Goldman Sachs Group will pay $2.9 billion to settle U.S. criminal and civil penalties for a major bribery scheme involving 1Malaysia Development Bhd., officials from the Securities and Exchange Commission and Department of Justice said Thursday.
The combined enforcement action "marks a major milestone to fight foreign corruption," a Justice Department official said during a press briefing call.
Justice Department officials described the bribery as "a massive global scheme" that resulted in the largest fine for violations of the Foreign Corrupt Practices Act. The $2.9 billion includes $606 million in disgorgement of profits, a $1.24 billion criminal penalty, a $400 million SEC penalty and a $154 million penalty charged by the Federal Reserve, in addition to actions brought by foreign regulators. Goldman Sachs also admitted criminal wrongdoing.
In a separate action, New York State Department of Financial Services imposed a $150 million fine. State officials said the Goldman Sachs U.S. unit was impacted by the 1MDB misconduct because in March 2013, Goldman Sachs U.S. purchased $250 million of bonds in the third 1MDB bond offering to hold as an investment for its long-term investment portfolio and in May it extended a $50 million loan to a special purchase vehicle collateralized with bonds from the second 1MDB bond offering. Those investments relied on due diligence, and the reliance was misplaced after red flags were either ignored, undetected or not adequately addressed, the New York regulator said.
In the U.K., the Financial Conduct Authority and Prudential Regulation Authority fined Goldman Sachs International a total of £96.6 million ($125 million) for risk management failures connected to the bribery scheme.
In a memorandum to all global employees Thursday, Goldman Sachs Chairman and CEO David M. Solomon said the firm will seek $174 million in clawbacks and reduced compensation that will include $76 million from the employees involved and reduced performance incentive rewards of former senior executive officers, including the former CEO, chief operating officer, chief financial officer and vice chairman in charge of growth markets.
"We all share in the benefits when our colleagues perform well for our clients. The opposite must be true as well," Mr. Solomon said in the memo.
According to the SEC's order, beginning in 2012, former senior employees of Goldman Sachs used a third-party intermediary to bribe high-ranking government officials in Malaysia and the Emirate of Abu Dhabi. Those bribes enabled Goldman Sachs to obtain lucrative business from 1MDB, a Malaysian government-owned investment fund, including underwriting about $6.5 billion in bond offerings that earned Goldman Sachs more than $600 million in fees. The bond deals were supposed to support energy development projects but instead were used to pay $2.7 billion in bribes and kickbacks, among other things, the government officials said.
The civil settlement with the SEC calls for Goldman Sachs to disgorge $606 million in fees connected to the scheme and to pay a $400 million civil penalty. SEC enforcement director Stephanie Avakian said during the joint press briefing that the bank has already made those payments to the government of Malaysia and 1MDB. Goldman Sachs will pay four times that amount of fees earned in fines, plus separate fines brought by Malaysian officials.
On the criminal charges, Goldman Sachs entered a deferred prosecution agreement under certain conditions. The firm's Malaysian subsidiary pleaded guilty to the charges Thursday. Three executives were charged individually and one is a fugitive from justice, Justice Department officials said during the briefing.