September 13, 2017 / 7:15 AM / 3 months ago

McKinsey ignored staff warnings in South Africa Gupta scandal, ex-employees say

JOHANNESBURG (Reuters) - Global consultancy McKinsey, facing parliamentary hearings in South Africa over payments to a firm controlled by a billionaire family, ignored suspicions raised over several years by local senior staff that companies it worked with were set up to steer state contracts, two former employees said.

Steam rises at sunrise from the Lethabo Power Station, a coal-fired power station owned by state power utility ESKOM near Sasolburg, South Africa, March 2, 2016. REUTERS/Siphiwe Sibeko/File Photo

Since July, when new information emerged about McKinsey’s flagship South African contract, the consultancy has been under increasing scrutiny in a widening corruption scandal over the influence of the Gupta family, businessman friends of President Jacob Zuma.

South Africa’s parliamentary committee on public enterprises is investigating whether McKinsey knowingly let funds from state utility Eskom be diverted to a Gupta company as a way of securing a $78 million contract to advise Eskom. McKinsey denies wrongdoing and says it intends to cooperate with the authorities if evidence of any impropriety emerges.

“We hold ourselves to the highest professional standards wherever we work and stand firmly against corruption. We are committed to ascertaining the facts and swiftly taking any and all appropriate action,” spokesman Steve John told Reuters.

McKinsey has hired law firm Norton Rose Fullbright to assist in an internal investigation. Norton Rose said it would not comment while its probe is under way.

The accounts by the two former employees, who spoke to Reuters separately on condition of anonymity because their present jobs do not permit them to speak to the media, could provide fodder for lawmakers who say they have questions about the timeline McKinsey has given of when it learned of potential problems.

McKinsey says it carried out a due diligence review on its partner in the Eskom deal beginning in January 2016, and cut all ties with the local firm two months later after it concluded the company was unfit.

“We carry out checks on suppliers and partners when we work with them and address issues and concerns when they arise. When concerns were raised we undertook due diligence,” spokesman John said in a written response to questions.

But the ex-employees said they had attended meetings in Johannesburg where problems with that firm and a precursor company employing the same principal staff had been discussed much earlier: as far back as 2013.

The ex-employees said they would have expected such concerns to have been escalated to managers outside South Africa, although they did not know if that had happened.

Ultimately, McKinsey accepted the Eskom account in spite of the warnings, the sources said.

“We turned a blind eye,” said one.

McKinsey spokesman John said he could not comment on meetings that may have taken place without knowing the names of the participants.

Natasha Mazzone of the opposition Democratic Alliance, a member of the parliamentary committee investigating the affair, said the committee would be looking at what McKinsey knew, and when, about the intentions of its local partners.

“If McKinsey is found to have been deliberately misleading South Africa and assisting in state capture, they will certainly be held to account and recommendations will be made to the portfolio committee.”

“STATE OF CAPTURE”

McKinsey’s Eskom contract was huge for the consultancy, accounting for more than half of its South African revenue, according to the two ex-employees. The deal coalesced even as a number of other business services firms were curtailing their work for South African state firms in the wake of an anti-corruption watchdog’s report into the Guptas.

The 355-page report by the constitutionally-mandated Public Protector watchdog, entitled “State of Capture”, accused the government of improperly steering hundreds of millions of dollars in state contracts to Gupta-controlled firms.

The Guptas and President Zuma deny wrongdoing and say the scandal has been manufactured to undermine Zuma’s leadership.

While McKinsey was working for Eskom in 2015-2016, Eskom paid 30 percent of the deal’s value to a firm called Trillian, which was controlled at the time by a Gupta family ally. The three parties, McKinsey, Eskom and Trillian, have given contradictory explanations for the payments to Trillian.

Eskom says it paid because it was told by McKinsey that Trillian was McKinsey’s subcontractor. The utility declined to answer further questions for this story.

Trillian, in response to Reuters questions, said it “was the partner of McKinsey and was paid its proportionate share of what McKinsey and Trillian billed against work done.” It said it was no longer controlled by the Guptas, as longterm Gupta family business partner Salim Essa had sold his shares this year. Essa did not respond to requests for comment.

McKinsey has long said it was not responsible for the payments, never had any contractual relationship with Trillian and had severed all ties with the company in March 2016.

But in July this year, several South African newspapers released a leaked Feb. 2016 letter by a McKinsey director instructing Eskom to pay Trillian and describing Trillian as McKinsey’s subcontractor.

McKinsey says the letter “inaccurately characterised” its relationship with Trillian. The McKinsey director who wrote it, Vikas Sagar, has been placed on leave pending the outcome of McKinsey’s internal investigation.

Sagar did not respond to attempts to reach him on social media, and McKinsey declined to make him available for comment.

Mazzone of the opposition Democratic Alliance said: “We need to establish why a firm like McKinsey agreed to a 30 percent share of work with Trillian in the first place, when exactly they realised that siphoning to Gupta companies was taking place and if they alerted the Minister of Public Enterprises to possible concerns.”

TIMELINE

The two ex-employees said McKinsey’s South African office had been wrestling for years with the question of whether it was working with local companies that were little more than window-dressing to get contracts.

Trillian was formed in 2015 by directors from another firm called Regiments, and employed many of the same principal staff. Regiments had already been McKinsey’s local partner on another contract since 2012, and the ex-employees said McKinsey’s office considered the new company to be a spin-off of the older one, intended to play a similar role in future deals.

According to the ex-employees, McKinsey partners in South Africa told managers in the country that they thought both Regiments and Trillian had few capabilities, and were valuable mainly for political connections necessary to secure contracts.

“At least two (Johannesburg-based) partners raised concerns about using Regiments as a sub-contractor back in 2013. It seemed clear Regiments was a way of us winning the contract and if we caused a fuss we would lose business,” one of the ex-employees said.

“We had several meetings between 2013 and 2016 at top level locally about Regiments and Trillian, where it was asked: how are these unqualified companies winning us contracts? Why are the contract amounts so favourable? Why do we have to use them to get business?”

In a statement to Reuters, Regiments strongly rejected the suggestion that it was employed by McKinsey solely to win contracts. Regiments had received “numerous client and McKinsey acknowledgements of our value add and delivery,” it said. “Regiments was never involved in the procurement process, except to provide our profile to McKinsey on a few occasions.”

According to the ex-employees, as the Eskom deal was coming together in 2015, there was strong resistance within McKinsey’s South Africa office to working with Regiments personnel and their new vehicle Trillian on the Eskom bid.

They said a McKinsey partner approached an Eskom board member in September 2015 to say that McKinsey did not want to work with either Regiments or Trillian, due to concerns over the ownership of those companies and their capabilities. A former Eskom executive, who also spoke to Reuters on condition of anonymity, confirmed that conversation took place.

The McKinsey ex-employees said the partner who made the overture to the Eskom board member was shifted off the project and replaced by Sagar, who was promoted to the rank of director. Sagar then wrote his letter to Eskom describing Trillian as McKinsey’s subcontractor and instructing Eskom to pay it.

The Eskom deal was too big to jeopardise by looking too closely at the role of the Guptas, the ex-employees said.

“Losing a contract of that size would have serious implications for the business and staff in South Africa,” said one. “It was considered a risk worth taking.”

($1 = 12.9514 rand)

Editing by Peter Graff

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