The 1MDB Deals That Continue to Haunt Goldman Sachs - EcoFinBiz Blog

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The 1MDB Deals That Continue to Haunt Goldman Sachs

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(Bloomberg) -- The three bond deals took place in 2012 and 2013, and the debt is more than halfway to maturity. Yet for Goldman Sachs Group Inc., the furor surrounding the funds it raised for a Malaysian state investment company refuses to go away. Goldman has been under scrutiny for years for its role in raising $6.5 billion for 1Malaysia Development Bhd. -- and for the nearly $600 million in fees it earned from the bonds. 1MDB is at the center of a global scandal involving claims of embezzlement and money laundering, which have triggered investigations in the U.S., Singapore, Switzerland and beyond. In the first charges against individuals by U.S. prosecutors, at least three senior current or former Goldman executives were implicated, with its lead banker for the bond sales confessing to bribery and money laundering.

1. What did the confession reveal?

Tim Leissner, Goldman’s former chairman of Southeast Asia, admitted in a plea that he bribed officials to get the three bond deals, and that he and others arranged the fundraising as debt offerings because it would generate higher fees for the bank. Leissner also admitted that more than $200 million in proceeds from 1MDB bonds flowed into accounts controlled by him and a relative. Prosecutors assert that beyond Leissner, who left the bank in February 2016, a number of employees at Goldman knew about a bribery scheme but worked to hide it from the firm’s compliance and legal departments. Leissner’s deputy, Roger Ng, and Malaysian financier Low Taek Jho -- the central figure in the scandal, according to U.S. prosecutors -- were charged with conspiring to launder billions of dollars embezzled from 1MDB. Malaysian and U.S. investigators are probing earlier deals carried out by Leissner in the country, according to Malaysia’s leader-in-waiting Anwar Ibrahim.

2. How did Goldman get involved with 1MDB?

1MDB took shape in 2009 under former Prime Minister Najib Razak as a vehicle to drive investment into Malaysia and boost the country’s assets overseas, with early initiatives including buying power plants and planning a new financial district in Kuala Lumpur. In all, it would raise more than $8 billion via bond sales to do so. Goldman advised 1MDB on its acquisition of Tanjong Energy Holdings from Malaysian billionaire Ananda Krishnan, and domestic power plants from Genting Bhd. To help finance the purchases, Goldman arranged two separate bond offerings in 2012 worth $3.5 billion. In March 2013, 1MDB issued $3 billion in debt underwritten by Goldman to raise capital for "new strategic economic initiatives between Malaysia and Abu Dhabi" and said the venture’s first investment could be Tun Razak Exchange, or TRX -- a financial center to be built on 70 acres of prime Kuala Lumpur real estate and named for Najib’s father, the country’s second premier.

3. What happened to the money?

The U.S. Department of Justice alleges Low and 1MDB officials diverted more than 40 percent of the net amount raised in the 2012 bond sales, or $1.4 billion, to a Swiss bank account belonging to a British Virgin Islands entity known as Aabar Investments PJS Limited, or Aabar BVI. The BVI entity bore a similar name to Aabar Investments PJS -- a unit of an an Abu Dhabi wealth fund IPIC which had co-guaranteed the bonds. Bond offering circulars didn’t state that some of the proceeds would be transferred to Aabar. The U.S. said 1MDB -- in its audited accounts -- booked the monies to Aabar as a refundable deposit that was collateral for the guarantee, while Low and 1MDB officers told officials they were non-refundable payments for IPIC’s backing of the debt.

4. How about the 2013 bonds?

U.S. investigators allege about $1.3 billion was diverted to accounts whose beneficial owner was an associate of Low’s. There were also accusations with serious implications for Malaysian politics. Within days of the close of the 2013 bond offering, $681 million of the diverted funds was transferred to an account belonging to Najib. The former premier denied wrongdoing and said it was a political donation from a royal family in Saudi Arabia, an assertion backed by Saudi Arabia’s foreign affairs minister. About $620 million was returned to the account belonging to Low’s associate in August 2013. Investigators say some of the embezzled funds were used to buy artwork which ended up with Low. The Malaysia-Abu Dhabi joint venture, "which was the stated basis for the 2013 bond sale, was ultimately never funded," the U.S. said.

5. What else is controversial about the bond offerings?

Malaysia’s new Prime Minister Mahathir Mohamad says his country wants to recoup some of Goldman’s fees, which exceeded what banks typically make from government deals. The bank’s revenue from the 1MDB deals amounted to about 7.7 percent of the face value of the securities. Underwriters collected average fees of 1.32 percent in 2013 on comparable deals, according to Bloomberg data. Anwar, who is expected to take over from Mahathir as prime minister in a year or two, says Malaysia must follow due process, but if Goldman is “prepared to negotiate, they have to return" about $600 million of the fees and commissions. Goldman said in 2015 that fees and commissions “reflected the underwriting risks" it had assumed. It’s also controversial that Goldman won the underwriting work without competing for the deals, a person familiar with the matter said at the time. And the 2013 deal was hurried through shortly before a general election that Najib won. He lost May’s election and now faces dozens of corruption charges related to 1MDB. He denies wrongdoing.

6. What does Goldman say?

Goldman officials have said for years that the bank raised money for 1MDB without knowing that it would be diverted from the development projects. The bank had been telling U.S. prosecutors it was deceived by Leissner during the deals with 1MDB, people familiar with the matter said.

The Reference Shelf

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editors responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net, Grant Clark, Leah Harrison Singer

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