Recent Gupta Saga Developments: Asset Forfeiture Unit Keeping Up Pressure

By Charl van der Merwe

The South African National Prosecuting Authority’s Asset Forfeiture Unit (AFU) recently obtained a preservation order against various individuals and companies linked to the Gupta Family in respect of the controversial ‘Estina Diary Project’ in Vrede, Free State. According to the AFU, the project was established in partnership with a Gupta linked company, Estina, and was agreed to by the provincial government without a tender. In terms of the project, R220.2 million (US$18761040) which was intended for the development of emerging black farmers were deposited into bank accounts (including offshore accounts) of various individuals while only R2 million was actually spent on the project.

According the court papers, “[t]he respective parties worked jointly… with the ultimate purpose of forcing the department to make financial commitments in a business idea that was in clear failure from the outset”… In the circumstances, I submit that the entire project, including the land it was located on, were instrumentalities of the evident theft, fraud, and money laundering,”

As part of the preservation order, the Court ordered the freezing of R10 million (US$852000) in the personal bank accounts of Mr Atul Gupta (Atul) who allegedly personally benefitted from the ‘project’. Atul has, however, recently filed an urgent application seeking to prevent the AFU from freezing his accounts.

Under section 38 of the South African Prevention of Organised Crimes Act (121 of 1998) (POCA) a South Africa High Court may (on an ex parte application by the National Director) may make an order prohibiting any person from dealing with any property if it has reasonable grounds to believe that such property is the proceeds of unlawful activities.

POCA also makes specific provision for the rescission of such a preservation order in instances where a person so affected is deprived of the means to provide for his or her reasonable living expenses and where the order will cause undue hardship (and such hardship outweighs the risk that the property may be destroyed etc.). Interestingly, however, despite claiming to be a request for reconsideration by an affected person it appears that the urgent application brought by Atul is not a rescission application under section 47 of POCA but, instead, a legal challenge on the evidence. In this regard, the application avers that the “NDPP not only failed to make out a case for the relief sought, but also misled the court in respect of the evidence supporting the granting of the order” .

Despite the fact that the papers filed with by the AFU do contain some errors (as pointed out by Atul) in light of the widespread allegations of corruption and the larger public interest element to this case, it is unlikely that the High Court will overturn the original preservation order on the basis of legal technical grounds – especially when there is no averment of harm/hardship which outweighs the risk of the money being transferred out of Atul’s accounts.

Due to the fact that the preservation order has already been granted and the urgent rescission application has been brought by Atul, Atul bears the evidentiary burden of proving his case. This might require the production of evidence in the form of his bank statements or other similar documentary evidence to show that no money was transferred to him by Estina, as alleged.

Interestingly, Atul confirmed in his affidavit that he is currently out of the country and that he, therefore, has not had an opportunity to consider the documents pertaining to the preservation order and that he wished to file supplementary papers once he has had an opportunity to do so

Although there is not yet a warrant of arrest issued by the South African Police for Atul’s arrest, Atul’s brother Ajuy Gupta is already declared a fugitive of justice by the South African Police service for his involvement in the matter. It, therefore, appears unlikely that Atul would risk voluntarily returning to South Africa for the hearing of the matter.

The AFU has given notice that it will oppose the application and should it successfully do so, it may apply to the court for a forfeiture order under section 48 of POCA to have the R10 million (US$852000) forfeited to the state. The only difference between a preservation order and a forfeiture order is that a forfeiture order needs to be proven on a balance of probabilities which is a slightly higher evidentiary burden than the reasonable grounds required for a preservation order.





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




Public protector role to be filled by Advocate Mkhwebane

busisiweAdvocate Busisiwe Joyce Mkhwebane was appointed as the new public protector in South Africa — a very important, albeit often sadly emasculated, role.  Adv. Mkhwebane will be replacing outgoing public protector Thuli Madonsela; her seven-year term officially begins on 15th October 2016.

In an informal online survey, Corruption Watch determined that her appointment by President Jacob Zuma was deemed transparent, and an 87% majority of respondents expressed confidence in Mkhwebane’s appointment.  That said, controversy erupted after the country’s Democratic Alliance party claimed that Mkhwebane had been “on the payroll” of the State Security Agency, implying a former role as an intelligence officer for the state.

Caprikat, Foxwhelp & Aurora: The Tip of Africa’s ‘Panama Papers’ Iceberg?

The X, Y and Zumas of the ‘Panama Papers’ leak

By AAT & AAF author, Michael-James Currie.

During the week of 04 April 2016, headlines around the world reported on what may turn out to be one of the most significant developments in the fight to combat the use of offshore accounts for purposes of hiding proceeds derived from various forms of white-collar crime, including fraud, corruption, and tax evasion among others.

The leaked documents — from about 214,000 offshore entities, covering almost 40 years from 1977 up until the spring of 2016 — were obtained from an anonymous source by the respected German daily Süddeutsche Zeitung (“SZ”) and made public through the Washington-based International Consortium of Investigative Journalists (“ICIJ”).

The Panama Papers leak is the second major scandal in recent history, relating to leaked information on individuals’ private bank accounts, following the HSBC Switzerland scandal in 2015. In the HSBC scandal, a number of high-ranking African individuals were identified as having utilised private bank accounts by HSBC’s Switzerland branch. This information came about as a result of a whistleblower HSBC employee (at the time) who leaked confidential information relating to various individuals who allegedly utilised these Swiss accounts for purposes of money laundering and tax evasion.

Inter alia, the following African individuals were identified as a result of the HSBC information leak:

  • Rachid Mohamed Rachid, Egypt
  • Fana Hlongwane, South Africa
  • Jean-Yves Ollivier, South Africa
  • Gad Elmaleh, Morocco
  • Johnson Nduya Muthama, Kenya
  • Belhassen Trabelsi, Tunisia
  • Roger Boka, Zimbabwe
  • Patrick Bédié, Côte d’Ivoire
  • Aziza Kulsum Gulamali, Burundi
  • Abdul-Karim Dan Azoumi, CAR
  • Saïd Ali Coubèche, Djibouti

Kh ZumaThe Panama Papers have now shown, perhaps unsurprisingly, that the Zuma family is also embroiled in this scandal. This time it is President Zuma’s nephew, Khulubuse Zuma, who is identified as being authorised to represent Caprikat Ltd.  Andreas Stargard, a partner at Pr1merio Africa advisors, notes that “Caprikat is no stranger to the white-collar crime news.  Four years ago, the Financial Times ran an investigative report on this offshore entity and its connections to Dan Gertler, an entrepreneur with ties to the Congolese president.  It and other reports detailed how Caprikat (which had been incorporated only months before in 2012 in the BVI) was able to obtain oil blocks 1 & 2 of the ‘Albertine Graben’ in the Western Rift Valley bordering Uganda.”  Stargard notes that Mr. Zuma was also revealed to have ownership stakes in two other offshore companies, Foxwhelp Ltd. and Aurora Empowerment Systems Ltd:

“Taken together, Mr. Zuma’s three companies’ financial interests comprise not only the estimated 2 billion barrels of oil reserves in Lake Albert, but also several gold mines in the South African republic itself, potentially implicating direct political favours from the leadership there, as well as suspicion of any potential influence exerted by President Zuma on Congolese President Joseph Kabila to grant the oil blocks to his nephew’s company in 2012.”

The following passage in relation to Mr. Zuma was posted on The Centre For Public Integrity’s webpage:

“In late summer 2010, as published reports raised questions about the acquisition, British Virgin Islands authorities ordered Mossack Fonseca to provide background information on Zuma, which the law firm had not previously obtained. That same year, Mossack Fonseca decided to end its relationship with the companies.  Zuma and representatives of the companies have rejected allegations of wrongdoing and claimed the oil deals are ‘quite attractive’ to the DRC government.”

Mr. Zuma is, however, just one of a number of hundreds of individuals identified in the Panama Papers, which include individuals from all over the globe. While the papers will no doubt form part of broader investigations, the public outcry has already resulted in Iceland’s Prime Minister, Sigmundur Davíð Gunnlaugsson resigning on Tuesday, 05 April 2016.  John Oxenham, also with Pr1merio, observes that the Panama Papers “truly show the global scale of anti-corruption efforts: this is no longer a question of domestic or even regional enforcement, but one of worldwide dimensions.  The dealings of Mr. Zuma’s companies may simply be the tip of the iceberg.  Associates of Presidents Vladimir Putin (Russia), Nawaz Sharif (Pakistan), Mauricio Macri (Argentina), Petro Porochenko (Ukraine) and others are likewise reportedly implicated by the Papers.”  Time will tell whether there will be more casualties, as politicians around the world, including UK Prime Minister David Cameron, are called on to explain their financial links to Panama.KHZUMA2

The Panama Papers represent no doubt an important breakthrough in the global war on corruption. As David Lewis, Chairperson of Corruption Watch in South Africa said:

Well hopefully it means a number of good things because this is a big revelation and law enforcement authorities will be hard pressed to do so given the scale of the leaks or follow up I guess … looking at critically exposed persons who have been hiding large amounts of assets that vastly exceed the salaries that they earn. So it will aid law enforcement and exposure of people who use these structures to hide illicitly sourced gains. It’s a big deal.”[4]

AfricanAntifraud will keep you posted on all major developments in relation to this story.


Fraud, corruption and the MTN fine

Fraud, corruption and the $5 billion MTN fine

By Michael Currie

MTN, Africa’s largest mobile network is reeling after a the Nigerian Communications Commission (NCC) fined the company USD $5.2 billion for failing to disconnect approximately 5.1 million customers from unregistered phone cards.

The NCC calculated the fine by fining MTN USD $1,001 for each unregistered SIM phone card.

While MTN are seeking to reduce this fine (due November 16th) by negotiating with the NCC, the South African Parliament has reportedly summoned MTN to appear before it to explain the fine handed down by the NCC and also to ensure that MTN is compliant with South Africa’s laws.[1]

MTN’s shared were also provisionally suspended from trading on the Johannesburg Stock Exchange, however, shares are trading freely again.

UPDATE (12 Nov. 2015): MTN’s recent chairman appointee, Phuthuma Nhleko, has indicated to media that the company would seek to reduce the fine was named executive chairman of MTN for up to six months after Sifiso Dabengwa stepped down as CEO with immediate effect on Monday.  “The planning is based on all possible outcomes and contingencies and our aim is to comply with all regulations in Nigeria,” said MTN spokesman Chris Maroleng, with experts expecting a reduction ranging from as little as 5% to as much as 75%.

While the fine imposed by MTN has received mixed reactions as many feel that the fine is harsh and disproportionate to the harm done, it does not appear the relationships between MTN and the NCC have broken down entirely as the NCC has granted MTN an extension on their licence to operate in Nigeria.

While it has been accepted that there are legitimate security reasons for ensuring that phone cards are registered, it has been suggested that the massive MTN fine was influenced by the kidnapping of a high ranking Nigerian politician, Olu Falae, a former finance minister and runner up in the 1999 presidential elections, on 21 September 2015[2].

The MTN fine saw their share price fall by up to 20% since the announcement of the fine highlighting that apart from the financial penalties highlighting, once again, the need to ensure that companies are fully compliant with the regulatory environment in which they operate.

Fraud and cybercrime

The need to ensure that all phone cards are registered is an increasingly important element to safeguarding individuals from various forms of illicit conduct.  Says John Oxenham, “Mobile phones are increasingly being used as the platform upon which to connect to the internet and on the South African continent the majority of internet access is through phones and not computers.  Unregistered SIM cards are too easily capable of being used for criminal activity, reducing the traceability of illicit telecommunications.”

This is an important consideration as cybercrime has become an increasingly pressing issue to address. A number of countries including such as Namibia are in the process of drafting new legislation specifically to deal with cybercrime. South Africa’s telecommunications has also recently set up a cybercrime hub which will promote collaboration between the public and private sector to detect, track and combat cybercrime techniques. South Africa is also on the brink of having the Protection of Personal Information Act (POPI) fully come into force. While POPI generally regulates the use, storage and dissemination of personal information, POPI imposes a higher duty of care when processing persons account numbers and a contravention of the provisions relating to the processing of account numbers is a criminal offence.

It was reported that South Africa is the third highest cybercrime hotspot in the world. Furthermore, an estimated 50% of credit card fraud occurs online[3].

Accordingly, any measure which needs to be put in place to guard against cybercrime attaches and make it easier for the relevant authorities to detect and prosecute those responsible for cyber attacks should be encouraged. Whether the MTN fine is proportional is a debate for another day, however, it will undoubtedly raise the awareness of mobile operators to ensure that they comply with all regulations particularly relating to the registration of phone cards, and that can only be of great assistance to the fight against cyber-crime. 





“Apartheid stole the past, corruption steals our future” – South Africa protests graft

Wake-up call for Zuma government?  Unlikely as ANC battles crises on many fronts

On September 30, 2015, several major South African cities saw a significant turnout of the Republic’s denizens taking to the streets, protesting rampant perceived corruption in their country: demonstrations took place, inter alia, in Pretoria, Cape Town, Polokwane, and Durban.  They numbered in the tens of thousands, signifying for the first time in years a substantive expression of unhappiness with the ruling African National Congress‘s politics and handling of graft.

Of note here is not merely the protest against problems of purely domestic or otherwise internal corruption (case in point, President Zuma’s infamous $22m+ renovation of his personal Nkandla country homestead), but the broader picture of governmental fraud, waste and abuse — notably including those involving foreign entities.

As The Economist poignantly observed in its current edition, “[t]housands marched in South Africa against corruption. The protest coincidentally took place soon after Hitachi, a Japanese engineering firm, agreed to pay $19m to settle charges brought by American regulators over payments made to the African National Congress, South Africa’s ruling party, in connection with contracts to build power stations.

The Hitachi investigation, spearheaded by the U.S. Securities and Exchange Commission (not the Department of Justice in this instance), is a fascinating one, and hits South Africans in a particularly hurtful spot: electricity has been scarce for years, and its availability has reached a new nadir in 2015.  For this particular industry to be affected by proven corruption is (if that is possible) “worse” for South Africans than the run-of-the-mill scandal: virtually every citizen has experienced dark nights, marred by rolling black-outs, which have necessitated the need for expensive household generators.

A “success fee” to the “Chancellor”…

The SEC’s settlement and complaint (read here) allege truly scandalous, yet entirely classic, corrupt conduct.  They read, in relevant part:

In 2005, Hitachi created a subsidiary in South Africa for the purpose of establishing a local presence in that country to pursue lucrative public and private contracts, including government contracts to build two new major power stations.

Hitachi sold 25% of the stock in the newly created subsidiary to Chancellor House Holdings (Pty) Ltd. (“Chancellor”), a local South African company that was a front for the African National Congress (“ANC”), South Africa’s ruling political party. Hitachi’s arrangement gave Chancellor- and by proxy the ANC- the ability to share in the profits from any power station contracts secured by Hitachi. Hitachi also entered into an undisclosed “success fee” arrangement with Chancellor, wherein Chancellor would be entitled to “success fees” in the event that the contract awards were “substantially as a result” of Chancellor’s efforts.

During the bidding process, Hitachi was aware that Chancellor was a funding vehicle for the ANC. Hitachi nevertheless continued to partner with Chancellor and encourage Chancellor’s use of its political influence to help obtain the government contracts.

As a result, Hitachi was awarded power station contracts in South Africa worth approximately $5.6 billion. In April and July 2008, Hitachi paid the ANC- through Chancellor- “success fees” totaling approximately $1 million.

Hitachi’s South African subsidiary inaccurately recorded its “success fee” payments to Chancellor as “consulting fees” in its books and records for the year ended December 31, 2008. The inaccurate books and records of Hitachi’s subsidiary were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2009, which were filed with the Commission.

In 2010, Hitachi’s South African subsidiary also inaccurately recorded a dividend worth over a million dollars to be paid to Chancellor, its 25% shareholder. The journal entry recorded this dividend as “Dividends Declared” in the subsidiary’s books and records for the year ended December 31, 2010. The books and records did not reflect that the dividend was, in fact, an amount due for payment to a foreign political party in exchange for its political influence in assisting Hitachi land two government contracts. The subsidiary’s inaccurate books and records were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2011, which were filed with the Commission.

Andreas Stargard, an attorney with Africa-based consultancy firm Pr1merio, observes that:

“Hitachi’s corporate tag line reads ‘inspire the next…’ — one can only hope that the inspiration resulting from this particular corruption scandal, is not one of imitation by others, but rather avoidance of the same mistakes.  On the local South African (government) front, we view it as  unlikely that these protests, well-intentioned as they may be, will have much of an impact on actual politics in Pretoria.  President Zuma is battling too many fires to focus on this particular issue in any different manner than what he has done thus far, which is simply firing those responsible for, and competent at, uncovering graft.”

Nota bene, the Hitachi electricity-generating scandal is not all that has rocked South African corruption news lately — just over a week ago, the opposition party Democratic Alliance launched corruption allegations over Danny Jordaan’s involvement with the FIFA mega-scandal (he was the head of the country’s 2010 football World Cup).

Stay tuned for more…

Increased anti-corruption enforcement across Africa?


Chimera or Reality — Is Africa stepping up its anti-graft game?

If one is to believe the media attention that has been bestowed upon anti-corruption enforcement by various African jurisdictions, there has been an uptick in successful anti-graft campaigns across the continent.  Or is there…?  Has Africa truly embraced the prosecution of well-to-do businessmen and government officials?  As one practitioner observes, mere penalty statistics (albeit impressive in terms of pure figures) are far from enough:

“You will read about record-breaking fines imposed; and you will hear about ever-longer jail sentences for violators.  African nations are no different in this regard than the U.S., where the DOJ has an annual tradition, almost invariably touting record-setting numbers resulting from its various enforcement divisions.  Even a quarter billion dollars of cumulative fines in South Africa are insufficient evidence of true deterrence, however — what is needed going forward is a culture of anti-corruption compliance, which goes deeper and spreads its roots more widely throughout the business & governmental community than any single record fine or jail sentence can ever accomplish,” says Andreas Stargard, an attorney with Primerio, an Africa-focused law firm and boutique business consultancy, advising on anti-corruption and competition & regulatory matters across the continent.

Over the next weeks, AAF will be investigating this “trend” of enhanced enforcement — and analyse whether it is real or only perceived.  Today, we begin with two case examples, one from the East and one from the South, both of which have recently been featured in the media with seemingly impressive news to report…

The Ethics and Anti-Corruption Commission offices in Nairobi

The Ethics and Anti-Corruption Commission offices in Nairobi

Example ‘A’: Kenya

George Wachira, a director of Petroleum Focus Consultants, writes in the Business Daily that, “over the past six months a series of events have given Kenyans some hope that this time around we may be on the right path in shaking the roots of corruption.”  He cautions, however, that the ongoing fight against corruption will yield results only “if sufficiently supported by all,” echoing Andreas Stargard’s observation of the importance of a universal “culture of compliance”:

The fight against corruption cannot survive merely on the push of top leadership. There must be in place support from effective and sustainable systems and institutions that can routinely function without prompting or interference. And recently some of these institutions have been undergoing a real-life test. … With clear and strong messages and actions from the top leadership it becomes easier to address corruption. This is an essential and critical starting point.

Second in line in the crusade against corruption is certainly the media which has been consistent in its anti-corruption messages and analysis.

The other key anti-corruption voices have included the Opposition, civil society, and a number of foreign offices with well intentioned interests in Kenya.

… I judge that the D-Day on the fight against corruption occurred when the list of shame was published with names of senior public servants suspected to have engaged in corruption. … If this process succeeds and achieves these standards, then Kenya will have moved a major step ahead in the war against corruption. If the process is derailed by whatever causes, then I am afraid we shall have lost momentum on the war on corruption. … [Another] recently launched system with similar detective capacity is the e-procurement system that can document the audit trails of all public procurement.

It is evident from recent events that Kenya can and should keep on the path towards a country with reduced corruption. We need to appreciate the efforts of all the players in this anti-corruption crusade.

As a general matter, AAF concurs with Mr. Wachira’s comments and the tenor of this article: it takes  more than just one element to create an effective anti-corruption system that both prevents as well as detects and punishes violations swiftly.

As he points out, this system may well start “from the top,” as is the case with the Kenyan presidents recent pronouncements on his unwillingness to tolerate corrupt government dealings.  The question is, however, what happens if society cannot rely on its top officials to provide such guidance, nor rely on even lip-service paid to the anti-graft movement.  An example is South Africa, our next case study, where the recent worldwide FIFA corruption scandal resonated with particular momentum, given the country’s past hosting of the FIFA soccer World Cup.  As several news outlets have reported, the South African government (at its highest levels, including the Ministry of Sports and Recreation), has tried to keep details of the FIFA bribery allegations from the country’s public, specifically by instructing ex-Cup local organising committee (LOC) members not to give interviews and to hand over any evidence to the Ministry only.  Other corporate fraud scandals (ex.: Nedbank) continue to embroil the country, whose economy (and currency) appear on a perpetually and dangerously downward-sloping curve.

Example ‘B’: South Africa

In our FIFA article, we pointed out with significant concern that “the South African Government’s, particularly under the auspices of President Zuma, dismantling of key enforcement agencies, especially the National Prosecution Services … has effectively prevented proactive enforcement of corrupt activities.”

Nonetheless, in the South African daily Times, Babalo Ndenze recently summarised the “most successful year yet” for the country’s Asset Forfeiture Unit — some of the few corruption-busters that have remained intact since a sweeping and politically-driven “overhaul” of the anti-graft investigative units in Africa’s southernmost Republic has caused the effective number, quality and fervour of public fraud prosecutors to dwindle to dangerous lows.  As we observed in a prior article on the perception of corruption in the country causing less foreign direct investment, “a new report released by the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School, concludes that corruption remains one of the major obstacles to Africa’s economic rise: among the Southern African Development Community (SADC), South Africa suffers particularly from the perception of a high prevalence of bribery and corruption in the granting of South African government contracts and procurement tenders …”

Nonetheless, the Times chimes in with healthy enforcement statistics, and we will conclude today’s instalment with a recitation of those numbers:

The crime-fighting unit recover R2.8-billion [that’s almost $250 million] during the 2014-2015 financial year. Its biggest haul involved freezing contracts worth R1.8-billion issued by the Gauteng health department.

The unit also froze orders worth R4.2-million against a company that was awarded a tender to transport mourners to Nelson Mandela commemoration events in the Eastern Cape. The tender process was rigged.

A number of Buffalo City Municipality officials, including former mayor Zukiswa Ncitha, were implicated in the case.

The unit also recovered a farm worth R1.5-million in the Free State that had been illicitly obtained by an SA Police Service detective.

The unit froze and recovered R59-million in various bank accounts of people who defrauded the Social Housing Regulatory Authority in East London . The unit also recovered some of the authority’s R4.8-million that had disappeared for “personal purposes”.

It was assisted by the National Treasury to recover more thanR61-million that was swindled from the authority’s coffers.

A list of the unit’s major recoveries appears in the National Prosecuting Authority’s latest annual report, which has been tabled in parliament.

According to legislation, the seized money goes into the central revenue fund.

“The unit achieved its best-ever performance, obtaining freezing orders to the value of R2.8-billion, significantly exceeding the annual target of R755-million by 265% and last year’s performance by 293%,” the report read.

The unit’s head, Willie Hofmeyr, said this success can be attributed to working closely with other crime-fighting institutions such as the Hawks, the police and the Special Investigating Unit.

“We’ve had a few good years in the past but this was probably our best,” he said.

“It’s true that working together has made a difference

Corruption & instability scare away foreign direct investment in South Africa


Corruption & instability scare away foreign direct investment in South Africa

Former ANC Treasurer and Mpumalanga premier Mathews Phosa has identified corruption, inconsistent government policies, and other factors as root causes of investors’ growing reluctance to invest in South Africa.

The Mail & Guardian’s Adam Wakefield reports that Mr. Phosa, who speaks nine languages and has had a successful but not always undisputed past history within the ANC organisation, spoke at an investment conference sponsored by the Austrian Business Chamber in Johannesburg, at which the former ANC official admitted that the current government’s tackling of corruption and other conduct had led to diminished investor confidence in the political leadership’s adherence to promoting the rule of law and in the country’s forward-looking stability.

In order to create and maintain an “investment-friendly culture where every investor feels protected and free to do business,” the ZA government should implement “actions and activities to grow the economic cake,” rather than dividing it.  Emphasising that South Africa must send a clear signal about its dedication to the fight against corruption, Mr. Phosa said that whistle blowers should enjoy greater protections, the office of the Public Protector should be strengthened, and perpetrators of graft and other corrupt activities must be removed.

Mathews Phosa (Felix Dlangamandla, Gallo Images).

Mathews Posa with Mr. Zuma

Other factors he identified as leading to foreign investors’ reluctance to expand into South Africa include inconsistent BEE policies, mining policies that have led to a diversion of mining-related investments away from RSA and into  Zambia, Mozambique and Angola; lacking eduational policy; and failed agricultural development and land reform.

Mr. Phosa’s comments coincide with a new report released by the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School, which concludes that corruption remains one of the major obstacles to Africa’s economic rise.  In the Centre’s “Ethics and Compliance Risk Survey 2014,” the authors claim that, among the Southern African Development Community (SADC), South Africa suffers particularly from the perception of a high prevalence of bribery and corruption in the granting of South African government contracts and procurement tenders, whilst the top countries in terms of ethical business environments and regulatory efficiency are Mauritius, Botswana, Namibia and Lesotho.

south africa ethics report table excerpt

Legislative Anti-Corruption Reference: South Africa

As reference for AAF’s readership, below is a summary of the anti-corruption / anti-bribery / anti-fraud laws enacted in (or, in the case of international treaties, ratified by) the Republic of South Africa:

  1. – The Public Service Act, 1994 (Proclamation No. 103 of 1994)
  2. – The Public Protector Act, 1994 (Act No. 23 of 1994)
  3. – The Intelligence Services Control Act, 1994 (Act No. 40 of 1994)
  4. – The Special Investigating Units and Special Tribunals Act, 1996 (Act No. 74 of 1996)
  5. – The International Cooperation in Criminal Matters Act, 1996 (Act No. 75 of 1996)
  6. – The National Prosecuting Authority Act, 1998 (Act No. 32 of 1998)
  7. – The Criminal Law Amendment Act, 1997 (Act No. 105 of 1997)
  8. – The Executive Members Ethics Act, 1998 (Act No. 82 of 1998)
  9. – The Witness Protection Act, 1998 (Act No. 112 of 1998)
  10. – The Prevention of Organised Crime Act, 1998 (Act No. 121 of 1998)
  11. – The Public Finance Management Act, 1999 (Act No.1 of 1999) and the Municipal Finance Management Act, 2003 (Act No. 56 of 2003)
  12. – The Promotion of Access to Information Act, 2000 (Act No. 2 of 2000)
  13. – The Protected Disclosure Act, 2000 (Act No. 26 of 2000)
  14. – The Financial Intelligence Centre Act, 2001 (Act No. 28 of 2001)
  15. – The Prevention and Combating of Corrupt Activities Act, 2004 (Act No. 12 of 2004)
  16. – The Income Tax Act, 1962 (Act No 58 of 1962)
  17. – The United Nations Convention against Corruption (UNCAC), including mutual legal and evidentiary assistance, and asset-recovery
  18. – The Southern African Development Community (SADC) Protocol against Corruption, a sub-regional anti-corruption treaty
  19. – The Organisation for Economic Co-operation and Development (OECD) Convention on Combating Bribery of Foreign Officials in International Business Transactions

Nigeria & South Africa: Two tales of anti-corruption enforcement


Nuhu Ribadu & the Scorpions: Setbacks and potential promises for anti-corruption efforts in Africa’s two largest economies

Two recent articles point to a convergence of missing or diminishing anti-corruption efforts in both South Africa and Nigeria.

For one, Nigeria’s former head of anti corruption Mr. Ribadu (whose high-provile 2012 report revealed that the country had lost tens of billions of dollars in oil and gas revenues due to illicit dealings between multinational oil companies and government officials) defected from the opposition All Progressives Congress (APC) to President Goodluck Jonathan’s ruling People’s Democratic Party (PDP).  This is a welcome development for President Jonathan, whose party has been plagued by allegations of bribery and corruption scandals.  It remains to be seen whether Mr. Ribadu’s move beckons a more docile and timid anti-corruption approach in Africa’s largest economy (by GDP), or whether – perhaps less likely so – he will remain the strong voice of the anti-bribery advocate that he has proven to be in his prior tenure.

In the Mail & Guardian piece, “Concourt justices: Where are SA’s corruption busters?”, Phillip De Wet writes about a similar state of lack of enforcement in South Africa: “Years after disbanding the Scorpions, courts are still grappling with the consequences. And the highest court seems unamused at the state of play,” says Mr. De Wet, writing about the hearing of the Constitutional Court on Tuesday in a case that brings to the fore the keenly felt absence of  the dedicated investigative unit tasked with ridding South Africa of corruption?  A key question is whether the police unit of the Hawks are capable of taking on the role that the felled Scorpion unit used to play.

“We don’t have a dedicated corruption-fighting unit,” chief justice Dikgang Moseneke declared.  The Hawks are seen as potentially weaker and less independent than the former Scorpions, as they remain within the police forces from an administrative standpoint: Advocate David Unterhalter (a friend of AAF and told the court on behalf of an amicus curiae, the Suzman Foundation, that the police minister has “a very very deep power to suspend without pay and then to dismiss” the head of the Hawks.  Judgment was reserved for now.

As to Mr. Ribadu’s parallel defection several thousand kilometers to the north, the World Bulletin writes as follows:

Former president Olusegun Obasanjo hired Ribadu as chairman of Nigeria’s Economic and Financial Crimes Commission (EFCC) from April 2003 to December 2007 and he earned a reputation for going after seeming untouchables in the fight against rampant corruption, even at risk to his own life…. “In terms of electorate Ribadu hasn’t got much influence, but he was seen as clean and anti-corruption”, which had benefited the opposition’s fight on an anti-graft ticket, Lagos-based consultancy 46-Parallels partner Kayode Akindele said.