First it was the private bankers who were scared. Now, it’s the investment bankers’ turn to cower in the corner.
In 2016, Singapore sent two Swiss private banks – Falcon Private Bank and BSI SA – packing over their role in laundering billions of dollars stolen from 1MDB, a Malaysian sovereign wealth fund. The city-state also fined Credit Suisse Group AG, UBS Group AG, Standard Chartered Plc, Coutts & Co. and DBS Group Holdings Ltd. between S$700,000 and S$5.2 million ($509,000 and $3.8 million).
But that was just a rap on the knuckles. The haymaker came Monday as the Malaysian government filed criminal charges against units of Goldman Sachs Group Inc., which had pocketed hefty fees by helping 1MDB sell bonds.
Fines against Goldman could run into the billions of dollars: The Malaysian attorney general said he would seek restitution well in excess of the $2.7 billion in allegedly misappropriated funds and the $600 million fees paid out to Goldman. The investment bank is accused of misdirecting investors by telling them the bond-sale proceeds would be used for legitimate purposes while knowing that the funds would line private pockets. Goldman said it will “vigorously defend" against the “misdirected" charges.
This will send shivers down the spines of the banking and advisory industry in emerging markets, where working on government mandates is often a ticket to prominence, and leads to a much-coveted bump in league-table rankings. (Making real money from state-sponsored deals, as Goldman did in Malaysia, is more the exception than the norm.)
Still, close engagements with any regime can ruin reputations. In South Africa, global firms from KPMG LLP to McKinsey & Co. and Bain & Co. have paid a big price for unethical conduct during Jacob Zuma’s nine-year rule, during which state power was practically usurped by the billionaire Gupta family, tycoons with strong ties to the former president. In Malaysia, the central figure is the fugitive financier Low Taek Jho, known as Jho Low, who met Goldman’s then Chief Executive Officer Lloyd Blankfein in 2012.
Two years ago, Libya’s wealth fund failed in a legal challenge to claw back $1.2 billion lost in equity derivatives sold to it by Goldman during Moammar Al Qaddafi’s regime. The outrage over the bank’s secret 2001 loan to Greece, which helped the country hide its true financial position when seeking to join the euro area, has also blown over. Still, the 1MDB episode is being taken more seriously by investors: Goldman shares are down 32 percent so far this year.
Most of that decline has occurred since May, when Mahathir Mohamad caused an election upset by unseating Prime Minister Najib Razak. That was when the lid blew off the scandal. Since then, the Mahathir government has charged both Najib and his wife.
While the implications of Malaysia’s actions against Goldman will extend beyond the investment firm, it’s unclear whether lessons are being learned. Over the weekend, the New York Times wrote about a McKinsey offsite in Kashgar, a city in China’s restive far west where an internment camp holds thousands of ethnic Uighur Muslims. The title of the article, “How McKinsey Has Helped Raise the Stature of Authoritarian Governments" gives a taste of the scrutiny that banks and advisory firms can now expect.
Which emerging-market political risks are acceptable and which are beyond the pale? In their own interest, Wall Street firms should be asking themselves this question everywhere they do business.