This article first appeared in Forum, The Edge Malaysia Weekly on November 12, 2018 - November 18, 2018
To posit the global investment banking industry has become synonymous with mistrust in recent years is hardly a revelation.
What is far more interesting is the way the well-oiled public relations and legal machinery work at some of the world’s largest and most influential banks.
Following the recent indictment of two of its former employees — Tim Leissner and Roger Ng — for bribery and money laundering involving 1Malaysia Development Bhd by the US Department of Justice (DoJ), Goldman Sachs, in its third-quarter earnings report filing, acknowledged for the very first time in nine years that it could face “significant penalties resulting from 1MDB”.
This, following years claiming zero wrongdoing and hiring external law firms to investigate shortcomings in any of its internal controls while seasoned PR gatekeepers issued statements sidestepping the need for admission of guilt.
Blame-shifting weaknesses in Goldman’s compliance programme to the perceived risks of doing business in emerging markets however, DoJ curiously wrote in its indictment: “System of internal accounting controls could be easily circumvented and that the firm’s business culture, particularly in Southeast Asia, at times, prioritised consummation of deals ahead of the proper operation of its compliance functions.”
Considering how numerous global investment banks have been penalised (some repeatedly) for encouraging exuberant lending by banks (1997) to mis-selling credit products (2007) to the forex rigging scandals (2013), the one-dimensional narrative by the DoJ of blaming Goldman’s “business culture, particularly in Southeast Asia” instead of the pervasive culture of greed at Wall Street banks almost wherever they operate is disingenuous at best, and deceitful at worst.
Reporting how it was “cooperating with the [DoJ] investigation”, the conciliatory tone of the latest regulatory filing by Goldman is the exception rather than the rule.
When asked to explain the exorbitant US$600 million fee for three tranches of bond deals amounting to US$4.75 billion, citing deal complexity, the financial press was instructively told “we helped raise money for a sovereign wealth fund that was designed to invest in Malaysia”, in the words of a Goldman spokesperson at the time.
Never mind the most complex part of the deal evidently was to raise funding for an entity that is today at the centre of a circuitous scandal over its missing funds, ballooning debt and financial ties with former prime minister Datuk Seri Najib Razak, who is on trial himself for over two dozen-odd charges of corruption.
Nevertheless, when stubbornly asked to justify the 10% in fees and commissions, the bank in 2014 described them as “part of Goldman Sachs’ compensation for the risks assumed in underwriting the bonds in question”.
Unapologetically repeating the same lingering argument four years on, in a June Bloomberg interview, Goldman head of corporate communications (Asia-Pacific) Edward Naylor elaborated, “What we earned from the debt transactions reflected the risks we assumed at the time, specifically movement in credit spreads tied to the specific bonds, hedging costs and underlying market conditions.”
In plain speak, risk factors every underwriter takes on, regardless of whether the corporate or sovereign client in question has an established credit profile among global fixed income investors. Yet any bond market banker will readily admit fees typically range from 0.1% to 3%, depending on the complexity of the transaction, instead of what was charged.
Therefore, instead of only sacking and investigating 1MDB’s top management, changing the guard at various government-linked companies (GLCs) — including the country’s regulators — freezing and auctioning assets or barring travel of those allegedly involved or even reportedly omitting the Wall Street bank to bid on GLC deals in Malaysia, there may be a much more powerful statement Malaysia could make.
As arguably the third most developed regional financial market in Asia ex-Japan after Hong Kong and Singapore, Malaysia ought to do more than let the US Attorney’s Office take the lead role meting out the fines.
Over the last few decades, a long list of investment banks has been found guilty of misdemeanours, resulting in billions of dollars’ worth of fines, let alone prison sentences by none other than the powerful US Attorney-General.
Therefore, simply seeking to recoup some of the almost US$600 million in fees Goldman made from the three deals, as Prime Minister Tun Dr Mahathir Mohamad demanded in June, may just be insufficient, especially given the reputational damage Malaysia’s financial markets have suffered due to the incessant media coverage of the 1MDB fiasco.
It may also be worth noting that in 2012, HSBC paid US$1.9 billion in fines in the US in a wide-ranging money laundering case. In June 2014, France’s BNP Paribas paid US$8.9 billion to the US government for sanctions violations. Last August, RBS agreed to pay US$4.9 billion for mis-selling residential mortgage-backed securities prior to 2008, illustrating billion-dollar fines proportional to the severity of the violation are increasingly becoming the norm.
Market regulators in Malaysia, therefore, ought to consider imposing a penalty that sends a loud enough message to regional and global banks that the business culture in Malaysia indeed does not prioritise “consummation of deals ahead of the proper operation of its compliance functions”.
Instead, Malaysia will evidently not only vote anyone out of power suspected of corruption but also unrelentingly pursue every legal means possible to uphold the integrity of its financial markets.
Siddiq Bazarwala is a Hong Kong-based writer covering Southeast Asia’s capital markets for the last 12 years
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