Do you recall the boycott of South Africa from the 1970s and 1980s as a lexicon of the global fight against apartheid? The boycott extended from business to sporting events and everything in between. The campaign was one of the key reasons for the fall of the white minority government. Now a new campaign fighting the specter of corruption in the country may be gaining traction as the New York Times (NYT) has reported that South African President Jacob Zuma agreed to set up a nationwide corruption commission to look into allegations of rampant corruption through looting of government agencies and state-owned entities, most particularly through Zuma’s links with the Gupta family. Zuma had long resisted such calls from government officials and even members of his own political party, the African National Congress (ANC).
There is not much doubt one of the companies to be investigated will be McKinsey and Company (McKinsey) and a transaction it worked on for the South African state-owned utility Eskom and a company controlled by the Gupta family named Trillian Capital Partners Ltd. (Trillian), in 2015 and 2016. In Q3 of 2017, reports began circulating about this transaction. In response McKinsey conducted an internal investigation but claiming it did not find any evidence of payment of bribes or other evidence of corruption which are illegal under the Foreign Corrupt Practices Act (FCPA). The report did find that the company had failed to follow its own internal compliance policies, procedures and internal controls by doing business with a third party which had not gone through the company’s full due diligence process. Additionally, McKinsey placed a partner in South Africa on a leave of absence. This partner had been involved in bringing a subcontract, which had been alleged to be either a politically exposed person (PEP) or conduit to a PEP into a consulting contract with McKinsey and “whether it knowingly let funds from state power utility Eskom be diverted to a Gupta company as a way of securing a $78 million contract to advise Eskom.”
The project which brought McKinsey to grief involved a restructuring plan for a South African state-owned utility, Eskom. The next step was to be implementation of the plan for which McKinsey was to be paid up to $370MM over four years. This amount was characterized in one internal McKinsey report as “exorbitant”. However, it was not price gouging which impacts the FCPA. It was McKinsey’s work with a business partner on the implementation, Trillian. Eskom alleged pointed McKinsey to partner with Trillian as a part of the requirement to work with a black empowerment partner. It turned out that Trillian was associated with the Gupta family. Six months after beginning work, McKinsey had not inked a contract with Trillian and Eskom pulled the implementation contract, after McKinsey “only” billing $76MM.
McKinsey has said that it has not uncovered any illegal payments under the FCPA. However, FCPA also prohibits the corrupt “offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to” a foreign official. Over-paying for a contract and having some of the over-payment rebated to foreign officials is a well-known bribery scheme. It would be easy to envision a bribery scheme where there is an “exorbitant” amount paid to the prime contractor, which then hires a subcontractor who receives a very high fee for bringing very little or indeed nothing to the project. Another tactic could be to simply begin a project before due diligence is completed, then if it comes back with uncleared red flags, claim the company is now contractually obligated to complete the work. Finally, there is simply the old-fashioned wink, wink, nod, nod where there is an ‘understanding’ the bribe receiver will be taken care of at some point in the future.
Further, even if there were no illegal payment or illegal promise to pay, there is the matter of McKinsey violating its own internal compliance controls, which can be a separate FCPA violation, even without evidence of bribery and corruption. At one point, McKinsey had said it has done nothing which would require it to self-report to the Justice Department. John Gapper, writing in the Financial Times (FT), said “This seems to be setting the reputational bar rather low.” It turns out his thoughts were not the final word on the subject.
Early this week, South African prosecutors ordered McKinsey to forfeit its share of the Eskom contract “after prosecutors argued that the fees may be the proceeds of corruption.” While McKinsey has previously apologized for “several errors of judgment” from its work on the project; it continues to proclaim its overall innocence stating, “We are returning the money not because we have done anything wrong but because Eskom has told us they did not follow the appropriate process.”
Recent revelations about McKinsey and others in South Africa over possible allegations of corruption have driven home a truism that many in the compliance space have known for some time; that South Africa has become one of the most corrupt countries on earth. When you couple a structural requirement baked into every government contract with a non-South African company for a local content partner with a corrupt system you have a recipe for rampant corruption. Such would appear to be the situation on South Africa today.
The Gupta family is widely viewed as the true power behind sitting President Zuma. The Guptas fingerprints are all over the transactions involving McKinsey and others. Yet this is only the highest profile allegations of corruption which is claimed to be ongoing in the country. Foreign companies are routinely directed to certain players under the requirement of the Black Economic Enterprise (BEE) requirement for a local South African partner. This alone is a well-known red flag under any anti-corruption compliance program.
With all the public information coming out of South Africa, it is not surprising to see reports that the FBI is now investigating US companies with ties to the Gupta family. Eric Holder has publicly stated he would not be surprised if the Department of Justice was investigating US companies for their actions in South Africa. With these revelations, one must wonder if a FCPA country sweep with the Justice Department focusing on South Africa is just around the corner.
Similar questions might be asked in the United Kingdom as Lord Hain, has accused the law firm of Hogan Lovells of aiding corruption at South Africa’s revenue service and has apparently referred the firm to UK’s Solicitor Regulation Authority for investigation. With South Africa’s continuing commercial connection to Great Britain the same question might be asked of the UK government, most specifically the Serious Fraud Office and other authorities under the UK Bribery Act.
For US and UK companies doing business with the South African government now is the time review your third-party risk management protocol for any local agents, distributors or partners in South Africa. If your company comes under scrutiny through a follow-on case, it may well fare much worse than a company which cleans itself up sooner rather than later.
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