McKinsey apologizes for errors in South Africa corruption scandal

Geoffrey York / Globe and Mail

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Global consulting firm McKinsey & Co., headed by a top adviser to Finance Minister Bill Morneau, has apologized for “errors of judgment” in its business dealings with corruption-tainted firms in South Africa.

The company admits it might have to give back $78-million (U.S.) in controversial payments from Eskom, the South African electricity monopoly, which is facing a parliamentary inquiry for its close connections to the Gupta brothers, the business family at the heart of the South African corruption scandal.

“We are sorry for the distress this matter has caused the people of South Africa, our clients, colleagues, alumni and others,” said a statement on Tuesday by McKinsey’s global managing partner, Dominic Barton, a Canadian who heads Mr. Morneau’s council of economic advisers.

“We deplore corruption, and we will co-operate fully with relevant authorities and any official inquiries and investigations into these matters,” Mr. Barton said.

“We acknowledge that there are more than just legal issues at stake…We are taking a hard look at all of our practices in the country to ensure that we are not just compliant with the law and free of any form of corruption, but also that we are seen as a constructive partner in building a better future for South Africa.”

McKinsey is just the latest global company to suffer heavy damage for its dealings with Gupta-linked companies. Auditing firm KPMG and public-relations firm Bell Pottinger have both been embroiled in the Gupta controversy. Both have lost clients and dismissed top executives because of the scandal, and Bell Pottinger was expelled from an industry association and has gone into a form of creditor protection in Britain.

The Gupta brothers, who control a sprawling empire of mining, financial, media and information technology companies, are close allies of South African President Jacob Zuma and have a business partnership with Mr. Zuma’s son, Duduzane.

An investigation by a South African ombudsman last year found that the Guptas were so powerful that they wielded heavy influence over state-owned companies and even controlled some cabinet appointments.

After reviewing 2.4 million e-mails and conducting more than 60 interviews, McKinsey’s internal investigation found violations of professional standards and disciplinary issues, the company said on Tuesday. It confirmed that several of its executives have been sanctioned or left the firm.

McKinsey also promised to suspend any business deals with South Africa’s state-owned companies until there is “greater transparency” and careful review of these deals.

One of McKinsey’s biggest errors was its relationship with Trillian, a controversial company controlled by a Gupta associate. “We should not have started working alongside Trillian in December 2015 before we completed our due diligence,” the company said.

McKinsey worked with Trillian for several months, and Eskom paid a stunning total of about $120-million to McKinsey and Trillian for a few months of advisory work.

McKinsey insists that Trillian “withheld information” about its “connections to a Gupta family associate.” But it also acknowledged its own errors. “We were not careful enough about who we associated with, did not understand fully the agendas at play, and should not have worked alongside Trillian, even for a few months, before completing our due diligence,” said a statement by Tom Barkin, McKinsey’s global chief risk officer.

“We are embarrassed by these failings, and we apologize to the people of South Africa.”

In another of its admitted errors, a McKinsey partner sent a letter to Eskom in February, 2016, telling Eskom to pay a Trillian invoice because Trillian was a McKinsey subcontractor. The letter was inaccurate and “insufficiently reviewed,” McKinsey says.

Earlier this month, Eskom demanded that McKinsey repay the $78-million that it received from Eskom over the past two years, since the payment was “unlawful.” The huge size of the payment has triggered protests and demonstrations in South Africa, where there is widespread concern that state-owned companies are being looted by corrupt insiders.

South African media have reported that Eskom’s payments to McKinsey would have been much smaller if Eskom had not violated its legal advice and Treasury rules on how to calculate its payments to consultants.

In its statement on Tuesday, McKinsey promised to support a court review of the validity of its contract with Eskom.

“In the expectation it will be repaid, we have already set aside the full fee McKinsey earned … in a ring-fenced account, ready to comply with the court’s decision,” McKinsey said.

“McKinsey will back the fee in full if the court determines Eskom acted unlawfully.”