Hong Kong’s Securities and Futures Commission (SFC) today announces that has reprimanded and fined Goldman Sachs (Asia) L.L.C. US$350 million (HK$2.71 billion) for failures related to 1Malaysia Development Berhad (1MDB) bond offerings.

The regulator explains that the fine relates tolapses and deficiencies in the company’s management supervisory, risk, compliance and anti-money laundering controls that contributed to the misappropriation of US$2.6 billion from US$6.5 billion that 1MDB raised in three bond offerings in 2012 and 2013.

The 1MDB bond offerings were arranged and underwritten by Goldman Sachs International, but the actual work was conducted by deal team members in multiple jurisdictions, and revenue generated from the transactions was shared among Goldman Sachs entities in different jurisdictions.

In particular, Goldman Sachs Asia, the compliance and control hub of Goldman Sachs in Asia and based in Hong Kong, had significant involvement in the origination, approval, execution and sales process of the three 1MDB bond offerings. Ultimately, Goldman Sachs Asia received 37% of the total revenue of US$567 million generated from the bond offerings, in the sum of US$210 million, the largest share among the various Goldman Sachs entities.

The SFC considers that 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 and satisfactory answers to such red flags had not been obtained.

The 1MDB bond deals were obtained for Goldman Sachs by Mr Tim Leissner, a responsible officer of Goldman Sachs Asia and a participating managing director of the investment banking division at the material time. In August 2018, Leissner pleaded guilty to criminal charges brought by the United States Department of Justice (US DOJ) against him for conspiring to commit money laundering and to violate 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 bribes and kickbacks to Malaysian and Abu Dhabi officials to obtain and retain the business from 1MDB for Goldman Sachs, including the bond offerings.

The SFC’s investigation found that Leissner was essentially given a free rein in the execution of the 1MDB bond offerings, enabling him to provide misleading information to – or conceal information from – Goldman Sachs without being adequately challenged.

In determining the disciplinary sanctions, the SFC took into account all relevant circumstances, including:

• Goldman Sachs Asia had extensive involvement in the 1MDB bond offerings and received more than one third of the total revenue generated from 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 which 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 properly addressed;
• Goldman Sachs has settled criminal proceedings with the Malaysian government for US$2.5 billion plus a US$1.4 billion guarantee;
• since the securities industry is of fundamental importance to Hong Kong’s role as an international financial centre, it is essential to maintain among members of the investing public a well-founded confidence in the securities industry as well as in the integrity and professional competence of those who are employed in the industry;
• a strong message needs to be sent to the market to deter other market participants from allowing similar failures to occur;
• Goldman Sachs Asia’s acceptance of the SFC’s findings and disciplinary action facilitated an early resolution of the matter; and
• Goldman Sachs Asia undertook to provide the SFC with annual reports prepared by its internal audit function for three consecutive years confirming, among others, that effective remedial measures have been implemented to address the regulatory concerns identified by the SFC in this matter.