NY Fed Demanded Goldman Improve Compliance Controls After 1MDB Bond Offerings

Apparently, Malaysian Prime Minister Mahathir Mohamed isn't the only one who thinks Goldman Sachs's compliance controls "don't work very well."

As more details emerge about Goldman's efforts to win deals to underwrite $6 billion in bonds for the doomed Malaysian sovereign wealth fund 1MDB, which was ransacked by former Prime Minister Najib Razak and his cronies to the tune of $4.5 billion, senior bankers' ignorance of red flags is appearing increasingly deliberate.

To wit, a report in the New York Times published on Thanksgiving Day revealed that, in addition to attending meetings with Malaysian Prime Minister Najib Razak and a group of senior Goldman bankers in 2009 and 2013, former Goldman CEO Lloyd Blankfein also welcomed disgraced Malaysian financier Jho Low into Goldman's opulent 200 West Street headquarters in December 2013 for a "one-on-one" sit-down, effectively confirming that the CEO was instrumental in helping suspend the bank's compliance controls to ensure that the bank won the business to underwrite three bond offerings for Malaysian sovereign wealth fund 1MDB regardless of obvious evidence of corruption. This has made his departure at the end of September, just weeks before the DOJ charged  two senior Goldman bankers who helped bring in the business, appear increasingly suspect.

Malaysian Prime Minister Mahathir Mohamed isn't alone in thinking that Goldman Sachs' compliance controls "don't work very well."

In the latest indication of just how blatantly the bank flouted compliance best practices in pursuit of the deal, the Financial Times reported overnight that the New York Fed approached the bank in 2013, after the three bond deals - which netted a staggering $600 million fee for the bank on $6 billion of business - had been closed, to demand that Goldman tighten its compliance controls. What's more, the changes demanded by the New York Fed weren't directly linked to 1MDB, but instead were the result of a "wider questioning of controls," the first indication that the bank may have repeatedly bent its own rules to win other business around the same time as 1MDB. This suggests that more shady deals could eventually come to light.

The changes reportedly affected all of the Goldman's investment committees around the world after the Fed asked why so few deals had been rejected on grounds that they were too risky or inappropriate. 

Goldman implemented sweeping changes to how the powerful internal committees that oversee how its operations work, under pressure from the New York Federal Reserve. The reforms were agreed in 2013 after the Fed pressed Goldman to be more transparent, but were not publicly disclosed.

[...]

The changes, which included rewriting of the charters of Goldman committees that approved three 1MDB bonds, were not directly linked to those deals. They resulted from a wider questioning of controls, including concerns that committee minutes did not record debate in sufficient detail.

All of Goldman’s company-wide and regional committees were affected by the reforms, which were introduced shortly after the bank financed the last of the 1MDB bonds in March 2013, receiving a total of $600m in fees. They included its capital and client suitability committees, which oversaw the 1MDB financing, and approve all such deals.

One person close to its Asia Pacific capital committee, which initially reviewed the first 1MDB deal in 2012, said that the Fed questioned why committees seemed to reject very few deals as being too risky or inappropriate. The bank then instructed its committees to record proposals that it had turned down at earlier stages.

One example of how these lax controls played out, according to the FT, is the fact that Tim Leissner, the former Goldman partner who pleaded guilty and has agreed to cooperate in the DOJ's investigation of Goldman, was allowed to remain in the room during a meeting of the bank's Asian investment committee where it eventually approved one of the bond offerings. Leissner stayed in the room, even as the minutes of the meeting recorded him as having recused himself. This was reportedly standard practice at Goldman before it implemented the changes requested by the NY Fed.

Goldman

The report also offered more previously unreported details about the role that former senior Goldman dealmkaer Andrea Vella played in winning the business. Vella also remained in the room with Goldman's investment committee while the 1MDB deal was being pitched. Vella has been put on leave at Goldman following revelations that he had been caught up in the DOJ's probe.

In other 1MDB-related news, Bloomberg reported that Malaysia's former finance minister scrubbed the presence of Low, who is believed to have facilitate the siphoning of more than $2.5 billion from 1MDB money to pay bribes and for other purposes, from an 1MDB board meeting where members expressed concerns about "anomalies" in 1MDB's accounts (which is a kind term for a black hole purportedly larger than $4 billion).

Low

Jho Low

The scrubbing of Low's attendance, as well as alterations meant to mask the questions about 1MDB's financial accounts raised by a team of auditors. These changes were justified by Razak, who argued that both details could be used as ammunition by his political enemies.

The rationale was that mentioning Low would be sensitive, and omitting the information would prevent the opposition from using it against the government, Madinah said. Najib also ordered that paragraphs containing two versions of 1MDB’s financial statements for the year ending 2014 be removed from the document, which was prepared by Madinah’s predecessor Ambrin Buang.

The previous administration categorized the 1MDB audit report as a crisis, Madinah said, which led to a meeting between the audit team and representatives of the government and 1MDB, including then president and CEO Arul Kanda, in late February 2016. A number of changes were made to the report as a result of those discussions.

The final report was presented to a select parliamentary committee in March of that year but it remained protected by the Official Secrets Act until Najib was defeated at the May 2018 general election. Days after he was sworn in as prime minister, Mahathir Mohamad ordered a renewed probe in 1MDB and declassified the document.

The report showed investigators expressed concern about anomalies in 1MDB’s accounts, and that officers on several occasions undertook investments without the full knowledge of the board and at other times acted against their advice.

Today, Low is a fugitive from justice who is waging an expensive PR battle to clear his name even as he hides from prosecutors from multiple continents. If anybody still believed Goldman CEO David Solomon (who is looking increasingly like a patsy who was set up to take the heat for the scandal) and his claims that the 1MDB scandal "isn't us" - these latest details should quickly disabuse readers of that notion.