On 22 October 2020, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) announced they have imposed a fine of GBP96.6 million on Goldman Sachs International (GSI). The fine relates to GSI’s role in three fund raising transactions for 1Malaysia Development Berhad (1MDB) - a Malaysian state-owned development company - and alleged risk management failures by GSI in this respect.
1MDB has been at the centre of billion-USD embezzlement allegations. GSI undertook key roles in respect of three bond transactions for 1MDB in 2012/13 (raising a total of USD6.5 billion for 1MDB), for which they booked profits of USD567 million. According to the relevant FCA press release, even though the transactions involved clients and counterparties in jurisdictions with higher financial crime risk, GSI failed to assess and manage risk as required in the circumstances and failed to assess risk factors in a sufficiently holistic manner.
The regulatory breaches
Following investigation by the UK regulators, GSI was found in breach of a number of FCA and PRA principles and rules, including:
PRIN 2 breaches:
- Failure to assess and manage the risk of a particular third party – who had previously been rejected as a client of GSI due to concerns about an unverified source of wealth.
- Failure to properly represent risks in committee papers and before the GSI committees assessing the 1MDB transactions prior to approving them.
- Failure to escalate information relating to the bribery allegations and failure to take “timely action” in relation to the same.
PRIN 3 breaches:
- The GSI transaction committees who were responsible for reviewing the risks associated with the 1MDB Transactions prior to approval did not maintain adequate records to show how they had considered and dealt with the risks holistically.
- GSI was unable to demonstrate how it assessed, challenged and approved transactions; or how it scrutinised transactions when financial crime issues arose.
In addition, it seems likely that investigations are open in relation to individual misconduct as well and it is understood that criminal sanctions may be imposed on individuals in other jurisdictions.
GSI agreed to resolve the case with the UK regulators, qualifying it for a 30% discount in the overall fine imposed by both the FCA and the PRA.
The UK regulators’ fines form part of a USD2.9 billion “globally coordinated resolution” reached with the Goldman Sachs Group, which includes: the US Department of Justice, the US Securities and Exchange Commission, the US Federal Reserve Board of Governors, the New York Department of Financial Services, the Monetary Authority of Singapore, the Attorney-General’s Chambers Office, Singapore, and the Commercial Affairs Department of the Singapore Police Force. This global resolution is separate to the USD3.9 billion settlement reached in August 2020 between Goldman Sachs Group and the Government of Malaysia.
Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, stated that “we [the PRA] expect firms to manage risk, including financial crime risk, prudently and holistically and for allegations of bribery and misconduct to be taken very seriously.”
The size of the fine reflects the importance of firms addressing financial crime risks with utmost seriousness.