(published in the FCPA Blog)
By Advocate Asher Miller
Although it seems to us that we have already seen everything, or at least a whole lot, the Goldman Sachs affair amazes us. Not only because it is a large organization that had a legal and compliance system in place at the relevant times of the corruption events but because we would expect a significant financial market player like Goldman Sachs to operate the most sophisticated of controls in order to prevent wrongdoing from entering its system, but ultimately it turns out its compliance failures were at the most basic levels, failures which apply equally to large and small companies. So, following my article regarding takeaways from the Airbus affair, I have summarized the five lessons for compliance officers that can now be learned from the Goldman Sachs affair, as arising from the DOJ documents and other sources concerning this issue:
- The most basic lesson is that the company’s compliance and control functions must first and foremost fulfill their basic functions: insist on proper inspections before onboarding of third parties, raise red flags signs, follow-up on activities to ensure that their recommendations are carried out, and of course withstand pressure from sales and marketing entities in their hunger to make deals. In the Goldman Sachs case, the issue of employing Jho Low (that turned out to be the corruption ringleader) clearly emerged in early stages of the Malaysian mega deals, but compliance and legal counsel were not strong enough to hold any engagement with him or to receive satisfactory explanations as to how the deals in Malaysia could be carried out without his involvement.
- Like in poker, If you cannot spot the fool around the table, it’s probably you. In order not to be that fool, then further than taking the basic handbook steps, the compliance officer and her team should think outside the box and assume there are elements in the company who have an interest in cheating or bypassing the compliance path. The compliance officer should also devote efforts to recruit the senior management to work with him and intercept such activities, otherwise she may be (as demonstrated in the Goldman Sachs case) in a dire situation.
- The risk of FCPA violations is not the exclusive one – since the 1MDB Malaysian fund issue is huge in range, it involved massive money laundering schemes, such as far reaching as investment in the Hollywood blockbuster “wolf of wall street” and acquisition of art items in a commercial extent. The US and other authorities involved in the case have exercise all measures available including civil forfeiture and other steps, as long as the investigation was in its early stages. The compliance officer cannot be involved in every issue in the company, but definitely, properly addressing and following on suspicions is a good way to prevent risks in any arena.
- In principle, any activity involving off shore and tax shelter companies raise a red flag that should not be let down until satisfactory explanation to the deal structure is given. An industrial or commercial company purchasing service from an individual that has no reason to work through a network of shell companies should thoroughly check such chain up payment since such “payment chains” are a door to compliance hazards. Complications already done so, then it is incumbent on them to either find out the matter or get satisfactory explanations from the company regarding the execution of transactions.
- and finally, third party compliance does not end on onboarding. As arising from the DOJ’s factual statement of the case, suspicions regarding Jho Low, the focal point of bribes and covert payments in the affair, have also raised after commencement of Goldman Scahs’ massive involvement with the Malaysian 1MDB fund. However, the control functions in the company did not act upon such “corridor talks” to try and find out more about the evolution of the deals, acting that may have prevented the “compliance earthquake” the company is currently experiencing.
As in other cases where huge companies have paid huge sums for bribery, corruption and money laundering, this is not an affair threatening to destroy Goldman Sachs however it does seriously disrupt its ongoing and anticipated business, but unlike previous times, and in light of strong voices call for greater social responsibility of corporations and changes in global corporate culture, all companies, and in particular large ones, need to ask themselves, do they want to be on the side of blacklisted companies, which move from rejection to accusations, or are they willing , as part of their role in society, take it upon themselves to correct their organizational culture, tackle unpleasant issues and resolve compliance and control concerns before the authorities come knocking on their door.