Regulators co-ordinate to levy record breaking fines on Goldman Sachs

Allegations that billions of dollars were misappropriated from a Malaysian state-owned investment fund (1MDB) by, among others, the former Malaysian prime minister, have been in the headlines for a number of years now.

While numerous banks, advisors and intermediaries across the globe were exposed to the scandal, last week’s focus was on Goldman Sachs. The investment bank was fined in the UK by both the FCA and PRA as well as by regulators in the US and Asia.

The investment bank acted as principal in arranging, purchasing and underwriting three state-guaranteed bonds via a private placement, and did so at a significant discount to the market price. Goldman Sachs’ involvement in the scandal could be, in part, attributed to complicit members of its team, but there were a number of missed opportunities for the Bank and its senior management to detect and challenge the legitimacy of the deal.

The FCA expects firms to review, reflect and where necessary, take action following the publication of final notices. While a number of the points raised in the FCA’s Final Notice require little elaboration, we have highlighted three key messages we believe all firms should take note of:

Importance of an effective assurance function

  • It would be impractical (and in reality impossible) for senior management to be in possession of all of the available facts prior to making every decision. In this case, key risk factors were omitted from the documentation submitted to its decision-making committee. An effective assurance function could have better mitigated against this by ensuring controls and processes were being executed as intended, enabling senior management to make informed risk-based decisions.

Evidencing informed risk-based decisions

  • It’s all too easy to make business decisions without evidencing how you have formed your opinion. While this is commonly cited as a record keeping issue, our experience suggests that more often than not, firms lack mature risk appetite and management frameworks, which facilitate informed decision making by risk owners.

Establishing the legitimacy of your client’s activity

  • Establishing the economic and / or legal purpose of certain activity isn’t always straightforward. In this case bonds, typically considered to be a lower risk instrument, were used in a complex manner to facilitate the misappropriation of funds. A firm should be able to demonstrate the nature of its client’s activity and why it is being structured or conducted in a certain way, particularly when it appears complex. Here are examples of questions you should be asking yourself:
    • Do there appear to be unusually favourable payment / contractual terms;
    • Is the activity occurring at the prevailing market rate (or within an acceptable variance); and
    • Are there any unexplained or miscellaneous charges?

Often a firm will be in possession of information or data, which can help you answer these questions. Rumour has it, fees generated from the three bonds exceeded twice the sum of the revenue generated by all of Goldman Sachs’ equivalent business in the preceding five years (213 bond offerings).

We can help

If any of the above messages resonate with you or if you feel like you would benefit from some additional input or assurance on your financial crime control framework systems and controls, please don’t hesitate to get in touch.

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