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JOHANNESBURG — South Africa’s breakneck speed news cycle can be fertile ground for spin doctoring. Yesterday, we witnessed just one such example with Transnet. The state-owned rail company, along with energy utility Eskom, finds itself at the epicentre of state-capture claims. A whistleblower recently told BizNews how consultancy firm McKinsey worked with Gupta-linked Regiments Capital at Transnet. The whistleblower joined the dots when McKinsey and Trillian (a company comprising of former Regiments staff) were accused of ripping millions of rands from energy utility Eskom. In July, amaBhungane also reported that SAP had tapped a Gupta-linked company called CAD House to win a lucrative contract with Transnet. The key questions around the amaBhungane story have always centred on what Gupta-linked companies did exactly to ensure that SAP won state business with Transnet. Did Gupta-linked CAD House, for example, pay Transnet employees bribes? Transnet, though, has turned SAP’s statement on its head and I’ll explain why below in my deconstruction of the rail company’s spin… – Gareth van Zyl
Firstly, let’s go back to July 2017 when amaBhungane reported the following in a bombshell expose regarding SAP – a story that stemmed from the Gupta email leaks on 11 July 2017:
AmaBhungane and Scorpio can reveal that in August 2015, SAP signed a “sales commission agreement” with a small Gupta-controlled company that specialises in selling 3D printers.
The terms suggest a thinly disguised kickback arrangement: If the Gupta company were the “effective cause” of SAP landing a Transnet contract worth R100-million or more, it would get 10%.
In the year to follow, SAP paid the company, CAD House, a whopping R99.9-million, suggesting SAP used the Gupta influence network to drive sales of a billion rand to Transnet and other state-owned companies.
SAP denies it paid kickbacks or was party to laundering the payments, arguing that CAD House had “the necessary skills in terms of positioning our solution” and was paid a sales commission for acting as “an extension of the sales force”.
But there are factors suggesting that SAP’s denial does not hold water: There is no evidence that CAD House had any experience marketing or selling SAP software. And CAD House appears to have been used as a front, both to distance the transaction from the Guptas and to launder the proceeds to them.
The story would send shockwaves through SAP with its South African MD, Brett Parker, at first vehemently denying the allegation and stopping short of threatening the media with legal action on July 12, 2017. But SAP then suspended Parker, along with three other South African managers, on July 13 and launched a probe into the matter. What we now know from yesterday’s SAP press conference is that SAP also approached the US Department of Justice (DoJ) and the Securities Exchange Commission with what is a voluntary disclosure over their Gupta links on the same day, July 13.
Breaking down its work for Eskom and Transnet and the links to Gupta front companies, here’s what SAP had to say yesterday in its statement. SAP said that none of its own employees has been found to have paid bribes to win Transnet or Eskom business. The investigation is also still ongoing, meaning that a possibility still exists of more revelations emerging – it’s not possible then, as of yet, to rule out bribes paid by a Gupta-linked company to Transnet:
To date, the investigation has not revealed any evidence of a payment to a South African government official, including Transnet and Eskom employees. It has, however, uncovered indications of misconduct in issues relating to the management of Gupta-related third parties. To this end, SAP has instituted formal disciplinary proceedings, in accordance with South African labour law, against three employees who were placed on administrative leave at the beginning of the investigation. SAP has been clear from the outset that it will not tolerate misconduct or wrongdoing.
Clarifying the scope of the investigation so far, SAP executive Adaire Fox-Martin had this to say in yesterday’s press briefing, highlighting that no SAP employee had, so far, been found to have directly bribed a Transnet or Eskom official. But again, this leaves the door open for the possibility that a Gupta-linked company could have paid a bribe to win its commission, with or without SAP’s knowledge:
When we spoke as a group of media to you in July, you said that at the time, SAP still rejects the allegations. If that’s still true, do you still reject the allegations and perhaps, if you do, you can just elaborate on what you’re actually saying this misconduct is because I think that could be interpreted quite broadly.
That’s a great question, thank you very much for allowing me the opportunity to clarify. As I’ve indicated, to date our investigation has uncovered no evidence that any SAP employee paid a South African official, or for that matter an employee of Transnet or Eskom, or attempted to improperly influence any of those parties.
Adding to its statement regarding the contracts with Transnet and Eskom, SAP says the following regarding a probe being done by law firm Baker McKenzie:
Baker McKenzie initially focused its investigation on SAP’s contracts with Transnet and Eskom, and this part of the investigation will conclude by the end of 2017. Following a data analytics search of 8.4 million documents, the law firm has completed a first-level review of 131,609 documents, and a second level review of 52,985 documents. Baker McKenzie has conducted numerous interviews. SAP has also invoked its third-party audit rights with entities understood to be Gupta-related – and these audits are in the early stages.
Baker McKenzie has been contracted by SAP to continue to investigate the public-sector business in South Africa going back to 2010. To date the investigation has determined that, between December 2014 and November 2016, SAP concluded two contracts for the sale of software to Transnet and two contracts for the sale of software to Eskom, each with the assistance of an entity currently understood to have been Gupta-related.
In connection with these four contracts, SAP provided software and received revenue totaling approximately R660 million (approximately $48 million), and paid commissions to entities currently understood to be Gupta-related totalling approximately R94 million (approximately $6.8 million). The amounts actually paid to the third parties totaled approximately R107 million (approximately $7.7 million) because, by contract, each commission payment included an amount of VAT for taxes due on the receipt of the funds.
In December 2016 and June 2017, SAP concluded two additional contracts to provide software and services to Eskom with the assistance of an entity currently understood to have been Gupta-related. No revenue has been received or commissions paid in connection therewith.
After SAP’s initial voluntary disclosure, Baker McKenzie has spoken on SAP’s behalf with prosecutors at both the DOJ and SEC, and has started the process of sharing documents and information.
In terms of revenue received, SAP has four contracts, two of these with Eskom and two with Transnet. As SAP says, in all these four contracts, Gupta-linked companies received commissions. Again, what these Gupta-linked companies did exactly to win these commissions from SAP is not made clear at this stage, therefore one cannot conclusively rule out bribes being paid by the likes of CAD House to Transnet.
So, it is then inconclusive for Transnet to make itself out as being off the hook as i) the investigation is not complete and ii) there’s a possibility that Gupta company may have exerted influence on Transnet employees.
This is the statement that Transnet issued yesterday. In light of the incomplete SAP investigation, Transnet’s statement risks being premature:
SAP Exonerates Transnet from wrongdoing
Transnet SOC Ltd has noted and welcomes SAP’s update on the ongoing investigation into its South Africa business. The update, which stems from an ongoing investigation on SAP contract with Transnet and has links with Gupta-related companies, has preliminarily absolved Transnet of wrong doing. According to the SAP statement, investigations into Gupta-related third parties payments, has not revealed any evidence of payment to any Transnet employees. The payments were as result of commission agreement between SAP and its suppliers. Transnet feels a sense of relief and encouragement on behalf of its over 60,000 employees who continue to work hard to make sure that the goods chain keeps on moving. The freight and logistic company would also like to reiterate its commitment to good governance.
I’ll leave it up to BizNews readers to make up their own mind on this statement.