By: Benin Lee, Articles Editor

In early October 2023, Goldman Sachs filed a suit against the government of Malaysia in the London Court of International Arbitration (LCIA). This developing case serves as an informative resource on contemporary arbitration developments while stimulating discourse on the advantages of LCIA arbitration and the strategic decisions made in international arbitration.

The lawsuit relates to a major financial scandal involving Goldman Sachs and the Malaysian state-owned investment fund 1Malaysia Development Berhad (1MDB). The scandal came to light in 2015 and led to investigations in multiple countries. 1MDB acquired substantial funds through bond issuances made between 2009 and 2013, intended for investment initiatives and collaborative ventures. According to the U.S. Department of Justice, 1MDB redirected $4.5 billion of these funds to offshore accounts and shell companies. Malaysian authorities contend that additional billions remain untraceable in the ongoing investigation.

Goldman Sachs Group, Inc. (Goldman Sachs), a New York City-based financial institution, and its Malaysian subsidiary were involved in the scandal because of their role in underwriting 1MDB’s bond deals. In October 2020, Goldman Sachs admitted to conspiring to violate the Foreign Corrupt Practices Act (FCPA) concerning a scheme that involved paying over $1 billion in bribes to Malaysian and Abu Dhabi officials, obtaining lucrative business. Of the billions 1MDB made from the scandal, Goldman Sachs earned hundreds of millions in fees.

 As a part of the guilty plea, Goldman Sachs entered into a deferred prosecution agreement with the United States Attorney’s Office for the Eastern District of New York and the Department of Justice’s Criminal Division, Fraud Section, and Money Laundering and Asset Forfeiture Sections. According to the terms of these agreements, Goldman will be subject to a criminal penalty and disgorgement—made to surrender ill-gotten gains— totaling over $2.9 billion. Additionally, the bank reached parallel settlements domestically and internationally with authorities in the United Kingdom, Singapore, Malaysia, and others.

In the parallel agreement between Goldman Sachs and the Government of Malaysia, if the Malaysian government does not receive at least $500 million in assets and proceeds by August 2022, then Goldman Sachs must make a one-time interim payment of $250 million. The interim payment remains the point of contention in the Goldman Sachs arbitration claim, in which Goldman Sachs argues that Malaysia violated its obligations to appropriately credit assets against the guarantee provided in the settlement agreement.

Conversely, Malaysia’s Attorney General Chambers argued that Goldman Sachs’ allegation “mischaracterizes the conduct of the government.”  The 1MDB task force formed by the Malaysian government has accused Goldman Sachs of attempting to divert attention from the late interim payment, the due date of which Goldman Sachs has already asked for an extension several times.

According to the task force, Goldman Sachs brought this dispute to arbitration only after the Malaysian government threatened to sue. Goldman Sachs’ choice of arbitration in the LCIA was a strategic decision due to the unique benefits of arbitrating in the LCIA. The Malaysian government could have referred the dispute to a different arbitration body, such as the International Chamber of Commerce (ICC) or The International Centre for Dispute Resolution (ICDR) If Goldman Sachs did not take the initiative to start arbitration proceedings in the LCIA.

The first of these unique benefits is the reliability and establishment of LCIA. Formally inaugurated in 1892, this court has over 120 years of history.  The long history allows parties to predict how their disputes will be settled reliably. The reliability of the LCIA provides a diverse array of professional experience and expertise, which has granted it the respected title of the “commercial world court,” hearing multiple claims a year for countries worldwide.

In addition to its reliability, arbitration in the LCIA is highly efficient compared to other arbitration establishments.  The high efficiency level is partially because the LCIA does not require terms of reference. The terms of reference in an arbitration agreement prevent the parties from introducing claims beyond the scope of the terms and limit the procedural and substantive rules used in the debate. Although terms of reference can be beneficial, coming to a preliminary agreement on the terms can be arduous and time-intensive. 

“The first key advantage lies in the stringent confidentiality it ensures. Despite Goldman Sachs being a publicly traded company, the LCIA empowers the firm with increased control for managing or mitigating any adverse exposure during the proceedings.”

Benin Lee

Additionally, the final awards at the LCIA are binding on the parties, and parties generally waive their right to appeal. Because the final award is not reviewed, parties can rest assured that they will not risk their award being overturned and will avoid the cost of repeat arbitration.

The LCIA’s reputation for efficiency continues regarding the cost of arbitration. While other arbitration institutions base fees on the amount in dispute or the complexity of the issues at hand, LCIA calculates arbitration costs and arbitrator’s fees at an hourly rate. Therefore, parties may find seeking arbitration in the LCIA cheaper when the amount in controversy is excessive.

Lastly, the LCIA is unique in its commitment to confidentiality. Article 30.1 provides that LCIA cannot publicize any documents relating to the arbitration, the award, or the outcome without the agreement of all parties. 

The LCIA offers distinct advantages to Goldman Sachs by providing a strategic edge in various aspects. The first key advantage lies in the stringent confidentiality it ensures. Despite Goldman Sachs being a publicly traded company, the LCIA empowers the firm with increased control for managing or mitigating any adverse exposure during the proceedings. Secondly, the efficiency of the LCIA facilitates a swift resolution process, allowing Goldman Sachs to secure a final award without relinquishing a substantial portion of the disputed amount in arbitration fees. Consequently, irrespective of the case’s outcome, opting for the LCIA as the seat of arbitration enables Goldman Sachs to avoid both high costs and negative publicity associated with the arbitration process.

In conclusion, although the case between Goldman Sachs and the Malaysian government continues, Goldman Sachs may have gotten the initial upper hand by submitting the complaint to the LCIA.