By Dylan Tokar 

When Goldman Sachs Group Inc. first came under scrutiny for its dealings with Malaysian development bank 1Malaysia Development Bhd. or 1MDB, the investment bank was adamant: The alleged bribery misconduct was the fault of rogue employees, according to former chief executive Lloyd Blankfein.

By the time of its blockbuster $2.9 billion settlement with authorities in the U.S. and elsewhere on Thursday, the bank was singing a different tune.

Following the settlement, the bank announced an unusually broad set of bonus clawbacks and pay cuts to current and former executives, including Mr. Blankfein. Goldman's board released a statement calling the matter "an institutional failure."

Central to the Justice Department's case was the repeated failure of Goldman's compliance and internal control functions to properly investigate the involvement of a corrupt Malaysian financier who was involved in the 1MDB bond offerings underwritten by the bank.

Mr. Blankfein and others at Goldman for years blamed the scandal on a pair of senior bankers who were criminally charged in the matter, Timothy Leissner and Roger Ng. The two circumvented the firm's internal controls to work with financier Jho Low to secure business from 1MDB, the bank said.

Yet fault for the misconduct, and the continued dealings with Mr. Low, extended beyond Messrs. Leissner and Ng, according to Goldman's agreement with the Justice Department.

The bank's control functions vetted Mr. Low in 2009 and refused to onboard him as a client. Mr. Leissner kept trying, prosecutors said. He and others later worked with Mr. Low to underwrite three separate bond offerings for 1MDB worth more than $6.5 billion.

Although the bank's control functions suspected Mr. Low's participation in the bond offerings, they repeatedly failed to do anything other than ask members of the deal team whether he was involved, prosecutors said.

Mr. Leissner denied Mr. Low's involvement and the oversight functions accepted his denial, doing little else to investigate the matter, they said. Prosecutors specifically faulted the control functions with failing to review the electronic communication of deal team members for concrete evidence of Mr. Low's involvement.

The settlement documents portray a business environment where compliance officers and other institutional checks had little power to override high-profile bankers or lucrative investment deals.

In one email cited by prosecutors, executives in the bank's control functions discussed the disparity between how certain deals were vetted and the unusual latitude given to certain employees such as Mr. Leissner.

"Yes, double standard, and it looks stupid," one unnamed executive said.

Goldman on Thursday reached coordinated settlements with the Justice Department, the U.S. Securities and Exchange Commission, the Federal Reserve and the New York State Department of Financial Services, and with foreign authorities in the U.K., Hong Kong and Singapore. In July, it agreed to pay $2.5 billion to the government of Malaysia.

As part of the settlements, the firm agreed to continue overhauling its compliance and oversight functions. Goldman on Thursday released a seven-page statement outlining completed and ongoing enhancements.

Since the 1MDB transactions eight years ago, its compliance department has nearly doubled in size, Goldman Chief Executive David Solomon said.

Many of the enhancements outlined are standard best practices for a firm such as Goldman, according to Bruce Searby, a former federal prosecutor. Mr. Searby said the reforms appeared to give the compliance functions and others within the firm greater power to vet risky deals.

"What they are faulting Goldman for is not having enough barriers to the deal team pushing back on the compliance team," he said. "At least under some circumstances, you cannot simply accept the denials of your own people."

Among the changes made or proposed by the investment bank is an increased scrutiny on senior employees who are involved in high-risk areas of business. The bank says it has developed a program to conduct in-depth reviews of senior employees and reviewed its process for approving their travel and entertainment expenses.

The changes force executives to take on a more personal role in oversight, said Michael Weinstein, a partner at Cole Schotz PC who serves as chair of the firm's white collar litigation and government investigations practice.

"The people that were handling deals in [the 1MDB case] seemed to be at such a high level that no one questioned what they were doing," he said. "They are saying, 'We can't let that happen anymore.'"

Write to Dylan Tokar at dylan.tokar@wsj.com

 

(END) Dow Jones Newswires

October 22, 2020 20:51 ET (00:51 GMT)

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