Introduction

The Securities and Futures Commission (the “SFC”) has reprimanded and fined Goldman Sachs (Asia) L.L.C. (“Goldman Sachs Asia”), which is licensed under the Securities and Futures Ordinance (the “SFO”), US$350 million (HK$2,712.5 million) pursuant to section 194 of the SFO. This is in addition to the charges brought against Goldman Sachs in Malaysia and United States.

The disciplinary action is taken in relation to Goldman Sachs Asia’s management, supervisory, risk, compliance and anti-money laundering control failures in connection with three bond offering transactions (the “Bond Transactions”) arranged and underwritten by Goldman Sachs International in 2012 and 2013 for 1Malaysia Development Berhad (“1MDB”), a strategic investment and development company wholly owned by the Malaysian government.

During the fund raising projects of 1MDB over the period from 2009 to 2015, billions of dollars were reportedly misappropriated and fraudulently diverted from 1MDB by high level officials of 1MDB and their associates through a scheme of conspiracy involving money laundering and bribery. This included US$2.6 billion of the funds raised in the Bond Transactions.

Goldman Sachs Asia’s involvement

Goldman Sachs Asia was heavily involved in the origination, approval, execution and sales process of the Bond Transactions and made a substantial sum of revenue from its role therein:

1.        the majority of the key investment bankers with a substantial role in the Bond Transactions were licensed persons accredited to Goldman Sachs Asia;

2.        Goldman Sachs Asia’s responsible officers (“ROs”) and licensed representatives were involved in the distribution of the bonds and associated risk management;

3.        Goldman Sachs Asia’s Business Intelligence Group was responsible for conducting business, legal and regulatory due diligence relating to the Bond Transactions; and

4.        the senior personnel of Goldman Sachs Asia were members of various regional and firmwide committees (the “Committees”) which discussed, examined and/or approved the Bond Transactions.

Serious lapses in management oversight

The SFC has found that Goldman Sachs Asia failed to detect the misconduct of Tim Leissner (“Leissner”), one of its ROs, and allowed the Bond Transactions to proceed even though numerous red flags had not been properly scrutinised.

Misconduct of Leissner and co-conspirators not detected

At the core of the conspiracy was Leissner and Low Taek Jho (“Low”), who together with others paid bribes and kickbacks to Malaysian and Abu Dhabi officials to obtain and retain businesses from 1MDB for Goldman Sachs, including the bond offerings. Low was also portrayed by US prosecutors as the central figure who set up shell companies to collect proceeds from the funds and arranged withdrawals for payoffs for his own lavish spending. According to the allegations in the US court filings, Low and Leissner and others conspired to launder more than US$2.7 billion through the US financial system for bribing foreign officials and the personal benefit of themselves and their relatives. In the premises, the SFC took the view that Goldman Sachs Asia did not have adequate controls in place to monitor the staff and detect their misconduct at a day-to-day level, notwithstanding that there were numerous facts which should have raised alarms. Despite the compliance department of Goldman Sachs’ unease over taking Low as a client whose source of wealth could not be verified, resulting in a potential money laundering risk, Leissner and Roger Ng, a former banker of Goldman Sachs, who arranged the 1MDB bond sales, continued to press the case until at least 2013. Besides, Goldman Sachs was aware that Low had close ties with government officials in Malaysia and Abu Dhabi, including Malaysia’s then prime minister who had the authority to approve 1MDB business decisions.

Further, Leissner was effectively overseen only by the Committees without any other reporting lines. The Committees accepted Leissner’s assertion that Low had no roles in the Bond Transactions without making further inquiries although the possible involvement of Low had been brought to their attention. This essentially gave Leissner free rein in the execution of the Bond Transactions, enabling him to provide misleading information to Goldman Sachs without being adequately challenged.

Inadequate inquiries into numerous red flags

There were numerous red flags present in the Bond Transactions that had not been looked into in-depth and properly addressed before the deals were approved. These include:

1.        Fees earned by Goldman Sachs in the Bond Transactions: The SFC found that Goldman Sachs Asia had not exercised due care and diligence in examining and approving the Bond Transactions by failing to make the appropriate inquiries in relation to the mandates and fees. For instance, the revenue Goldman Sachs earned from the Bond Transactions alone was more than double the total revenue it generated from acting as an arranger and/or underwriter in 213 other Asia ex-Japan bond offerings in the five years between 2011 and 2015.

2.        Use of proceeds and deal structure: The SFC further found that Goldman Sachs Asia had failed to make adequate inquiries and obtain satisfactory responses in relation to money laundering red flags before proceeding with the Bond Transactions.

There were circumstances which raised questions as to the commercial rationale of the Bond Transactions that should have given rise to suspicion on the part of Goldman Sachs. Yet, the Committees did not investigate on any associated risks of fraud and money laundering.

SFC’s findings

In light of the above, the SFC considers that Goldman Sachs Asia has failed to:

1.        supervise diligently its senior personnel who were involved in the execution of the Bond Transactions and ensure that they maintained appropriate standards of conduct (in breach of para. 4.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”));

2.        identify and/or adequately address money laundering and bribery concerns when there were numerous red flags in the Bond Transactions (in breach of section 23(b) of Schedule 2 of the Anti-Money Laundering and Counter Terrorist Financing Ordinance (Cap 615) (the “AMLO”));

3.        exercise due skill, care and diligence, and act in the best interest of its client and the integrity of the market when vetting and approving the Bond Transactions (in breach of General Principle 2 of the Code of Conduct); and

4.        put in place adequate and effective internal control procedures to protect its clients from financial loss arising from fraud and other dishonest acts or professional misconduct (in breach of para 4.3 of the Code of Conduct).

The SFC considers certain factors in arriving at the sanction. They include:

1.        Goldman Sachs Asia is Goldman Sachs’s compliance and control hub in Asia and had extensive involvement in the Bond Transactions;

2.        there were serious lapses and deficiencies in Goldman Sachs Asia’s risk, compliance and anti-money laundering controls and management oversight;

3.        a strong message needs to be sent to the market to deter other market participants from allowing similar failures to occur; and

4.        various mitigating factors including Goldman Sachs Asia’s acceptance of the SFC’s findings and disciplinary action facilitated an early resolution of the matter.

The SFC eventually reprimanded and fined Goldman Sachs Asia a sum of US$350 million.

Takeaway

The multiple charges pressed and heavy fines imposed in various jurisdictions in relation to the Bond Transactions mean that this case will go down as one of the worst scandals in Goldman Sachs’s long history. The scandal also brought down the prime minister of Malaysia at the time, Najib Razak, who was convicted of corruption, sentenced to up to 12 years in prison and fined nearly US$50 million, although the sentence was stayed on appeal.

The securities industry is of fundamental importance to Hong Kong’s role as an international financial centre. Licensed corporations, regardless of how reputable or well-established they are, are subject to the same set of stringent regulations in Hong Kong, including the Code of Conduct and the AMLO.