Malaysia Fund 1MDB Deal by Goldman being Probed

Goldman Sachs didn’t sound an alarm about a suspicious transaction in Malaysia and U.S. investigators are trying to determine whether the bank had broken the law by doing so, reports The Wall Street Journal citing sources knowledgeable about the matter.

Goldman had helped Malaysian state investment fund 1Malaysia Development Bhd., or 1MDB to raise $3 billion and this is now under the scanner. Half of the money that was collected disappeared offshore, with some later ending up in the prime minister’s bank account just days after Goldman sent the proceeds into a Swiss bank account controlled by the fund reports The Wall Street Journal.

A major real-estate project in the nation’s capital that was intended to boost the country’s economy was the actual destination of the accumulated money.

Sources told the newspaper that interviews with Goldman executives have been sought by U.S. law-enforcement officials. While the bank says it had no way of knowing how 1MDB would use the money it raised, Goldman hasn’t been accused of wrongdoing.

The U.S. Bank Secrecy Act which requires financial institutions to report suspicious transactions to regulators and whether the bank failed to comply with this act is however at the focus of the investigations. Cases related to the ignoring red flags about the operations of Ponzi scheme operator Bernard Madoff and banks for failing to report money laundering in Mexico made use of the law for prosecution.

According to people familiar with the probe, the investigators believe that the bank has enough reasons to suspect that the money that they had raised would potentially be used for purposes other than the intended purpose.

Instead of to a large global bank, as would be typical for a transfer of that size, Goldman wired the $3 billion in proceeds to a Singapore branch of a small Swiss private bank and this was one red flag that the bank reportedly ignored, the newspaper reported. The timing of the bond sale and its rushed nature was another red flag for the bank.

Malaysia’s prime minister, Najib Razak, approached Goldman Sachs bankers during the annual meeting of the World Economic Forum in Davos, Switzerland for the deal and the deal took place two months later in March 2013. The Journal has reported, citing bank-transfer information and people familiar with the matter that Najib, who used some of the cash from his personal bank account on election spending and the deal happened just two months before voting in a tough election campaign for Najib.

A legal political donation from Saudi Arabia was the money that the prime minister received in his personal accounts which has since been returned, said Najib and Malaysia’s attorney general.

Since the money was not needed immediately, proceeds from the bond offering were moved offshore, the fund says. It is cooperating with probes, the fund said and denied sending money to Najib.Malaysia’s attorney general cleared the prime minister of any wrongdoing in January.

It did proper due diligence on 1MDB, Goldman has said. However the bank could largely rely on their word that the money was being used as intended since this was a government-owned fund run by the prime minister, said several current and former Goldman executives in interviews soon after the bond deal. Goldman couldn’t do business there without interacting with people and organizations that were potentially corrupt as corruption was common in many developing markets, the executives also said, reports The Wall Street Journal.

(Adapted from The Wall Street Journal)

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