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From Securities Regulation Daily, November 2, 2018

Ex-Goldman bankers embroiled in massive Malaysian corruption scandal

By Lene Powell, J.D.

Two former Goldman Sachs bankers were charged with Foreign Corrupt Practices Act (FCPA) and money laundering violations for allegedly paying hundreds of millions in bribes to Malaysian and Abu Dhabi officials and conspiring to launder billions of dollars embezzled from the 1Malaysia Development Berhad (1MDB), Malaysia’s investment development fund. A Malaysian financier who facilitated the scheme was also charged.

According to the DOJ press release, Tim Leissner, former Southeast Asia Chairman and participating managing director at Goldman, was ordered to forfeit $43.7 million in connection with his guilty plea to a two-count criminal information charging him with conspiring to violate the FCPA and launder money. Ng Chong Hwa, also known as Roger Ng, a former managing director at Goldman, was charged in a three-count indictment with conspiring to violate the FCPA and launder money. Low Taek Jho, 36, also known as Jho Low, was charged in the same indictment.

Bribes and money laundering. According to the DOJ, beginning in approximately 2009 and continuing through 2014, Leissner, Ng, and other co-conspirators used Low’s close relationships with high-ranking government officials in Malaysia and Abu Dhabi to obtain and retain business for Goldman by promising and paying hundreds of millions of dollars in bribes. This included a role in three bond transactions known internally at Goldman as "Project Magnolia," "Project Maximus," and "Project Catalyze."

In Project Magnolia, the defendants arranged in 2012 for 1MDB to issue $1.75 billion in bonds guaranteed by an entity wholly owned and controlled by the government of Abu Dhabi. To seal the deal, the defendants allegedly promised to pay 1MDB officials bribes and kickbacks; for example, promising "a big present" to one official. After the offering closed, more than $500 million of the proceeds were allegedly misappropriated and diverted from 1MDB through numerous wire transfers to bank accounts in the name of shell companies beneficially owned and controlled by the defendants.

Similarly, in Project Maximus and Project Catalyze, the bond offerings raised more than $4 billion, but billions were diverted via wire transfers to shell companies controlled by the defendants. Some of the money made its way to relatives of Malaysian officials, while other funds stayed with the defendants or were used to purchase real estate and art.

The defendants continued to seek business after the three bond offerings concluded, including paying bribes in an attempt to secure a role for Goldman in a proposed initial public offering (IPO) of 1MDB’s energy assets. For example, a few months after Low and Leissner discussed the need to "suck up" to a 1MDB official and send "cakes" to the wife of a certain official, an account controlled by Leissner sent $4.1 million to a high-end New York jeweler, in part to pay for gold jewelry for the wife of the official.

Goldman’s controls circumvented. The indictment provided somewhat conflicting signals regarding Goldman’s role in the scheme. Weighing on the side of corporate liability, Ng and Leissner were alleged to be acting within the scope of their employment and as agents of Goldman. Further, the DOJ alleged that Goldman received approximately $600 million in fees and revenues, as well as increased reputational prestige for its work for 1MDB.

But there were also allegations cutting against any possible corporate liability. The DOJ alleged that the defendants and co-conspirators "knowingly and willfully circumvented" Goldman’s internal accounting controls by conspiring to conceal the bribes from the firm’s compliance group and legal department so that those groups would not attempt to stop Goldman from participating in the transactions. Moreover, the compliance and legal groups refused several attempts by the defendants to make Low a formal client, based in part on concerns they had about the source of Low’s wealth. And, as alleged, Ng and Leissner actively misappropriated some of the diverted funds for their own personal use, arguably undercutting the argument that the defendants were acting within the scope of their employment.

Mark Hays, anti-money laundering campaign leader at Global Witness, argued for further inquiry into accountability above the individual level—not just at Goldman but in other parts of the system, including U.S. law firms that allegedly allowed the use of client accounts to help Low move the money.

"At nearly every point in this scandal, the bankers, accountants, lawyers involved were either complicit in it or failed to spot this dirty cash and prevent it from being taken in the first place," said Hays.

But Mike Koehler, a professor at Southern Illinois University School of Law and author of the FCPA Professor blog, counseled against enforcement overreach. In a statement provided to Securities Regulation Daily, Koehler said,

The individual charges are interesting from the standpoint of the DOJ clearly asserting respondeat superior allegations yet at the same time alleging that Leissner and Ng took steps to conceal their conduct from others at Goldman and willfully circumvented the company's existing internal controls. The FCPA's internal controls provisions state that issuers shall have sufficient internal controls to provide reasonable assurances that certain financial objectives are met. However, with increasing frequency the government seems to take the position that issuers have to "prevent and detect" improper conduct by employees. This is clearly not what the law says, but something the government has been able to get away with because issuers are risk averse and don't put the government to its burden of proof.

The cases are Nos. CR 18-439 (MKB) (Leissner) and CR 18-00538 (Ng and Low).

Attorneys: Drew Godfrey Rolle, U.S. Attorney's Office, for the United States.

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