Deja Vu all over again — Yogi Berra

Yogi Berra said it best — we have seen this scenario before, with similar parties — corrupt foreign officials from Eskom (and Transnet), local partner requirements resulting in engagement of unqualified businesses, and corrupt third parties who assist the bribery scheme in exchange for a cut of the action.  This is a familiar set of facts, and was on full display in the ABB and SAP cases brought late last year and early this year, respectively.

Third Parties

The red flags and warning signs in the Transnet scheme were evident from the beginning.  Starting with foreign official 1’s introduction of company 1 and CC 1 in the Transnet scheme reflected the virtual certainty that bribes would be paid to secure contracts from Transnet at the behest of foreign official 1.

Equally problematic was  the injection of company 2 into the Eskom bribery scheme and its failure to satisfy McKinsey’s due diligence requirements. McKinsey engaged company 2 and CC 2 without satisfying due diligence requirements.  Even when rejected, McKinsey continued to rely on company 2 for several months after its due diligence rejection. 

Both of these infirmities underscore the complete absence of a meaningful due diligence process and the lack of enforcement of McKinsey’s risk management controls.  All too often we observe companies engaging suspect third parties without satisfying basic due diligence requirements.  It is essential that any engagement of a third party cannot occur unless and until the prospective third party has successfully completed the due diligence process.

Even with this major problem, McKinsey apparently had no meaningful controls to monitor third-party activity, to ensure that Sagr, McKinsey’s senior official, was adhering to third-party controls and no improper payments were made.

Contract Competition

The McKinsey case stands as a poster child for the need for robust controls and oversight of contract competitions and awards, especially when such contracts are worth hundreds of millions of dollars. McKinsey’s bidding and competitive efforts were executed under the singular eye of Sagr, a corrupt executive who eventually plead guilty to an FCPA offense. 

In the absence of such controls, a company can be corrupted through the actions of a single or small, number of executives.  If subject to such controls, requiring review of all bids by an internal tender committee, consisting of representatives from business, marketing, legal and compliance officials.  The purpose of the tender committee is to review, monitor and ensure that the company competes fairly and transparently.

Local Partners

Companies face a unique set of risks when subjected to local partnership requirements in various foreign countries.  This is especially prevalent in the oil and gas and defense industries, where foreign governments face public pressure to ensure that some of the financial benefits are shared with local companies.

In the face of this significant requirement and corresponding risk, companies have to increase their vigilance to protect against entanglements with local businesses with corrupt ties to government officials.  In many cases, the identified local partner lacks sufficient qualifications to assist the company and has tangible ties to key government officials.