Fed step ups Goldman probe over 1MDB compliance failures

SINGAPORE: The Federal Reserve is ramping up its investigation into how Goldman Sachs Group Inc. executives dodged the bank’s internal controls while helping Malaysian authorities raise billions of dollars that later went missing, according to people briefed on the matter.

The probe examines the actions of the New York-based investment bank as well as individuals and has been gaining momentum in recent weeks, the people said, asking not to be identified because the inquiry is confidential.

 The Fed doesn’t have the powers of a criminal prosecutor, but it can and often does sanction people involved in banking scandals.

The Fed has previously interviewed current and former employees at the firm, prying into how easy it is to short-circuit compliance systems, the people said. In recent weeks, representatives from Goldman Sachs met with the Fed and defended the bank’s controls, according to a person with knowledge of the matter.

As Goldman Sachs’s main regulator, the Fed has broad authority to penalize the bank or impose other changes.

Earlier this year, it capped Wells Fargo & Co.’s size until the lender shores up internal controls.

“It is the Federal Reserve’s policy not to confirm or deny the existence of investigations,” the central bank said in an emailed statement. 

“We refer criminal violations to the Department of Justice as necessary and exercise our enforcement and safety and soundness authorities if the facts are warranted.”

Leissner’s Plea

In a guilty plea unveiled this month, Goldman Sachs’s former head of Southeast Asia, Tim Leissner, said he and others conspired to conceal facts from the firm’s compliance and legal staff. 

Leissner said he and his colleagues hid, for example, the involvement of controversial financier Low Taek Jho while setting out to raise more than $6 billion on behalf of 1Malaysia Development Bhd., a Malaysian state investment company that investigators say was plundered.

U.S. prosecutors have accused Low of masterminding schemes to launder funds from 1MDB and pay kickbacks to Malaysian government officials. 

Low and a group of Malaysians allegedly diverted some of the money raised into personal accounts disguised to look like legitimate businesses. Low maintains his innocence.

Leissner pleaded guilty to U.S. charges he conspired to launder money and violated the Foreign Corrupt Practices Act. He’s been ordered to forfeit $43.7 million. 

He admitted to bribing officials in Malaysia and the United Arab Emirates to get bond deals for Goldman Sachs, and he said he and others arranged the 1MDB fundraising as debt offerings because it would generate higher fees for the bank.

In a statement to the court, Leissner said his behavior was “very much in line of its culture of Goldman Sachs to conceal facts from certain compliance and legal employees.” 

The Justice Department has also said in filings that the business culture at Goldman Sachs, particularly in Southeast Asia, prioritized consummating deals ahead of the proper operation of its compliance functions.

Still, the DOJ filings said individual bankers knowingly circumvented controls the bank had in place and hid certain details about the deal to prevent compliance officers from seeking to block the firm’s involvement in the transactions.

Since prosecutors unveiled their indictments this month, analysts and investors have been trying to gauge what the financial fallout might be for Goldman. 

In behind-the-scenes talks with authorities, the firm has presented information that isolates much of the blame on Leissner, people with knowledge of those exchanges have said. Yet publicly, it has acknowledged it may spend significantly to resolve the case.

“The firm has received subpoenas and requests for documents and information from various governmental and regulatory bodies,” including the Department of Justice, the company wrote in a regulatory filing this month that didn’t specify the Fed’s interest.

Goldman said in the filing that it’s cooperating with investigators and that while it can’t predict the outcome, “any proceedings by the DOJ or other governmental or regulatory authorities could result in the imposition of significant fines, penalties and other sanctions.” - Bloomberg

Corporate News , 1MDB