Goldman Sachs’ Malaysian subsidiary pleaded guilty to a bribery charge as the bank agreed a record $2.9bn global settlement with regulators over the 1MDB money-laundering scandal.
The settlement on Thursday came as Goldman said it would claw back up to $175m in pay and bonuses from current and former executives including David Solomon, the bank’s boss, and his predecessor Lloyd Blankfein.
The deal with regulators is the first criminal settlement in Goldman’s history as a public company. It was punished for ignoring multiple red flags over the multibillion-dollar fundraisings it arranged for state fund 1Malaysia Development Berhad.
US officials said Goldman had played a “central role” in the looting of 1MDB and maintained that the bank should have detected warning signs that could have prevented at least part of the theft of $2.7bn from the fund.
“Personnel at the bank allowed this scheme to proceed by overlooking or ignoring a number of clear red flags,” said Brian Rabbitt, the acting head of the US Department of Justice’s criminal division.
He added that $1.6bn in bribes had been paid in the scheme to loot 1MDB, the largest amount ever in a US foreign bribery case, and that Goldman’s penalty was similarly a record for such cases.
Goldman Sachs Group, the parent company, has entered into a three-year deferred prosecution agreement with the justice department and admitted wrongdoing. The bank’s Malaysian subsidiary pleaded guilty to a criminal charge of violating the Foreign Corrupt Practices Act.
In federal court in New York, Karen Seymour, Goldman’s general counsel, admitted the Malaysian subsidiary had paid bribes “in order to obtain and retain business for Goldman Sachs”.
“Guilty, your honour,” she said at the hearing on behalf of Goldman Sachs Malaysia.
Goldman’s board said that “in acknowledgment of the firm’s institutional failures” it would claw back $67m of bonuses granted or paid to five former senior executives. Those executives were not named but their descriptions match those of Mr Blankfein, former chief operating officer Gary Cohn, former finance boss David Viniar, and former executives Michael Sherwood and Mike Evans.
Some $31m will be cut from the 2020 pay packets of Mr Solomon, chief operating officer John Waldron, chief financial officer Stephen Scherr and Goldman Sachs International boss Richard Gnodde.
The bank is also seeking repayment of $76m in bonuses previously awarded to three former bankers, including Tim Leissner, who has pleaded guilty to charges in the case; Roger Ng, who has pleaded not guilty to US charges; and Andrea Vella, a former partner who the Federal Reserve has banned from working in US banking.
“We recognise that we did not adequately address red flags and scrutinise the representations of certain members of the deal team,” said Mr Solomon.
The settlement includes $2.3bn in fines and the forfeiture of $600m fees earned by Goldman on the deal.
It will be split between authorities including the US justice department, Securities and Exchange Commission and Federal Reserve; New York’s Department of Financial Services; the UK’s Financial Conduct Authority and Prudential Regulation Authority; and regulators in Singapore and Hong Kong.
Earlier this year, Goldman agreed a settlement of up to $3.9bn with Malaysian authorities. The $600m in forfeiture will be credited against the Malaysian settlement.
The sums announced on Thursday are broadly in line with the amount Goldman has set aside for potential penalties and represent the final regulatory actions in the case. Goldman helped 1MDB raise $6.5bn in bonds from 2012 to 2013, much of which was ultimately looted.
Shares in Goldman were flat in early trading in New York.
The latest settlements revealed fresh details about Goldman’s role in the scandal, which earned the bank unusually high fees of $600m for issuing 1MDB’s bonds.
The bank also profited by investing $250m in the bonds in 2013 and selling the positions the following year, even though the bonds were intended to be held to maturity.
The bonds were sold at the “recommendation” of a Goldman team that worked with Mr Leissner, New York’s Department of Financial Services said.
The DFS also claimed that a senior official at Goldman’s London operation was nonplussed upon hearing that a person connected to the 1MDB deals was “trying to get something in his pocket”.
“What’s disturbing about that? It’s nothing new, is it?” the official said, according to the DFS settlement.
Earlier on Thursday, Hong Kong’s Securities and Futures Commission reprimanded Goldman Sachs Asia for “serious lapses and deficiencies” in its compliance controls.
Mr Leissner, who has pleaded guilty to US money-laundering charges, was given “free rein” and not “adequately challenged” by Goldman, the SFC added.
The money-laundering scandal involves the use of money from 1MDB to fund a lavish spending spree, including expensive art and the financing of the Oscar-nominated film The Wolf of Wall Street.
Jho Low, the Malaysian financier who allegedly masterminded the elaborate scheme, is still at large. He has denied wrongdoing.
The scandal has already led to a 12-year jail sentence for Malaysia’s former prime minister Najib Razak, who pleaded not guilty to all charges and is appealing against the verdict.
The 1MDB saga has hung heavily over Mr Solomon’s first two years as Goldman’s chief executive, but the bank’s share price gave little reaction when the broad terms of its wide-ranging settlements became public earlier this week.
“This is already priced in. The stock price is already reflecting this kind of action,” said Sumit Agarwal, finance professor at the National University of Singapore’s business school.