Goldman Sachs: The Intermediary Compliance Rejected and Bankers Kept

Goldman Sachs agreed to a $400 million civil penalty to the Securities and Exchange Commission in its 1MDB Foreign Corrupt Practices Act case over alleged bribery to win bond business and failures in the bank’s records and controls. The SEC’s October 22, 2020 order describes bankers working with an intermediary whom compliance had already rejected, then concealing his involvement from the people approving the deals. For someone inside a bank, the revealing records are the rejected client application, the committee’s questions and the answers that let the financing proceed.

The SEC found that Goldman helped 1MDB raise approximately $6.5 billion through three bond offerings in 2012 and 2013, earning approximately $600 million. It said participants diverted more than $2.7 billion into bribes, kickbacks and benefits for themselves and their families. We see the absurdity: the bank’s earnings exceeded its SEC civil penalty, while the money being diverted was supposed to support development for the Malaysian people.

1MDB Bond Deals Put Public Money at Stake

1MDB was a Malaysian government-owned investment and development company that relied mainly on debt to finance its projects. Its intended work included energy, real estate, tourism and agribusiness. The SEC’s account places Goldman, a New York investment bank, in the business of raising that money and committing its own capital to buy the bonds initially.

That role put the bank’s transaction records and internal accounting controls directly in the path of the money. Management committees had to approve the commitment of Goldman capital, while the deal teams supplied the information on which those decisions rested. An omitted intermediary could change the committee’s understanding of who was arranging the business and why officials were backing it.

The SEC order describes Project Magnolia as financing, in part, the acquisition of Tanjong Energy Holdings. Goldman was sole underwriter for the $1.75 billion bond transaction, backed by an Abu Dhabi sovereign wealth fund. The deal earned Goldman approximately $193 million.

Project Maximus financed another Malaysian power-company acquisition, this time involving Genting Berhad. It used a similarly sized bond offering with indirect backing from the same Abu Dhabi fund. The order put Goldman’s earnings at approximately $188 million.

Project Catalyze raised approximately $3 billion for 1MDB’s proposed joint venture with a subsidiary of the Abu Dhabi fund. The offering produced approximately $186 million for Goldman. Across the deals, the bank earned money for arranging financing whose proceeds, according to the SEC, also supplied the money used to buy official cooperation.

The SEC’s Findings: Rejected as a Client, Kept for Business

The intermediary had no formal position at 1MDB, yet the SEC found that he exercised significant control over it. He acted as a finder between Goldman, the fund and government officials. The people who knew his role could explain a transaction very differently from someone reading only its formal list of participants.

The order describes at least three attempts by Goldman bankers to make him a formal client between September 2009 and March 2011. Compliance and business-intelligence personnel refused, in part because of concerns about the source of his wealth. The SEC said those rejections were communicated to the bankers and others inside Goldman.

According to the order, senior employees continued working with him because they believed he would help officials in Malaysia and Abu Dhabi deliver lucrative business to the bank. We see the contradiction plainly: the firm rejected the relationship while its bankers kept pursuing the business that relationship could bring. Rejected as a client. Still useful for business.

The distinction matters to someone who worked on onboarding or client diligence. A rejection in the client system can sit beside deal correspondence showing the same person’s continuing involvement. Here, the SEC described both the refusals and the business that followed them, making the gap between screening and transaction approval central to the case.

The Committee’s Question and the SEC’s Finding of a False Answer

The SEC order describes an April 2012 committee meeting to approve Goldman’s own capital commitment to Project Magnolia. Its account shows what the committee asked and what the banker knew when he answered:

The committee process also depended on follow-up. The SEC explained that the Capital Committee could grant conditional approval, requiring open issues to be addressed before a deal went ahead. For these bond deals, those issues included the Abu Dhabi fund’s financial backing for Magnolia.

Deal-team memoranda were the committee’s principal inputs, and written minutes were supposed to record decisions and required follow-up. The Debt Underwriting Group was responsible for confirming that those items were completed before closing. The SEC found that the results were not documented in a way that allowed the committee to perform its control function.

Under its deferred prosecution agreement with the Justice Department, Goldman admitted that capital and reputational committees ignored or only nominally addressed warnings. We would put the question, the answer and the follow-up record alongside one another. A committee minute can show that someone raised the right concern, while the transaction file shows whether anyone resolved it. In Goldman’s case, the SEC’s findings reached the bank’s approval system as well as the employees who concealed the intermediary.

The SEC’s Account of Bond Proceeds Through Shell Companies

The SEC described a scheme in which money raised for public projects became the source of payments to officials and insiders. Near Magnolia’s closing, bankers and the intermediary worked to divert proceeds into accounts of shell companies they owned or controlled. Some money was intended for their own use and some for officials whose assistance secured the business.

According to the order, Goldman wired Magnolia’s proceeds to the designated 1MDB entity. Participants already knew that a large portion would then be diverted through shell companies. The SEC traced onward transfers to a Hong Kong account held in the names of British Virgin Islands companies controlled by a senior banker, and to companies controlled by Abu Dhabi officials with influence over the transaction.

For Maximus, the SEC described payments passing through shell companies to officials, their relatives and companies they owned. Recipients included a close relative of Malaysia’s prime minister and a senior official at the Abu Dhabi sovereign wealth fund. The order connected those payments to the officials’ help in obtaining and retaining business for Goldman.

The SEC separately found that Goldman’s records for Magnolia, Maximus and Catalyze failed to reflect key aspects of the transactions, including the third-party intermediary. That omission connects the accounting issue to the people arranging the money. Someone who knew who called the meetings or secured official support could supply a part of the transaction that the bank’s formal records left out.

A similar split between the investment record and the use of money appeared in Och-Ziff’s SEC case. The SEC found that Och-Ziff categorized transactions as investments or convertible loans even though employees knew investor funds would pay bribes. It also described a disclosure requirement being weakened: the company removed the obligation to prove that an agent had told the state investment authority about his role and fee, accepting a representation instead. In both cases, the financing file and the intermediary’s actual role needed to be read together.

Another Deal, Another Undisclosed Role

The SEC found that the intermediary remained involved in Goldman business after the bond offerings. Project Condor concerned his acquisition of an oil company through a joint venture with a subsidiary of the Abu Dhabi sovereign wealth fund. Goldman employees failed to disclose his involvement to the Intelligence Group for approximately ten months.

The SEC said a senior banker sought approval in October 2013 for Goldman to advise the intermediary’s business entity. The Intelligence Group refused, but employees completed the transaction with that entity participating as a minority co-investor alongside the fund subsidiary that was Goldman’s client. Condor closed in January 2014 and earned the bank approximately $10 million.

The client designation changed how the relationship appeared on paper. The SEC’s account still placed the rejected intermediary in the transaction, this time supplying a minority share of the capital. For an insider, the distinction between the named client and the people participating in the deal can be the entire point.

The SEC Payment and the Malaysia Credit

Goldman’s 1MDB FCPA penalty and foreign credits make more sense when read through the SEC’s own payment terms. Alongside the civil penalty, the order required $606,300,000 in disgorgement, the surrender of gains. It treated that obligation as satisfied by a payment previously made to Malaysia and 1MDB under an August 18, 2020 settlement agreement.

That wording matters when reading about FCPA penalties and disgorgement. The SEC expressly recognized the prior Malaysian payment against the disgorgement obligation.

The order also identifies a separate civil settlement with the Federal Reserve Board. The SEC’s own findings covered bribery, inaccurate transaction records and inadequate controls over the bank’s assets.

What an Insider Can Explain

A banker, finance employee or compliance professional may know why an intermediary mattered even when the committee file leaves that person out. In this case, the evidence connects the decision, the money and the written account: rejected client applications, deal-team memoranda, committee minutes, required follow-up and transfers through controlled companies. We work with the person who can explain the difference between the transaction as approved and the transaction as carried out.

Research gives a separate reason to take that knowledge seriously. The March 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, from the University of Chicago Booth School of Business and Baruch College, studied companies owned by state pension funds exposed to state False Claims Acts. It found a 5% to 9% reduction in estimated accounting-fraud likelihood, measured through financial-reporting indicators.

The SEC whistleblower program for foreign-bribery information can pay eligible whistleblowers a combined 10% to 30% of qualifying collected sanctions. Separately, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We assess the program and evidence with you so your knowledge reaches FCPA whistleblower lawyers who understand the transactions you worked on.

You Know Who Was Really in the Deal

If you saw a rejected intermediary return through another entity, or an approval condition disappear on the way to closing, talk with our whistleblower experts about the financing. We build the case around your knowledge of the business, bring in FCPA whistleblower lawyers who understand banking transactions, and stay beside you through the case and the pursuit of an award.