Multiple news sources (for example, here and here) are reporting that the U.S. government is conducting an investigation into whether Goldman Sachs violated the so-called Bank Secrecy Act (real and less-Orwellian name: Currency and Foreign Transactions Reporting Act of 1970) by conducting a highly suspicious wire transfer and failing to file a Suspicious Activity Report with the U.S. Treasury.
The Bank Secrecy Act, among other things, requires financial institutions to file Suspicious Activity Reports with the Treasury Department's Financial Crimes Enforcement Network ("FinCEN") when a customer's transactions are, well, suspicious. Banks face serious penalties for failing to file Suspicious Activity Reports. Additionally, the electronically filed reports provide tips that often trigger IRS criminal investigations of the customers that engaged in the transactions. FinCEN closely guards the criteria for when a financial institution must file Suspicious Activity Reports to avoid tipping off would-be wrongdoers on how to avoid behaviors that might trigger the reports. Still, it's not hard to see why the federal government might view the transaction at issue as suspicious.
According to news reports, Goldman conducted a $3 billion bond offering on behalf of now-disgraced Malaysian government investment fund 1MDB. The investigation reportedly focuses on several "red flags" that Goldman either missed or ignored. First, Goldman reportedly conducted the bond offering, immediately purchased the entire offering itself (to be sold later to investors), and wired the $3 billion in proceeds within just a few months, during an expensive election campaign for Malaysian Prime Minister Najib Razak. Apparently, this is considered unusually fast, even leaving aside the election campaign coincidence. Second, Goldman's fee was a full 10 percent of the total offering, or $300 million, an amount that is reportedly abnormally high but that Goldman justifies as being commensurate with the risk that it took on. It is hard to imagine, though, that the Malaysian government-backed investment fund couldn't have borrowed $3 billion on the open market on more favorable terms if it didn't need the money so quickly. Third, instead of having the money wired to a large global bank, as one might reasonably expect, 1MDB asked Goldman to wire the funds to a small private Swiss bank called BSI (a bank that in the last few months has come under criminal inquiry in Switzerland and Singapore).
Although that was the end of Goldman's control of the money, the money reportedly immediately flowed from BSI to various offshore funds. The 1MDB investment fund is under investigation in multiple countries for its ties to Prime Minister Najib Razak and an allegation that the fund transferred $680 million to his personal bank accounts.
What are the takeaways from this? First, financial institutions have a strict obligation to be familiar with their customers and to report suspicious activity to the U.S. government. Second, if you conduct unusual transactions at your bank, for example conducting multiple cash transactions in amounts at or under $10,000 in quick succession, an electronic Suspicious Activity Report with your name and transaction details will in all likelihood find its way to the U.S. Treasury. Third, if an IRS Special Agent knocks on your door, there is a good chance that he or she has just reviewed one or more Suspicious Activity Reports about you and has a few questions for you – after advising you of your rights.
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