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Background screenings, Lifestyle Assessments and the difference between the two

Read Time: 6 minutes

In our previous article, we spoke about Lifestyle Assessments, why they are considered necessary and whether or not they are effective. In this blog, we are looking at background Screenings, considering the need for them, and how they differ from Lifestyle Assessments.

What is a Background Screening?

 Very simply, background screening is a process undertaken by a company to verify that an individual is who they claim to be.

This in turn provides the company with an opportunity to investigate activities from the individual’s past, including, but not limited to, education, employment history and criminal record.

Not only are these screening expected to verify information, but they also aim to uncover character flaws and criminal tendencies that might jeopardize the employer, tarnish its reputation, endanger staff, or limit the effectiveness of the candidate. Screening is often done to determine if employees can be trusted to manage financial resources or protect sensitive or confidential information.

There is no standard or level of tests to be used in a background screening exercise. The level of tests can be extensive and are often designed in conversation with an employer to highlight specific areas of concern that the employer may have related to their circumstances or industry norms.

The list of what can looked at during a background verification assessment is extensive, and while most are common amongst employers, others may be more specifically related to the position that is being applied for. Below are some of the things that could be looked at during the process of a background assessment.

  • Criminal History:
    Many countries have specific laws that dictate how a criminal record enquiry can be used to evaluate a person’s employment application.
  • Social security or identity number:
    Usually, these details are verified as being correct then are used as the primary identifier for a candidate in credit or criminal record enquiries.
  • Drug and substance testing:
    Drug testing has become a common practice to ascertain the trustworthiness of prospective employees, to avoid workplace injuries, and ensure that new hires will be productive employees.
  • Polygraph testing:
    Truth verification testing is used in the process for obtaining a security clearance certificate and often in forensic investigations.
  • Medical Assessments:
    These tests are quite common with professional sports persons and are now more frequently used in high profile appointments such as appointments to CEOs positions of global companies. They are used for employment purposes if they provide evidence that an injury would make it impossible for a candidate to carry out their duties.
  • Credit Scores:
    Many employers consider the credit status of candidates to determine if financial problems might impact their trustworthiness or be evidence of irresponsible behaviour.
  • Sex offender’s registry:
    Employers seek to avoid hiring individuals who might endanger staff or damage their reputation. This is a common test for positions working with young or vulnerable persons, such as schools or children’s organisations.
  • Driver’s license:
    Most often this type of screening will be done when employees utilize a motor vehicle to carry out their job responsibilities in areas like sales, delivery, and trucking.
  • Skill assessments:
    Some employers will administer tests to determine if applicants have the right skills or personality orientation to carry out a particular job. Tests may include multiple-choice instruments as well as assessments to evaluate manual dexterity, programming, editing, writing, spreadsheet, word processing, or other technical skills.
  • Resume or CV verification:
    Employers will often check each of the jobs listed on your resume and applications to make sure the job title, dates of employment, and other details are accurate.
  • Employment referees:
    Employers will usually ask for written recommendations and/or they will interview your references to assess your readiness to carry out the job for which you are applying.
  • Educational Qualification Verification:
    Employers will often want to verify your degree, major, and academic performance prior to finalizing a hire, especially for entry-level jobs.

The difference between background screening and lifestyle assessments?

While on the face of it, there may be some similarities between background screenings and lifestyle assessments, the objectives are different. In our experience, however, it is the similarities between the two that leads to companies believing one is as effective as the other. But from our research, it appears that companies doing background screenings seldom do any further evaluation of the individual once employed.

Background screenings look at variables that are unlikely to change, such as identification numbers, while looking at employment history and prior criminal activities are all retrospective acts and by and large are static infomration.

So, while they are necessary to identify possible risks, they serve little purpose after the fact, should the employee’s situation change and leave them open to corruption.

A lifestyle audit, meanwhile, has a different focus to that of pre-employment screening. It is a tool used to identify the future risks of a person being involved in fraud or corruption. The lifestyle assessment objectives are to:

  • Assess the employee’s lifestyle in relation to his/her income
  • Assess the employee’s involvement in possible fraud
  • Assess the financial stability of the employee
  • Examine the reasonable acquisition of any suspicious wealth assets in the employee’s possession
  • Provide assurance that the employer has paid for or acquired their wealth assets through legitimate means

By nature, a lifestyle assessment focuses less upon historic risk behaviour, but more closely upon the employee’s behaviour since commencing employment.

But as with background screenings, lifestyle assessments are usually done in the wake of a corruption scandal, while the company views it as a once-off, with little-to-no follow-up after the fact. It is therefore not a good tool to detect and prevent corruption should it not be used on a continuous basis.

So while there are differences between the two assessments, there are similarities, none more so than their deficiencies. For companies to truly detect and prevent corruption, they need an assessment that is continual and digs deeper than the current systems that are used. The circumstances of a business are never fixed and the same can be said for that of individuals. To manage this fluidity, you need a system that is able to keep abreast of the changes at all times.

Protect yourself

Corporate Insights has developed a one-of-a-kind modular system that combines TransUnion’s big data universe with our own artificial intelligence and smart logic algorithms. It enables you to continually monitor, detect, act on, and prevent critical risks, both internally and externally.

The Corporate Insights system will allow you to protect your business from succumbing to the typical pitfalls that lead to corruption. It also comes with a host of additional benefits to ensure your company continues to operate optimally, free of the threat of corruption.

Click here to book a demonstration or call us today to find out how you can transform your business.

Why detection systems fail to capture corruption

Read Time: 6 minutes

In previous blogs, we have highlighted a number of entities – both publicly and privately owned, local and international – that have fallen victim to or been implicated in corruption on a grand scale. The resultant fall-out has impacted on these institutions and companies in an incredibly negative manner, both in terms of financial and their public image.

McKinsey and Company, regarded as one of the world’s leading management consultancies, has done serious damage to its reputation after a number of high-profile corruption scandals linked to State Owned Enterprises like Eskom and Transnet, while the SOE’s themselves seem to be embroiled in never-ending scandals involving dodgy payments, improper procurement and more.

Other SOEs like South African Airways have also featured, with the highest echelons of South African government often stars in the show. This blog is not aimed at highlighting the corruption in the country, but rather look at why current detection system fail at capturing it.

Fighting after the fact

In most of the cases we have written about before, the SOE involved would later claim that the work delivered was either overpriced or sub-standard and it did not receive value for money. The SOE would then launch an investigation to determine what transpired and often the large international company contracted to do the job did likewise. Each report either looked to divide the blame or simply pointed the finger at the counterparty.

The next step, rather predictably, was once the law firm had concluded the investigation, a legal battle between the parties ensued. In most cases, the parties reached an out of court settlement and issued statements that conceded little in the terms of wrongdoing by either party. In some cases, the large international company paid back the fees earnt to the SOE, in part or in full, plus interest.

The results are costly, time-consuming and ultimately benefit neither party. In the case of SOE-related cases, however, the real victims are citizens of the country.

So how do companies protect themselves against the threat of corruption? It is clear that third party due diligence was not undertaken in a number of examples we have previously discussed, while in the case of McKinsey, they admitted to having relied upon what appear to be unsophisticated and very elementary compliance tests that would be undertaken by in-house compliance teams at the very beginning of a new business relationship before any contract is considered, let alone had been entered into.

What is the norm?

But what do other large companies say about third party due diligence? And what methods do they employ to protect the reputations of the companies they work for and the people that work in them?

The PriceWaterhouseCoopers survey of businesses in 2020, reported that

33% of the companies surveyed lack a robust Third-Party Due Diligence Risk Monitoring Program and as many as 24% of the companies surveyed reported having nothing in place at all. As much as 20% of the companies reported the risk of corruption having the greatest impact

What types of risks did the companies detect related to corruption by employees, customers, and suppliers? Surveys conducted by MIE and iFacts over the past five years, together with the PriceWaterhouseCoopers survey reported that:

  • 18% of Fraud was attributed to Suppliers
  • 15% of Fraud was attributed to Partners
  • 13% of Fraud was attributed to Consultants
  • 14% of Fraud was attributed to Employees
  • 10% of applicants had Criminal record or pending criminal record
  • 28% of applicants had misrepresented qualifications
  • 19% of applicants had a Poor credit record
  • 6% of applicants had a Fake ID
  • 21% of applicants had a Fake Driver’s license
  • 42% of companies did not conduct an investigation after Fraud had occurred
  • 72% of incidents were not disclosed to the auditors
  • 66% of incidents were not disclosed to regulators or SAPS
  • 59% of incidents were not disclosed to the board of directors

Detection and prevention before it’s too late

Business leaders that we surveyed expressed that where there was a need to undertake measures to prevent and detect corruption, there was often insufficient capacity within the company to undertake in-depth due diligence. Equally, we were told that they did not have the necessary due diligence tools within their current systems and resources. The people surveyed felt that the current systems were unable to detect wrongdoing or compliance programs were unnecessarily complex and getting more costly to maintain, despite an acknowledgment that reporting requirements were becoming tougher.

These are clear indications that although the systems detected some risks, in the case of the examples and surveys, business leaders do not know the extent to which their businesses are vulnerable to the risk of corruption as a result of several factors related to collecting and analysing the necessary data and possessing the necessary skills or tools.

What we do differently at Corporate Insights is that we conduct continual Third-Party Due Diligence assessments, quickly, affordably, and consistently and provide insights as to where there are anomalies or risks against multiple risk criteria.

The variables included in our calculation include such risk areas as vendor identity verification, level of financial stability, indications of fraud, etc that are conducted by our systems on a continual basis to pick up patterns and trends and report them to you.  Our Third-Party Due Diligence is a deep dive aimed at picking up the threat of corruption before it occurs, it is continuous and not a one-off assessment, meaning better protection for your company. One-off assessments have the risk of being quickly out of date and irrelevant, allowing corruption to slip through the cracks, leading to costly audits and damage to a company’s reputation – the latter arguably more problematic to your company.

Protect yourself

Corporate Insights has developed a one-of-a-kind modular system that combines TransUnion’s big data universe with our own artificial intelligence and smart logic algorithms. It enables you to continually monitor, detect, act on, and prevent critical risks, both internally and externally.

The Corporate Insights system will allow you to protect your business from succumbing to the typical pitfalls that lead to corruption. It also comes with a host of additional benefits to ensure your company continues to operate optimally, free of the threat of corruption.

Click here to book a demonstration or call us today to find out how you can transform your business.

1

The Zondo Commission – will it change anything?

Read Time: 6 minutes

There are few people living in South Africa that have not heard at the very least a passing reference to the Zondo Commission of Inquiry; it has had a significant impact on the country’s psyche since it began in 2018. The commission has further highlighted the plight of corrupt practices within the upper echelons of South African government and the ongoing testimonies continues will undoubtedly continue to do so.

Proclaimed by former president Jacob Zuma in January 2018 to “investigate allegations of State Capture, Corruption, Fraud and other allegations in the Public Sector including Organs of State” within South Africa, the bulk of the testimonies to date, ironically, has focused on allegations of corruption during the administration of Jacob Zuma.

Accusations to date have, unsurprisingly, have detailed allegations of state capture by the controversial Gupta brothers. These have ranged from the running of their media enterprises and contracts that Gupta-associated companies received from state owned companies to the ‘Guptagate’ Waterkloof Airforce base incident.

Other incidents to arise relate to:

  • Corruption and maladministration at the Vrede Dairy Project/Estina
  • Issues relating to lobbying to protect the pay-tv monopoly of MultiChoice.
  • Accusations of maladministration and corruption at:
    • National rail monopoly and state-owned enterprise Transnet.
    • Passenger Rail Agency of South Africa.
    • Law enforcement agencies.
    • National energy utility Eskom.
    • South African Broadcasting Corporation.
    • State owned defence contractor Denel.
    • Former chairperson of South African Airways, Dudu Myeni.

Driving the issues in the rear-view mirror

The hits, of course, keep on coming and will do for months to come, further emphasizing the needs for systems that combat corruption ahead of time, not only after the fact. As we have discussed in previous articles on this blog, State Capture has already cost this country billions of Rands (with some estimates in the trillions).And while the commission is doing good work in uncovering the gross corruption at State level, it is not a mechanism to ultimately prevent and detect corruption.

Other means commonly applied to root out corruption has been forensic investigations, which is something we have become very accustomed to in this country. It is fair to say that in South Africa, there is rarely a day that passes without a media report detailing a forensic investigation that has been undertaken by a company into allegations of wrongdoing.

It is fair to say that in South Africa, there is rarely a day that passes without a media report detailing a forensic investigation that has been undertaken by a company into allegations of wrongdoing.

A forensic investigation is the practice of lawfully establishing evidence and facts that are to be presented in a court of law. The term is used for nearly all investigations, ranging from cases of financial fraud to murder. It is a costly operation and leaves a lasting stain on the business involved.

From our experience, the cost of a forensic investigation is between 10% and 15% of the loss involved. So, for a loss of R100 million, an investigation that takes about 6 to 12 months to complete may cost the company instructing the investigative team a fee between R10 million and R15 million.

Importantly, while necessary to undertake, a forensic investigation is driving the issues in the rear-view mirror. Any action resulting from an investigation, no matter how worthy, is retrospective. Given that the framework detects the critical issues in the examples that we have cited, at a fraction of the cost of an investigation, who would not want to save the costs of an investigation and apply them towards growing their business and brand?

A key deliverable of forensic investigations is to identify and report evidence related to a crime and come to a conclusion about a suspect. The scope of the investigation is usually limited to one or several suspects and one or several groups of transactions. They do not and cannot provide a 360 view of the risk of corruption to the extent to which a business is vulnerable to it. Albeit an investigation may make recommendations for improvement in the control environment, it is not a tool that will predict or monitor risk before the risks manifest themselves.

From our experience, the cost of a forensic investigation is between 10% and 15% of the loss involved. So, for a loss of R100 million, an investigation that takes about 6 to 12 months to complete may cost the company instructing the investigative team a fee between R10 million and R15 million.

Additionally, investigations are intrusive. Investigators spend long periods of time inside an organisation, undertake their duties and tasks confidentially without sharing their findings, for obvious reasons. All these events can lead to suspicion and retrospection within the organisation and take focus away from the key task of a business – growth.

Equally, a report is not a finding of a court of law. Companies have a responsibility to be circumspect not to defame a third party. Sometimes, the reports will form part of a legal process, which means that public disclosure may be embargoed until the report is placed before a judge.

Very occasionally, companies hide behind the veil of legal action because it would be too damaging to them to release the contents of a report. Is this a prevention mechanism?

Will it have a real-world impact?

In short, is investigating after the fact going to fix the damage already done? On the evidence above, we would argue no. To date, nobody has been held to any real account. No damages have been repaid, none of those implicated have been punished, while others continue to sidestep the commission entirely.

The Zondo Commission is a positive step towards assigning some sort of culpability, and revealing the depths to which those we put out trust in have sunk, but in many ways the damage is already done, with huge financial losses and, perhaps more worrying, significant reputational damage to the country.

The Zondo Commission is a positive step towards assigning some sort of culpability, and revealing the depths to which those we put out trust in have sunk, but in many ways the damage is already done, with huge financial losses and, perhaps more worrying, significant reputational damage to the country.

Time, of course, will tell. The commission has yet to run its full course, but unless real action is taken, it may be consigned to the list of inquiries that have done nothing but pay lip service to the ideals of fighting corruption in South Africa.

Protect yourself

Corporate Insights has developed a one-of-a-kind modular system that combines TransUnion’s big data universe with our own artificial intelligence and smart logic algorithms. It enables you to continually monitor, detect, act on, and prevent critical risks, both internally and externally.

The Corporate Insights system will allow you to protect your business from succumbing to the typical pitfalls that lead to corruption. It also comes with a host of additional benefits to ensure your company continues to operate optimally, free of the threat of corruption.

Click here to book a demonstration or call us today to find out how you can transform your business.

Corruption scandals that have rocked South Africa

Read Time: 9 minutes

South Africa has certainly faced its share of high-profile scandals, some of which we have covered in other blogs, which can be found here. Below we profile some of the bigger cases in the country, and with some still playing out in front of various commissions and inquiries, there is no doubt, there is still more to come.

Bain & Co.

The Backstory

Looking to win work from the public sector in South Africa Bain & Co – one of the world’s leading management consulting companies – had its managing director in sub Saharan Africa Vittorio Massone meet with Tom Moyane months before his “surprise” appointment as Commissioner at SARS in September 2014. Massone and his team spent several days — tens of billable hours — for a man without an official government position and ostensibly no political power.

The Outcome

Bain & Co. worked on three projects for SARS, to the tune of almost R204 million – including one project that had cost R151 million and another that cost R50 million –after being awarded the tender. The bidding process was later questioned, with a number of irregularities to be found.

The SARS tender opened on December 12, 2014 and closed on December 18, 2014. PwC, one of the bidders, pulled out of the process as the time frames were “unrealistic”, according to National Treasury procurement official Solly Tshitangano, who appeared at the Commission of Inquiry testified that only “clever” bidders would be able to respond to a tender that was only open for six days.

National Treasury procurement official Solly Tshitangano, who appeared at the Commission of Inquiry testified that only “clever” bidders would be able to respond to a tender that was only open for six days.

Senior SARS officials told the Commission they felt Bain & Co entered into these interviews with a preconceived idea of what needed to be done, that the interviews were inadequate and without depth, while being conducted by junior staffers that had no knowledge about SARS or taxation. These officials would testify that Bain & Co’s operating model made “no business sense”, but that it was clear to them certain senior officials were targeted by Moyane and his henchmen.

The Result

A massive R50 billion revenue collection shortfall for 2017-18 — a factor that impacts every South African, but especially the poor, in ways that have a direct material impact on their lives.

The Nugent Commission reported: “We think what occurred can fairly be described as a premeditated offensive against SARS, strategized by the local office of Bain & Company Inc, located in Boston, for Mr Moyane to seize SARS, each in pursuit of their own interests that were symbiotic, but not altogether the same. Mr Moyane’s interest was to take control of SARS. Bain’s interest was to make money.”

South African Airways

The Backstory

BnP Capital won a bid by South African Airways to raise capital to consolidate the struggling State-Owned airline’s debt. BnP would work for a fee of R260 million. It was later discovered that the Financial Services Board had suspended the company’s licence to operate as a financial services provider, a fact that will have rendered any contract with it illegal.

The Outcome

Following media reports detailing the dodgy deal, there was a public outcry, the deal was cancelled, executives Musa Zwane and PhumezaNhantsi were suspended for their roles in the deal, and an independent disciplinary hearing led by Nazeer Cassim SC.

The pair would be found guilty of gross financial misconduct, negligence and dishonesty.

“The quantum leap in BnP’s appointment as transaction adviser for a fee of R2.6 million to a staggering R250 million  a month or so later, this was a jump of almost 10 000% a truly eye watering increase and without compliance to any credible procurement process is bizarre in the circumstance and has the hallmarks of corrupt activity,” said Cassim in a scathing report.

“Both of them knew the money was not payable. There is no legal basis to make this payment to BnP. This is a clear sham and the two knowingly participated in a scheme to procure payment for BnP when the company was not entitled to it.”

“Both of them knew the money was not payable. There is no legal basis to make this payment to BnP. This is a clear sham and the two knowingly participated in a scheme to procure payment for BnP when the company was not entitled to it.”

The Result

Before the Zondo commission, BnP Capital director Daniel Mahlangu stated he did not know his company flouted tender regulations and was working with former SAA chairperson Dudu Myeni’s adviser when it won the tender.

An application was successfully bought before the courts seeking to find former SAA chairperson, Dudu Myeni a delinquent director and the judgement’s findings were referred to the National Prosecuting Authority for consideration during May 2020.

A North Gauteng High Court Judge declared her a delinquent director and referred the findings to the National Prosecuting Authority (NPA) for a decision on a criminal prosecution. Myeni delivered a stinging rebuke and questioned the findings.

Vodacom and the free State govt

The Backstory

A Daily Maverick report claimed that South Africa’s largest mobile phone network operator, Vodacom, “gifted lucrative partnership deals to companies linked to politician Ace Magashule” in relation to voice and data contracts Vodacom scored from provincial government departments in the Free State. One of the deals has subsequently been reported to the Zondo Commission of Inquiry.

The Outcome

The media reported that Vodacom signed the first of two dubious partnership agreements with Free State businesses in 2014 after Magashule met with Vodacom CEO Shameel Joosub in Cape Town to discuss the cell phone giant’s commitment to “BEE procurement and local empowerment”.

Later that year, in a letter to Magashule, Joosub vowed that Vodacom would divert nearly R600-million to emerging companies in the Free State and the Northern Cape. Vodacom later partnered with Marangrang IT, a company with strong links to Magashule and the ANC, while Vodacom won the Free State’s voice and data tender.

A similar partnership with Supana Technologies, another entity linked to Magashule, came about in 2017 after Vodacom had won the government’s massive transversal contract for cell phone services. The National Treasury’s RT15-2016 transversal contract all but guaranteed that Vodacom would clinch contracts from national and provincial government departments and stood to bring in estimated revenues of around R5-billion.

The Result

Thanks to their association with Vodacom, Marangrang IT and Supana Technologies are said to have earned at least R20-million in commissions and other revenues as a direct result of the contracts Vodacom secured from the Free State provincial government. Some of Vodacom’s other BEE partners in the province claimed the cell phone firm side-lined them to make way for Marangrang IT and Supana Technologies.

When one of these partners queried Vodacom’s actions, Vodacom employees allegedly told him that they were under “political pressure” from Magashule. Vodacom’s dealings with Supana Technologies triggered an internal investigation that eventually saw the cell phone giant report details on some of its dealings in the province to the Zondo Commission.

The cell phone giant has been tight-lipped about the report’s findings.

Vodacom, “gifted lucrative partnership deals to companies linked to politician Ace Magashule” in relation to voice and data contracts Vodacom scored from provincial government departments in the Free State.

Prasa and Swifamba locomotives

The Backstory

Novice BEE Swifambo Locomotive was awarded the tender to provide a fleet of new locomotives to PRASA. The State Owned Enterprise would pay R2.6 billion for the locomotives, but once delivered, it was discovered they were too tall for the South African rail network and therefore useless.

The Outcome

The Prasa board led by Popo Molefe, went to court in 2015 to have the tender set aside, pitting Molefe against former CEO Lucky Montana. It was argued by PRASA, that despite paying R2.6 billion, the full complement of locomotives was not delivered – 13 of 70 were received – and those that were delivered, were “gathering dust”.

Judge Ellem Jacob found that Swifambo was nothing more than a willing and criminal front for the international rail company VosslohEspaña, recently bought by Stadler Rail. The judge found there was sufficient evidence that proved Swifambo was merely a “token participant that received monetary compensation in exchange for the use of its B-BBEE rating. Vossloh could not bid on its own. Instead it concluded an agreement with Swifambo in which its B-BBEE points were exchanged for money”.

The Result

According to a report in the Daily Maverick, almost R500-million from the failed contract disappeared into a web of private accounts, trusts and companies controlled by or linked to the main role-players in one of South Africa’s largest tender scandals to date.

After review, the South Gauteng High Court set aside the contract for the supply of locomotives. The Constitutional Court later dismissed the application brought by Swifambo for leave to appeal an earlier Supreme Court of Appeal (SCA) decision not to reinstate the contract. Swifambo Rail Leasing is facing liquidation.

The list goes on

For more information on these cases, the history of corruption, both globally and local, and ways to protect against it, download a copy of our E-book, which along with local case studies, looks at global cases and the legacies they have left. It also presents you with all the information at hand to better detect and fight corruption within your business.

Protect yourself

Corporate Insights has developed a one-of-a-kind modular system that combines TransUnion’s big data universe with our own artificial intelligence and smart logic algorithms. It enables you to continually monitor, detect, act on, and prevent critical risks, both internally and externally.

The Corporate Insights system will allow you to protect your business from succumbing to the typical pitfalls that lead to corruption. It also comes with a host of additional benefits to ensure your company continues to operate optimally, free of the threat of corruption.

Click here to book a demonstration or call us today to find out how you can transform your business.

McKinsey and the company they kept

Read Time: 7 minutes

Regarded as one of the world’s leading management consultancies – and self-described as a “trusted advisor and counsellor to many of the world’s most influential businesses and institutions” – McKinsey & Company are also plagued by allegations of corruption and the company they keep, with names likes the Guptas closely associated with them.

In a South African context, McKinsey & Company has been implicated in corruption scandals linked to State Owned Enterprises like Eskom and Transnet.

McKinsey and Eskom

The Backstory

 A report by Open Secrets details that McKinsey entered into a contract with Eskom to develop an internal project management and engineering capacity.

 The contract, however, was not subject to a bid procedure, as is required by basic public procurement procedures. The contract had the potential to earn McKinsey US$700 million (R9 billion) by its conclusion and was the firm’s biggest ever contract in Africa. Despite objections by some at the firm, the contract was supported by several of McKinsey’s senior partners globally, including Yermolai Solzhenitsyn and Thomas Vahlenkamp.

The Outcome

 After entering into the contract, McKinsey was required to partner with a BBBEE supplier. Presented with a list of potential companies, the firm went with Trillian, a company closely associated with the controversial Gupta family. Trillian, of course, was the brainchild of one Mr Wood and Mr Essa, both having very close links to the Guptas. This closeness was what inspired them to set up Trillian to aggressively trade and by 2019 pull out at the end of former South African president Jacob Zuma’s term. After arriving in Trillian’s accounts, the Eskom money was quickly spirited off to various consultancies and shell companies. For example, on August 13, 2016, Trillian got R235million from Eskom. Within five days, R221million of that had been dispersed. On August 12, Trillian had just R8900 in that account.

The Result

 Following an investigation launched by the then-chairman of Trillian, Tokyo Sexwale, McKinsey claimed that they had entered into a contract with Trillian before completing the requisite “due diligence” checks. These checks involved investigating the beneficial ownership of Trillian before entering any contract with the company.

In response to the Open Secrets report on the matter, McKinsey claimed to have returned the full amounts it received under the Turnaround Programme, with interest, to Eskom in 2018. The settlement agreement that effectuated this provides that the return of the funds was made “without any admission of liability or wrongdoing by McKinsey”. In doing so, McKinsey has repeatedly emphasized that it returned the fees, not because it engaged in any misconduct, but despite being misled, McKinsey “had no intention of benefitting from a contract that was invalid due to Eskom failing to obtain appropriate approvals and follow proper procurement procedures.”

Mckinsey and Transnet

 The Backstory

 McKinsey& Company was hired by another SOE, Transnet this time, to advise on the purchase of 1064 locomotives from the Chinese railways company. Bidders were requested to partner with a local, smaller BBBEE company for skills development and capacity building.

The Outcome

As per the contract, McKinsey was responsible for:

  • Developing and augmenting the business case for the approval of the locomotives by the Transnet Board of Directors and Department of Public Enterprises
  • Calculating the impact of wagons, locomotives infrastructure, optimisation, profitability of each sector and clear capital volume link
  • Procurement and legal work, which included “Supplier Development and Localisation strategy”
  • Overseeing technical and operations aspects of the 1064 business case

As with the Eskom contract, McKinsey partnered with a company associated with the Gupats, this time Regiments Capital, which already stood accused of money laundering with a number of Gupta family associated entities such as The New Age media company and the Transnet Second Defined Benefit Pension Fund.

The McKinsey/Regiments business case presented to the board of Transnet was altered (by someone who has not been identified) to inflate the value from R38 billion to R54.5 billion. The business case recommended two parcels of locomotives to provide an accelerated delivery schedule.

Werksmans law firm was appointed to investigate any wrongdoing and their report gave a damning opinion of the business case submitted, as well as the calculations supplied by Regiments to support it. In his report, Professor Wainer stated “It would not be an overstatement to describe the Regiments calculations as absurd, obviously wrong and grossly misleading.”

The Result

Multiple reports in the media detailed serious allegations of corruption by the firm. The Mail & Guardian newspaper reported that a “…new forensic treasury report shows how controversial former Transnet and Eskom Chief Financial Officer Anoj Singh enjoyed overseas trips at the expense of international consulting firm McKinsey, which scored multi-billion-rand contracts at the State Owned Entities.”  The report reiterates treasury’s recommendations that Singh’s conduct with regards to McKinsey should be referred to the elite crime-fighting unit, the Hawks, for investigations under the Prevention and Combating of Corrupt Activities Act (PRECCA).

The Sunday City Press, meanwhile, reported that the forensic report in turn reported that “multinational advisory firm McKinsey paid for Singh to go on lavish international trips to Dubai, Russia, Germany and the UK, after which their contract with Transnet was massively extended.”

McKinsey would later issue a statement stating that “based on an extensive review encompassing interviews, email records and expense documents, our understanding is that McKinsey did not pay for Mr. Singh’s airfare and hotel lodgings in connection with the CFO Forum and the meetings that took place around the CFO Forum in London and elsewhere in 2012 and 2013.”

Foul play at work

In early August 2018, however, McKinsey admitted to helping Transnet Group Chief Executive Siyabonga Gama prepare a part of his thesis to obtain an MBA degree from TRIUM, a collaborative MBA programme jointly run by the NYU Stern School of Business, the London School of Economics and Political Science and HEC School of Management. Several researchers at McKinsey’s Johannesburg office were assigned to help outline and prepare Gama’s submission to a joint thesis to which he had to contribute at least two chapters.

Despite multiple earlier denials that any corrupt activities had been discovered, a McKinsey’s spokesperson said “… we believe this matter passed the threshold of reasonable suspicion that an offence may have occurred under South African law. As such, we reported it last year to relevant authorities under Section 34(1) of PRECCA.”

The end results

 While McKinsey & Company has been implicated in two of the most infamous cases of State Capture in South Africa, they have not been held accountable, nor have they taken any real responsibility for the role they played. Considered the largest Management Consulting Firm in the world, that, according to a Daily Maverick report, boasted a total annual global revenue of over $10 billion in 2018. Yet, to date, they have faced no real fallout, apart from the stain these cases have left on their reputation. But is that enough?

Want to know more?

For more information on State Capture in South Africa, and the role the Guptas and others are alleged to have played, download a copy of our E-book, which along with local case studies, looks at global cases and the legacies they have left. It also presents you with all the information at hand to better detect and fight corruption within your business.

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