Goldman Sachs fine sees UK regulators offer banks a stark reminder to act on bribery red flags

Mon

The British slice of Goldman Sachs’ hefty global 1MDB settlement represented a modest 5 percent of the $2.3 billion total — but the regulators' reasoning serves up important takeaways for other UK financial institutions ignoring red flags as they push deals through.

Goldman Sachs International, a London-based arm of the US investment banking group, had a fine of 96.6 million pounds ($126 million) jointly imposed by the Financial Conduct Authority and the Prudential Regulatory Authority as part of a coordinated global resolution.

That comprised the $2.3 billion in fines from nine regulators in the US, UK and Singapore, for a catalogue of risk-control failures linked to scandal-hit Malaysian sovereign wealth fund 1Malaysia Development Berhad, alongside a repayment of $600 million in fees that GSI earned for its part in 1MDB's dealings.

The huge penalty is in addition to a $3.9 billion corruption settlement agreed with Malaysia’s government in July. 1MDB has been at the center of a massive corruption scandal since 2015 when former Malaysian Prime Minister Najib Razak was accused of funneling billions of dollars from the fund into his personal bank accounts.

Warnings ignored

While US regulators took the lion's share of the settlement, the British dimensions of GSI's trail of failings emerged clearly in the report by the FCA and PRA yesterday and should offer salutary lessons for other banks regulated in the UK.

The FCA punished GSI for its involvement in three bond transactions for 1MDB in 2012 and 2013. While the transactions took place mainly in Asia, GSI executives in London signed off on it. The bank made $567 million on the deals, with $91 million booked to London.

The FCA said signoff on the transactions occurred despite the “significant risk” involved and the fact that they involved clients that the bank itself had identified as presenting “enhanced legal, compliance and reputational risk.” The bank had previously turned away a risky client who later was linked to the transactions, the regulator said.

Bank executives were warned after the deals closed about possible bribery linked to 1MDB as well as other misconduct. And while the deals had already gone ahead, the bank had a duty to inform its compliance function and in turn regulators about the issues.

Negative publicity surrounding 1MDB after the deals were signed off were seemingly ignored by executives, who failed to take appropriate steps and escalate concerns internally.

Fishy smell

While the scale of the wrongdoing by multiple actors in the 1MDB scandal might be extraordinary, any big deals need to pass the smell test. If there are concerns about the probity of those involved then concerns must be escalated, despite the huge profits at stake. This applies to issues that arise even after the deals have been signed off and completed.

The failure to assess the risks involved in the transactions and then the neglect to be open with the authorities after they were done are the essential factors behind yesterday’s UK sanction — which in absolute terms was a significant sum, and one that would have been substantially higher except the bank was given credit for settling early and for having paid so much already to the Malaysian authorities.

The FCA and PRA have been unambiguous that unless banks are open and honest with them when they discover anything fishy in a transaction, they can expect the same.

They must avoid placing too much reliance on executives putting deals together and ensure to examine the risks involved in transactions appropriately. In GSI's case, the FCA said, "the manner in which some of the risks were presented to the committees did not enable them to assess the risks fully, including the reputational and financial crime risks arising from each of the 1MDB transactions, holistically."

Mark Steward, the FCA's head of enforcement, spelled out the risk for companies that willfully turn a blind eye: "GSI’s failure to take appropriate action in this case shows that it did not take this responsibility seriously. When confronted with allegations of bribery and staff misconduct, the firm’s mishandling allowed severe misconduct to go unaddressed. There is no amnesty for firms that tackle financial crime poorly."