In case Kenyan companies feel this is an abstract happening in the big bad world outside, the DPPand the CBK have proven otherwise with the Sh400m in fines levied earlier this year on Banks that failed to query the unusual movement of the NYS fraud monies that were transacted through their accounts
BY ELSIE OYOO
In 2012 and 2013 Goldman Sachs, one of the largest investment banks in the world bribed Malaysian and Emirati officials so that it could underwrite $6.5b in bond offerings with 1Malaysia Development Berhad (1MDB).
1MDB, a strategic development company wholly owned by the Malaysian Government, undertook a capital rising spearheaded by former Malaysian Prime Minister Najib Razak under the guise of raising funds for development projects in the country. However, most of the money raised ended up lining the pockets of Najib Razak and other politicians. Goldman Sachs made over $600m in commissions from the deal.
A Reuters article, Understanding Goldman Sachs’ role in Malaysia’s 1MDB mega scandal, published on October 22, 2020, lists all the monies Goldman Sachs has had to pay in retribution for its crime. The investment bank reached a settlement with the US Department of Justice (DOJ) for over $2.9b plus a plea of guilt. It also had to pay $600m in disgorgement following the principle of not benefitting from fraud money. Furthermore, Goldman Sachs will have to pay $3.9b to the Malaysian government to have all charges against it dropped. Additionally, Hong Kong’s securities watchdog has fined Goldman Sachs’ Asia branch $350m for poor management of the money raised by 1MDB. In short, at the end of all this, Goldman Sachs will have paid out about $10b in fines.
What nuggets of wisdom can be drawn from this scandal?
First, executives who cannot see beyond their noses are a company’s biggest weakness. If not weeded out in time they will lead to the collapse of the entity. Because they wanted to report higher profits in the end-of-year financial statements, the Goldman Sachs executives lost sight of the possible risks that were likely to crystallise. Had they been truly committed to business ethics or at the very least, had they been more realistic about their position as hailing from a country whose regulatory bodies have an above average reputation for catching and prosecuting fraudsters, the executives would have thought twice about their machinations.
What’s more, Goldman Sachs has taken a reputational hit due to their unscrupulousness. The executives squandered the goodwill of foreign governments, regulators, investors and customers all because of $600m in commissions, which Goldman Sachs will pay back fifteen-fold in monetary fines and immeasurably in intangible assets.
Second, the 1MDB scandal underscores the deterrent function of punishments. Deterrence is not the principal reason for penalising criminal activity, but it certainly is important. According to a Wall street Journal article on 15 January 2020, Goldman Profit Falls as Bank Braces for 1MDB Fine, the fines that Goldman Sachs has had to pay have made it feel the pinch. Its 2019 profits fell by 19% as it made provision to pay the fines. Similarly, a 7 August 2020 article by Lizz Hoffman in the same newspaper, Goldman Sachs had to lower its second quarter 2020 earnings from $2.4b to $273m after reaching the $3.9b settlement with the Malaysian Government. No matter how big a bank thinks it is, once it faces the amount of backlash Goldman Sachs did, it goes back home and changes how it does things.
Some of the changes Goldman Sachs has implemented, as published in the October 2020 document, the Completed and Ongoing Enhancements Since the 1MDB Transactions, include “exercising heightened scrutiny of senior level people engaged in high risk areas, business or products, and reviewing the firm’s committee structure to ensure that it is fit for purpose”.
Moreover, drawing from this experience, boards of directors of similar companies should take a moment for introspection using Goldman Sachs and 1MDB as a case study. Some of the questions directors could ask themselves are: “Do we have a compliance programme in place? Do we tolerate the flouting of compliance requirements by top executives? What tools do our compliance employees have to check non-compliant behaviour? Is our compliance programme just for the show or does it actually work to detect, prevent and mitigate fraud and other regulatory risks?”
Companies with the courage to be this frank will save themselves unpleasant brushes with the law. And just in case Kenyan companies feel this is an abstract happening in the big bad world outside Kenya, the Kenyan Director of Public Prosecution and the Central Bank have proven otherwise with the Sh400m ($3 million) in fines levied earlier this year on Banks that failed to query the unusual movement of the National Youth Service fraud monies that were transacted through their accounts. These are wake-up calls to everyone running a business of any size to shape up before the system ships them out.
Third, advocates of territorial sovereignty, who assert that countries have a right to regulate whatever happens within their territorial borders according to their own policies and priorities, should eat some humble pie in this instance. This case shows a beneficial application of a law with extraterritorial reach. The Foreign Corrupt Practices Act (FCPA) under which the DOJ pursued Goldman Sachs was enacted precisely to curb corruption between US companies and foreign government officials. Through the FCPA, the DOJ helped Malaysia recover over $1.8b in assets. It has also helped Malaysia track down Najib Azik and some of his sidekicks and bring them to book.
Loathsome as it is to admit, the FCPA and laws like it assist less powerful economies curb increasingly globalised fraud by availing more resources. This help becomes even more relevant in light of the fact that revenues of the most successful multinational companies completely eclipse those of developing countries and some developed countries. A 2016 World Economic Forum article reveals that if Walmart were a country, it would have the tenth largest economy in the world based on revenue. Moreover, a 2018 study by the OECD estimates that multinational corporations account for nearly a third of the world’s GDP.
Fourth, undeniably, banks have behaved badly in the past but they can rise from their ashes. Banking dates back to loans of grains given by merchants to farmers in Assyria, India and Sumeria in 2000 BC. They have survived 4000 years of world history to emerge as drivers of the world economy.
Yet, they have been catalysts or even responsible for some of the world’s biggest economic downturns with the most poignant being the 2008 financial crisis. Still, the world will not hold their errors against them if banks can use the hard knocks from past mistakes to make a change for the better and emerge as bigger, better, stronger institutions to assist in charting the way through the 21st century.
Their role in the modern economy remains relevant. Additionally, they wield great power that can positively influence entire economies and cultures by committing to obtaining profits only through ethical means. They can use their soft power to fight fraud, child labour, violence and other social, political and economic ills in many countries. They can choose to drive positive change instead of being embroiled in every other scandal that emerges.