On 21 October 2020 GSI was fined a combined total of £96.6 million by the UK Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for risk management failures in three fund raising transactions with 1Malaysia Development Berhad (1MDB). The FCA Executive Director of Enforcement, Mark Steward, said: "When confronted with allegations of bribery and staff misconduct, the firm’s mishandling allowed severe misconduct to go unaddressed. There is no amnesty for firms that tackle financial crime poorly, and the size of GSI’s fine reflects that." The level of fine imposed reflected GSI's failure to address allegations of bribery in 2013 and to manage allegations of misconduct in connection with 1MDB in 2015.
The UK fine is part of a US$2.9 billion globally co-ordinated settlement, described by the US Department of Justice as "of historic significance" and represents a record penalty for violating a US anti-corruption law. Under the Deferred Prosecution Agreement concluded in the US, GSI accepted responsibility for its role in a conspiracy to bribe high-ranking foreign officials to obtain lucrative underwriting and other business relating to 1MDB. The failure by GSI properly to recognise and escalate the risks about possible bribery, and the consequent failure to assess the information and take appropriate action, were key findings in the FCA's finding that GSI had failed properly to address the risk of financial crime.
Background
1MDB is a strategic investment and development company, wholly-owned by the Malaysian government and subject since 2015 to criminal and regulatory investigations relating to political corruption, bribery and international money laundering. GSI arranged, purchased and underwrote three bond transactions for 1MDB that raised US$6.5 billion.
FCA Final Notice
The FCA Final Notice concluded that the 1MDB transactions "carried significant risk for GSI. They were high value, complex deals, executed in compressed timescales over an 11-month period" and "involved clients and counterparties in jurisdictions that GSI had identified as representing enhanced legal, compliance and reputational risk." In spite of this awareness, GSI had failed to assess and manage these risks to an appropriate standard or "to assess risk factors on a sufficiently holistic basis". The FCA accordingly determined that GSI had breached its duties under Principles 2 and 3 of the Principles for Business by not exercising due skill, care and diligence and not taking reasonable care by having adequate risk management systems in place.
Global warning
This outcome provides a timely reminder to the financial sector. An organisation which fails to demonstrate good governance and fails to tackle bribery in its business risks significant financial penalties and reputational damage. Prior to entering into the deal, GSI had failed to deal with allegations of bribery and misconduct with due skill, care and diligence and the control functions did not act to prevent the risk of bribery becoming reality. The preparation of policies is only one step on the compliance journey and, without further action, will not be sufficient when the regulators come knocking. Policies and procedures must be enforced, and that enforcement must be demonstrable to regulators.
Penalty
GSI settled with the FCA and PRA and received a 30% discount on the overall penalty, which would otherwise have been £69,012,000 imposed by each regulator.
In addition to the UK regulators, the US$2.9 billion global resolution included US and Singapore regulators. A copy of the FCA Final Notice can be found here.
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