On Thursday 22nd October, The U.S. Department of Justice announced that Goldman Sachs’ Malaysian subsidiary have been fined $2.9 billion in relation to the 1Malaysia Development Berhad (1MDB) corruption scandal. The Department of Justice found the bank guilty of violating the Foreign Corrupt Practice Act (FCPA) in connection with a scheme to pay over $1 billion to win work raising money for the Malaysian state-owned wealth fund. As a consequence they must now pay a record $2.9 billion in penalties and fees.
Despite blaming individual employees and arguing that they had no idea that the money raised would be diverted from planned development projects in Malaysia for a long time, Goldman Sachs have finally admitted their culpability. The bank admitted that they had ‘fallen short’, ignored signs of fraud and ‘knowingly and willingly’ paid bribes to foreign officials. They called it an ‘institutional failure, ‘inconsistent with the high expectations it has for the firm’. This is a very costly oversight for the bank as not only do they have to pay hefty penalties to regulators but their reputation has also been affected. This serves as a reminder of the importance of having robust compliance departments in banks. It is also important for non USA firms to note that the FCPA has an extraterritorial jurisdictional reach, meaning its provisions can apply to prohibited conduct anywhere in the world and extends to publicly traded companies and their officers, directors, employees, stockholders, and agents. Agents can include third party agents, consultants, distributors, joint-venture partners, and others..
Failure to comply with the regulators will be taken very seriously as this case demonstrates. Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division stated, “Today’s resolution, which requires Goldman Sachs to admit wrongdoing and pay nearly three billion dollars in penalties, fines, and disgorgement, holds the bank accountable for this criminal scheme and demonstrates the department’s continuing commitment to combating corruption and protecting the U.S. financial system.”