After being caught in the Gupta State Capture web, the world’s largest consulting company, McKinsey, has implemented stricter controls across its global operations to prevent being drawn into corrupt activities in the future, senior partner Jean-Christophe Mieszala appeared before the Zondo Commission this week.
Lessons learnt from their experience with contracts at Eskom, Transnet, and SAA – particularly as State Capture began to peak between 2014 and 2016 – have been incorporated into McKinsey global operations, said senior partner at the company, Jean-Christophe Mieszala on Thursday.
Mieszala was testifying before the Commission of Inquiry into State Capture via a video link from Paris.
Mieszala, and other senior partners who appeared before the commission on Thursday and Friday, claimed they were unaware that their fellow partner Vikas Sagar, who ran the South African office, was colluding with Gupta henchman Salim Essa to bring Regiments Capital – which later morphed into Trillian management consultants – in as BBBEE required supply development partners.
This, evidence before the commission has revealed, resulted in up to 50% of Regiments’ fees from state entities being laundered through shell companies set up by Essa. Fees from Transnet alone resulted in R100-million fed to shell companies.
McKinsey terminated its contract with what had largely become Trillian, after an internal investigation in 2016 was launched following concerns that Sagar was linked to the Gupta brothers.
Thereafter, according to Mieszala, McKinsey (which has a presence in 166 countries), made various risk and strategy adjustments across its global operations.
These included appointing a chief risk officer, making it compulsory to conduct due diligence on any new client, and regularly updating information on existing clients. The team responsible for due diligence was given access to external resources, and looked into clients’ ownership and board members.
McKinsey had also decided not to undertake certain kinds of work in “particular geographies” without a thorough review by a risk committee, and had tightened its rules for dealing with the public sector and state entities.
The company had “doubled down” on corporate responsibility training and awareness for employees, as well as “legal and regulatory matters”.
Mieszala said in the wake of their South African experience, McKinsey employees had to seek company permission to give clients gifts or accept invitations to events.
He said they had also put a cap on their fees and established a global hotline for reporting corrupt or suspicious activity in order to encourage whistleblowers.
Mieszala, together with senior partners Dr David Fine and Dr Alexander Weiss who appeared before Deputy Chief Justice Raymond Zondo on Thursday evening and Friday morning respectively, assured the commission they were not aware McKinsey was implicated in money flows to Gupta enterprises at the time, and were left red-faced when they realised they had been hoodwinked by Sagar and Regiments.
McKinsey has since agreed to pay back R650m in consulting fees to Transnet and SAA, following its 2017 decision to repay R1-billion in consulting fees to Eskom.
Evidence leader Advocate Matthew Chaskalson SC, repeatedly assured the McKinsey partners that he recognised McKinsey was the first company to offer to pay back fees to South African SOEs, and that they had done so voluntarily. Chaskalson noted McKinsey had terminated its contracts with Gupta-aligned Trillian Capital Partners when it became aware of questionable relationships, and had done so at the risk of losing future South African business.
Nonetheless, he put some discomforting questions to the McKinsey partners. Interrogating McKinsey corporate culture as opposed to governance, Chaskalson questioned Mieszala as to why a slew of sole-source contracts (contracts not put out to tender for competitive bids) awarded by Transnet from 2013 to 2015 in line with an approximately 70% increase in fees over the period, did not raise concerns.
“At the time, it appears there was too much of a premium on bringing in business against the need not to compromise on (interrogating) sole-source contracts,” queried Chaskalson. “Unless (the company) culture fosters taking a principled stand, it can’t be addressed by governance.”
Mieszala said with most clients, there were “bursts of activity” which could be driven by unique conditions, and these were often driven by the need to get out of a crisis, and fees could vary for legitimate reasons. The question, he said, was whether McKinsey had provided value and had an impact. He believed that despite its unwitting involvement in State Capture, its work had brought value to its clients.
Fine said concerns about Regiments began to emerge in 2015 when the quality of its work deteriorated, and although it was a supply development partner, its leadership did not reflect South Africa’s demographics. Then, at a Transnet steering committee meeting on 11 December 2015 from which Regiment’s principal Mohamed Bobat was absent, Fine learnt Bobat had become new finance minister Des van Rooyen’s special adviser. As former president Jacob Zuma’s axing of respected finance minister Nhlanhla Nene in favour of unknown backbencher Van Rooyen had caused international concern and local outrage, he became worried. Further personal probing revealed links between Bobat and Gupta associates, and queries about Bobat sent to Regiments/Trillian CEO Eric Wood went unanswered. This was the smoking gun that led to an internal investigation into Trillian, and McKinsey’s subsequent termination of their relationship in March 2016.
Chaskalson also put Weiss on the spot. Although McKinsey terminated its contract with Trillian in March 2016, it continued to work with Eskom, another Regiments/Trillian supply development partner – until September 2016. Chaskalson queried why the Eskom contract had been signed by Weiss in “September or October” 2016, but backdated to make it appear it had been signed in January 2016.
Thus, pressed Chaskalson, McKinsey was paid fees by Eskom during 2016 without a signed contract in place, and if signed as its true date, would have been flagged as an irregularity.
Weiss pleaded context, saying the contract was a result of “long negotiations” and a letter of acceptance had been signed in September 2015, which was viewed as binding. He said he requested a signed contract from Eskom on a weekly basis. Then, he said, at the beginning of June 2016 Eskom terminated the contract, with payment settled in August. It was only in September, he said, that he finally received a printed version of the contract, dated 7 January, 2016.
Weiss conceded the McKinsey team relied too much on relationships with Eskom, rather than insisting on proper procedure.
“It is fair to say we shouldn’t have started work before the due diligence process was closed, but this is a process we have changed,” said Weiss.
Former Free State MEC for Human Settlements Mosebenzi Zwane took the stand to give testimony at the commission later on Friday, while former Eskom CEO Matshela Koko was due to appear on Friday evening. DM