There was certainly no shortage of significant corruption and white collar crime stories this year. The biggest stories this year all concern corruption on a truly vast scale. Most interestingly, the three biggest corporate misconduct stories of 2018 all contain valuable lessons for compliance officers to take to heart going into the new year. Let’s explore the three biggest headline-grabbing stories of the year.
Runner-up 1: Money-Laundering Scandals in Europe
Denmark’s largest bank, Danske Bank, came under fire from authorities from multiple countries this year, as it was revealed that the bank’s Estonian branch may have assisted in money-laundering of up to EUR 200 billion. The bank is currently under investigation by authorities in multiple jurisdictions, including Denmark and the U.S. Then in late November, Deutsche Bank’s offices in Frankfurt were raided over suspicions of money-laundering related to the Panama Papers. In response to the scandals, European legislators have scrambled to improve anti-money laundering capabilities across the continent. Compliance officers should keep an eye out in 2019 for new anti-money laundering regulations.
The revelations in the Danske Bank case came as a surprise to many, considering that Denmark is perceived internationally to be among the least corrupt countries in the world. In fact, 2018 has shown us that we need to be careful not to be blinded by the low perception of corruption in highly developed countries. What does this mean for compliance officers? Most importantly, compliance officers should continually check their own assumptions and biases about country risks and be prepared to adjust processes based on new information. Always keep in mind that perception and reality are not the same things.
Runner-up 2: “Operation Car Wash”
Brazilian prosecutors continued full steam ahead with what has become known as “Operation Car Wash”, a widespread investigation that has ensnared Petrobras, the national oil company, as well as Odebrecht, the continent’s biggest construction company, and a host of senior politicians. Brazil’s now former President Temer was indicted twice on charges related to the investigation. The long-running investigation has so far ensnared two presidents in Brazil and has had political ramifications across South America and beyond.
The continued political turmoil has contributed to falling investment levels and the delay of an economic rebound of the country, which has been in recession for close to five years now. Moreover, the economic discontent helped elect Brazil’s far-right President Jair Bolsonaro. It seems likely that the scandal is far from over, judging by the steady stream of revelations in 2018. The scandal has been an eyeopener to the truly vast scale of the network of corruption in Latin America. Compliance officers would do well by allocating appropriate due diligence resources when evaluating business opportunities in the continent, particularly when dealing with state-owned enterprises.
The Year’s Biggest Corporate Misconduct Story: 1MDB
However, the most significant corporate misconduct story to grab the limelight this year is undoubtedly the sprawling 1MDB scandal, involving sovereign wealth fund 1Malaysia Development Berhad. While news about the case has been building slowly since 2015, the investigation picked up steam this year after Malaysian Prime Minister Najib Razak was ousted from office. Since then, Najib, along with his wife, billionaire Jho Low, and two Goldman Sachs bankers, among others, have all been charged with wrongdoing over the scandal. Estimates of how much money was embezzled vary, but it is believed that at least USD 4.5 billion was misappropriated. Some of the biggest developments are analyzed below.
In a bizarre twist, an official at the DOJ was indicted in early December for laundering USD 74 million coming from Malaysian billionaire Jho Low. The money was used to pay for a disorganized lobbying campaign with the goal of torpedoing the investigation into the embezzlement of funds from 1MDB. The DOJ official essentially acted as the middleman by moving the money between shell companies under false pretenses.
However, the most significant development in the scandal is how America’s most famous investment bank, Goldman Sachs, has become deeply embroiled in the investigation. The bank sold bonds on worth roughly USD 6.5 billion on 1MDB’s behalf, netting USD 650 million in fees in the process. Malaysia’s finance minister has said he will press for a “full refund” of those fees from the bank.
What’s more, one of Goldman’s former senior executives in the region, Timothy Leissner, entered a guilty plea over his involvement with Jho Low’s scheme. At his court hearing, Leissner maintained that it was “very much in line of its culture of Goldman Sachs to conceal facts from certain compliance and legal employees of Goldman Sachs”. Understandably, Goldman’s culture has come under intense scrutiny since, as it emerged that even top-level executives might have been involved in the deal. The bank was sued by an Abu Dhabi’s sovereign wealth fund, and it will likely have to boost its legal reserves in anticipation of the resolution of probes by authorities in multiple jurisdictions.
The estimates for Goldman’s likely fines range from USD 650 million, the amount it made in fees, to possibly USD 2.5 billion. No matter the fine, Goldman’s business with sovereign wealth funds, a key area of growth for the bank, is likely to suffer from the continued negative publicity surrounding the case. The bank is also likely to face more intense scrutiny of its culture in 2019 as regulators are sure to demand robust remediation efforts and a strengthening of its compliance program.
Ultimately, it does not matter how much money Goldman spends on internal investigations, legal fees, and even new compliance technology, as long as it does not thoroughly change its culture. A culture in which the closing of deals is prioritized over ethical business practices and where employees routinely conceal facts from the compliance department can only be changed by a strong “tone from the top”. Whether that culture can actually be changed will be the true test for Goldman moving into 2019 and beyond.
Misconduct Lessons Learned in 2018
The three biggest corporate misconduct stories this year all contain lessons for compliance officers. The money-laundering scandals in Europe have made it painfully clear that there still is a risk of large-scale corruption in countries, despite perceptions of low corruption. Operation Car Wash in Brazil continued to expose a vast network of corruption in Latin America, indicating that dealing with state-owned enterprises in the region requires heightened levels of due diligence. Lastly, Goldman Sachs’ 1MDB troubles once again affirms that a compliance program needs a strong ethical corporate culture to back it up to be truly worth its salt. Hopefully, these compliance lessons will allow you to think about your own program and organization with new insight.