Pressure builds on Goldman Sachs over role in 1MDB scandal, as MAS discloses probe

31 January 2017 9:54am

1 August 2016. By Toh Han Shih.

With a statement by the Monetary Authority of Singapore, or MAS, that specifically names Goldman Sachs as the subject of an investigation into possible money laundering by state investment fund 1Malaysia Development Berhad, or 1MDB, it looks increasingly unlikely that the US bank will be able to avoid some measure of responsibility for the scandal surrounding 1MDB, given that US authorities are also probing the bank’s conduct.

For the first time, MAS over the weekend disclosed it is conducting an investigation of Goldman Sachs and did not rule out the possibility of punishing the bank if it is found to have violated Singapore regulations.

On July 30, a spokeswoman for MAS told MLex via email, “MAS’ supervisory examination into the extent of Goldman Sachs (Singapore) Pte’s involvement in the 1MDB bond deals is still ongoing. MAS will take decisive regulatory actions against any financial institution or individual in Singapore that has breached regulations or failed to meet the expected anti-money laundering standards.”

1MDB engaged Goldman’s Singapore office to be the sole book runner and arranger for 1MDB’s first bond issue of $1.75 billion in March 2012. In all, Goldman underwrote three bond issues by 1MDB totaling $6.5 billion in 2012 and 2013.

On July 29, The Wall Street Journal reported that earlier this year, Goldman Sachs received subpoenas from the US Department of Justice, or DOJ, and the Securities and Exchange Commission, or SEC, compelling the bank to produce information on its dealings with 1MDB.

On July 20, the DOJ filed a civil suit in the US District Court for the Central District of California, which alleged billions of dollars from the proceeds of 1MDB bonds underwritten by Goldman Sachs were stolen and laundered. In a 136-page complaint accompanying the civil suit, Goldman Sachs was mentioned 50 times.

Goldman Sachs will find it hard to completely evade any liability by saying it merely underwrote the bonds and had nothing to do with the subsequent fraud and money laundering that occurred with the bond proceeds, it is understood. Details of Goldman Sachs’ involvement with 1MDB described in the complaint raise some troubling questions.

The complaint revealed Goldman Sachs was involved with 1MDB’s establishment in 2009, when it was called the Terengganu Investment Authority, or TIA, a sovereign wealth fund of the Malaysian state of Terengganu. It was involved in establishing TIA with a Malaysian tycoon Low Taek Jho, popularly called Jho Low. The complaint alleged more than $1 billion of 1MDB funds were laundered through Good Star, a now-defunct Seychelles company owned by Jho Low. According to the complaint, in January 2009, TIA’s executive director of business development sent an email to Jho Low and some Goldman Sachs employees, saying, “I think it is best to get Jho involved at every stage.”

In an email dated March 27, 2012, an Asia managing director of Goldman Sachs described Jho Low as “the 1MDB operator or intermediary in Malaysia,” despite Jho Low holding no official position in 1MDB. Jho Low earlier told media he was an informal advisor to 1MDB. Jho Low did not reply to questions from MLex.

In 2013, 1MDB raised $3 billion from a bond issue underwritten by Goldman Sachs. More than $1.26 billion of the proceeds from the bond were misappropriated and fraudulently diverted to bank accounts in Singapore and Switzerland, according to the DOJ complaint. From 1MDB’s third bond issue, $681 million was transferred to a bank account of Malaysian Prime Minister Najib Razak, who was then 1MDB chairman, while other portions of the proceeds were used by Jho Low to purchase art.

During 1MDB’s bond issues in 2012 and 2013, Jasmine Loo Ai Swan, who was 1MDB general counsel and executive director at that time, was a main contact between 1MDB and Goldman Sachs. Najib and Loo received millions of dollars from 1MDB’s two bond issues in 2012, according to the complaint. In July 2015, Malaysia’s central bank, Bank Negara, issued a “Wanted” poster on its Facebook page, seeking Loo and Casey Tang Keng Chee, a former 1MDB executive director, to assist investigations under Malaysia’s Exchange Control Act 1953.

Even if Goldman Sachs is not found to be complicit in the laundering of 1MDB funds, it may be liable for misrepresentation in the prospectuses of 1MDB’s bond issues, it is understood.

The circular of 1MDB’s bond issue in 2013 “failed to disclose that certain individuals related to 1MDB,” including Najib, “would receive hundreds of millions of dollars from the proceeds of the bond sale within days of its closing,” the complaint alleged. “This fact would have been material to the bond transaction, as it would have alerted investors to the possibility of conflicts of interest.”

Before the publication of bond circulars, underwriters have an obligation to know their clients and conduct proper due diligence to ensure the authenticity of the statements in the circulars. Goldman Sachs should have conducted due diligence on a person like Jho Low, who played an important role in 1MDB.

US regulators have punished underwriters of fraudulent bond issues. For example, in September 2015, the SEC sanctioned and fined 22 underwriting firms for violating US laws by selling US municipal bonds using offering documents that contained materially false statements or omissions. The SEC found that the underwriting firms failed to conduct adequate due diligence to identify the misstatements and omissions, said an SEC press release.

Earlier, Goldman Sachs was quoted in media reports saying it had conducted due diligence on 1MDB. Goldman Sachs declined to comment to MLex.

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