Malaysian authorities filed criminal charges against three subsidiaries of Goldman Sachs this week in connection with the US investment bank’s involvement in a sprawling scandal that saw billions embezzled from state fund 1Malaysia Development Berhad (1MDB).

The move has shaken confidence in the Wall Street firm.

While past controversies have seen the bank pay hefty legal settlements when its employees became subject to criminal charges and investigation, the charges filed by Malaysia’s Attorney General Tommy Thomas on December 17 are believed to represent the first time the New York bank has been directly blamed for wrongdoing.

Tim Leissner, an ex-managing director at Goldman who was once the bank’s Southeast Asia chairman, and Ng Chong Hwa, a former bank employee, were also charged alongside 1MDB’s former general counsel Jasmine Loo Ai Swan and fugitive Malaysian financier Low Taek Jho, who authorities regard as a central player in the scandal.

In a media statement, Thomas accused bank employees of conspiring with Low to bribe Malaysian state officials and claimed Goldman made false and misleading statements in order to dishonestly misappropriate US$2.7 billion from the proceeds of three bond issuances in 2012 and 2013 that raised $6.5 billion for 1MDB.

Massive fees

For its role as the underwriter and arranger of the bond sales, which were vetted by internal committees made up of senior bank executives, Goldman controversially collected fees for its work topping $600 million.

Thomas alleged that these earnings were “several times higher than the prevailing market rates and industry norms.”

Goldman’s employees and directors “received large bonuses and enhanced career prospects” as a result of the bond issuances, which he said were “planned and executed in order to defraud the Government of Malaysia and the purchasers of the bonds” and contravened the country’s securities laws.

Malaysia would seek criminal fines “well in excess” of the $2.7 billion misappropriated from the bond proceeds and $600 million in fees received by Goldman, Thomas said.

Arul Kanda, center, ex-head of the 1MDB sovereign wealth fund, leaves a court in Kuala Lumpur on December 12, after being charged with altering an audit of the state fund. Photo: Mohd Rasfan / AFP
Arul Kanda, center, ex-head of the 1MDB wealth fund, leaves court in Kuala Lumpur on December 12, after being charged with altering an audit of the state fund. Photo: Mohd Rasfan / AFP

The individuals charged face penalties of up to 10 years in prison and fines of at least 1 million ringgit ($240,000), according to the charge sheets.

Malaysian businessman Low Taek Jho, also known as Jho Low, in a file photo. Photo: AFP
Malaysian businessman Low Taek Jho, or ‘Jho Low’, may be in China. Photo: AFP

Low, commonly known as Jho Low, has issued statements denying wrongdoing through his attorneys and remains at large. Some speculate that he could be in China.

Loo’s whereabouts are also unknown. Ng, meanwhile, was arrested in Malaysia last month after being charged in the United States with conspiring to violate the Foreign Corrupt Practices Act.

Leissner admitted guilt in an August 28 plea hearing at a federal court in New York City, in which he described his actions as being “very much in line of its culture of Goldman Sachs to conceal facts from certain compliance and legal employees [of Goldman Sachs].”

He has yet to be sentenced in the US and could face many years in prison.

Leissner acknowledged Low’s role as a key intermediary and admitted that he and other Goldman employees concealed bribes and kickbacks paid to foreign officials to “obtain and retain 1MDB business.” His admission is thought to have given US prosecutors more leverage to go after the bank, and potentially, other senior executives.

The US Department of Justice (DoJ) estimates that $4.5 billion was stolen from 1MDB by fund officials and their associates between 2009 and 2014 and funneled through the global financial system using intermediaries and shell companies. Investigations into the scandal are ongoing in at least six countries, including Singapore, Switzerland and Luxembourg.

‘Government lied’

Goldman Sachs has consistently any denied institutional wrongdoing and already faces mounting pressure in the US from a graft probe into 1MDB. In response to criminal charges brought by Malaysia, the bank claimed that members of the former Malaysian government and 1MDB lied to the bank about the proceeds of the bond sales.

The bank also suggested that Najib Razak, Malaysia’s former prime minister, sought to deceive the Wall Street firm by concealing Low’s involvement: “1MDB, whose CEO and board reported directly to the prime minister at the time, also provided written assurances to Goldman Sachs for each transaction that no intermediaries were involved,” it said.

KUALA LUMPUR, MALAYSIA - OCTOBER 25: Former Malaysian Prime Minister Najib Razak (C) talks to media members at Kuala Lumpur High Court after the court ruled RM 1 million ($ 250,000) bail for his charges on October 25, 2018. Former Malaysian Prime Minister Najib Razak is facing charges related to mismanagement of government funds that linked to a multi-billion dollar scandal at 1Malaysia Development Berhad (1MDB), a state fund founded by him in 2009. Adli Ghazali / Anadolu Agency
Former PM Najib Razak talks to the media at Kuala Lumpur High Court after getting bail for $250,000 for 1MDB charges on Oct 25. Photo: AFP/ Adli Ghazali / Anadolu

“Under the Malaysian legal process, the firm was not afforded an opportunity to be heard prior to the filing of these charges against certain Goldman Sachs entities, which we intend to vigorously contest. These charges do not affect our ability to conduct our current business globally,” the statement read.

US investigators are now working to determine whether top Goldman executives knew of Low’s involvement as an intermediary. The Malaysian financier attended at a private meeting between an Abu Dhabi fund executive and Goldman’s then chief executive Lloyd Blankfein in 2012, an encounter now being scrutinized by the DoJ’s corruption probe.

‘Rogue employees’

Goldman has argued that misconduct was limited to a small number of “rogue employees” like Leissner and Ng.

“These are guys who evaded our safeguards, and lie, stuff like that’s going to happen,” Blankfein said last month in relation to the case. “Somebody’s going to use phones away from us, and personal this and personal that.”

That account fails to explain why an internal committee of senior Goldman bankers in charge of vetting the Malaysian bond deal in 2012 overlooked 1MDB’s largely negligible business track record since its founding in 2009, as well as the outsized profits offered exclusively to the firm without having to contend with other bidders.

“A nearly 10% fee on a $6.5-billion capital raise should have raised all sorts of red flags inside Goldman, and it’s a little shocking that it appears not to have raised any concerns,” said William D. Cohan, a former senior Wall Street M&A investment banker and bestselling author.

Banks ordinarily receive a 1% to 2% fee for such bond sales, financial analysts say.

US investment bank Goldman Sachs is under rising fire for its alleged role in the 1Malaysia Development Berhad (1MDB) scandal. Picture: Facebook
Shares in the US investment bank have plunged over the past month. Photo: Facebook

“There is no doubt that Goldman finds itself in quite the predicament. I am told a special team has been set up inside Goldman to focus on this developing situation. I suspect they will try to settle this matter, by paying a large fine, if they can,” Cohan told Asia Times, adding that Goldman’s new chief executive, David Solomon, is treating the matter seriously.

Goldman has attempted to mend its reputation over the last decade, which was damaged by allegations of misconduct during the US subprime mortgage crisis beginning in 2007. As chief executive, Blankfein attempted to clean up the firm’s image while overseeing a post-crisis expansion into new markets, such as Southeast Asia, where it doubled its staff.

The bank now faces turbulent headwinds in the region as one of the most significant scandals in its history continues to unfold. “This will definitely hurt Goldman’s reputation in Asia and it will have to do a lot of damage control and fence-mending to get back on track but I suspect that has become a priority for the bank now,” said Cohan.

The Wall Street firm is said to be preparing for potential penalties related to its dealings with 1MDB. Goldman’s stock has fallen by more than 30% since November, wiping out some $20 billion in shareholder value as the firm struggles to contain a crisis that has shattered a rehabilitated image it had sought to promote.