This week Goldman Sachs missed earnings expectations for the second consecutive quarter. The main cause of this? Litigation provisions related to the 1MDB scandal removed more than $1bn from the bank’s bottom line.
What is the 1MDB scandal?
1MDB is the name of a Malaysian state investment fund from where several billion dollars was stolen in an audacious fraud. The money was spent on luxury property, expensive art and even financing the Oscar-nominated film The Wolf of Wall Street — itself a tale of financial excess. At its heart is Jho Low, a 38-year-old Malaysian financier accused of masterminding an extraordinary looting of the fund. Mr Low has denied wrongdoing in the scandal, which has been labelled “kleptocracy at its worst” by US officials.
How did Goldman get caught up in it?
Goldman helped 1MDB raise $6.5bn in a series of bond issues in 2012 and 2013, much of which was ultimately stolen. Tim Leissner, a former senior partner who led the deals, has pleaded guilty to US charges of money laundering and bribery. His former deputy at Goldman, Roger Ng, is set for trial in May.
US prosecutors have criticised Goldman’s culture and compliance controls. The US bank, which earned $600m in fees from the bond deals, has claimed it was duped by rogue employees and that it did not know Mr Low was involved in the bond deals.
In 2010 Goldman’s private bank had turned down Mr Low as a client because it could not “validate the source of his wealth”.
How big a deal is the 1MDB scandal for Goldman?
Investor concerns about 1MDB peaked about a year ago. Notably, reports that Lloyd Blankfein, Goldman’s former chief executive, had met Mr Low fuelled concerns that some of the bank’s most senior executives could be caught up in the probe.
Authorities in Malaysia said Goldman should pay $7.5bn in reparations, and analysts predicted a massive financial hit to the US bank. Rival investment bankers claimed that Goldman’s reputation was terminally tarnished — not just in Malaysia but in south-east Asia and further afield.
In recent months, the issue of 1MDB has fallen down the list of investors’ fears, partly thanks to reassuring comments on Goldman’s earnings calls last year about the level of potential fines and signs that its investment banking franchise has not endured lasting damage.
A newer worry is the prospect of Goldman’s first criminal settlement with the US Department of Justice. The bank is discussing with the DoJ whether its Asian subsidiary will plead guilty as part of a deal. That would be particularly painful for a bank that avoided criminal sanctions after the financial crisis.
What have the US and Malaysian governments done so far?
The US led the way on investigations and charges linked to 1MDB with a series of civil lawsuits in 2016 to recover money stolen from the fund. At the time, Malaysia was still governed by Najib Razak, who founded 1MDB and is accused of profiting from its looting. He has denied the claims. In 2018, when Mahathir Mohamad ousted Mr Najib as prime minister, probes in the US and Malaysia, where much of the evidence lay, unfolded quickly.
In November 2018, the US Department of Justice indicted Mr Low and Mr Ng, and announced that Mr Leissner had already pleaded guilty. Malaysian prosecutors in December 2018 filed criminal charges closely mirroring the DoJ’s against three Goldman units — Goldman Sachs International, Goldman Sachs Asia and Goldman Sachs Singapore — as well as against Mr Leissner, Mr Ng and Mr Low.
Last August Kuala Lumpur doubled down, filing criminal charges against 17 current and former Goldman executives, accusing them of misleading 1MDB bond investors.
Are those the only cases?
These are the biggest cases, but there have been several others. Goldman is facing various civil claims in the US courts, including an action filed by some of its own shareholders in February 2019. Abu Dhabi’s International Petroleum Investment Company (Ipic), which guaranteed billions of dollars of bonds arranged by Goldman for 1MDB, also began a US legal action against Goldman in late 2018.
There is also a handful of 1MDB cases in Switzerland, including one centred on the role of Switzerland’s Falcon Private Bank. In France, the scandal led to the 2018 seizure of almost $30m of properties owned by Ipic’s former managing director Khadem al-Qubaisi, who was arrested in August 2016 over his role in the scandal. He was given a 15-year prison sentence by the Abu Dhabi courts last year.
Meanwhile also last year, Mr Low settled a string of US civil asset forfeiture lawsuits, allowing the government to recover $700m worth of assets that prosecutors say were purchased with stolen 1MDB money. Mr Low did not admit any wrongdoing as part of the settlement.
What’s coming next?
Mr Ng will go on trial in the US in May. Mr Leissner, who is set for sentencing the following month, may testify against his former colleague. For Goldman, as well as a possible $2bn resolution to the US probes in the coming weeks, it is also in the throes of a court case in Kuala Lumpur involving three of its subsidiaries.
Cases involving two of the subsidiaries have moved to Malaysia’s high court and the third may follow in February, when the high court may decide on a timeline for a trial. Kuala Lumpur’s progress in bringing the 17 Goldman executives — who all reside outside the south-east Asian country — before Malaysian courts remains unclear. Under Malaysian law, it is not possible to charge someone in absentia.
What will that mean for Goldman?
Goldman’s business in Malaysia is small so, beyond any fines, restrictions on the bank’s operations in the country are unlikely to have a large impact on its bottom line. The prospect of sanctions against individual Goldman executives is reasonably remote, as the executives would have to present themselves for charges in Malaysia. In any case, the bank is hoping these charges will be dismissed as part of a settlement between the bank and the Malaysian authorities.
Will that be the end of it?
After the likely Goldman settlement, the major unknown is Mr Low. He faces charges in the US and Malaysia, and is reported to be in China. He has argued that he would not get a fair trial in Kuala Lumpur under Mr Mahathir’s government. The prime minister told the Financial Times in November that Malaysia was not negotiating, or in contact, with Mr Low.
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