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Goldman Faces 1MDB Speedy Scandal Inquiry by Federal Reserve

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While battling with ongoing issues related to the multibillion-dollar 1Malaysia Development Bhd (1MDB) scandal, Goldman Sachs (GS - Free Report) is now facing heightened investigation by the Federal Reserve. The news was reported by Bloomberg.

The regulator is speeding up the inquiry into how employees, despite the company’s internal controls, were able to manipulate money from the Malaysian sovereign wealth fund. Per the article, Goldman’s representatives have met with the central bank and defended the bank’s controls.

Two former executives of the company have been accused of bribing foreign officials and helping manipulate money from the Malaysian sovereign wealth fund. One of them has pleaded guilty.

Tim Leissner, former head of Southeast Asia region, has pleaded guilty to U.S. charges by admitting to bribing officials in Malaysia and the United Arab Emirates to get bond deals for Goldman Sachs.  Also, he disclosed that along with others he arranged the 1MDB fundraising as debt offerings because it would generate higher fees for the bank.

Earlier this month, Malaysia's Minister of Finance, Lim Guan Eng said that he plans of recouping "full refund" of the fees earned by the bank from the 1MDB deals. Notably, nearly $600 million has been earned by the bank, including three bond offerings in 2012 and 2013, which raised $6.5 billion.

"The Malaysian government will want to reclaim all the fees paid, as well as all the losses including the interest rate differential," Lim told reporters. Per Lim, the rate paid by Malaysia was about 100 basis points above the market rate.

Notably, two Abu Dhabi investment funds — International Petroleum Investment Co. and Aabar Investments — filed a lawsuit in November 2018 in the state court of New York, alleging Goldman of bribing former officials of the 1MDB fund.

As a lesson learnt from ongoing legal tension, Goldman is planning to conduct a special surveillance program with an aim to supervise higher risk employees in far-flung locations, per an article by Financial Times.

“Things can always be better,” the person familiar with the matter said. “One thing we’re thinking about is looking at people who have an up and down P&L [a profit and loss account that varies], are operating in far-flung places and have a compliance record, however minor, and maybe having a special program of surveillance for those kind of people.”

While the Federal Reserve is yet to disclose the sanctions that would be imposed on the bank, the matter is likely to have a significant effect on its financials. Also, other pending litigation issues remain a concern for the company.

Shares of the company have lost around 19.7% in the past three months compared with the 13.1% decline of the industry.

Goldman currently carries a Zacks Rank #3 (Hold).

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