Dive Brief:

• Goldman Sachs admitted wrongdoing and will pay $2.9 billion to the Justice Department and regulators in the U.K., Singapore and Hong Kong as part of a settlement announced Thursday that resolves a 1MDB scandal that has spanned more than a decade.
• The bank will claw back $174 million in compensation from current and former executives. That includes a combined $31 million in pay that CEO David Solomon, President and Chief Operating Officer John Waldron, CFO Steven Scherr, and Goldman’s head of international business, Richard Gnodde, will forfeit this year, The Wall Street Journal reported.
• A Malaysian subsidiary of the bank pleaded guilty Thursday in federal court in New York to conspiring to violate anti-bribery laws. The parent company entered into a three-year deferred prosecution agreement that allows the bank to avoid further legal consequences as long as it boosts its compliance measures, regularly submits compliance reports and cooperates with ongoing U.S. investigations.

Dive Insight:

Thursday’s penalty is the largest ever levied against a U.S. company for violating the Foreign Corrupt Practices Act, the Justice Department said. It also brings Goldman’s price tag for the 1MDB scandal above $5 billion, including a July settlement the Malaysian government struck, in which the bank agreed to pay Kuala Lumpur $2.5 billion in cash and guaranteed the recovery of $1.4 billion in seized assets.

The $2.9 billion settlement breaks down to a $2.3 billion penalty and $600 million disgorgement — the latter matching the amount in fees Goldman collected for helping the Malaysian government raise $6.5 billion for the 1MDB economic development fund by selling bonds to investors.

The bank’s fine could have been as high as $5.1 billion under federal sentencing guidelines, The Wall Street Journal reported. The Justice Department gave the bank credit for cooperating with investigators but was “significantly delayed in producing relevant evidence,” the agreement said. Goldman also avoided being assigned a government-appointed monitor as part of the settlement.

Prosecutors said Goldman paid more than $1.6 billion in bribes to foreign officials in Malaysia and Abu Dhabi between 2009 and 2014 to win 1MDB business.

About $4.5 billion was funneled to fraudulent shell companies and misappropriated by high-level fund officials and their associates in that time to pay for real estate, art, a luxury yacht and funding for the 2013 film “The Wolf of Wall Street.”

Roughly $700 million ended up in the bank account of Malaysia’s then-prime minister, Najib Razak, who, in July, was sentenced to 12 years in prison.

In a statement of facts, prosecutors documented a phone conversation during which a Goldman Sachs managing director told a senior executive the bank was finding it difficult to secure an investment from an Abu Dhabi-based fund connected to 1MDB.

The managing director said he was sure an Abu Dhabi government official was “trying to get something on the side in his pocket” from the deal. “I think it’s quite disturbing to have come across this piece of information,” he said, according to a Justice Department filing.

“What’s disturbing about that?” the senior executive replied. “It’s nothing new, is it?”

“When government officials and business executives secretly work together behind the scenes for their own illegal benefit … their behavior lends credibility to the narrative that businesses don’t succeed based on the quality of their products, but rather their willingness to play dirty,” William F. Sweeney Jr., assistant director in charge of the FBI’s New York field office, said in a press release Thursday. “Greed eventually exacts an immense cost on society, and unchecked corrupt behavior erodes trust in public institutions and government entities alike.”

Goldman has long blamed the scandal on two bankers who were criminally charged, Timothy Leissner and Roger Ng. Leissner pleaded guilty and is set to be sentenced in January. Ng pleaded not guilty and is awaiting trial.

Solomon reiterated that stance Thursday in a memo to the company but struck a more conciliatory tone.

“While many good people worked on these transactions and tried to do the right thing, we recognize that we did not adequately address red flags and scrutinize the representations of certain members of the deal team,” Solomon wrote. “When a colleague knowingly violates a firm policy, or much worse, the law, we — as a firm — have to accept responsibility and recognize the broader failure that individual behavior represents.”

Solomon and other current bank officers are not the only ones seeing clawbacks in the case. Goldman is taking back $67 million in bonuses given to former CEO Lloyd Blankfein, former CFO David Viniar, former Chief Operating Officer Gary Cohn and former executives Michael Sherwood and Mike Evans, according to the Financial Times. Cohn’s future bonuses were paid out when he joined the Trump administration in 2017, an unnamed source told The Wall Street Journal. Cohn left his role as White House economic adviser in 2018.

“It goes with the responsibility of leadership to accept some consequences for things that go wrong on your watch,” Blankfein said in a statement to the Journal.

The bank is also seeking repayment of $76 million in bonuses previously paid to Leissner, Ng and Andrea Vella, a former partner whom the Federal Reserve banned from working in U.S. banking, the Financial Times reported.

“The board views the 1MDB matter as an institutional failure, inconsistent with the high expectations it has for the firm,” Goldman’s board said in a statement Thursday.

Prosecutors’ statement of facts faulted Goldman’s compliance employees, who were on notice to watch for any transactions involving Jho Low, a Malaysian financier who was considered a significant risk and has since been charged in the case. Low denies wrongdoing but has dropped of the grid.

In the 1MDB bond deals, compliance workers didn’t take “reasonable steps” to keep Low out of the transactions, the Justice Department said.

“What they are faulting Goldman for is not having enough barriers to the deal team pushing back on the compliance team,” Bruce Searby, a former federal prosecutor, told The Wall Street Journal. “At least under some circumstances, you cannot simply accept the denials of your own people.”

“The people that were handling deals in [the 1MDB case] seemed to be at such a high level that no one questioned what they were doing,” Michael Weinstein, a partner at law firm Cole Schotz, told the Journal.

In his memo Thursday, Solomon said Goldman has doubled the size of its compliance division since the 1MDB transactions.

The bank has also been preparing for the financial consequences related to the 1MDB scandal for some time. It has set aside nearly $4.4 billion since last year to cover legal and regulatory matters, Reuters reported. In August, the bank restated its second-quarter earnings to reflect a $2.01 billion boost to its litigation reserves. Goldman said it would book an additional $250 million in the third quarter to cover the cost beyond previous reserves, according to Bloomberg. The bank also preemptively withheld deferred pay that was owed to top executives.

The Justice Department’s penalty credits more than $1 billion in fines paid to other regulators, including $400 million to the Securities and Exchange Commission, $150 million to New York’s Department of Financial Services and $154 million to the Federal Reserve.

Authorities in Hong Kong, the U.K. and Singapore issued their own penalties Thursday, costing the bank $350 million, $126 million and $122 million, respectively.

“There is no amnesty for firms that tackle financial crime poorly, and the size of [Goldman’s] fine reflects that,” Mark Steward, executive director of enforcement and market oversight at Britain’s Financial Conduct Authority, said in a statement Thursday, according to Reuters.