POLITICS

Eskom And Trillian: Did McKinsey Engage In Corrupt Practices?

Anti-graft body Corruption Watch plans to use a powerful US statute to ensure accountability for the South African taxpayer. Here's the case against McKinsey.

16/10/2017 06:11 SAST | Updated 16/10/2017 08:04 SAST

*McKinsey was asked extensive and detailed questions for this report but the company chose not to answer and referred HuffPost SA to a set of tightly scripted statements.

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In about 10 days, a thick complaint about McKinsey's conduct in South Africa will whack down in New York as Corruption Watch takes its anti-graft campaign global.

The world's leading management consultancy is under the whip for earning R970-million in projected savings and R70-million for tariff-based consultancy work in about six months work at Eskom.

The company denies the money was for jam, but Corruption Watch believes "the contract was an absolute sham. It is an artificial construct based on subterfuge and McKinsey went along with that".

The FCPA is undoubtedly the most effective anti-corruption legislation in the worldDavid Lewis from Corruption Watch

Corruption Watch executive director David Lewis says: "Privately, a range of interesting South African businesspeople are outraged at the scale of the fee and the way it has been developed in the form of a contract that is clearly illegal. They never performed any services vaguely commensurate with that fee."

Last week, McKinsey said it would ring-fence in a separate account its bonanza of a windfall from Eskom pending a High Court review, which has not yet been formally requested by any party. It also defended its record and says it has worked with Eskom since 2005. Sources say the Eskom payment to McKinsey equated to half the revenue of its growing Africa operations over the most recent financial year.

McKinsey is the fourth multinational company to become crisis-ridden after being ensnared in the Gupta family's empire. Its trouble relates to a contested partnership with Trillian, a capital-raising firm and management consultancy majority-owned by the family's lieutenant, Salim Essa, and a former Investec luminary, Eric Wood.

A statement by Trillian whistleblower Bianca Goodson reveals how closely tied the Gupta empire was to Trillian: numerous state capture characters South Africa has come to know through the drama of the #Guptaleaks emails worked at the company or were associated with it.

This means there is an umbilical link between Trillian and the Gupta family who have come to symbolise the idea of state capture in South Africa. The cord is now tied to McKinsey as well and its reputation has taken a knock in global financial media including the Financial Times and Wall Street Journal, which are the titles of choice for world business.


McKinsey and a Foreign Corrupt Practice

David Lewis is a fan of the Foreign Corrupt Practices Act (FCPA), which is the US's big stick law to keep its multinationals in check wherever they have operations. It is strictly enforced and falling foul thereof fills global executives with dread. One reason McKinsey may have been pushed into action from a period of lethargy about its enrichment is that of the threat of a US suit. Another is that Eskom has demanded its money back.

"The FCPA is undoubtedly the most effective anti-corruption legislation in the world," says Lewis. It is extraterritorial [which means US companies can be sued for operations anywhere in the world], costs a lot of executive time to defend against and it carries significant reputational risk as well as penalties if a company is found guilty of a contravention.

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Future SA supporters picket outside the McKinsey offices on October 05, 2017 in Sandton, South Africa.

For Lewis, McKinsey's contract with Eskom amounts to "a vanilla case of bribery" in that it needed Trillian to get the contract. "What was the payoff to Eskom executives?" The question has not been answered, but at last count by Financial Mail deputy editor Sikonathi Mantshantsha, five Eskom executives have been suspended for facilitating the massive payments to McKinsey and Trillian.

"McKinsey has had significant opportunity to clear its name. But it refused to cooperate further with the Budlender inquiry. Now the complaint to the US Department of Justice will give them the opportunity to participate in a formal inquiry where they will have no option but to co-operate," says Lewis.

Probing a Trillian

At the centre of the state capture story, as it relates to McKinsey, is a swish capital-raising and management consultancy called Trillian based at Melrose Arch in Johannesburg.

The upmarket precinct in the north of the city is a shrine to the high capital with its New York-styled apartments and top-notch restaurants and boutiques.

TMC (Trillian Management Consultancy) would become the leading BEE management consulting company, competing with the leaders in the industry, such as McKinsey, Letsema and AccentureWhistleblower Bianca Goodson

Its streets are patrolled by private security and paved with gold. They are chock a block with supercars for the super executives who spin deals there. This is where Essa and Wood set up an office and, like Pinky and the Brain of the Disney series, plotted to take over the world.

For a short while, Bianca Goodson worked at Trillian after she was headhunted to start up a management consultancy. "[Clive] Angel had told me TMC (Trillian Management Consultancy) would become the leading BEE management consulting company, competing with the leaders in the industry, such as McKinsey, Letsema and Accenture," wrote Goodson in a statement she made which blew the whistle on exactly how Essa and Wood intended to take over the rich world of public sector consulting.

Contracts between management consultancies and state-owned enterprises or government departments are big money and amount to billions every year. This is because the state is weak and inefficient.

Trillian's swashbuckling methods and the fact that it lies at the centre of the Gupta family nexus attracted negative attention when amaBhungane exposed how much money the company was totting up for work at Transnet. Insiders felt the work was unnecessary as Transnet has a well-staffed treasury and a huge management component. But with previous CEO Brian Molefe and chief financial officer Anoj Singh at the helm, the company was being favoured for big contracts.

Budlender's report released earlier this year was damning about Trillian, but arguably more damaging to McKinsey

Molefe and Singh are part of the Gupta network (as has been revealed in former Public Protector Thuli Madonsela's "State of Capture" report) and in the #Guptaleaks emails, both of which have profiled the family's patronage networks.

Sexwale orders a probe

At the time, Trillian's chairperson was Tokyo Sexwale, the former premier of Gauteng. In that role, Sexwale commissioned advocate Geoff Budlender to probe what was happening at his company. Budlender's report released earlier this year was damning about Trillian, but arguably more damaging to McKinsey.

A junior executive at the management consultancy lied to Budlender about the extent of its partnership with McKinsey and then would not explain why documents in Budlender's possession revealed that the relationship between the two companies was not arms-length but umbilical.

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That report cast the first harsh spotlight on McKinsey's business practices in South Africa as it provided the first evidence of how much money the two companies were making in a very short time. Shortly after, Goodson's statement landed and it tied McKinsey to Trillian through documents, which she has put into the public domain.

"I worked very closely with [Vikas] Sagar (former head of McKinsey in South Africa) and his team on matters relating to Eskom," wrote Goodson.

She laid out emails, documents and contracts of Trillian's relationship with McKinsey and Eskom and so set up the case against McKinsey that is now likely to attract the interest of American prosecutors.

A New York-based law firm, which specialises in suits that involve foreign corrupt practices, is acting pro bono (for free) for Corruption Watch in the interest of South African social justice.

You are selling advice – you are not building a nuclear turbine and how many hours of advice do you have to give to even approximate a billion rands fees?David Lewis

Back in South Africa, McKinsey issued a strange statement saying it would welcome a High Court review of its work at Eskom which has demanded that it pay back the full R1.6-billion it earned at the electricity utility company. The statement is strange because McKinsey did not approach the court and neither is there an ongoing review of its work with Eskom.

Beyond that, McKinsey has refused to explain what exactly it did to earn its huge Eskom payday or to explain why its executive lied to a South African inquiry. About McKinsey, Lewis says: "You are selling advice – you are not building a nuclear turbine and how many hours of advice do you have to give to even approximate a billion rands fees?"