The publication is part of the forthcoming collection of articles“ Transparency, Corruption and In Between” by Transparency International –Israel. ed. Judge Nili Arad (Retired), Nevo publication, 2020

Introduction:
‍Earlier this year, in October 2020, Goldman Sachs Group Inc. (“Goldman”),as part of its settlement with the U.S. Department of Justice (“DOJ”)and other regulators, both U.S. and overseas, agreed to pay $2.9 billion, in connection with its role in 1Malaysia Development Berhad (“1MDB”)corruption scandal.  Goldman also announced that it was clawing back $174 million in executive compensation from individuals directly involved in violations of anti-bribery laws and from its former and current executive team.  The following will briefly provide background on the settlement and will further focus on the issues of compliance functions failure and executive compensation clawbacks, emphasizing liability of senior management for money laundering and foreign bribery violations by the corporation and its failure to adequately address red flags and implement properly functioning compliance functions.  

Background:
‍1MDB was a strategic investment and development company created by Malaysian government to pursue projects for the economic benefit of Malaysia and its people.  1MDB relied primarily on debt to finance its projects.  In 2012and 2013, Goldman worked on raising $6.5 billion for 1MDB through issuing and selling bonds on international markets and received approximately $600 million in fees for its work.  Subsequently, over$2.7 billion were stolen from 1MDB and about $1.6 billion of this amount was used to pay bribes to officials in Malaysia and Abu Dhabi.  Senior Goldman bankers played a central role in orchestrating this scheme. As a result, Goldman and its Malaysian subsidiary were each charged with conspiracy to violate anti-bribery provisions of Foreign Corrupt Practices Act (“FCPA”). The Malaysian subsidiary pleaded guilty to those charges and Goldman entered into deferred prosecution agreement (“DPA”) with the DOJ.  As part of the resolution, Goldman admitted the wrongdoing and will disgorge the entirety of $600 million in fees it received form 1MDB and pay a $2.3 billion penalty, which constitutes “the largest monetary penalty ever paid to the United States in a corporate criminal foreign bribery resolution.” [1]

‍Failure of Compliance Functions: The DPA contains important insights about Goldman’s compliance functions and its disregard for substantial red flags.  It appears that “there were significant red flags raised during the due diligence process and afterward” [2] that were either ignored or only nominally addressed, so that the transactions would be ultimately approved and Goldman could continue doing work for 1MDB, involving individuals that clearly posed substantial compliance risks as intermediaries and facilitators.  As Brian C. Rabbitt, Acting Assistant Attorney General for the DOJ’s Criminal Division, pointed out, in addition to Goldman executives implicated in the criminal scheme, “other personnel at the bank allowed this scheme to proceed by overlooking or ignoring clear red flags.” [3] More, specifically, the DPA notes that “other Goldman employees and agents who were responsible for implementing its internal accounting controls failed to do so.” [4] This failure involved several crucial elements.  First, Goldman control functions knew about significant risks associated with a particular individual, who was used to obtain and retain business for Goldman, and also knew about his involvement in the transactions at question, but did not take reasonable steps to stop this involvement.  In the past, that same individual was never onboarded as Goldman’s client due to numerous red flags, despite several attempts and substantial pressure on the compliance function to approve him.  The control functions failed to investigate his involvement and were satisfied with (mis)representations of the deal team without reasonable confirmation. Review of electronic communication of the deal team members would have provided evidence to the opposite.  Second, Goldman continuously ignored additional red flags related to the business rationale of the transaction.  The control functions did not verify how the proceeds of the bond offerings were used and did not raise any concerns when1MDB was seeking to raise substantial additional funds within a few months of a previous raise, without utilizing the full amount from that initial deal.  It also did not inquire why 1MDB was seeking to raise far more than it indicated in its use of proceeds.  Third, Goldman’s approval committee proceeded with approvals of the transactions despite the above described red flags, negative media coverage of the intermediary involved, and internal phone calls from Goldman employees raising concerns. High ranking employees failed to escalate concerns about criminal conduct, even though Goldman had an escalation policy in place.  In addition, the DPA indicates that there was radical disparity between how due diligence and risks were handled on various transactions and that “double standard” was applied to different deals. 

Personal Liability of Senior Executives and Compensation Reductions:
‍Goldman has acknowledged that its involvement in a sweeping international corruption scheme was not only due to certain individual behavior, but was a consequence of a broader failure of the firm, [5] as a result of which compliance and internal control functions were not able to prevent criminal wrongdoings of individual employees.  Goldman’s involvement in 1MDB corruption scandal has been recognized as a “collective failure” and “institutional failure,” whereby all are “responsible for each other’s actions.”[6] As part of this realization, Goldman announced executive compensation reductions and clawbacks.  Statement from the Board of Directors of Goldman[7] specified how the compensation of former employees and past and current members of its senior management will be impacted, even though some of them were not involved in or even aware of any illicit activities, through (1) clawbacks, (2) forfeitures, and (3) compensation reductions:1.     Three former employees directly implicated in the criminal scheme (one of them, the former Participating Managing Director and Chairman of Southeast Asia, has plead guilty to criminal charges of money laundering and FCPA violations; one, the former Managing Director and Head of Investment Banking for Goldman’s Malaysian subsidiary, has been charged with the same crimes and is awaiting trial in 2021; and one, holding leaderships positions in Goldman’s Asia operations, has been prohibited from by the Federal Reserve to participate in the banking industry) are subject to clawback actions by Goldman to the full extent of its contractual entitlements, totaling approximately $76 million; 2.  Five of Goldman’s former senior executive officers (the former Chief Executive Officer, the former Chief Operating Officer, the former CEO of Goldman Sachs International and the former Global Head of Growth Markets) will forfeit previously awarded or outstanding compensation based on performance incentive plan awards, where the performance period included the years when Goldman underwrote 1MDB bond offerings. This measure is reflective of acknowledgement that the illicit activities amounted to Goldman’s “institutional failure” and senior management should bear responsibility.  The total amount forfeited by the above five individuals is about $67 million.3.  The current executive leadership team (the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the CEO of Goldman Sachs International) will have their compensation for 2020 reduced by $31 million, which the Board of Directors of Goldman deems to be appropriate. According to statements by David M. Solomon, Chairman and CEO of Goldman, executive compensation clawbacks are part of the “consequences for not getting it right” and are “entirely appropriate under the circumstances.” [8] Goldman is recapturing compensation from senior executives who were in charge during the time the scandal unfolded, however it remains unclear whether all individuals that participated in the decision making on various levels and ignored signs of fraud corruption and money laundering, thereby allowing 1MDBbond offerings to proceed, are affected. 

Conclusions:
‍Individual liability under FCPA is not a novel concept and a number of cases have dealt with criminal convictions of individual company employees along with corporate criminal liability. In this case, by announcing charges against two Goldman executives, the DOJ demonstrated, in their own words, “steadfast commitment to punishing corporate misconduct by prosecuting not only corporations, but also culpable executives where appropriate.” [9] Two Goldman executives were charged, and one pled guilty, with conspiring to launder billions of dollars embezzled from 1MDB and conspiring to violate FCPA by both paying bribes to foreign officials and circumventing Goldman’s financial controls, while being employed by Goldman.  It appears how ever that those two executives were not he only ones that allowed this international corruption scheme to happen.  The only repercussions against other senior officers on whose watch the relationship with 1MDB unfolded, are the compensation adjustments, as outline above. Forfeitures and compensation reductions totaling close to $100 million is certainly a substantial measure, but it remains an open question whether this constitutes a strong deterring mechanism and whether more expansive FCPA enforcement focusing on individual liability is warranted.   The major takeaway from this case for senior management of every company is that anti-bribery and anti-money laundering compliance programs should not only be properly designed, but efficiently and consistently implemented.  This also means that internal control functions and concerns raised by it could not be overridden by business considerations of the company, which in turn implies that the stature of compliance functions within the organization should empower it to properly challenge deal-side decisions.  The companies should also allow for more opportunities for its employees to escalate their concerns about any transgressions, including on an anonymous basis.  Companies may also consider the level of scrutiny appropriate for senior level personnel, involved in high risk transactions or in charge of company’s business activities in high risk jurisdictions, including approval of travel and entertainment expenses.  In this context it may be worth mentioning that, as part of its remedial measures and ongoing enhancements since the 1MDBtransaction, Goldman has developed a program to conduct “in depth” reviews of its senior people, relying both on internal and external data, and implemented “holistic surveillance” tools of its data driven compliance, including sophisticated e-communication surveillance. [10]
‍
[1] Acting Assistant Attorney General Brian C. Rabbitt Delivers Remarks Announcing Goldman Sachs/1mdb Enforcement Actions, October 22, 2020, https://www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-c-rabbitt-delivers-remarks-announcing-goldman
‍[2] Department of Justice, Office of Public Affairs, “Goldman Sachs Charged in Foreign Bribery Case and Agrees to Pay Over$2.9 Billion,” October 22, 2020, https://www.justice.gov/opa/pr/goldman-sachs-charged-foreign-bribery-case-and-agrees-pay-over-29-billion‍
‍[3] Acting Assistant Attorney General Brian C. Rabbitt Delivers Remarks Announcing Goldman Sachs/1mdb Enforcement Actions, October 22, 2020, https://www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-c-rabbitt-delivers-remarks-announcing-goldman
‍[4] United States v. The Goldman Sachs Group Inc., Docket Number 20-CR-00437-MKB, Deferred Prosecution Agreement,§25, https://www.justice.gov/criminal-fraud/file/1329926/download
‍[5] Goldman Sachs’ Statements Relating to1MDB Government and Regulatory Settlements, October 22, 2020,
https://www.goldmansachs.com/media-relations/press-releases/current/goldman-sachs-2020-10-22.html
‍[6] Id.
‍[7] Id.
[8] Id.
‍[9] Acting Assistant Attorney General Brian C. Rabbitt Delivers Remarks Announcing Goldman Sachs/1mdb Enforcement Actions, October 22, 2020, https://www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-c-rabbitt-delivers-remarks-announcing-goldman
‍[10]Goldman Sachs, Completed and Ongoing Enhancements Since the 1MDB Transactions, October 2020,
https://www.goldmansachs.com/media-relations/press-releases/current/pdfs/gs-2020-10-22.pdf ‍