U.S. investigators are trying to determine whether Goldman Sachs broke the law when it didn't sound an alarm about a suspicious transaction in Malaysia, people familiar with the investigation said.
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At issue is $3 billion Goldman raised via a bond issue for Malaysian state investment fund 1Malaysia Development Bhd., or 1MDB. Days after Goldman sent the proceeds into a Swiss bank account controlled by the fund, half of the money disappeared offshore, with some later ending up in the prime minister's bank account, according to people familiar with the matter and bank-transfer information viewed by The Wall Street Journal.
The cash was supposed to fund a major real-estate project in the nation's capital that was intended to boost the country's economy.
U.S. law-enforcement officials have sought to schedule interviews with Goldman executives, people familiar with the matter said. Goldman hasn't been accused of wrongdoing. The bank says it had no way of knowing how 1MDB would use the money it raised.
Investigators are focusing on whether the bank failed to comply with the U.S. Bank Secrecy Act, which requires financial institutions to report suspicious transactions to regulators. The law has been used against banks for failing to report money laundering in Mexico and ignoring red flags about the operations of Ponzi scheme operator Bernard Madoff.
The investigators believe the bank may have had reason to suspect the money it raised wasn't being used for its intended purpose, according to people familiar with the probe.
One red flag, they believe, is that Goldman wired the $3 billion in proceeds to a Singapore branch of a small Swiss private bank instead of to a large global bank, as would be typical for a transfer of that size, the people said.
Another is the timing of the bond sale and why it was rushed. The deal took place in March 2013, two months after Malaysia's prime minister, Najib Razak, approached Goldman Sachs bankers during the annual meeting of the World Economic Forum in Davos, Switzerland. And it occurred two months before voting in a tough election campaign for Mr. Najib, who used some of the cash from his personal bank account on election spending, the Journal has reported, citing bank-transfer information and people familiar with the matter.
Mr. Najib and Malaysia's attorney general say the money the prime minister received in his personal accounts was a legal political donation from Saudi Arabia and most was returned.
The fund says proceeds from the bond offering were moved offshore, because they weren't needed immediately. The fund denies sending money to Mr. Najib and says it is cooperating with probes. In January, Malaysia's attorney general cleared the prime minister of any wrongdoing.
Goldman had deep ties with 1MDB and Malaysia. Its top regional banker at the time, Tim Leissner, was present at a meeting to launch a predecessor of the fund in 2009 and Goldman later made hundreds of millions of dollars underwriting three bond deals worth a total of $6.5 billion and advising on two acquisitions for 1MDB.
Over that same period, Goldman also underwrote bonds for an important province in Malaysia and worked on IPOs for a Malaysian port operator and a major hospital operator.
Goldman has said it did proper due diligence on 1MDB. But several current and former Goldman executives said in interviews soon after the bond deal that because this was a government-owned fund run by the prime minister, the bank could largely rely on their word that the money was being used as intended. The executives also said that corruption was common in many developing markets and the bank couldn't do business there without interacting with people and organizations that were potentially corrupt.
The 1MDB fund is the focus of probes into alleged corruption in at least seven countries. Investigators believe more than $6 billion of 1MDB's money is unaccounted for. Mr. Najib and his family used hundreds of millions of dollars originating with the fund on the election campaign, to buy real estate, clothing and jewelry, as well as to help finance a Hollywood film, according to people familiar with the matter and bank-transfer information.
The episode involving Goldman and 1MDB comes at a time when regulators are closely watching banks' behavior and cracking down on money laundering.
After Mr. Najib asked Goldman to handle the bond offering, the bank effectively bought the entire $3 billion issue, gave 1MDB the proceeds and then held the bonds on its balance sheet until it could sell them off to investors. For its efforts, Goldman was paid about $300 million, far above fees for similar offerings and one of the bank's biggest paychecks of the year. Goldman has defended the fees as commensurate with the risk it assumed by buying the entire bond issue.
Later, though, 1MDB claimed Goldman overcharged it and sought a partial refund. Mr. Leissner took the request to his Goldman colleagues, who rejected it, people familiar with the matter said. Mr. Leissner resigned from Goldman earlier this year after bank investigators found he allegedly violated company policies by sending an unauthorized reference letter to another financial firm on behalf of a person involved with 1MDB.
One question investigators are asking is why 1MDB needed the cash so quickly for a property-development project that would take years to complete. Investigators also are looking into questions raised by Goldman's lawyer on the deal, Kevin Wong, a Singapore-based partner with Linklaters, who sent a note to Goldman bankers alerting them to the fact the money was to be sent to a private bank, according to a person familiar with the matter.
Goldman checked the credentials of the bank, Switzerland's BSI SA, and found no reason not to send money there, the person added. Mr. Wong declined to comment. A BSI spokeswoman didn't respond to a request for comment.
From BSI, half the $3 billion bond issue was funneled into offshore investment funds because it wasn't needed immediately, 1MDB said.
Some of the money ended up in Devonshire Funds, run by a Bangkok-based financial firm, according to bank-transfer information reviewed by the Journal. Devonshire in turn sent $210 million to Tanore Finance, a now-defunct British Virgin Islands shell company. An employee of Devonshire declined to comment.
Tanore also received other money that originated with 1MDB, according to investigators and bank-transfer documents.
In March 2013 -- the same month Goldman had sold the $3 billion bond -- Tanore transferred $681 million into Mr. Najib's private bank account, according to investigative documents.
The U.S. Bank Secrecy Act was used against HSBC Holdings PLC, which agreed to pay $1.9 billion in late 2012 to settle charges involving money laundering in the U.S. and Mexico. In its settlement, HSBC admitted to violating the Bank Secrecy Act and other laws designed to prohibit money laundering.
The law was also used in the Madoff case by prosecutors examining why J.P. Morgan Chase & Co. didn't alert regulators about Mr. Madoff's activities despite red flags. J.P. Morgan settled the Madoff case to head off a criminal case. The bank didn't admit to any criminal liability, but did agree to a statement of facts that highlighted the red flags its employees missed. The bank agreed to pay $2.6 billion in 2014 to settle the case.
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