Goldman Sachs is currently facing serious charges of fraud related to the 1MDB investment fund. Though Goldman Sachs itself has attempted to distance itself from the scandal — claiming that some of its employees went “rogue” — it has, at least initially, appeared as though the issues may run much deeper. Goldman Sachs’ shares are currently down 35% and the outcome of this scandal will undoubtedly impact the company’s future.
The Malaysian government is accusing Goldman Sachs of providing false statements regarding 1MDB: 1Malaysia Development Berhad. 1MDB’s investment fund was allegedly plundered by those who managed it, and the accusations are that Goldman Sachs was aware and complicit in the situation. From 2012 through 2013, Goldman Sachs was able to funnel $6.5 million in funds towards 1MDB, making over $600 million in fees.
Goldman Sachs claims that former employees of Goldman Sachs were primarily responsible for the fraud, yet those who are intimate with the workings of the company claim that this would be impossible. Allegations have been made that decisions at this high of a level would involve quite a few people within the business and would require an institutional decision.
While this issue has been going on for some years, it is only recently that Malaysia has levied charges against Goldman Sachs itself. Through this, the Malaysian government hopes to charge Goldman Sachs for its alleged crimes.
Timothy Leissner, previously an investment banker with Goldman Sachs, has already plead guilty to being complicit. Another Goldman Sachs banker, Roger Ng, is currently awaiting charges. However, though these individuals may be taking responsibility, the Malaysian government appears to be interested in gaining restitution from Goldman Sachs itself.
Money from the 1MDB fund was funneled to employees and managers of the fund, and was said to be spent on everything from entertainment and dining to the funding of major motion pictures. It’s believed that Goldman Sachs charged much higher than average fees in order to manage these funds, with the understanding that they would mislead potential investors regarding the validity of the funds.
If it’s shown that Goldman Sachs took kickbacks from 1MDB to look the other way, the charges are serious — but even without intent to deceive, it’s possible that the company could nevertheless be found to be negligent. At best, it appears that Goldman Sachs would have failed to do its due diligence for its investors, as well as not providing appropriate controls to protect its clients from “rogue agents.”
One “smoking gun” in the investigation is that Goldman Sachs employees repeatedly referenced “Project Tiara” in internal communications, and part of the funds were used to purchase 14 diamond tiaras. In addition to this, money was spent on jets, yachts, and a see-through piano. Further investigations may continue to yield insights regarding where the funds went, but it’s inarguable that the funds were stolen and laundered — the question is whether Goldman Sachs has liability as an entity or whether their agents had truly gone rogue.
Ultimately, the 1MDB scandal could potentially cost Goldman Sachs billions — and it certainly doesn’t improve customer faith. Though this is undoubtedly the largest example, many major financial institutions have undergone controversy in recent years: Bank of America with its foreclosures, and Wells Fargo with its fraudulent savings and checking accounts.
With Goldman Sachs, the most obvious change has been in stock price, with the stock going down by a considerable 35%. Fines levied could number in the billions, which will also be substantially harmful for a business that has a net income of less than $5 billion annually (though a revenue of over $30 billion). On a broader scale, a loss of consumer faith and continued controversies have hurt many larger banks, and are giving rise to startups, credit unions, and peer-to-peer lending networks.