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Here’s Why McKinsey Is Freezing a Big Chunk of Its Work in South Africa

The consulting giant McKinsey has suspended all its work for state-owned companies in South Africa, due to a corruption scandal involving state power company Eskom.

The New York-based firm is one of several global outfits to get caught up in the sprawling intrigue surrounding the Guptas, an Indian family that has extremely close ties to president Jacob Zuma. The Gupta brothers are seen by many as being at the nexus of South Africa’s “state capture” problem, as investigations in recent years have accused them of siphoning off state funds and enjoying extraordinary influence in the selection of senior ministers. The Guptas and Zuma deny any wrongdoing.

McKinsey’s role in this drama centered on arrangements it had with Eskom alongside the Gupta-linked financial services firm Trillian Capital Partners. In 2016 the creaky utility paid McKinsey and Trillian around 1.6 billion rand ($120 million), reports the investigative journalism group amaBhungane, of which 564 million rand went to Trillian for a so-called “turnaround program.”

A Trillian whistleblower claimed that international consultancies had to take on Trillian as a local partner in order to gain lucrative contracts, from which Trillian would get up to half the proceeds.

In a lengthy statement on Tuesday, McKinsey said it had completed an internal four-month investigation and had found that it had never served “any companies publicly linked to the Gupta family.” McKinsey said it had never had an official partnership with Trillian, although it worked alongside the firm for several months at Eskom, until Trillian failed a due diligence test “after repeatedly refusing to provide details about its ownership.”

Several McKinsey staff have now left the firm, it said, including senior partner Vikas Sagar. Nonetheless, although the investigation unearthed “violations of our professional standards,” McKinsey global chief risk officer Tom Barkin said the company had not been “involved in any acts of bribery or corruption.”

“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,” Barkin said. The statement also asserted that “McKinsey did not introduce Trillian to Eskom nor vice versa.”

Apart from suspending all its work with state-owned companies in South Africa “until further notice,” McKinsey also said it was working to strengthen governance in its South African office, and would no longer work with supplier development partners “until due diligence is complete and a contract is signed.”

South African anti-bribery group Corruption Watch said last month that it would lay charges against McKinsey in the U.S. under the Foreign Corrupt Practices Act. And Eskom, now under new management, last week demanded that McKinsey and Trillian pay back the fees they took in 2016 and 2017. The utility said the payments had been unlawful.

McKinsey says it has set aside its full fee for repayment, though it will only return the cash if the High Court reviews the validity of the contract and finds it unlawful—something no-one has actually asked the court to do yet.

Last month auditor KMPG cleared out its South African leadership over a separate scandal that also involved the Guptas. Outrage over work performed for the family also led to the demise of public relations giant Bell Pottinger.

This article has been updated to note that Vikas Sagar was a senior partner with McKinsey, not its South African head as incorrectly stated.