1
FINAL NOTICE
To:
Goldman Sachs International
Reference
Number:
142888
Address:
25 Shoe Lane, London, EC4A 4AU
Date:
21 October 2020
1.
ACTION
1.1.
For the reasons given in this Final Notice, the Authority hereby imposes on Goldman
Sachs International (“GSI”) a financial penalty of £48,308,400 (equivalent to
US$63,000,000), pursuant to section 206 of the Act.
1.2.
GSI agreed to resolve this matter and qualified for a 30% (Stage 1) discount under
the Authority’s executive settlement procedures. Were it not for the discount, the
Authority would have imposed a financial penalty of £69,012,000 (equivalent to
US$90,000,000) on GSI.
2.
SUMMARY OF REASONS
2.1.
GSI is a global investment banking, securities and investment management firm
headquartered in London. The breaches of Principles 2 and 3 arose from GSI’s
involvement in three bond transactions for 1MDB that took place in 2012 and 2013.
2
2.2.
The Deal Team for these three bond transactions was principally based in Asia.
Individuals from various Goldman Sachs entities, including GSI, were involved in
the review and approval of the 1MDB Transactions. GSI, Goldman Sachs’ primary
booking entity for bond transactions underwritten and purchased by Goldman
Sachs outside of the USA, was the arranger, initial purchaser and underwriter of
the 1MDB Transactions. In total, these transactions raised approximately US$6.5
billion for 1MDB in an 11-month period. The profit initially booked into GSI from
these
transactions
was
considerable,
totalling
US$547million,
of
which
approximately US$91 million was ultimately attributed to GSI. Goldman Sachs as
a whole booked profit of US$567 million from the 1MDB Transactions.
2.3.
The 1MDB Transactions carried significant risk for GSI. They were high value,
complex deals, executed in compressed timescales over an 11-month period.
Further, they generated very significant revenue for GSI and involved clients and
counterparties in jurisdictions that GSI had identified as representing enhanced
legal, compliance and reputational risk. GSI was also aware of the risk that a third
party it had previously turned down as a client may be involved in the transactions.
As such, GSI’s management of the risks arising from these transactions, including
the potential involvement of a high-risk individual, needed to operate at an
appropriate standard given the high-risk profile of the transactions.
2.4.
Furthermore, after the 1MDB Transactions had closed, GSI senior personnel (and a
control function in the case of the information received in late 2015) received
information in mid-2013 about possible bribery related to one of the 1MDB
Transactions and in late 2015 regarding possible 1MDB-related misconduct.
a.
The information obtained in mid-2013 related to possible bribery between two
non-Goldman Sachs parties in connection with the joint venture which 1MDB
was funding using the proceeds of the third bond transaction, Project Catalyze.
Goldman Sachs received similar information at a similar time alleging that one
of the third parties had also delayed an earlier 1MDB transaction in order to
secure a bribe.
b.
The information received in late 2015 suggested that misconduct may have
been committed by a senior member of the Goldman Sachs Deal Team,
referred to below as “Senior Banker A”, in relation to 1MDB.
2.5.
The information received in mid-2013 and late 2015 could have been relevant to
GSI’s assessment of legal, compliance and reputational risks, including the risks
3
arising out of historic, current and future dealings or transactions involving the
entities and individuals in question. It was therefore important that this information
was escalated to control functions to ensure that the credibility and significance
could be properly assessed, and appropriate action taken by GSI, including so that
relevant authorities could be informed if necessary.
2.6.
In relation to these matters GSI breached Principles 2 and 3 of the Authority’s
Principles for Businesses:
a.
Principle 2 requires a firm to conduct its business with due skill, care and
diligence.
b.
Principle 3 requires a firm to take reasonable care to organise and control its
affairs responsibly and effectively, with adequate risk management systems.
Breach of Principle 2
2.7.
GSI’s breach of Principle 2 fell into three broad categories of failings.
2.8.
First, GSI did not assess and manage the risk arising from the involvement of a
particular third party individual (referred to below as Third Party A) in the 1MDB
Transactions with due skill, care and diligence. Prior to the 1MDB Transactions, this
individual had previously been rejected by Goldman Sachs as a client, including due
to concerns about their unverified source of wealth. However, insufficient care was
taken in relation to assessing and managing the risk of this individual’s involvement
in the 1MDB Transactions. Instead, overreliance was placed on statements of the
Deal Team that this individual had no role, despite inconsistent accounts being
provided by a senior member of the Deal Team about the extent of the individual’s
involvement in the first 1MDB bond transaction. The risk of this individual’s
involvement was not raised in the documentation that went before the committees
assessing the 1MDB Transactions.
2.9.
Second, GSI failed to act with due skill, care and diligence when considering the
risk factors arising in each of the 1MDB Transactions. It was crucial that sufficient
consideration was given to all relevant risk factors both individually and holistically
and that the committees were presented with all relevant information to enable
such consideration. The manner in which some of the risks were presented to the
committees did not enable them to assess the risks fully, including the reputational
and financial crime risks arising from each of the 1MDB Transactions, holistically.
4
2.10.
Third, GSI failed to deal with allegations of bribery and misconduct with due skill,
care and diligence. GSI failed to escalate the information received in mid-2013
about possible bribery by a third party in accordance with GSI internal policies,
which would have allowed GSI control functions to assess the information and take
appropriate action. Further, in respect of the allegation received in late 2015 that
a senior member of the Goldman Sachs Deal Team may have been involved in and
benefitted from 1MDB-related misconduct, GSI failed to record further escalation
of this information or how the control functions at GSI and Goldman Sachs assessed
this information. Timely action was not taken in response to the allegation.
Breach of Principle 3
2.11.
Adequate record keeping is necessary to enable a firm to identify and manage risks
associated with its business. It is also required for the proper discharge of the
Authority’s supervisory responsibilities, including the monitoring of a firm’s
compliance with the requirements under the regulatory system.
2.12.
GSI breached Principle 3 because it failed to take reasonable care to organise and
control its affairs responsibly and effectively in relation to appropriate record
keeping of how risks arising from these transactions had been assessed and
managed. In particular, the transaction committees who were responsible for
reviewing the risks associated with the 1MDB Transactions prior to approval did not
maintain adequate records to show how they had considered and dealt with the
risks holistically.
2.13.
A failure to keep such records meant that it could not be fully demonstrated how
GSI’s governance and oversight arrangements fulfilled their obligations to assess,
challenge and approve the transactions. Neither could those arrangements be
scrutinised adequately when issues of possible financial crime arose.
2.14.
The Authority views these failings as serious. Indicators of potential financial crime
and other risks were not properly challenged and assessed by governance
functions, escalated to control functions or actions recorded by the firm, or notified
to the Authority where appropriate. As set out in paragraph 2.11 above, adequate
record keeping and escalation is necessary to enable a firm to identify and manage
risks associated with its business. Failures in this regard can hide misconduct, make
misconduct harder to detect or indicate wider cultural tolerance of such issues.
GSI’s record keeping and escalation failings significantly undermined the ability of
5
the firm to mitigate those risks, particularly where some of the failures involved
individuals holding senior positions.
2.15.
The Authority hereby imposes a financial penalty on GSI of £48,308,400
(equivalent to US$63,000,000) pursuant to section 206 of the Act for breaches of
Principles for Businesses 2 and 3.
2.16.
GSI agreed to resolve this matter and qualified for a 30% (Stage 1) discount under
the Authority’s executive settlement procedures. Were it not for this discount the
Authority would have imposed a financial penalty of £69,012,000 (equivalent to
US$90,000,000) in respect of these breaches.
3.
DEFINITIONS
The definitions below are used in this Notice:
“1MDB” means 1Malaysia Development Berhad, a strategic investment and
development company wholly-owned by the Malaysian government through its
Ministry of Finance;
“1MDB Transactions” means Project Magnolia, Project Maximus and Project Catalyze;
“Act” means the Financial Services and Markets Act 2000;
“Authority” means the body corporate previously known as the Financial Services
Authority and renamed on 1 April 2013 as the Financial Conduct Authority;
“BIG” means the Business Intelligence Group;
“Compliance” means the Compliance Division of Goldman Sachs;
“Conflicts” means the Business Selection and Conflicts Resolutions Group of Goldman
Sachs;
“Deal Memos” means the memoranda prepared and submitted by the Deal Team to
committees in advance of the committees’ consideration of the 1MDB Transactions;
6
“Deal Team” means the principally Asia-based team of Goldman Sachs bankers who
originated the 1MDB Transactions and undertook the day-to-day work on executing
the 1MDB Transactions;
“FWCC” means the Firmwide Capital Committee of Goldman Sachs;
“FWSC” means the Firmwide Suitability Committee of Goldman Sachs;
“Goldman Sachs” means the Goldman Sachs group of companies;
“GSI” means Goldman Sachs International;
“Legal” means the Legal department of Goldman Sachs;
“the March 2012 Meeting” means the meeting in March 2012 relating to Project
Magnolia between Senior Banker A and a high-ranking official of Sovereign Wealth
Fund A;
“Project Catalyze” means the third 1MDB bond transaction;
“Project Magnolia” means the first 1MDB bond transaction;
“Project Maximus” means the second 1MDB bond transaction;
“Relevant Period” means the period from 1 February 2012 to 3 February 2016;
“Senior Banker A” means a senior Asia-based member of the Deal Team;
“Sovereign Wealth Fund A” means an investment fund that was wholly owned and
controlled by a foreign government;
“Sovereign Wealth Fund A Subsidiary” means a subsidiary of Sovereign Wealth Fund
A;
“Third Party A” means an individual who had connections to high-ranking officials of
1MDB, Sovereign Wealth Fund A and Sovereign Wealth Fund A Subsidiary; and
“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber).
7
4.
FACTS AND MATTERS
4.1.
The following facts and matters are set out below:
Background facts and matters
Relevant participants involved in the 1MDB Transactions
paras 4.2 – 4.8
The 1MDB Transactions
paras 4.9 – 4.12
How GSI managed transaction risk
paras 4.13 – 4.20
Facts and matters giving rise to breaches
Risk relating to Third Party A
paras 4.21 – 4.38
Assessment and management of risk
paras 4.39 – 4.46
Allegations of bribery and misconduct
paras 4.47 – 4.53
Subsequent criminal and regulatory action
paras 4.54 – 4.55
BACKGROUND FACTS AND MATTERS
RELEVANT PARTICIPANTS INVOLVED IN THE 1MDB TRANSACTIONS
Goldman Sachs
4.2.
Goldman Sachs is a global investment banking, securities and investment
management group headquartered in New York.
GSI
4.3.
GSI is an investment banking, securities and investment management firm
headquartered in London. GSI is an indirect, wholly owned subsidiary of The
Goldman Sachs Group, Inc. GSI acts as the main booking entity for bond transactions
underwritten and purchased by Goldman Sachs outside the USA.
4.4.
GSI operates and has representation within a group framework of firmwide, regional,
divisional and legal entity management, governance and oversight structures. As a
result, the governance and oversight of GSI is aligned with the governance principles
and risk management systems and controls operated by Goldman Sachs.
1MDB
4.5.
1MDB was a strategic investment and development company wholly-owned by the
Malaysian government through its Ministry of Finance. 1MDB performed a
government function on behalf of Malaysia, with the mandate to pursue long-term
8
investment and development projects for the economic benefit of Malaysia and its
people.
Sovereign Wealth Fund A
4.6.
Sovereign Wealth Fund A
was an investment fund wholly-owned and controlled by a
foreign government and performed a government function. Goldman Sachs had
entered into a number of transactions with or for Sovereign Wealth Fund A prior to
the 1MDB Transactions.
Sovereign Wealth Fund A Subsidiary
4.7.
Sovereign Wealth Fund A Subsidiary was an investment company. Goldman Sachs
had entered into a number of transactions with or for Sovereign Wealth Fund A
Subsidiary prior to the 1MDB Transactions.
Third Party A
4.8.
Third Party A is an individual who had some involvement in certain proposed or actual
transactions involving Goldman Sachs between 2009 and 2013. Third Party A had
connections to high-ranking officials of 1MDB, Sovereign Wealth Fund A and
Sovereign Wealth Fund A Subsidiary.
THE 1MDB TRANSACTIONS
4.9.
In 2012 and 2013, GSI was the arranger, initial purchaser and underwriter of the
1MDB Transactions for subsidiaries of 1MDB. A total of US$6.5 billion was raised
from the 1MDB Transactions in an 11-month period.
a.
the first transaction was a US$1.75bn bond issuance, known internally within
Goldman Sachs as Project Magnolia. Work on the transaction commenced in
February 2012 and closed in May 2012. Approximately half of the proceeds of
the bond issuance was to be used to partially fund the acquisition of a power
plant and the remainder was to be used for general corporate purposes,
including potential future acquisitions. The bonds were jointly guaranteed by
1MDB and Sovereign Wealth Fund A, in return for which Sovereign Wealth Fund
A Subsidiary was granted an option to acquire up to 49% of the subsidiary of
1MDB acquiring the power plant. The foreign government which owned
Sovereign Wealth Fund A and Malaysia had a history of cooperation and the
transaction was expected to cement their strategic partnership. The bond
transaction was also seen as the first of a number of future business
9
opportunities with 1MDB, which was seen as a key client for Goldman Sachs in
the Asia region;
b.
the second transaction was a US$1.75bn bond issuance, known internally
within Goldman Sachs as Project Maximus. Work on the transaction
commenced in July 2012 and closed in October 2012. Approximately half of the
proceeds of the bond issuance were to be used to purchase certain power
assets, with the remainder to be used to fund transaction costs and interest
payments and for general corporate purposes, including potential acquisitions.
The bonds were deposited into a special purpose vehicle which issued
collateralised linked loans (“CLLs”) and collateralised linked notes (“CLNs”) and
which were sold to investors. The CLLs and CLNs benefitted from a guarantee
by Sovereign Wealth Fund A, in return for which Sovereign Wealth Fund A
Subsidiary was granted an option to acquire a 49% interest in the subsidiary
of 1MDB acquiring the power assets; and
c.
the third transaction was a US$3bn bond issuance, known internally within
Goldman Sachs as Project Catalyze. Work on the transaction commenced in
January 2013 and closed in March 2013. The proceeds were to be used by
1MDB to fund its contribution to a US$6bn strategic government to government
backed joint venture between 1MDB and Sovereign Wealth Fund A Subsidiary.
The bonds benefitted from a letter of support from the government of Malaysia.
4.10.
The 1MDB Transactions were originated by a team of bankers based in Asia (the
“Deal Team”) who handled the day-to-day work on the 1MDB Transactions.
Individuals from various Goldman Sachs entities, including Authority-registered
and/or UK-based GSI employees, were involved in the review, approval and aspects
of the execution of the 1MDB Transactions, including as part of the firmwide
transaction committee review process.
4.11.
Other than US$250 million of the Project Catalyze issuance (which was purchased
by another Goldman Sachs entity), GSI effectively purchased the entirety of the
issuance of the 1MDB bonds at a discount to par, this discount amounting to
US$558.25 million, to reflect, amongst other factors, the market and other risks
assumed by Goldman Sachs in purchasing the entirety of the bonds as a principal.
4.12.
Goldman Sachs then managed the risk of holding the bonds (e.g. through hedging
and funding arrangements) whilst they were sold to investors. Goldman Sachs’
profits from the 1MDB Transactions were driven by the difference between the price
at which the bonds were initially purchased and the price at which they or the related
10
CLLs and CLNs were sold to investors (less hedging/funding costs and adding any
interest earned on the bonds whilst held). Including the interest it earned whilst
holding the 1MDB bonds (but excluding funding/hedging costs), GSI sold the bonds
or notes for US$644 million more than it paid for the bonds. After including funding
and hedging costs, Goldman Sachs as a whole earned profits of approximately
US$567million from the 1MDB Transactions. The profit initially booked into GSI was
US$547million, of which approximately US$91 million was ultimately attributed to
GSI, with the remainder allocated to other Goldman Sachs entities in accordance
with the firm’s transfer pricing methodologies.
HOW GSI MANAGED TRANSACTION RISK
4.13.
The 1MDB Transactions were reviewed and approved using Goldman Sachs’ global
transaction review framework, which utilised a combination of GSI and broader
Goldman Sachs resources and personnel.
4.14.
In particular, the 1MDB Transactions were subject to:
a.
due diligence by business and control functions; and
b.
review and approval by the relevant transaction committees.
Due diligence by the business and control functions
4.15.
GSI considered that both Malaysia and the jurisdiction in which Sovereign Wealth
Fund A and Sovereign Wealth Fund A Subsidiary were based were at the higher end
of risk in relation to jurisdictions in which GSI undertook business, given their higher
level of legal, compliance and other reputational risks. In addition, the use of third
parties and intermediaries was widely known within GSI to be common practice in
these jurisdictions. Transactions with parties in such jurisdictions were therefore
required to undergo a commensurately higher level of due diligence.
4.16.
The due diligence review of the 1MDB Transactions involved various business and
control functions, including the Deal Team, Conflicts, Legal (including BIG, a sub-
function within Legal which conducted research and due diligence on legal, regulatory
and reputational risk matters) and Compliance. The process included: financial and
management due diligence; auditor due diligence; due diligence in relation to
underlying acquisitions; identification and management of potential conflicts of
interest; and review of legal and compliance issues and reputational risks.
11
Transaction committee review and approval process
4.17.
The 1MDB Transactions were also subject to a regional and firmwide transaction
committee review and approval process. Due to the 1MDB Transactions’ size and
nature, they were each reviewed and approved by the FWCC and FWSC:
a.
the FWCC was responsible for providing global approval and oversight of certain
debt-related transactions; and
b.
the FWSC was responsible for overseeing standards and policies for client,
product and transaction suitability.
4.18.
For the 1MDB Transactions to proceed, they had to be approved by both the FWCC
and FWSC.
4.19.
In advance of a committee meeting, the Deal Team typically provided a
memorandum (or a supplement to an earlier memorandum) to the committee
members to facilitate their review of the proposed transaction (known as “Deal
Memos”). The Deal Memos generally included key factual information (including a
background to and overview of the transaction, including principal transaction
terms), a summary of the due diligence undertaken and key discussion points or
transaction concerns (i.e. risks) arising, including the work done to address or
mitigate the concerns identified. At each meeting, the committee was expected to
discuss the proposed transaction and ask questions of the Deal Team where relevant
or appropriate, after which the committee could reject or approve the transaction or
require “follow ups” to be completed, either prior to further committee review or as
part of a conditional approval.
4.20.
The FWCC and FWSC minutes were maintained in standardised form as mandated in
their respective Charters. The FWCC minutes identified at a high level the outcome
of the committee’s consideration, including any agreed action items or follow ups,
which were required to be completed before the transaction could proceed. The
FWSC minutes briefly identified the areas of focus and inquiry and the outcome of
the committee’s consideration, including any agreed action items or follow ups, which
again were required to be completed before the transaction could proceed.
12
FACTS AND MATTERS GIVING RISE TO BREACHES
RISK RELATING TO THIRD PARTY A
4.21.
The identification and assessment of risks posed by third parties involved in
transactions was an important area of legal and compliance risk for GSI, particularly
where transactions involved parties in jurisdictions that posed higher levels of legal,
compliance and other reputational risks to GSI.
4.22.
As detailed further below, GSI:
a.
was aware that Third Party A’s application to open a private wealth account
with Goldman Sachs had been declined due to concerns over the source of their
wealth;
b.
had knowledge of Third Party A’s pre-existing relationships with 1MDB,
Sovereign Wealth Fund A and Sovereign Wealth Fund A Subsidiary; and
c.
was on notice of Third Party A’s role in relation to the March 2012 Meeting and
thereby the possibility of their broader involvement at least in Project Magnolia.
GSI’s knowledge of Third Party A prior to the 1MDB Transactions
4.23.
Prior to GSI’s involvement in the 1MDB Transactions, it was known within GSI that
Third Party A had links to the institutions that were central to the 1MDB Transactions.
Furthermore, GSI had concerns about the unverified source of Third Party A’s wealth
and was aware of media reports of opposition political party calls for an anti-
corruption investigation into Third Party A due to concerns about their source of
wealth and connections to senior Malaysian government officials.
4.24.
As detailed further below, this knowledge arose from previous projects and Goldman
Sachs’ two previous refusals to onboard Third Party A as a client.
Knowledge arising from prior on-boarding attempts
4.25.
Between 2009 and 2011, two Asia-based Goldman Sachs bankers, one of whom
would later lead the Deal Team on the 1MDB Transactions (“Senior Banker A”), made
two unsuccessful attempts to refer Third Party A for a Goldman Sachs private wealth
account and proposed to have Goldman Sachs act for Third Party A in relation to an
acquisition. These attempts were unsuccessful because BIG and Compliance had
concerns about (i) an inability to verify the sources of Third Party A’s wealth and (ii)
media reports of opposition political party calls for an anti-corruption investigation
13
into Third Party A due to concerns about their source of wealth and connections to
senior Malaysian government officials. In 2011, Compliance stated that it had “
…
pretty much zero appetite for a relationship with this individual
”, a view that was
supported by BIG which stated that “…
this
[Third Party A]
is a name to be avoided
”.
Knowledge arising from previous transactions
4.26.
Prior to the 1MDB Transactions, between 2009 and 2012, certain Goldman Sachs
and GSI personnel had contact with Third Party A in relation to certain proposed or
actual transactions. In these transactions, Third Party A was not Goldman Sachs’ or
GSI’s client or otherwise advised by Goldman Sachs or GSI, but had some other
involvement (e.g. acting as an adviser for clients of Goldman Sachs or GSI or to
other parties involved).
4.27.
Through this, it was known within Goldman Sachs and GSI that Third Party A had
connections to high-ranking officials of 1MDB, Sovereign Wealth Fund A and
Sovereign Wealth Fund A Subsidiary.
Notice of involvement of Third Party A in Project Magnolia
4.28.
At the outset of Project Magnolia, Conflicts instructed the Deal Team to disclose to
Conflicts any intermediary working on the deal. The Deal Team did not indicate that
any intermediary was involved.
The March 2012 Meeting
4.29.
Prior to the first regional transaction review committee meeting for Project Magnolia,
BIG asked Senior Banker A whether Third Party A was involved in Project Magnolia.
Senior Banker A said that Third Party A was not.
On 29 March 2012, BIG repeated
its question to Senior Banker A at the first regional transaction review committee
meeting for Project Magnolia. Senior Banker A again responded that Third Party A
had no involvement.
4.30.
Prior to the first FWCC meeting, BIG learned that Third Party A (whom BIG knew had
connections to 1MDB and to Sovereign Wealth Fund A)
had attended a meeting
earlier in March between Senior Banker A and a high-ranking official of Sovereign
Wealth Fund A (“the March 2012 Meeting”). In response, BIG took a number of steps:
a.
BIG conducted some due diligence into the issue, including media searches
(which did not identify evidence of Third Party A’s involvement) and asking
questions of other Deal Team members who confirmed that they had no
14
knowledge of Third Party A having any role. BIG discussed the matter again
with Senior Banker A and reported that Senior Banker A had told BIG that Third
Party A was present at the March 2012 Meeting, but was not involved at all in
Project Magnolia.
b.
On 4 April 2012, during the first FWCC meeting to discuss Project Magnolia,
BIG raised that Third Party A had attended the March 2012 Meeting. Senior
Banker A told the committee that Third Party A had arranged the March 2012
Meeting, but stated that Third Party A had not attended it.
c.
After the 4 April 2012 FWCC meeting, BIG emailed Senior Banker A. BIG noted
that its earlier understanding that Third Party A had attended the March 2012
Meeting was incorrect, but went on to note that Third Party A had clearly had
a role in arranging the March 2012 Meeting at which a letter from a high-
ranking official of 1MDB was delivered. After noting that GSI personnel had
historically been unable to secure such a meeting with the high-ranking official
of Sovereign Wealth Fund A, BIG stated to Senior Banker A that “[it is]
important we have no role on our side for
[Third Party A]
…” and “
… we should
ask that any payments from any of participants to any intermediaries are
declared and transparent
”. Senior Banker A said that they agreed.
d.
BIG required and Goldman Sachs received written representations from both
1MDB and Sovereign Wealth Fund A that no intermediary was involved in the
transaction.
e.
After Project Magnolia closed, BIG instructed Compliance to conduct email
surveillance of the Deal Team, including to identify any potential indications of
bribery or favours in connection with obtaining the Project Magnolia business.
No issues of concern were identified.
Project Maximus and Project Catalyze
4.31.
Goldman Sachs took the following steps during Project Maximus and Project
Catalyze:
a.
Conflicts again instructed the Deal Team to inform Conflicts and BIG if any
party became involved in the transactions who could be deemed an
intermediary or consultant. The Deal Team did not indicate that any
intermediary was involved.
b.
BIG required and Goldman Sachs received representations from 1MDB,
Sovereign Wealth Fund A and the Malaysian government that no intermediary
was involved in the transactions.
15
c.
BIG and, in the case of Project Maximus, Legal asked the Deal Team whether
any finders or intermediaries were involved in the transactions. In relation to
both transactions, the Deal Team responded that there were none. In respect
of Project Maximus, BIG also asked the Deal Team specifically whether Third
Party A was involved The Deal Team responded that Third Party A was not
involved.
d.
BIG conducted further background checks and assessed relevant media reports
during Project Maximus.
e.
Whilst Project Maximus was ongoing, as part of routine deal-compliance
surveillance, Compliance reviewed the emails of Senior Banker A and another
senior member of the Deal Team, including looking for any reference to 1MDB
or an intermediary. No issues of concern were identified.
Insufficient steps taken in relation to Third Party A
4.32.
Given Third Party A’s involvement in prior transactions involving 1MDB, Sovereign
Wealth Fund A and/or Sovereign Wealth Fund A Subsidiary; their connections to
high-ranking officials in Malaysia and the foreign government of Sovereign Wealth
Fund A; and the concerns Goldman Sachs had previously had regarding Third Party
A’s unverified source of wealth, it was important that the risk of Third Party A’s
involvement in the 1MDB Transactions was thoroughly scrutinised and considered by
the transaction review committees.
4.33.
Although, as noted above, steps were taken by BIG, Legal, Compliance and others
to scrutinise the issue, further steps should have been taken to assess and mitigate
the risk of Third Party A’s involvement, in particular by ensuring that the committees
carefully scrutinised and assessed the risk.
4.34.
There was also an overreliance placed on the representations of Senior Banker A and
the rest of the Deal Team. Senior Banker A was not challenged about (i) why they
had said initially to BIG and the regional transaction review committee that Third
Party A had no role in Project Magnolia when it became clear that Third Party A had
arranged the March 2012 Meeting, and (ii) why Third Party A was involved in
arranging the March 2012 Meeting at which Senior Banker A delivered a letter from
a high-ranking official of 1MDB to a high-ranking official of Sovereign Wealth Fund
A and what Third Party A stood to benefit from doing so.
4.35.
Whilst GSI required that the executed agreements for each of the 1MDB Transactions
contained representations from 1MDB, Sovereign Wealth Fund A and the Malaysian
16
government that no intermediary was involved in the 1MDB Transactions (which
were provided), more specific questions should have been asked of 1MDB, Sovereign
Wealth Fund A and the Malaysian government during the due diligence process as to
whether Third Party A was involved in the 1MDB Transactions and, if so, in what
capacity.
4.36.
In addition, the name of “Third Party A” was not used in the email searches that
GSI’s control functions conducted after Project Magnolia and during Project Maximus
(although it is unclear whether such searches would have raised additional issues of
concern beyond Third Party A’s role in arranging the March 2012 Meeting).
4.37.
Further, GSI failed to ensure that the committees carefully scrutinised and assessed
the risk of Third Party A’s involvement in the 1MDB Transactions. Although (i) the
issue of whether Third Party A was involved in Project Magnolia was raised orally by
BIG at the first regional transaction review committee meeting on 29 March 2012
and the first FWCC meeting on 4 April 2012; and (ii) the Deal Team noted in the
Project Maximus Deal Memos that representations as to the absence of
intermediaries had been or would be provided, the risk of Third Party A’s involvement
was not highlighted by the Deal Team as a compliance issue, concern or risk indicator
in any of the Deal Memos for the 1MDB Transactions. In respect of Project Magnolia,
the minutes of the FWCC meeting on 4 April 2012 did not record the basis on which
the committee was comfortable that the risk of Third Party A’s possible involvement
had been appropriately mitigated. Similarly, there is no record of how the
committees considered the specific risk of Third Party A’s involvement in the Project
Maximus and Project Catalyze transactions.
Involvement of Third Party A between and post the 1MDB Transactions
4.38.
Between and after the completion of the 1MDB Transactions, Third Party A and/or
connected entities were involved in various other circumstances pertaining to GSI
and/or Goldman Sachs, including acting as an adviser and co-investor in a
transaction in which Goldman Sachs was advising another investor.
ASSESSMENT AND MANAGEMENT OF RISKS
4.39.
The transaction committees were responsible for the assessment of legal, regulatory
and capital risks and the management of reputational risks referred to them as part
of the approval of transactions.
17
4.40.
The Deal Memos were prepared by the Deal Team with input from a range of control
functions, including BIG, Legal, Compliance and the Debt Underwriting Group. The
Debt Underwriting Group had a quality control function, whose responsibilities
included ensuring that FWCC memoranda conformed with the process requirements
and met certain standards, minuting meetings, liaising between deal teams and the
FWCC and tracking follow-up items
.
The Deal Memos were required to highlight any
key risks (referred to in the Deal Memos as key discussion points and areas of
concern) which a committee might be interested in discussing.
4.41.
The Deal Memos set out a number of key risks relevant to proper consideration of
the reputational, suitability and financial crime risks arising in the 1MDB Transactions
and mitigants in relation to these risks. The identified risks included:
a.
Negative media coverage of 1MDB and the 1MDB Transactions which
questioned the purpose, commerciality and overall appropriateness of the
deals. In addition, 1MDB had received public criticism from political and
business leaders within Malaysia, including allegations of corruption.
b.
The choice of transaction structure as private placements using GSI as sole
arranger and underwriter and the reasons why 1MDB had a preference in each
of the transactions for a principal financing (each time the quickest and most
expensive option but with more confidentiality) in preference to other lower-
cost financing alternatives.
c.
The planned use of proceeds for Project Catalyze, given the absence of a stated
investment plan and specific asset purchases for the joint venture.
d.
The reasons for 1MDB wishing to raise the amount of funds proposed in Project
Maximus when some of the funds raised through Project Magnolia remained
unused. The Deal Memo for Project Catalyze also summarised the earlier
Project Magnolia and Project Maximus transactions, the fact that US$1.6billion
of the proceeds had not yet been used and indicated the planned investment
activities to which those unused funds were to be used.
e.
The financing structures chosen by 1MDB for Catalyze would result in “negative
carry” (i.e., that 1MDB would be paying interest on the funds raised through
the transaction whilst they were unused).
f.
The Committees considered the amount of overall profits Goldman Sachs could
potentially earn from the transactions, and required presentations to be made
to 1MDB and Sovereign Wealth Fund A on the potential profits or losses it might
earn or incur, depending on how long it took to sell the bonds to third parties,
at what price, and what market exposures and associated hedging/funding
18
costs it would incur whilst doing so. The Deal Memos did not, however, contain
clear reasoning as to why the size of potential profits were considered suitable.
g.
Whether, in light of approvals by senior executives of Sovereign Wealth Fund
A, and other factors, there was sufficient evidence that the guarantees given
by Sovereign Wealth Fund A for Project Magnolia and Project Maximus had
been duly authorised, notwithstanding the absence of a board resolution
authorising the guarantees (as had originally been requested in Project
Magnolia).
h.
The timing of Project Catalyze in relation to the Malaysian 2013 general
election.
4.42.
The Deal Memos set out a number of mitigants that had been taken in relation to
several of these risks. The minutes of the committee meetings also highlighted
several follow up actions relevant to these risks, which the committees required
the Deal Team and control functions to take before the transactions would be
approved.
4.43.
However, as noted at paragraph 4.37 above, and unlike the risks set out at
paragraphs 4.41.a. – h., the Deal Memos for the 1MDB Transactions did not
highlight the risk of Third Party A’s involvement.
4.44.
Further:
a.
given the heightened financial crime and reputational risks associated with the
1MDB Transactions and that not all of the risks (e.g. reputational risks arising
out of negative media/political coverage) were capable of being fully mitigated,
it was crucial that sufficient consideration was given to all relevant risk factors
both individually and holistically and that the committees were presented with
all relevant information to enable such consideration; and
b.
in relation to the risks which were highlighted in the Deal Memos, the manner
in which some of these risks and the steps taken to address them were
presented and conveyed to the committees meant that the committees did not
have adequate information to enable them to assess the risks fully, including
the reputational and financial crime risks arising from each of the 1MDB
Transactions, holistically.
19
Record keeping
4.45.
The minutes of the FWCC and FWSC meetings were maintained in a standardised
format, whereby the minutes only recorded briefly the key decisions made,
including any follow up actions which the committee required to be completed. The
minutes did not contain details of how the committees had considered risks, the
rationale for the action points identified or the rationale for the committees’ decision
to approve the transactions.
4.46.
As a result, insufficient records were retained to show how the committees had
assessed the risks arising out of the 1MDB Transactions, or the reasons the
committees were comfortable approving, or conditionally approving the
transactions. Given the size and risk profile of the 1MDB Transactions, the failure
to document the committees’ consideration of these matters more fully is
significant.
ALLEGATIONS OF BRIBERY AND MISCONDUCT IN 2013 AND 2015
2013 information about potential bribery
4.47.
In mid-2013, shortly after Project Catalyze closed, GSI senior personnel were
provided with information about possible bribery relating to the joint venture the
Catalyze bonds were issued to finance. The information indicated that an official at
Sovereign Wealth Fund A may have been delaying funding the Sovereign Wealth
Fund A Subsidiary/1MDB joint venture in order to attempt to secure a bribe (from a
non-Goldman Sachs party) and also that this Sovereign Wealth Fund A official had
connections to Third Party A.
4.48.
The information was received amidst media and political criticism about the 1MDB
Transactions and the fees Goldman Sachs received for them, and at a time when, as
set out at paragraphs 4.21 to 4.38, GSI was on notice of the risk of Third Party A’s
involvement in the 1MDB Transactions. As such, the information could have been
relevant to GSI’s assessment of ongoing legal, compliance or ethical risks,
particularly the risks arising out of historic, current and future dealings or
transactions involving 1MDB, Sovereign Wealth Fund A, Sovereign Wealth Fund A
Subsidiary and the Sovereign Wealth Fund A official.
4.49.
This information presented an issue that might raise legal, compliance and ethical
concerns requiring immediate escalation to control functions in accordance with GSI
internal policies. Irrespective of how the information was viewed by the individuals
20
who received it, it was important that the control functions were given the
opportunity to assess the credibility and significance of this information, and, if
deemed necessary, act on this information. However, GSI senior personnel did not
escalate the information to GSI’s control functions for assessment and, if
appropriate, action. This was particularly important as Goldman Sachs separately
received similar information at a similar time alleging that the same Sovereign
Wealth Fund A official had delayed an earlier 1MDB transaction in order to secure a
bribe from a non-Goldman Sachs party.
2015 1MDB misconduct allegation
4.50.
Prior to late 2015, there were a number of known risk indicators within GSI
concerning 1MDB and the 1MDB Transactions, including:
a.
GSI was aware of criticisms reported in the media of 1MDB’s transaction
history, including the 1MDB Transactions, and also Third Party A’s connections
to high-ranking officials of 1MDB; and
b.
GSI was aware of Senior Banker A’s relationship with Third Party A, both
before, during and after the 1MDB Transactions.
4.51.
In late 2015, GSI senior personnel and a control function received information about
a third party’s suspicion that Senior Banker A had been involved in, and potentially
benefitted from, misconduct relating to 1MDB. The information suggested that Third
Party A may also have been involved.
4.52.
There are no records of further escalation of this information or of how control
functions at GSI and Goldman Sachs assessed this information. Furthermore, no
action was taken in response to this information in the weeks that followed.
4.53.
A few weeks after control functions learned from GSI of this allegation concerning
Senior Banker A, a separate concern arose unrelated to the 1MDB Transactions
involving Senior Banker A. Whilst investigating that matter, Goldman Sachs’ control
functions discovered in January 2016 that Senior Banker A may have been involved
in additional misconduct by providing an unauthorised reference for Third Party A.
Whilst GSI informed the Authority about the unauthorised reference matter in early
February 2016,
it did not inform the Authority about the information it had received
suggesting possible misconduct by Senior Banker A related to 1MDB.
21
SUBSEQUENT CRIMINAL AND REGULATORY ACTION
4.54.
Since 2015, Goldman Sachs entities (including GSI), Third Party A, Senior Banker A,
other current and former employees of Goldman Sachs (including GSI) and
individuals at 1MDB, Sovereign Wealth Fund A and Sovereign Wealth Fund A
Subsidiary have been the subject of criminal and/or regulatory investigations and
actions in various jurisdictions relating to political corruption, bribery and
international money laundering in connection with the 1MDB bond transactions.
4.55.
In particular, the U.S. Department of Justice has alleged that between 2009 and
2014 billions of dollars were misappropriated and fraudulently diverted from 1MDB
to individuals complicit in the scheme. It is alleged that members of the conspiracy
included officials at 1MDB, their relatives and other associates, including Third Party
A. The diverted funds allegedly included approximately US$2.7 billion of the US$6.5
billion in capital raised through the 1MDB Transactions.
5.
FAILINGS
5.1.
The regulatory provisions relevant to this Notice are referred to in Annex A.
5.2.
As described in further detail below, GSI breached Principles 2 and 3 of the
Authority’s Principles for Businesses.
PRINCIPLE 2 FAILINGS
5.3.
Principle 2 requires a firm to conduct its business with due skill, care and diligence.
In breach of Principle 2, GSI failed with due skill, care and diligence to:
a.
assess and manage sufficiently the risks surrounding the involvement of Third
Party A in the 1MDB Transactions;
b.
ensure that the transaction committees had adequate information to assess
the risks associated with the 1MDB Transactions holistically; and
c.
manage allegations of bribery and misconduct relating to individuals and/or
entities involved in or associated with the 1MDB Transactions.
Risk relating to Third Party A
5.4.
As set out in more detail below, insufficient steps were taken to scrutinise the risk of
Third Party A’s involvement in the 1MDB Transactions.
22
5.5.
Given (i) Third Party A’s involvement in prior transactions involving Senior Banker
A, 1MDB, Sovereign Wealth Fund A and/or Sovereign Wealth Fund A Subsidiary;(ii)
Third Party A’s connections to high-ranking officials in Malaysia and the foreign
government of Sovereign Wealth Fund A; and (iii) the concerns Goldman Sachs
previously had regarding Third Party A’s unverified source of wealth and media
reports of opposition political party calls for an anti-corruption investigation into
Third Party A and their links to the Malaysian government, it was important that the
risk of Third Party A’s involvement in the 1MDB Transactions was thoroughly
scrutinised and considered by GSI’s control and support functions.
5.6.
However, GSI failed to take sufficient steps to ensure that the committees scrutinised
and assessed fully the risk of Third Party A being involved in the 1MDB Transactions.
Although steps were taken by BIG, Legal, Compliance and others to scrutinise the
issue, the Deal Memos for the 1MDB Transactions did not highlight the risk of Third
Party A’s involvement. Whilst there is evidence of the Deal Team reporting on the
fact that representations as to the absence of intermediaries had been or would be
provided, there is no record of the committees considering the specific risk of Third
Party A’s involvement in the 1MDB Transactions subsequent to the FWCC meeting
on 4 April 2012. Further, the minutes of the FWCC meeting on 4 April 2012 did not
record the basis upon which the committee was comfortable that the risk of Third
Party A’s involvement had been subject to appropriate due diligence and mitigation.
5.7.
Furthermore, overreliance was placed on the representations of the Deal Team and
the transaction parties during the due diligence process to assess the possible
involvement of Third Party A in the 1MDB Transactions. The inconsistent accounts
given by Senior Banker A regarding the possible involvement of Third Party A in
Project Magnolia should have led to further investigation of the situation.
Notwithstanding the breadth of the contractual ‘no-intermediary’ representations
received from 1MDB, Sovereign Wealth Fund A and the Malaysian government, more
specific questions should have been asked of 1MDB, Sovereign Wealth Fund A and
the Malaysian government during the due diligence process for the 1MDB
Transactions about the possible involvement of Third Party A. In addition, the name
of “Third Party A” was not used in the email searches that GSI’s control functions
conducted after Project Magnolia and during Project Maximus.
Approach to risk assessment
5.8.
The 1MDB Transactions gave rise to a series of risks, several of which were inter-
related. Save for the risk of the involvement of Third Party A, information about the
23
risks and the mitigants taken or being taken were presented to the FWCC and FWSC
for consideration. However, GSI failed to take sufficient steps to ensure that the risks
identified in relation to the 1MDB Transactions were presented and conveyed to the
committees in a manner which provided the committees with adequate information
to enable them to assess the risks fully, including the reputational and financial crime
risks arising from each transaction holistically.
5.9.
The absence of information in relation to the risk of the involvement of Third Party
A in the 1MDB Transactions undermined the ability of the committees to assess this
risk in the round with the other attendant risks.
5.10.
The above failures were particularly serious given the size of the 1MDB Transactions
and the heightened financial crime risks associated with the jurisdictions in which
the parties involved in the 1MDB Transactions were based.
Bribery and misconduct allegations
5.11.
GSI failed to escalate in accordance with GSI internal policies or otherwise
adequately deal with information received regarding possible bribery in mid-2013,
after the 1MDB Transactions had closed. The information received was sufficiently
important that it should have been escalated to control functions, assessed and any
required action taken. The failure to undertake this assessment was particularly
acute because (i) there were concerns about the 1MDB Transactions reported in the
media; (ii) GSI was on notice of the risk of Third Party A’s possible involvement in
the 1MDB Transactions; (iii) Goldman Sachs separately received similar information
at a similar time alleging that the Sovereign Wealth Fund A official had delayed an
earlier 1MDB transaction to secure a bribe from a non-Goldman Sachs party; and
(iv) the information could have been relevant to GSI’s assessment of the risks arising
out of historic, current and future dealings or transactions involving the entities and
individuals in question.
5.12.
GSI also failed to adequately respond in a timely manner to an allegation of
misconduct on the part of Senior Banker A in 2015. While GSI escalated this
information to a control function, there is no record of how the control functions at
GSI and Goldman Sachs assessed this information, or of further escalation of the
information. No action was taken in response to the allegation in the weeks that
followed. It was several weeks before Senior Banker A was placed under heightened
surveillance following the discovery of other misconduct. When GSI later notified the
Authority of Senior Banker A’s non-1MDB related misconduct in February 2016, the
24
allegation GSI had received of 1MDB-related misconduct by Senior Banker A was not
notified to the Authority.
PRINCIPLE 3 FAILINGS
5.13.
Principle 3 requires a firm to take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems.
5.14.
GSI failed to retain sufficient records to show how the committees had assessed the
risks arising out of the 1MDB Transactions, or the reasons the committees were
comfortable approving or conditionally approving the 1MDB Transactions. The
minutes of the FWCC and FWSC meetings were in a standardised format which only
recorded briefly the key decisions made, including any follow up actions which the
committee required to be completed. The minutes did not contain details of how the
committees had considered the risks, the rationale for the action points identified or
the rationale for the committee’s decision to approve the 1MDB Transactions.
5.15.
The deficiencies in record keeping by the committees was a serious breach because
it meant the risk approach to the transactions could not be properly reviewed at the
time of the transactions, nor could it be adequately scrutinised post the transactions
when issues of possible financial crime arose. The maintenance of accurate and
sufficiently detailed records of a firm’s business and internal organisation,
particularly in respect of its senior decision-making committees, is necessary for the
proper discharge of the Authority’s supervisory responsibilities. Deficiencies in record
keeping hinder both the Authority’s and the firm’s ability to identify and manage
risks associated with the firm’s business prudently. The lack of detailed minutes of
committees’ scrutiny and approval to execute the 1MDB Transactions does not meet
the standard required of firms, particularly given the higher risk profile of these
transactions.
6.
SANCTION
6.1.
The Authority considers that a financial penalty is the appropriate sanction in the
circumstances of this case.
6.2.
The Authority’s policy on the imposition of financial penalties is set out in Chapter 6
of the Authority’s Decision Procedure & Penalties Manual (“DEPP”). In respect of
conduct occurring on or after 6 March 2010, the Authority applies a five-step
25
framework to determine the appropriate level of financial penalty. DEPP 6.5A sets
out the details of the five-step framework that applies in respect of financial penalties
imposed on firms.
Step 1: Disgorgement
6.3.
Pursuant to DEPP 6.5A.1G, at Step 1 the Authority seeks to deprive a firm of the
financial benefit derived directly from the breach where it is practicable to quantify
this.
6.4.
The Authority notes that, in relation to Goldman Sachs’ role in the 1MDB
Transactions, GSI’s ultimate parent company, The Goldman Sachs Group, Inc., has
paid US$2.5 billion to the government of Malaysia and guaranteed the recovery of
at least US$1.4 billion in asset proceeds. As such, the Authority considers that it
does not need to separately address the question of disgorgement.
6.5.
The Step 1 figure is therefore £0.
Step 2: the seriousness of the breach
6.6.
Pursuant to DEPP 6.5A.2G, at Step 2 the Authority determines a figure that reflects
the seriousness of the breach. Where the amount of revenue generated by a firm
from a particular product line or business area is indicative of the harm or potential
harm that its breach may cause, that figure will be based on a percentage of the
firm’s revenue from the relevant products or business area.
6.7.
The Authority considers that the annual revenue generated by GSI in total or from a
relevant business area would not be an appropriate indicator of the harm or the
potential harm caused by its breaches. Given the nature of GSI’s breaches and their
potential impact on the 1MDB Transactions and those involved in them, the
Authority
has determined that the appropriate metric which reflects the harm or potential harm
GSI’s breaches may have caused is the difference between the price at which GSI
purchased the bonds issued through the 1MBD Transactions and the price at which
it sold them (plus interest earned on the bonds whilst they were held by GSI). The
relevant indicator of harm is therefore US$643,871,222.
6.8.
In deciding on the percentage that forms the basis of the Step 2 figure, the Authority
considers the seriousness of the breach and chooses a percentage between 0% and
20%. This range is divided into five fixed levels which represent, on a sliding scale,
26
the seriousness of the breach; the more serious the breach, the higher the level. For
penalties imposed on firms there are the following five levels:
Level 1 – 0%
Level 2 – 5%
Level 3 – 10%
Level 4 – 15%
Level 5 – 20%
6.9.
In assessing the seriousness level for the purposes of Step 2, the Authority has taken
into account the following factors set out in DEPP:
a.
DEPP 6.5A.2G (6-9) which lists factors the Authority will generally take into
account in deciding which level of penalty best indicates the seriousness of the
breach;
b.
DEPP 6.5A.2G (11) which lists factors likely to be considered ‘level 4 or 5
factors’; and
c.
DEPP 6.5A.2G (12) which lists factors likely to be considered ‘level 1, 2, or 3
factors’.
6.10.
Of these, the Authority considers the following factors to be most relevant to the
assessment of seriousness:
a.
How a firm counters the risk that it might be used to further financial crime is
the responsibility of UK financial institutions. This was particularly important in
this instance given the enhanced risk profile of the 1MDB Transactions.
b.
Failures by GSI relating to its ability to assess and record risks undermined its
ability to manage those risks. An essential plank of protection against financial
crime is risk assessment and management. Such failings are particularly
serious in relation to high value transactions with higher-risk profiles such as
the 1MDB Transactions.
c.
The Principle 2 breaches that relate directly to the 1MDB Transactions persisted
across three transactions executed over the course of 11 months and involved
individuals at senior positions within GSI.
d.
The further breaches that occurred in 2013 and 2015, when there was a failure
to act appropriately after receiving information relating to possible bribery and
misconduct in relation to the third 1MDB transaction and 1MDB, directly
involved senior GSI personnel.
27
e.
The shortcoming in the firm’s internal procedures and controls around record
keeping was serious because it related directly to the assessment and
management of risk by the firm’s transaction approving committees.
f.
GSI’s breaches were not deliberate or reckless.
6.11.
The Authority considers the seriousness of the breach to be level 4 (15%).
6.12.
The Step 2 figure is therefore US$96,580,683.
Step 3: mitigating and aggravating factors
6.13.
Pursuant to DEPP 6.5A.3G, at Step 3 the Authority may increase or decrease the
amount of the financial penalty arrived at after Step 2 to take into account factors
which aggravate or mitigate the breach.
6.14.
The Authority considers the following factors are relevant:
a.
GSI has cooperated during the Authority’s investigation.
b.
Since 2013, GSI has made changes to its governance and control
arrangements, as is to be properly expected of an authorised firm in the
circumstances. In particular, GSI has made changes to its compliance and
surveillance programmes with the aim of improving the identification of
instances of corruption or fraud, and at group level, Goldman Sachs has
introduced a “Firmwide Reputational Risk Committee”. GSI has also changed
its record-keeping arrangements by requiring that more detailed records of
transaction committee meetings are maintained.
c.
The firm’s previous disciplinary history. In September 2010, the FSA imposed
a financial penalty on GSI of £17.5 million for breaches of Principles 2, 3 and
11 (including a failure to conduct its business with due skill, care and diligence
with respect to its regulatory reporting obligations).
Together the above factors should reduce the Step 2 figure by 5%.
6.15.
The Authority considers that the PRA’s decision to impose a financial penalty on GSI
in respect of misconduct by GSI arising from broadly the same facts and matters is
also a relevant factor. This should reduce the Step 2 figure by a further 50%.
6.16.
Having taken into account the above factors, the Authority considers that the Step
2 figure should be reduced by 55%.
28
6.17.
The Step 3 figure is therefore US$43,461,307.
Step 4: adjustment for deterrence
6.18.
Pursuant to DEPP 6.5A.4G, if the Authority considers the figure arrived at after Step
3 is insufficient to deter the firm who committed the breach, or others, from
committing further similar breaches, then the Authority may increase the penalty.
In doing so, it has also considered the financial penalty imposed by the PRA in respect
of misconduct by GSI arising from broadly the same facts and matters.
6.19.
Without
an
adjustment
for
deterrence,
the
financial
penalty
would
be
US$43,461,307. The Authority considers that a penalty of this size would not serve
as a sufficient deterrent to GSI or other firms from committing similar breaches.
Given the size and stature of GSI, and the nature of the misconduct, it is necessary
for the Authority to increase the Step 3 figure to achieve such deterrence. Having
taken into account the factors outlined at DEPP 6.5A.4G, the Authority considers that
the Step 3 figure should be increased to US$90,000,000.
6.20.
Step 4 is therefore US$90,000,000 (equivalent to £69,012,000).
Step 5: settlement discount
6.21.
Pursuant to DEPP 6.5A.5G, if the Authority and the firm to whom the penalty is to
be imposed agree the amount of financial penalty and other terms, DEPP 6.7 provides
that the amount of financial penalty which might otherwise have been payable will
be reduced to reflect the stage at which the Authority and the firm reached
agreement.
6.22.
The Authority and GSI reached agreement at Stage 1 and so a 30% discount applies
to the Step 4 figure. Step 5 is therefore US$63,000,000 (equivalent to £48,308,400).
Penalty
6.23.
The Authority thereby imposes on GSI a financial penalty of £48,308,400 (equivalent
to US$63,000,000).
7.
PROCEDURAL MATTERS
7.1.
This Notice is given to GSI under, and in accordance with, section 390 of the Act.
The following statutory rights are important.
29
Decision maker
7.2.
The decision which gave rise to the obligation to give this Notice was made by the
Settlement Decision Makers.
Manner and time for payment
7.3.
The Financial penalty must be paid in full by GSI to the Authority no later than 4
November 2020.
If the financial penalty is not paid
7.4.
If all or any of the financial penalty is outstanding on 5 November 2020, the Authority
may recover the outstanding amount as a debt owed by GSI and due to the
Authority.
Publicity
7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of information
about the matter to which this notice relates. Under those provisions, the Authority
must publish such information about the matter to which this notice relates as the
Authority considers appropriate. The information may be published in such manner
as the Authority considers appropriate. However, the Authority may not publish
information if such publication would, in the opinion of the Authority, be unfair to
GSI or prejudicial to the interests of consumers or detrimental to the stability of the
UK financial system.
Authority contacts
7.6.
For more information concerning this matter generally, contact Stephen Robinson at
the Authority (direct line: 020 7066 1338/ email:
stephen.robinson@fca.org.uk
), or
Eden
Legesse
at
the
Authority
(direct
line:
020
7066
6710/
email:
eden.legesse@fca.org.uk
).
Mario Theodosiou
Head of Department
Financial Conduct Authority, Enforcement and Market Oversight Division
30
ANNEX A
RELEVANT STATUTORY AND REGULATORY PROVISIONS AND GUIDANCE
1.
RELEVANT STATUTORY PROVISIONS
Financial Services and Markets Act 2000
1.1
The Authority’s general duties established in section 1B of the Act include the
strategic objective of ensuring that the relevant markets function well and the
operational objectives of protecting and enhancing the integrity of the UK financial
system and securing an appropriate degree of protection for consumers.
1.2
Section 206 of the Act gives the Authority the power to impose a penalty on an
authorised firm if that firm has contravened a requirement imposed on it by or under
the Act.
1.3
DEPP, which forms part of the Authority’s Handbook, sets out the Authority’s
statement of policy with respect to the imposition and amount of financial penalties
under the Act. In particular, DEPP 6.5A sets out the five steps for penalties imposed
on firms in respect of conduct taking place on or after 6 March 2010.
2.
RELEVANT REGULATORY PROVISIONS AND GUIDANCE
2.1
In exercising its powers to impose a financial penalty, the Authority has had regard
to the relevant regulatory provisions published in the Authority’s handbook. The main
provisions that the Authority considers relevant are set out below.
Principles for Business (PRIN)
2.2
The Principles are general statements of the fundamental obligations of firms under
the regulatory system and are set out in the Authority’s handbook. They derive their
authority from the Authority’s statutory objectives.
2.3
Principle 2 provides that a firm must conduct its business with due skill, are and
diligence.
2.4
Principle 3 provides that a firm must take reasonable care to organise and control its
affairs responsibly and effectively, with adequate risk management systems.
31
Decision Procedures and Penalties Manual (DEPP)
2.5
Chapter 6 of DEPP, which forms part of the Authority’s handbook, sets out the
Authority’s statement of policy with respect to the imposition and amount of financial
penalties under the Act. In particular, DEPP 6.5A sets out the five steps for penalties
imposed on firms in respect of conduct taking place on or after 6 March 2010.
The Enforcement Guide (EG)
2.6
EG sets out the Authority’s approach to exercising its main enforcement powers
under the Act.
2.7
Chapter 7 of EG sets out the Authority’s approach to exercising its power to impose
a financial penalty.