By Peter O’Brien
Cases of corruption are so common that you need a good excuse to write about another one. So how do we justify commenting on the South African scandals involving the Gupta family, at least one of the country’ most significant state-owned enterprises (SOE), a slew of well-known international firms, prominent local law offices, the uses of public law and actions of key monitoring and regulatory bodies –and ultimately the chronic misuse of political power for private gain? The justification is that what has been happening in RSA reveals in the clearest and richest form the way corruption behavior and patterns evolve across the globe. The Gupta model allows us to spell out exactly what to expect elsewhere. In a word, Gupta is generic, it is the DNA for the species.
Where should we start among the several streams that form part of the big river that is Gupta? Let’s take a wedding as entry point. In 2013, four partners of KPMG South Africa attended a wedding, held in Sun City and spread over four days, of a prominent Gupta family member. The reported bill for the event was around R30mn. That cost was put down in the 2014 accounts, audited by KPMG South Africa, as a business expense of an RSA registered company, Linkway Trading, controlled by the Gupta family. Linkway had received funds, to the tune of more than $8mn, from another Gupta controlled entity called Estina, which is a dairy producing enterprise in the Orange Free State. Estina itself was at that time receiving substantial subsidies (reported by 2014 to amount to some R210mn) from the Orange Free State government.
Examination of emails obtained from KPMG showed that, from 2008 onwards, the firm had helped the Gupta group to establish at least 36 entities, mostly shell companies set up in Dubai. It appears that Linkway had received the money for the wedding from one such firm – after transferring at least part of the Estina subsidy cash to Dubai. In short: Orange Free State government money intended to help the dairy industry in that State was being spent to pay for a wedding in the Gupta family, that expenditure was then made tax deductible for a Gupta owned firm audited by KPMG South Africa, and partners of KPMG were invited to the wedding financed by the subsidy money (at which wedding it seems likely that more than the bride and groom were being toasted). Who was being milked in the whole process? Answer: the tax payers in RSA.
The Independent Regulatory Board for Auditors (IRBA) in South Africa was already uneasy about KPMG/Gupta group relations in 2014, and began enquiries in that year. In 2015 KPMG itself was also clearly feeling jittery, so it terminated its 15 year relationship with Linkway. While IRBA work was going on, KPMG involvement in another serious matter, the so-called SARS (South Africa Revenue Service) case, was under scrutiny and the firm claims that it terminated that relationship as well in March 2016. By the following month, April 2016, the Head of KPMG in RSA decided to terminate services to Gupta related firms, citing “association risk” to other KPMG business. Furthermore, the Companies and Intellectual Property Commission (CIPC), the official body responsible for compliance with the RSA Companies Act, began to check behavior of three KPMG Directors to discover whether that was compliant with legal stipulations. As of now (late September 2017), even the Institute of Directors of Southern Africa has suspended all “cobranding activities” with KPMG, to limit possible image damage to other firms stemming from association with that entity. Corporate corruption is clearly a transmissible disease. Once a virulent strain is identified, everyone seeks to protect themselves.
The second major process concerns McKinsey, Eskom (a major, perhaps the major, SOE), and Trillian Capital Partners (a private RSA financial advisory firm linked with the Gupta family). Here the corruption chain centers around public tenders and the allocation of monies related to them. Some three years ago McKinsey was awarded contracts by Eskom worth around one half of McKinsey’s total revenue in the country. In 2015-2016, approximately 30% of this contract money was paid to Trillian, allegedly because Trillian was a company subcontracted by McKinsey to help fulfil the undertakings with ESKOM. The investigative work surrounding these transactions, work which includes the Budlender Report delivered on 29 June 2017 to the current non-executive President of Trillian, Tokyo Sexwale, indicates very strongly that Trillian has not performed any substantive work in return for the very large amounts of money it has received (based on accounts data, paid invoices and similar information, ESKOM has paid approximately R1.6bn to McKinsey and Trillian).
McKinsey must have realized at a relatively early stage that the whole process was dubious. In March 2016 it ended its relationship with Trillian, and in June 2016 did the same with ESKOM. When, at the beginning of 2017, Budlender was asked to investigate Trillian dealings, the issues he was requested to examine included (but were not confined to) the politically exceptionally delicate matter of the dismissal, in 2014, of the then RSA Finance Minister Nene and his replacement by Minister Van Rooyen. Specifically, Budlender was asked to determine whether the CEO of Trillian had prior knowledge of the dismissal; if so, whether Trillian had used such information for commercial purposes; whether Trillian had provided the Special advisor to the new Finance Minister and that this person would arrange for public tenders from the National Treasury and SOEs to be directed (at least in part) towards Trillian; and whether Trillian had subsequently invoiced some SOE for work which had not been done.
Budlender’s report, of 29 June 2017, lists a veritable litany of instances where Trillian totally failed to cooperate with an enquiry which had been launched by the firm itself. The mechanisms through which it stonewalled, employing the services of a well- known RSA law firm to do this, are set out in the report. Given non-cooperation, definitive proof of the various illegalities alleged to have been committed by Trilian, ESKOM officials, McKinsey and possibly others, has so far proved impossible to obtain. It is for that reason that Budlender concludes, inter alia, that an official enquiry is required which would thus allow persons and documents to be sub-paened.
This month, September 2017, Corruption Watch South Africa has laid Corruption and Bribery Charges against McKinsey in front of the US Justice Department. On the basis of the material summarized here, plus additional information, McKinsey is being accused under the Foreign Corruption Practices Act. Corruption Watch has noted that a number of McKinsey staff had not been in favor of the linkages with Trillian but that their misgivings had apparently been ignored by senior management.
The third issue concerns a very well- known public relations firm called Bell Pottinger. In January 2016 it was hired by a private South African firm, Oakbay Investments Productivity Limited. Oakbay also has significant links with the Gupta family. Bell Pottinger was asked to work on two things: corporate communications, and a campaign to promote “economic emancipation”. This fine sounding phrase was a front for an effort to shift the investment field in favor of certain groups in the population. Both the aim of the campaign, and the specific way it was carried out, led to Bell Pottinger being accused of fueling racial tensions in RSA.
Bell Pottinger has claimed that it only took on these “high risk clients” and “high risk mandates” after much discussion at top level. It seems safe to say that the heads of the company figured that the prospective rewards justified the risks. The work continued until April 2017, by which time there was so much adverse publicity hitting this public relations firm that it called a halt. It asked an RSA law firm, Herbert Smith Freekills LLP, to look into possible failings of its decision making and monitoring procedures. The brief summary of that report which is publicly available concludes that there was indeed poor management and poor monitoring. Bell Pottinger has responded by saying that it will “develop an ethics committee”, “develop and train staff on social media policy”, and “reissue corporate policy in a new employee handbook”. This verbiage carries as much conviction as the English Prime Minister (still, as I write) Theresa May, claiming she wants a “strong and special relationship with the EU”.
The Democratic Alliance of South Africa, noting what had happened, accused Bell Pottinger of “exploiting racial tensions on behalf of the Gupta family”, and took its complaint to the Public Relations and Communications Association (PRCA). This an international professional body comprising some 20,000 members in 55 countries. It seeks to create, maintain and monitor the highest professional standards in this ever more delicate field. PRCA began its investigation on 5 July, and both the Democratic Alliance and Bell Pottinger presented written and oral evidence. The Professional Practices Committee of PRCA delivered its verdict on 18 August. Bell Pottinger appealed the verdict but the Board of PRCA confirmed the verdict on 4 September.
The conclusions are damning. Bell Pottinger was found to have breached four very important clauses of the PRCA code of conduct. The behavior of the firm was held to have been faulty at every level and to have brought the reputation of the industry into disrepute. Bell Pottinger has been expelled as a member of the PRCA. This is the most severe penalty ever imposed in the near 50 year existence of PRCA.
The three cases allow us to describe the key features of the anatomy of corruption.
First, public and private entities, and their governing bodies/principal officials, are always tempted to sail very close to the wind. Enough prospective rewards will induce almost every group to take major risks.
Second, where there is political protection from the top of the State, the chains involving Ministries, SOE, Private firms and sometimes legal entities can divert and misuse public monies.
Third, the costs suffered by an economy/society will usually come in various forms. These include direct theft of funds; excess costs of investments and operations financed by public funds; loss of confidence in public institutions; and international damage to the reputation of the country.
Fourth, the reactions of private firms implicated in the gathering storms are too little, too late and too timid. This is true for major international groups as well as national firms.
Fifth, it follows that self-regulation and self-correction are non-starters. Without sharp sanctions from external bodies, that could in some instances be industry related, the patterns will continue.
Sixth, it is paradoxical that greed (or hubris) may often be the best hope to stem the corruption. As those practicing dishonesty become more successful, so they become over confident. It is when over stretch occurs that there is the best chance for crippling the corruption.
Seventh, public actions, usually channeled through active organizations and NGOs, can be effective. Still more, they can also succeed in securing international penalties for actions carried out in a specific country. International firms will have to pay greater attention to that kind of “collateral damage”. Their ability to engage in internal monitoring of their whole networks must be improved – “no affiliate is an island”.
This analysis has used three examples from RSA where a common theme has been the influence exerted by a powerful family, the Guptas, and their linkage with the political pinnacle of the State. But, alas, there are countless similar examples, in countries across the world and at every level of economic development. Evidence seems to suggest that the incidence of this behavior is increasing, despite the vigilance and activism of so many people and organizations.
How can we improve capacities to prevent and correct corruption? In the past, efforts centered around four things – the moral, the economic, the political, and the legal. The moral focused on the ethics of behavior. Individuals were supposed to have sufficient personal and professional principles such that their behavior would reject corrupt practices. The economic focused on market morphology. Companies would be kept at “arms -length” from each other, so that competition would prevent carve-ups. Still today, competition law exists primarily to preserve that kind of corporate distance. The political focused on the separateness of private from public decision making, and on the separation of the executive, legislative and judicial arms of government. Finally, the legal focused on assessing cases where corruption was thought to have occurred, determining appropriate penalties, and ultimately feeding back findings so that law making could be improved.
Across the globe, those four areas have come under ever greater siege. There are no reliable “barriers to corruption” under any of those headings. Seemingly infinite drafting of codes of voluntary conduct, regulations, national laws, and international agreements, seems to have provided precious little protection. The odd case might be prevented, the odd penalty might frighten people for a while. Yet that’s about the sum total. RSA itself will, as of 2023, introduce mandatory audit firm rotation every 10 years (thereby echoing a similar step taken in the EU earlier this decade). But this is a very timid move, and nobody seriously expects it will make much difference (either in RSA or the EU).
Perhaps it is time to long at the problem from a different angle. Which one? Corruption comes when groups, institutions and individuals that should be operating independently decide to collude for mutual benefit. So would it be smart for actors on the other side to collaborate a lot better? Put it this way. Suppose official legal bodies started to work much more closely with private associations and the media (the latter including activist organizations) to prevent malpractice, expose it where it does occur, and devise fresh ways of retribution on those responsible for corruption. Of course there is a certain degree of collaboration already (even including international collaboration, where the RSA examples here are revealing). But it seems the scope for it is considerable. It won’t take us to any ideal situation – the risk/reward link will always be a major temptation. Still, things might improve a bit, and that is what we must strive for.
Peter O’Brien, Bratislava, 24 September 2017
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Stargard’s Primerio colleague, Roger Tafotie, has now 
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Peter O’Brien is economics & trade advisor to Africa consulting boutique Pr1merio