Goldman Sachs has reached a $3.9bn (£3.1bn) settlement with the Malaysian government over the multibillion-dollar 1MDB corruption scandal.
The deal struck by the Wall Street bank, which allegedly failed to act while $4.5bn was looted from its client, Malaysia’s sovereign wealth fund 1MDB, involves a cash payment of $2.5bn and a guarantee to recover $1.4bn in assets bought with the fraudulently diverted money. Goldman Sachs underwrote and arranged bond sales for the wealth fund totalling $6.5bn.
The Malaysian finance ministry said including the fine and what it had already received from the US Department of Justice, more than $4.5bn “will be returned to the people of Malaysia”.
Quick GuideThe 1MDB scandal
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What was 1MDB?
1Malaysia Development Berhad (1MDB) was an investment fund created in 2009 by former prime minister Najib Razak with a laudable aim: to finance the development of Malaysia and help its poorest people. The fund leveraged Malaysia’s reputation as a fast-growing "tiger economy" to raise debt to fund infrastructure.
What went wrong?
Between 2009 and at least 2014 the fund became a vehicle for government officials to steal an alleged $4.5bn (£3.5bn) and launder the proceeds. Instead of funding projects for Malaysia’s poorest, the money was spent on luxury property in the US and elsewhere, including London, and used to pay gambling expenses at Las Vegas casinos.
The alleged thieves also acquired artwork worth more than $200m such as paintings by Vincent van Gogh and Claude Monet, bought lavish gifts for their family and friends and even invested in Hollywood productions, such as Martin Scorsese’s Oscar-nominated The Wolf of Wall Street – itself a story of investment fraud.
Who was involved?
The scandal reached the very highest political circles, with Najib accused of receiving $681m in his personal accounts. Najib, who has denied all wrongdoing, is on trial in July on corruption charges after the scandal led to his ouster in a 2018 election.
Najib’s wife, Rosmah Mansor, and stepson, Riza Aziz, were also charged in the case, but prosecutors recently dropped charges against Aziz following a heavily criticised settlement.
One of the key figures in the fraud was Low Taek Jho, better known as Jho Low, a Malaysian financier with no formal link to 1MDB but who is alleged to have been a mastermind behind its looting. Low is a fugitive, with reports he may be living in China.
What was the role of Goldman Sachs?
US prosecutors allege that there were four phases of the 1MDB fraud. Goldman Sachs, a globally renowned investment bank, was allegedly a key part of two of those. The US bank arranged and underwrote three bond offerings worth $6.5bn in 2012 and 2013 – earning an unusually large $600m in fees.
Tim Leissner, a former partner at the bank, has already pleaded guilty to bribery, conspiracy and money laundering charges. Another banker, Roger Ng, is awaiting trial after pleading not guilty, while a third, Andrea Vella, has been banned from the US banking industry.
Could Goldman Sachs face any other penalties?
The settlement ends all Malaysian criminal and regulatory proceedings against the bank and 17 current and former directors accused of misleading bond investors.
However, there is still the possibility of action from the hard-hitting US Department of Justice. The DoJ is reportedly looking into violations of the US Foreign Corrupt Practices Act. Jasper Jolly
“This settlement represents assets that rightfully belong to the Malaysian people,” said Tengku Zafrul Aziz, the Malaysian finance minister. “We are securing more money from Goldman Sachs compared with previous attempts, which were far below expectations.”
In November, the former Malaysian prime minister, Mahathir Mohamad, confirmed he had rejected an offer from Goldman Sachs worth $1.75bn. “We are not satisfied with that amount,” he said at the time, adding that the bank needed to “respond reasonably”.
“We are also good to be able to resolve the outside the court system, which would have cost a lot of time, money and resources,” said Tengku Zafrul. “With this settlement we will have the return of the monies expedited.”
The scandal has in recent years cast a shadow over Goldman Sachs, one of the most recognisable names on Wall Street. In a statement on Friday the bank said the settlement meant that Malaysia would not pursue criminal charges against the organisation or current or former directors or employees.
The Malaysian settlement will remove a large source of financial uncertainty from the bank. Goldman said it would increase the amount of money it sets aside to cover litigation and regulatory costs, after last week booking charges worth $945m for the second quarter of the year.
However, Goldman still faces an investigation by the US Department of Justice, with talks over a potential settlement thought to be at an advanced stage. In unrelated cases the DoJ has previously agreed settlements worth billions of dollars against other companies involved in corruption cases.
In a statement, Goldman Sachs said the settlement was “an important step towards putting the 1MDB matter behind us”, as well as allowing the Malaysian government to progress with efforts to recover more of the stolen money.
“There are important lessons to be learned from this situation, and we must be self-critical to ensure that we only improve from the experience,” the statement said.
The funds were allegedly siphoned off from 1MDB in a fraud said to have involved the former Malaysian prime minister Najib Razak, the Malaysian financier Jho Low, and his associates.
The funds were allegedly used to buy everything from from yachts to artwork, and fund the production of Hollywood films including The Wolf of Wall Street, starring actor Leonardo Di Caprio.
Razak, 66, faces several corruption trials in Malaysia, and has pleaded not guilty, with the first ending last month with a verdict due to be handed down on 28 July.
The former prime minister, who was voted out of power in 2018, also faces dozens of criminal charges relating to the fraud at 1MDB, a fund he co-founded in 2009.
Low, who has also denied wrongdoing, faces charges in Malaysia and the US.
Last year, the Goldman Sachs chief executive, David Solomon, apologised to the people of Malaysia over the role of the bank’s former employee Tim Leissner in the 1MDB scandal and the effect it had on the country.
Leissner, a former partner at Goldman Sachs in Asia, pleaded guilty in the US in August 2018 to conspiracy to launder money and conspiracy to violate the Foreign Corrupt Practices Act, and agreed to forfeit $43.7m.
Leissner and another former employee, Roger Ng, were excluded from the Malaysian settlement, meaning legal proceedings already started against them could continue.
