Goldman Sachs agrees to largest penalty ever in 1MDB scandal

Global financial titan Goldman Sachs agreed to pay US$2.9 billion in penalties to settle criminal charges in the 1MDB bribery scandal, the largest US fine ever in a corruption case, the Department of Justice (DoJ) announced Thursday.

Acting US Assistant Attorney-General Brian C Rabbitt said Goldman “accepted responsibility” in the case that involved US$1.6 billion in bribes, the largest ever recorded, and massive gains laundered through the US financial system.

Goldman Sachs helped raise US$6.5 billion for the government’s sovereign wealth fund. The DoJ has said more than US$4.5 billion was stolen from 1MDB by high-level officials at the fund and their associates between 2009 and 2015.

The investment fund “was looted by corrupt officials and their co-conspirators, including senior Goldman bankers” turning it “into a piggy bank for corrupt public officials and their cronies,” Rabbitt said at a press briefing.

In a first for Goldman Sachs, the company’s Malaysian unit pleaded guilty in a US court Thursday to violations of US bribery law as part of a deal to end the criminal probe in the sweeping case that involved authorities in nine countries.

The guilty plea could curtail activities of Goldman Sachs Malaysia but allows the parent company to avoid admitting wrongdoing in court – which would have damaged its ability to do business.

‘Meaningful consequences’

The parent company pleaded not guilty in US court and agreed to “deferred prosecution” for three-and-a-half years, during which time the firm will face increased monitoring by regulators.

But Rabbitt stressed that despite the deal, the company has been charged in the bribery scandal, “so there has been a significant amount of criminal liability” for Goldman and “imposes meaningful consequences” in the cases.

The DoJ has charged three individuals in the case including two former Goldman executives. Tim Leissner, the former Southeast Asia chairman, has pleaded guilty, while Ng Chong Hwa, also known as “Roger Ng”, former head of investment banking for GS Malaysia, is awaiting trial, and Low Taek Jho remains a fugitive.

“Goldman admitted today that, in order to effectuate the scheme, Leissner, Ng, Employee 1, and others conspired with Low Taek Jho” to pay the bribes and ignored red flags, the statement said.

In another stunning turn, the company said it will demand repayment of US$174 million in salary and bonuses paid to current and former executives including chief executive David Solomon and his predecessor Lloyd Blankfein.

These so-called clawbacks are almost unheard of in corporate cases.

Solomon said in a statement “it is abundantly clear that certain former employees broke the law, lied to our colleagues and circumvented firm controls”, adding, “we recognise that we did not adequately address red flags”.

Included in the total penalty amount, Goldman will pay a US$400 fine to the SEC and repay US$600 million in earnings, and pay a US$154 million fine to the Federal Reserve, which also will require the company to improve its risk management and internal oversight.

The government dropped the charges against Goldman in July after reaching a US$3.9 billion settlement with the financial giant.

The firm, which posted profits of US$3.5 billion in the latest quarter, had set aside more than US$3.1 billion as of Sept 30 “for litigation and regulatory proceedings”.

Goldman shares closed US trading 1.2% higher after settling the uncertainty.