Reputations on the line in Gupta state capture saga
Publish date: 13 July 2017
Issue Number: 124
Diary: Legalbrief Forensic
The corporate and personal reputations left in tatters by the Gupta state capture saga is going to force firms to think carefully about their business dealings, writes Legalbrief. This fear of being tainted by scandal is being felt even in politics with the SACP threatening to go it alone and contest elections against the ANC if it persists with candidates aligned to President Jacob Zuma whom it has asked step down over his links to the controversial Gupta family (see report below). With every SA state-owned enterprise having been embroiled in some kind of political infighting and internal strife, holding on to a clean reputation in the era of state capture is getting harder, Carol Paton notes in a Business Day analysis. ‘Law firms, consultancies and auditors are increasingly called in to do the dirty work of one or another faction, with the result that the reputational risk of taking on such contracts is rising.’ Among the firms whose reputations have taken a knock are global consultancy McKinsey and auditing firm KPMG. Paton concludes: ‘The credibility of the credible is being worn away. Firms that care about their reputation are going to need to think more carefully before becoming hired guns in the state-capture saga.’
Businesses must be held to the highest ethical standards, according to Business Leadership SA (BLSA) which has spoken out following allegations of state capture involvement by software firm SAP, auditors KPMG and consultancy firm McKinsey, among others. A Fin24 report states BLSA said on Tuesday it has ‘noted the recent accounts of prominent businesses being implicated in reports of state capture’. It said that ‘business needs to be held accountable to the highest ethical standards, the law and the spirit of good governance’.
Multinational enterprise software vendor SAP is the latest heavyweight company to be implicated in damning leaked e-mails which show the Guptas had access to confidential financial contracts between the German giant and state-owned companies in SA. However, notes a Business Day report, SAP on Tuesday denied it had paid millions as a ‘kickback’ to a Gupta-owned business. The report says the German software company may face a criminal investigation in its home country after allegations surfaced that it paid kickbacks to a Gupta-owned company to secure contracts with state-owned companies. The leaked e-mails throw the spotlight on SAP and the business activities of the Gupta family as the company defended itself against accusations of making irregular payments to a Gupta entity to secure a R100m contract with Transnet. SAP ‘strongly rejected’ the allegations, saying they were unfounded and unsubstantiated. ‘SAP is dedicated to conducting every aspect of our business responsibly and in accordance with the highest global compliance and legal standards,’ SAP Africa MD Brett Parker reportedly said. ‘It has always been and will continue to be SAP’s policy to partner with a wide pool of organisations that qualify for our partner programme, if those organisations meet the ... criteria of our global due diligence and certification processes.’ Parker said SAP took exception to the allegations and would take action.
The latest revelations by investigative units amaBhungane and Scorpio from the leaked Gupta e-mails claim that SAP agreed to pay 10% ‘sales commission’ to a company controlled by the Guptas. The evidence, they say in a detailed report on the Daily Maverick site, suggests the company – a little-known outpost of the Gupta empire called CAD House – was deliberately interposed to obscure Gupta involvement and to launder the proceeds to them. With €22bn (about R330bn) in revenue last year, the German multinational is the world’s third largest software company. AmaBhungane and Scorpio say that in August 2015, SAP signed a ‘sales commission agreement’ with a small Gupta-controlled company that specialises in selling 3D printers. The terms, they say, suggest a thinly disguised kickback arrangement: If the Gupta company were the ‘effective cause’ of SAP landing a Transnet contract worth R100m or more, it would get 10%. In the year to follow, SAP paid CAD House a whopping R99.9m, suggesting SAP used the Gupta influence network to drive sales of a billion rand to Transnet and other state-owned companies. Neither CAD House nor the Gupta family responded to detailed questions, says the report.
While SA’s law enforcement authorities sit on their hands over the mounting allegations, foreign entities are beginning to stir, notes Legalbrief. According to a report in the Sunday Times, top US consultancy McKinsey has moved against one of its SA directors as part of a widening probe involving Eskom contracts that netted a Gupta-linked entity a share of a R10bn bonanza. It says the development capped a week of bad news for the Guptas, prompting speculation that their empire in SA may be crumbling. This, says the paper, has been reinforced by the growing possibility of charges being filed in US courts, despite inaction shown by SA authorities. According to the Sunday Times, McKinsey SA director Vikas Sagar has been suspended after it emerged that he misrepresented the company in a transaction involving Gupta-linked company Trillian Capital Partners and Eskom. Sagar, an Indian national with links to the family, led discussions in 2015 for top US consultancy McKinsey to partner with Trillian on Eskom mandates. The newspaper says it has seen a spreadsheet that was discussed by Sagar and another McKinsey director, Alexander Weiss, with Trillian's Eric Wood in December 2015, four days after the firing of former Finance Minister Nhlanhle Nene. It identifies 11 key Eskom projects – including some worth more than R1.5bn each from the generation, procurement and primary energy divisions – that would net R9.4bn over a four-year period. And in May this year McKinsey discovered that two months after the December meeting, in February 2016, Sagar authorised Eskom to pay Trillian fees as a subcontractor to McKinsey. This was despite no contract being in place. In all, Trillian would receive close to R500m from the power utility.
McKinsey spokesperson Steve John confirmed Sagar and the company had agreed to a temporary leave of absence while an internal investigation continues. He said the matter had not been reported to law enforcement in the US. ‘Our investigation, assisted by Norton Rose Fulbright, has not discovered anything that would require us to notify US authorities. If we discover pertinent facts we will take appropriate action,’ he said. Both Eskom and McKinsey have defended the appointment of McKinsey, saying appointments via a closed tender process were allowed in law. However, an analyst who investigates multinational corruption in Africa reportedly told the Sunday Times: ‘If it could be established that McKinsey were party to, and benefited from, corrupt deals in SA, they would indeed be liable for prosecution in the US under the Foreign Corrupt Practices Act. But that would depend on the circumstances. ‘Keep in mind that the FCPA deals with bribery, in the broader sense, rather than conflict of interest, which appears more likely to be the transgression here. If the case could be made that McKinsey got deals by benefiting Zuma or any of his Ministers or children, then that would constitute bribery.’ Corruption Watch executive director David Lewis said the watchdog was still consulting with its lawyers about how to proceed to lodge a complaint with the US Department of Justice and request an investigation into McKinsey's actions. Lewis said such an application was an intricate process and the application could take weeks before it was ready to be filed.
The ANC is on notice from its alliance partner, the SACP, over state capture. The SACP warned this week that if the new leader elected at the ANC’s national conference in December is a supporter of Zuma, it is likely to go it alone and contest elections against the party. A Cape Times report says this emerged at the SACP’s week-long 14th National Conference which opened on Monday. The report notes that while the party stopped short of saying it would contest elections on its own if the ANC did not fix its house, it has given itself until December, after the ANC national elective conference, to determine whether the ANC is still fit to be the mother of its alliance partners – or whether to seek an alternative arrangement. SACP secretary-general Blade Nzimande said the next six months would be important as it carefully studied the political situation in the country and the ANC’s efforts to put a stop to state capture, according to the report.