Misconduct in the Financial Industry Outline

The recent 1MDB scandal that stretched from the East to the West is a major example of misconduct in the financial industry. It is also indicative of an endemic culture of misconduct within the industry itself. Several banks and higher-ups in government were involved and yet the few have been charged or convicted of any crime. The reason is that while the financial system is meant to prevent scandals such as this the reality is that those tasked with governance are incentivized to look the other way because the ones they are aiding and abetting in allowing these crimes to happen are the ones who also have the power the prosecute. Thus, the corruption extends from the industry to the state. It is very much a situation of scratch-my-back-and-I’ll-scratch-yours.

1MDB was set up as a massive sovereign wealth fund that was used as a slush fund by various well-connected individuals. The principals in the 1MDB scandal were Jho Low, Prime Minister Najib Raza and his step-son, and the heads of the world’s big banks, including Goldman Sachs, Deutsche Bank, BSI and others (Brown, 2020). The fraud could have been stopped had compliance officers in the banks been allowed to do their jobs, but as Brown (2020) notes, they were either ignored anytime they attempted to raise red flags about transactions or they were removed from their posts by the heads of the firms, as was the case with the Singapore branch compliance officer of Goldman Sachs, who reported suspicious activity in the fund and argued that Goldman should investigate. Instead, Goldman removed the man from his post. Goldman executives, such as Gary Cohn, who profited handsomely from the 1MDB scandal (yet refused to pay back any of his bonuses once the scandal was uncovered and executives were urged to give back their profits to help defer the fines and settlements the bank was obliged to pay), were not holding their employees accountable—unless those employees were compliance officers who actually did try to do what they were supposed to do, which was hold the bank’s employees accountable. This type of corruption goes straight to the top, as Brown (2020) points out, and it was enabled because the heads of the big banks work closely with the heads of state, as everyone has a finger in the pie and is getting some kind of reward for enabling the fraud.

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The incentive for executives to create a culture of looking the other way instead of insisting that controls be strengthened rather than weakened is evident throughout this scandal. Executives were incentivized with big bonuses to the tune of millions of dollars, to ensure that no one stopped the criminality or called attention to it. If a compliance officer did dare to try to alert the bank about the risk of impropriety, such an officer was swiftly removed from his post. Goldman wanted to make sure that everyone knew that compliance officers were there to wink at misdoings such as participation in 1MDB. They were not there to stop them. As Case (2017) points out, 1MDB paid Goldman’s underwriters an exorbitant amount of money—essentially bribing them to underwrite the loans—and this activity was one of many red flags that Compliance in Singapore tried to bring attention to.

The fallout was enormous fines and collapse for some banks, such as Falcon Bank in Singapore, the head of which did time in jail even though he was the one who flagged the suspicious transactions. He was overruled by the bank’s board and then scapegoated. The problem is that there is no real governance of the system. Goldman has been forced to pay out billions in fines to Malaysia for its role in facilitating the slush fund and the $6.5 billion bogus bond issue, as Brown (2020) calls it; although this is more or less a wrist slap considering how much the bank made off the fund. 2 senior Goldman Sachs executives were indicted for their role in the scandal. One of them has pled guilty. Goldman will likely pay the fine and avoid criminal charges as a bank, however (Brown, 2020).

These frauds can be prevented in the future but it requires transparency, and journalists like Brown (2020) are the only ones bringing any transparency to the system. The media is essentially unwilling to touch these kinds of stories because they will be hit with lawsuits from the wealthy actors involved in the scandals, and lawsuits are expensive to deal with. So it requires a great deal of tenacity and conviction as well as a paper or organization willing to absorb the upfront costs and challenges. Once media attention is brought to bear on a scandal, then the government agencies are essentially forced to take some action, although the action is very limited—as in the case of Goldman Sachs. The reason for this is that Goldman is very well connected in the Federal government, with former top level executives working in the Treasury and other departments. As Nemeth (2019) notes, one must follow the money to see where it all goes.

Ensuring compliance is really a firm’s job because governments simply do not have the resources to do anything about it. But these firms are complicit in the fraud because they make so much money from it. If they don’t agree, they get edged out of the market. If they try to stop it, they are collapsed, the way Falcon was. Who should have been responsible for conducting this investigation should have been Falcon’s board—but they squashed the investigation. Goldman’s board also should have been involved—but Goldman’s top leaders were involved in the fraud, so nothing happened there.

The question is: How can fraud be rooted out when it is actively engaged in by the very top people in the financial system? How can corporate governance be applied when the mechanism of control itself is afflicted with a culture of indifference that shines down from the very top. This type of indifference is seen throughout the entire financial industry as Burgis (2020) shows.

Best practices to improve Goldman’s ethics and compliance would be to have a system in place that allows Compliance to act independently of executive action. Compliance should, to some extent, be initiated by an independent third party that is not exposed to the corrupting influences of the internal chain of command. Political control should also never be allowed to happen within a bank, because it is that kind of influence that is leveraged and used to commit and cover over crimes (Jones, 2020). As Jones (2020) notes, watchdog agencies and investigative teams should be protected from political influence and interference as well. Accounts of shell companies should be monitored more closely and internal auditing conducting by third parties with the power to blow the whistle publicly on areas where major red flags are showing should also be a practice better established. To cultivate a better system of ethics and compliance, Jones (2020) also argues that “control through a rigorous process of verification must be exercised on the remittances of money to outside bank accounts, and whether such remittances are intended to fund approved projects. Such controls can reduce the loopholes by which money is embezzled” (p. 68). This would effectively help the firm to solve the problem of poor compliance in a most practical and pragmatic manner while allowing it to still operate internationally—albeit more ethically.


Brown, C. R. (2020). Crime in plain sight—1MDB. Retrieved from https://soundcloud.com/financialcrimematters/clarerewcastlebrown

Burgis, T. (2020). Kleptopia. Harper Collins.

Case, W. (2017). Stress testing leadership in Malaysia: the 1MDB scandal and Najib Tun Razak. The Pacific Review, 30(5), 633-654.

Jones, D. S. (2020). 1MDB corruption scandal in Malaysia: a study of failings in control and accountability. Public Administration and Policy, 23(1), 59-72.

Nemeth, C. P. (2019). Private Security and the Investigative Process, 4th Edition. Florida: CRC Press.



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