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1MDB probe shifts focus to extent of Goldman's role

Authorities question if scandal points to companywide corruption

Goldman Sachs is under fire for the role its former executives allegedly played in the embezzlement of funds at 1Malaysia Development Berhad.   © Reuters

TOKYO -- The corruption scandal ensnaring Malaysia's government-owned 1Malaysia Development Berhad fund has taken a new turn, raising questions about internal controls at Goldman Sachs Group.

Former executives of the U.S. financial giant have been charged with circumventing internal controls, and a former Southeast Asia chairman has pleaded guilty to conspiring to launder money and to violate the Foreign Corrupt Practices Act. A sovereign wealth fund in Abu Dhabi is suing Goldman for damages.

Here are some questions and answers about the scandal.

How were former Goldman executives allegedly involved?

Court documents unsealed by the U.S. Department of Justice on Nov. 1 offer a window into the alleged wrongdoing.

Funds purportedly procured for legitimate purposes were diverted to bribes, New York City real estate, and production costs for the movie "The Wolf of Wall Street," according to the documents.

The Justice Department indicted Malaysian financier Low Taek Jho, popularly known as Jho Low, who had effectively controlled 1MDB, and two former Goldman executives on charges including illegally siphoning off 1MDB funds.

Tim Leissner, then Goldman's Southeast Asia chairman, and colleague Roger Ng are said to have approached Low to secure 1MDB-related business deals. Low, now at large, was close to then-Malaysian Prime Minister Najib Razak.

Goldman underwrote bond offerings totaling $6.5 billion for 1MDB in 2012 and 2013, receiving about $600 million in fees.

Underwriting fees are usually somewhere between 0.2% and 2% of the amount of a bond issue. But simple arithmetic shows Goldman receiving nearly 10% -- an unusually large cut that raised questions even at the time.

Low and Leissner are said to have transferred 1MDB bond proceeds to bank accounts of shell companies, using the money to bribe senior Malaysian officials and purchase real estate. More than $2.7 billion was allegedly embezzled in this manner.

Leissner, who pleaded guilty, is said to have repeatedly lied to compliance officials at Goldman to hide the wrongdoing.

How have key figures responded?

In a widely reported mid-November voicemail to employees, Goldman CEO David Solomon said he was "personally outraged" that anyone at the company would engage in such conduct. Goldman says it is cooperating with prosecutors but insists it did not know about the misuse of funds.

Meanwhile, the Malaysian government and the Abu Dhabi sovereign wealth fund, International Petroleum Investment Co., think Goldman should be held accountable. Malaysian Prime Minister Mahathir Mohamad, who has pledged to root out the corruption that brought down Najib, seeks to recover underwriting fees paid to Goldman. There is evidence that it cheated 1MDB, Mahathir argues.

IPIC and unit Aabar Investments sued Goldman and its former executives in New York state court in November. IPIC provided a debt guarantee when 1MDB issued bonds. Then-senior officials of IPIC received bribes in return for agreeing to deceive IPIC and Aabar, the plaintiffs claim. 1MDB faced financial troubles soon afterward, forcing IPIC to shoulder interest payments on 1MDB's behalf.

What comes next?

Authorities in Malaysia, Singapore and the U.S. are working together to get a complete picture of what happened. A key question is whether the blame lies just with the former Goldman leadership in Southeast Asia, or if the company as a whole systemically broke the law. The U.S. Justice Department believes others at Goldman had known about the bribery.

Goldman's reputation would take a hit if the company as a whole is held responsible. It would have a harder time winning government-related business in the future, and heavy penalties could temporarily drag down earnings.

Even if the authorities decide the individuals involved were acting on their own, the incident only highlights the weakness of the company's internal controls and could lead to stricter regulatory oversight and less operational freedom for Goldman.

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