22 September 2017

ARC Briefing's Augustine Booth-Clibborn writes...

UK public relations firm Bell Pottinger has collapsed. Consulting firm McKinsey & Co faces charges of collusion and racketeering. Accounting firm KPMG faces litigation over a report that wrongly impugns South Africa’s respected former finance minister, Pravin Gordhan. It has lost six major clients, and Barclays Africa Group, Standard Bank and Nedbank decide this week whether to retain KPMG in future. Heads have rolled and more damage is likely. The reason is all three companies accepted the Gupta family as clients. The Gupta family, who immigrated to South Africa in 1993 ostensibly to establish a shoe business, instead built an empire that fed off the family’s close relationship with the president, Jacob Zuma, and Zuma’s allies in the ruling African National Congress (ANC). Three of Zuma’s relatives, most notably his son, Duduzane, worked in Gupta businesses. So extensive is the web of political exposure and financial corruption that it has became popularly known as “state capture” – a name celebrated former public protector Thuli Madonsela adopted in an investigation into the phenomenon.
The Gupta web was as tangled and extensive as it was blatant. For example, the Guptas are alleged to have used their influence to secure the appointment of Mosebenzi Zwane as mines minister in September 2015. Zwane, who had little mining experience, had been involved in Gupta businesses. Zwane used his position to shut down Swiss-based miner Glencore’s Optimum Colliery in October 2015, forcing Glencore to place the mine into administration. Glencore sold the mine to Gupta-controlled Tegeta Exploration & Resources at a greatly reduced price in April 2016. Optimum sells coal exclusively to state-owned power utility Eskom, where the Guptas had also developed influence. Glencore had failed to renew a coal supply deal, which contributed to forcing Optimum into administration. Suspicions of Zwane’s “capture” increased when he attended the deal negotiations in Switzerland, and gave minister’s consent to the sale in weeks when these deals can take years.

When South Africa’s press reported these allegations, the Guptas turned to United Kingdom (UK)-based Bell Pottinger in January 2016, which ran an aggressive, negative social media campaign claiming that the Guptas were victims of “white monopoly capital”, stoking racial tensions in South Africa. Finance minister Pravin Gordhan took a stand against state capture from his (re)appointment in December 2015 and against the “white monopoly capital” narrative. KPMG wrote a report alleging that Gordhan set up and knew about an illegal unit while he was head of the South African Revenue Service (SARS) that was finalised in January 2016. The report – which KPMG now acknowledges was false – led to Zuma’s attempt to fire Gordhan in April 2016. Zuma dismissed him in April 2017.

KPMG provided auditing services to Tegeta and its parent, Oakbay Capital, which is listed on the Johannesburg Stock Exchange (JSE). Eskom employed McKinsey as consultants in 2015, but – as part of the Optimum deal – paid McKinsey $19m in consultancy fees via Gupta-linked Trillian Capital Partners. KPMG has fired its South Africa Chair, CEO, head of risk, and six other senior executives, and has offered to pay back all fees earned from Gupta companies. KPMG will now face the South African parliament and may be censured by South Africa’s national auditing regulator. The opposition pressed Bell Pottinger and KPMG to cut ties with the Gupta family from mid-2016, with limited effect. In June 2017 the press obtained a leaked cache of emails that provided activists with the evidence they needed. The opposition Democratic Alliance (DA) reported Bell Pottinger in the UK to the Public Relations and Communications Association (PRCA). In August, the PRCA expelled Bell Pottinger. As clients left, the company collapsed. The DA on 20 September filed charges against McKinsey for fraud and racketeering. McKinsey also faces a parliamentary hearing. McKinsey insists it has done nothing wrong – but like Bell Pottinger and KPMG it may yet act to preserve its reputation and client list. Could these events shut down KPMG and McKinsey in South Africa? What are the implications for the global parent companies? Accepting fees from a firm whose very existence may be due to political corruption presents a particular problem. All three chased the Gupta account though the family were known to sponsor Zuma. Media reports on the Gupta’s deals were in the public domain. Clearly, even strong internal mechanisms for raising red flags are not always enough, particularly when a partner has a big deal on the line. Extra-territorial legislation such as the UK Bribery Act and USA’s FCPA test whether a company has done its due diligence. Executives can be personally liable for failing to carry out due diligence. Perhaps it’s time for every deal over a certain size to go through an independently validated due diligence process – especially with a public entity in a country with a chequered compliance history.

Author: Africa Risk Consulting’s South Africa commissioning editor, Augustine Booth-Clibborn. Augustine Booth-Clibborn came to ARC as a researcher with specialist knowledge of interreligious affairs in 2013. At ARC he has carried out political consultancy pieces on Mali, Morocco and South Africa, and due diligence cases for power, agriculture, and retail sectors clients. He is ARC Briefing's commissioning editor for Algeria, Morocco and South Africa. Prior to joining ARC, Augustine held a position as a research associate at the Woolf Institute for the study of Abrahamic faiths at the University of Cambridge and previously worked as an adviser to the UK government on domestic and international interreligious relations, as part of the Inter Faith Network for the UK. Augustine holds an MPhil in Religion and Politics from the University of Cambridge, which focused on church-state relations in China, India, and Swaziland, and a first class degree in Theology from the same institution. He has working competency in French.

ARC Briefing keeps you:

  • Up to date
  • In the know
  • Ahead of events!

Receive subscription information on your countries of interest or call: +44 20 7078 4080