A Not so Golden Bond: Goldman Sachs London pleads not guilty in Malaysian bond scandal

April 14, 2020

2 min read

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What's going on here?

Goldman Sachs has pleaded not guilty to a charge brought by Malaysian prosecutors in connection to the bank’s alleged role in raising $6.5bn in bond sales for a state backed fund known as 1MBD.

What does this mean?

1MBD is the Malaysian state sovereign development fund founded by former Malaysian Prime Minister Najib Razak. Goldman Sachs helped raise $6.5bn (£5bn) for the fund in its role advising on three bond offerings in 2012 and 2013. Prosecutors allege that over $4.5bn was taken from 1MDB funds. Malaysia’s Attorney General has charged the bank with helping to “dishonestly misappropriate” money from the fund by misleading investors about the bond sales and omitting material facts. 

The $4.5bn looted from 1MDB involves Mr. Razak and a Mr. Jho Low, a Malaysian financier accused of masterminding the fraud. Malaysian prosecutors have filed charges against three Goldman Sachs units based in London, Singapore and Hong Kong for making false statements and omitting key facts related to bond issues. The bank has pleaded not guilty and denied any wrongdoing; they argue that members of the former Malaysian government along with 1MBD lied to it about how proceeds from the bond sales would be used. Malaysia is seeking $7.5bn in compensation from Goldman Sachs over its work in the 1MBD scandal. 

What's the big picture effect?

As quoted by Loretta Lynch, the US Attorney General, this is one of the largest “kleptocracy case[s]” since the 2008 financial crisis. It involves a string of foreign jurisdictions that the money passed through in relation to the money-laundering here. Claims that conspirators rinsed billions from the people of Malaysia through offshore accounts and shell companies in tax havens adds to the gravity of this scandal.

The 1MBD scandal has been expensive for Goldman Sachs. The bank’s per share earnings dropped 22% in its fourth quarter last year as it set aside over $1b for the case pending allegations that it ignored red flags when arranging loans for the fund. The Federal Reserve has even imposed a lifetime ban on Andrea Vella, former partner of the bank, from the banking industry. The debacle will undoubtedly tarnish the bank’s reputation and may hamper profitability in the long-term. 

The scandal also opens up criticism to the bank’s compliance policies. Goldman Sachs has argued that its compliance officers were deceived about aspects of the deal, including the role of Mr. Low whom the bank had previously rejected as a client because it couldn’t validate the source of his wealth. This may lead to legislative reforms around banks’ compliance rules in an attempt to ensure tighter controls, and a higher degree of accountability and transparency.

Report written by Robyn Ma

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