The Scales of Justice That Every Compliance Person Must Consider

At the end of July Goldman Sachs settled a 2018 legal dispute with Malaysia for $3.9 billion related to its role as banker in the now infamous 1MDB sovereign wealth fund scandal. Most of the $6.5bn funding raised by Goldman was siphoned off by corrupt officials and advisors. The authorities are still trying to recover it, as well as track down and prosecute those responsible. Goldman still faces action from the U.S. attorney’s office and US bank regulators over the same issues. 

Tim Leissner and Roger Ng, the two senior bankers who were instrumental in managing the relationship with 1MDB, have been charged. Leissner has already pled guilty. Goldman received $600 million in fees for the bond issuance it arranged. Senior management at the bank has repeatedly apologized for Leissner’s action and said he operated beyond approval. Jho Low, the man who brokered the whole deal, and who remains at large, raised many red flags within the Compliance team at Goldman as it was never possible to verify the origin of his vast wealth. 

Meanwhile, the New York Times (NYT) wrote a fascinating article in mid July about the recent $150m enforcement by the NYDFS relating to Jeffrey Epstein and Deutsche Bank. The intrepid journalists there had discovered the unnamed individuals from Deutsche in the Consent Order who had worked with and met Jeffrey Epstein. 

The chronology of conduct is a great learning exercise for individuals and institutions who might be tempted to cut corners and look away. Paul Morris was the relationship manager who brought Epstein’s business to Deutsche in 2013 as ‘a potential client who could generate millions of dollars of revenue as well as leads for other lucrative clients to the bank.’ Cue the moment when everyone looks away and chooses to ignore Epstein’s 2008 conviction for soliciting prostitution from a minor and the widespread negative media on his involvement with underage girls. This is basically what Charles Packard, head of Americas Wealth Management, as well as Deutsche’s current general counsel and the head of anti-money laundering, chose to do, according to the NYT. Morris had predicted that Epstein could generate annual revenue of $4m for the bank. 

The Epstein relationship created a consistent flow of compliance red flags as it continued at Deutsche, notably large suspicious cash withdrawals and individual wire transfers to different women in Eastern Europe. This led to Morris and Packard meeting Epstein in his New York mansion in 2015 to explore the truth around media allegations at that time. There were no records kept from this face to face meeting. Eight days later a committee designed to monitor transactions that might damage the bank’s reputation, including the general counsel, the COO for the Americas and the head of compliance, concluded it was acceptable to continue banking for Epstein (side note – a number of sizable deals had popped up with him as the source at that time). Epstein’s world caved in November 2018 and only then did Deutsche start to step away. Packard and Morris had both moved on by then, to Bridgewater and Merrill Lynch respectively. 

Both of these anecdotes are a salutary lesson for those who need to weigh the short term flow of revenue against a long term potential legal liability that is orders of magnitude larger – the definition of a good compliance person is one who can guide the organization to the right side of the regulatory boundaries while enabling the business. 

Deutsche had become known in the market at that time as the banker of last resort and its propensity to not apply rigor to its compliance practice cost it dearly at these times across multiple disciplines, not only in its private banking division. Bad actors are always attracted to institutions with weak controls and systems. 

In this case the maximum revenue haul from Epstein of say $20m has now been vastly overshadowed by its enforcement fine, and that does not account for the extraneous legal costs and unrecoverable damage to corporate and individual reputations. 

In our other tale, Jho Low also had friends in high places, even at Goldman, and these relationships along with the fee income just proved too tempting for a bank that prides itself on its regulatory reputation — until now it has never had to plead guilty in a federal investigation. That might be about to change. The $600 million in fees looks like a drop in the ocean compared to the enforcement tab that is still running.