Global consultancy McKinsey & Co, 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.
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 South African President Jacob Zuma.
The South African Committee on Public Enterprises is investigating whether McKinsey knowingly let funds from state utility Eskom Co be diverted to a Gupta company as a way of securing a US$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 said.
McKinsey has hired law firm Norton Rose Fullbright to assist in an internal investigation, which said it would not comment while its probe is under way.
The accounts by the two former employees, who spoke 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 time line McKinsey has given of when it learned of potential problems.
McKinsey said it carried out a due diligence review on its partner in the Eskom deal beginning in January last year 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,” John said in a written response to questions.
However, the former 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 former 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,” one said.
John said he could not comment on meetings that might have taken place without knowing the names of the participants.
South African Shadow Minster of Public Enterprises Natasha Mazzone 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,” she said.
McKinsey’s Eskom contract was huge for the consultancy, accounting for more than half of its South African revenue, according to the two former 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 South Africa, entitled State of Capture, accused the government of improperly steering hundreds of millions of US dollars in state contracts to Gupta-controlled firms.
The Guptas and Zuma deny wrongdoing and said the scandal has been manufactured to undermine Zuma’s leadership.
While McKinsey was working for Eskom in 2015 to last year, 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 said it paid because it was told by McKinsey that Trillian was McKinsey’s subcontractor.
The utility declined to answer further questions.
Trillian 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 long-term 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 last year.
However, in July, several South African newspapers released a leaked a letter from February by a McKinsey director instructing Eskom to pay Trillian and describing Trillian as McKinsey’s subcontractor.
McKinsey said the letter “inaccurately characterized” its relationship with Trillian.
McKinsey director Vikas Sagar, who wrote the letter, 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.
“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 realized that siphoning to Gupta companies was taking place and if they alerted the minister of public enterprises to possible concerns,” Mazzone said.
The two former employees said McKinsey’s South African office had been wrestling for years with 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 Fund Managers Ltd and employed many of the same principal staff.
Regiments had already been McKinsey’s local partner on another contract since 2012 and the former 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.
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