Goldmine Sachs: Goldman Sachs and Malaysia settle for $3.9bn in 1MDB case

August 5, 2020

2 min read

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What's going on here?

A $3.9bn (ÂŁ3.1bn) settlement deal has been struck between Goldman Sachs and Malaysia over losses the giant investment bank caused in the 1MDB corruption scandal.

What does this mean?

In 2012 and 2013, Goldman Sachs helped Malaysia’s state investment fund 1MDB to raise $6.5bn through a number of bond sales. Billions of dollars were stolen from the fund to purchase luxury property, art and even to help finance the Wolf of Wall Street film. The famed Wall Street bank cashed out an unusually high amount of $600m for its work on the bond issuances. Goldman Sachs faces allegations that it failed to act while the fund was being looted by Malaysian financier Jho Low. Last year, 17 former and current Goldman executives were charged in Malaysia, facing prison sentences of up to 10 years and fines of at least one million ringgit (£200,000). 

Goldman has persistently denied wrongdoing, arguing that former Malaysian officials lied about how the proceeds would be used. After months of negotiation, Goldman finally reached a deal with Malaysia to drop criminal charges and end legal proceedings against various Goldman executives. In return, it will make a cash payment of $2.5bn to the Malaysian government and will guarantee a recovery of $1.4bn from the sale of assets bought under the fraud.

What's the big picture effect?

For the time being, the deal is likely to appease both parties. More importantly, Goldman Sachs will get to clear its name and renew its reputation. The deal would also save the bank from spending more money in the enormous lawsuit. The guarantee worth $1.4bn will hardly cost Goldman anything, as its valuation analysis on the seized assets does not indicate a significant risk exposure for the bank. Nevertheless, the scandal has unequivocally put a dent to Goldman’s reputation in the region and the bank could even face restrictions on its operation in Malaysia.

Meanwhile, the settlement marks Malaysia’s biggest victory so far in recovering the misappropriated money from the 1MDB fund. Despite not getting the  $7.5bn Malaysia’s finance minister initially demanded, the Southeast Asian nation will still receive a sizable amount from the deal, worth more than 1% of the country’s GDP. For the four-month old administration of Malaysian Prime Minister Muhyiddin Yassin, successfully standing up against the Wall Street giant is certainly something to celebrate.

Despite the huge settlement with Malaysia, Goldman is expected to answer for possible charges by the US Department of Justice (DOJ). The DOJ will be scrutinising the bank for violations of  the US Foreign Corrupt Practices Act which prohibits US companies from paying foreign government officials for help in getting or keeping business. Consequently, it is likely that Goldman will still have to make another hefty settlement with the DOJ to fully put an end to the scandal.

Coming out of the 2008 financial crisis, Goldman never pled guilty to criminal charges regarding its sales of mortgage-backed securities and derivatives. As it now looks to do the same with the 1MDB scandal, close attention will be paid to how the DOJ will handle this case. Should the DOJ enforce tougher actions against the bank, or is Goldman Sachs too big to jail?

Report written by Long Dinh

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