheated Malaysia over 1MDB: PM Mahathir

Goldman is facing scrutiny around the world for its part in the deal known as 1MDB, where it reaped about $600 million in fees.

Background

1Malaysia Development Berhad (1MDB) is a Malaysian strategic development company, wholly owned by the Minister of Finance (Incorporated). 1Malaysia Development Berhad was a Malaysian state fund, set up in 2009 to promote development through foreign investment and partnerships. The then prime minister, Najib Razak, was its chairman.

Since 2015, the company has been under heavy scrutiny for its suspicious money transactions and evidences pointing to money laundering activities. In a lawsuit filed by the United States Department of Justice (DOJ), it is stated that at least US$3.5 billion has been stolen from Malaysia's 1MDB state-owned fund.

A year after its establishment, 1MBD involved in a multi-billion ringgit Tun Razak Exchange development project. Opposition leaders questioned the credentials of the company and stated that according to the records held by the companies commission, 1MDB "has no business address and no appointed auditor." Prime Minister Najib Razak’s interest in the approval given to 1MDB on this matter was questioned.

In February 2016, Federal Bureau of Investigation (FBI) of the United States began probing the connection between a regional top executive of global investment bank Goldman Sachs with former Prime Minister Najib Razak and the nature of the former's involvement in multibillion-dollar deals with 1MDB. Similar probes have also taken place or are currently undergoing in the United Kingdom, Australia, Hong Kong and Singapore into banks that facilitated transactions for 1MDB.

Analysis

Goldman Sachs Group Inc (GS. N) “cheated” Malaysia over its dealings with state fund 1MDB which is the subject of corruption and money-laundering investigations, said Prime Minister Mahathir Mohamad. Mahathir said, “there is evidence that Goldman Sachs has done things that are wrong”. He said the bank’s compliance controls “don’t work very well” adding that he’s not ruling out a ban against the bank’s local operations as he observes the ongoing investigations. The United States, Malaysia and at least four other countries are investigating how billions of dollars went missing from 1MDB.

Goldman Sachs earned about $600 million in fees for its work with 1MDB, which included three bond offerings in 2012 and 2013 that raised $6.5 billion. The U.S. Department of Justice has said about $4.5 billion was misappropriated from 1MDB by high-level officials of the fund and their associates between 2009 and 2014. MDB’s bonds were sold at a “much higher” yield than what was the market rate at that time for which Malaysia is seeking from Goldman losses that stemmed from the interest-rate differential.

On Nov. 1, three senior Goldman Sachs bankers were publicly implicated by the U.S. Department of Justice in a multiyear criminal enterprise that included bribing officials in Malaysia and elsewhere and laundering hundreds of millions of dollars. The firm has said it’s cooperating with the investigations and may face “significant” fines.

Tim Leissner, the bank’s former chairman of Southeast Asia, admitted in a plea that he bribed officials to get the bond deals, and that he and others arranged the fundraising as debt offerings to generate higher fees. He also admitted that more than $200 million in proceeds from 1MDB bonds flowed into accounts controlled by him and a relative. Prosecutors have said executives who were involved, had circumvented the bank’s internal compliance operations to avoid detection. Leissner’s colleagues at Goldman's Asia business — Andrea Vella and Roger Ng, have been charged with bribery and money-laundering. Tim Leissner, pleaded guilty to violate the Foreign Corrupt Practices Act. Former premier Najib has been charged with corruption in Malaysia. Malaysian financier Low Taek Jho was also charged by U.S. prosecutors.

Malaysian Finance Minister Lim Guan Eng said the country is seeking a refund of all the fees it paid. Malaysia should also seek compensation from the bank for ruining Malaysia’s image, leader-in-waiting Anwar Ibrahim said in parliament.

Goldman Sachs has said it believed proceeds of the debt it underwrote were for development projects and that Leissner, its former Southeast Asia chairman, withheld information from the firm. Leissner has said Goldman’s culture of secrecy led him to conceal wrongdoing from the company’s compliance staff. Shares of Goldman Sachs fell to their lowest in nearly two years after Malaysian Finance Minister Lim Guan Eng said Malaysia would seek a “full refund” from the bank of the fees from 1MDB deals.

Assessment

Our assessment is that recouping 1MDB funds would require tracing assets bought using the money and locating Low Taek Jho who was the central figure in the corruption scandal. We feel that on one hand the company had compliance measures aimed at vetting the people it deals with and preventing illegal acts but at the same time, the employees of Goldman Sachs knew about and took part in efforts that thwarted those controls.