e-Learning login

26 October 2020

The FCA and the Prudential Regulation Authority (PRA) have fined Goldman Sachs International (GSI) a total of £96.6 million (US$126 million) for risk management failures connected to 1Malaysia Development Berhad (1MDB) and its role in three fund raising transactions for 1MDB. The FCA and PRA fines are part of a US$2.9 billion globally coordinated resolution reached with the Goldman Sachs Group Inc. (GSG) and its subsidiaries.

MDB is a Malaysian state-owned development company that has been at the centre of billion-dollar embezzlement allegations. GSI underwrote, purchased and arranged three bond transactions for 1MDB in 2012 and 2013 that raised a total of US$6.5 billion for 1MDB. The 1MDB transactions were approved by global GSG committees that GSI participated in, and were booked to GSI.

The 1MDB transactions involved clients and counterparties in jurisdictions with higher financial crime risk. GSI was also aware of the risk of involvement of a third party that GSI had serious concerns about. GSI failed to assess and manage risk to the standard that was required given the high risk profile of the 1MDB transactions, and failed to assess risk factors on a sufficiently holistic basis. GSI also failed to address allegations of bribery in 2013 and failed to manage allegations of misconduct in connection with 1MDB in 2015.

Mark Steward, FCA Executive Director of Enforcement and Market Oversight, said: ‘Firms have a crucial role to play in tackling financial crime, and in helping to maintain the integrity of the financial system. GSI’s failure to take appropriate action in this case shows that it did not take this responsibility seriously. When confronted with allegations of bribery and staff misconduct, the firm’s mishandling allowed severe misconduct to go unaddressed. There is no amnesty for firms that tackle financial crime poorly, and the size of GSI’s fine reflects that.’

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, said: ‘Failure to manage financial crime risk can have a significant adverse impact on a firm’s safety and soundness. We expect firms to manage risk, including financial crime risk, prudently and holistically and for allegations of bribery and misconduct to be taken very seriously.  The seriousness of the case and of GSI’s failures in connection with 1MDB are reflected in the size of the PRA’s fine.’

The investigation found that GSI breached a number of FCA and PRA principles and rules. Specifically, GSI failed to:

  • assess with due skill, care and diligence the risk factors that arose in each of the 1MDB bond transactions on a sufficiently holistic basis
  • assess and manage the risk of the involvement in the 1MDB bond transactions of a third party that GSI had serious concerns about
  • exercise due skill, care and diligence when managing allegations of bribery and misconduct in connection with 1MDB and the third 1MDB bond transaction
  • record in sufficient detail the assessment and management of risk associated with the 1MDB bond transactions

The US$2.9 billion global resolution included, in addition to the FCA and PRA, the US Department of Justice, the US Securities and Exchange Commission, the US Federal Reserve Board of Governors, the New York Department of Financial Services, the Monetary Authority of Singapore, the Attorney-General’s Chambers Office, Singapore, and the Commercial Affairs Department of the Singapore Police Force. The global resolution is separate to the US$3.9 billion settlement reached between GSG and the Government of Malaysia in August 2020. The FCA and PRA took this settlement into account in determining their financial penalties.

GSI agreed to resolve this case with the FCA and PRA, qualifying it for a 30% discount in the overall penalty imposed by both regulators. Without this discount, the FCA and PRA would have imposed a financial penalty of £69,012,000 (US$90,000,000) each on GSI.

1MDB is a Malaysian state-owned development company that has been at the centre of billion-dollar embezzlement allegations. GSI underwrote, purchased and arranged three bond transactions for 1MDB in 2012 and 2013 that raised a total of US$6.5 billion for 1MDB. The 1MDB transactions were approved by global GSG committees that GSI participated in, and were booked to GSI.

The 1MDB transactions involved clients and counterparties in jurisdictions with higher financial crime risk. GSI was also aware of the risk of involvement of a third party that GSI had serious concerns about. GSI failed to assess and manage risk to the standard that was required given the high risk profile of the 1MDB transactions, and failed to assess risk factors on a sufficiently holistic basis. GSI also failed to address allegations of bribery in 2013 and failed to manage allegations of misconduct in connection with 1MDB in 2015.

Mark Steward, FCA Executive Director of Enforcement and Market Oversight, said: ‘Firms have a crucial role to play in tackling financial crime, and in helping to maintain the integrity of the financial system. GSI’s failure to take appropriate action in this case shows that it did not take this responsibility seriously. When confronted with allegations of bribery and staff misconduct, the firm’s mishandling allowed severe misconduct to go unaddressed. There is no amnesty for firms that tackle financial crime poorly, and the size of GSI’s fine reflects that.’

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, said: ‘Failure to manage financial crime risk can have a significant adverse impact on a firm’s safety and soundness. We expect firms to manage risk, including financial crime risk, prudently and holistically and for allegations of bribery and misconduct to be taken very seriously.  The seriousness of the case and of GSI’s failures in connection with 1MDB are reflected in the size of the PRA’s fine.’

The investigation found that GSI breached a number of FCA and PRA principles and rules. Specifically, GSI failed to:

  • assess with due skill, care and diligence the risk factors that arose in each of the 1MDB bond transactions on a sufficiently holistic basis
  • assess and manage the risk of the involvement in the 1MDB bond transactions of a third party that GSI had serious concerns about
  • exercise due skill, care and diligence when managing allegations of bribery and misconduct in connection with 1MDB and the third 1MDB bond transaction
  • record in sufficient detail the assessment and management of risk associated with the 1MDB bond transactions

The US$2.9 billion global resolution included, in addition to the FCA and PRA, the US Department of Justice, the US Securities and Exchange Commission, the US Federal Reserve Board of Governors, the New York Department of Financial Services, the Monetary Authority of Singapore, the Attorney-General’s Chambers Office, Singapore, and the Commercial Affairs Department of the Singapore Police Force. The global resolution is separate to the US$3.9 billion settlement reached between GSG and the Government of Malaysia in August 2020. The FCA and PRA took this settlement into account in determining their financial penalties.

GSI agreed to resolve this case with the FCA and PRA, qualifying it for a 30% discount in the overall penalty imposed by both regulators. Without this discount, the FCA and PRA would have imposed a financial penalty of £69,012,000 (US$90,000,000) each on GSI.

Source: https://www.fca.org.uk/news/press-releases/fca-pra-fine-goldman-sachs-international-risk-management-failures-1mdb

By David Petty

Get in Touch

Speak to us to find out how we can help you: