How much trouble is international consulting firm McKinsey in as a consequence of its involvement in Eskom and Transnet contracts? The short answer, I think, is a lot.
The problem doesn’t relate so much to the South African operation because SA’s prosecutors have made it clear that they don’t intend to investigate anything related to the Gupta empire. This is despite the fact that a graduate law student with one hand tied behind her back and her foot in a pot of glue could find a dozen cases of fraud and theft on an average weekend just from what the news media has reported so far.
Head of the National Prosecuting Authority Shaun Abrahams is fast winning the prize as the most gutless prosecutor in global history, but that is another story.
McKinsey’s problem relates more to more diligent prosecutors overseas who operate under laws such as the Foreign Corrupt Practices Act in the US and the Bribery Act in the UK. In both cases, what appears to have happened here may violate these pieces of legislation, despite some speculation that the cases represent conflict of interest rather than just straight bribery.
The Budlender report on Trillian Capital Partners is fascinating on the topic of McKinsey’s involvement in Eskom and its relationship with Trillian. Lawyer Geoff Budlender relates the story with a blistering cutting edge.
Most state-owned companies, he says, have something called a supplier development programme (SDP) that requires international companies to hire locals to encourage the transfer of skills. He contacted Benedict Phiri, the McKinsey employee designated to answer his questions to ask whether Trillian had been an SDP on any McKinsey project.
Phiri replied in April that it had not. Budlender wrote back in early May, saying: "I attach a copy of a letter dated 9 February 2016 from Vikas Sagar of McKinsey to Prish Govender of Eskom. Its contents appear to be inconsistent with your letter of 6 April 2017. I shall be grateful for your comments in this regard."
The February 9 letter reads: "Dear Prish, Authorisation to pay Subcontractors Directly. We refer to the Professional Services Contract for the provision of consulting services for 6 entered into between Eskom SOC Ltd (Eskom) and McKinsey and Co Africa (Pty) Ltd (‘McKinsey’), dated 29 September 2015 (the Agreement). As you know, McKinsey has subcontracted a portion of the services to be performed under the Agreement to Trillian (Pty) Ltd."
Phiri first said he would discuss it and get back to Budlender but didn’t, despite three reminders. Finally, Budlender said he was finalising his report and would have to say McKinsey refused to reply.
Eventually, Phiri did reply and fed Budlender the usual sub-judice horse manure: "We have noted from media reports and press statements that there will be formal regulative and investigative enquiries into a number of matters which have featured prominently in the press including, we understand, some relevant to Trillian. In the circumstances, we have been advised that it would not be appropriate to provide further information relating to the informal investigation you are conducting into the affairs of Trillian. We trust you will understand our position."
Budlender didn’t. "I find this inexplicable," he wrote in his report. He then found a whole range of documents at Trillian that link the company to McKinsey and concluded that McKinsey’s statement that it didn’t have a relationship with Trillian to be false. Importantly, he offers one additional piece of detail. It was clear from the statement provided by a former Trillian employee and some internal documents, that McKinsey regarded Trillian as an "unwanted piece of baggage" that would still get its 30% regardless of its contribution. The SDP, was, at least from the point of view of some senior McKinsey representatives, a sham, Budlender writes.
And then there is the money. It has already been widely reported that the payments Sagar wrote to Govender about were not chicken feed: they amounted to about a quarter of a billion rand. Trillian was effectively paid for work it didn’t tender for, was not contracted to perform and didn’t do, Budlender concludes.
So why is this a problem for McKinsey? First, the amounts involved are enormous. A consultancy contract hitting the R50m mark would have staffers breaking out huge bottles of champagne. A contract amounting to nearly R1bn sounds too big to be clean.
Second, in November 2015, precedent was set when Standard Bank agreed to pay $32m to the UK’s Serious Fraud Office in fines and repayments of bribes and profits following a bribery scandal in Tanzania. Standard Bank had agreed to pay almost half its fee for a capital raising to a local company without requiring them to do anything. One of the three shareholders of the company was the head of Tanzania’s tax authority.
That, apparently, fell squarely into the ambit of the Bribery Act. If that did, then what happened here with McKinsey and Trillian is probably actionable.
McKinsey deserves its renown and some of its partners who are excellent people doing tough, smart, intelligent work. But this suggests a serious case of the eye straying off the ball.
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