McKinsey Charged in South African Corruption Case

The South African branch of McKinsey & Company, the global consulting firm, was charged in a corruption scandal involving work the company completed advising the country’s state-owned freight rail and port operator. It may be the first time in McKinsey’s 96-year history that the firm has faced criminal charges.

South Africa’s National Prosecuting Authority added McKinsey and one of its former top consultants in the country to a long list of defendants in a case involving a locomotive purchase contract for the state-owned operator, Transnet, the authority said in a statement on Friday. McKinsey oversaw work on the bid, which, at the time it was announced in 2012, was the country’s largest-ever public procurement.

The other defendants, including the former chief executive of Transnet, are facing charges including fraud, corruption and money laundering. It was not clear from the statement what specific charges McKinsey and its former senior partner, Vikas Sagar, would face. A spokesperson for the authority was not available to comment.

“We believe the charges filed against our South Africa office are meritless and we will defend against them,” a spokesman for McKinsey said in a statement.

Details of McKinsey’s role in the troubled procurement have been known for years, aired extensively in the media and in government hearings. The investigations exposed deep-seated corruption, which turned departments of the South African government into revenue-generating vehicles for crooked businessmen and led to the downfall of Jacob Zuma, the country’s former president. In South Africa, this endemic corruption of public officials and enterprises is called “state capture.”

Brian Molefe, the former Transnet chief executive, last year in Johannesburg.Credit…Papi Morake/Gallo Images, via Getty Images

McKinsey is just one of several international companies caught up in the investigation. This month, its rival Bain & Company was banned from bidding on public contracts in South Africa for 10 years because of work it had completed with the country’s tax collection agency during Mr. Zuma’s tenure.

The charges are among the most serious ever leveled against McKinsey. Last year, in the United States, McKinsey agreed to pay more than $600 million to settle civil investigations into its role in advising opioid makers, though it admitted no wrongdoing.

To secure a consulting contract with Transnet, McKinsey was required by South African law to work with a Black-owned subcontractor. But instead of thoroughly vetting that subcontractor, McKinsey relied on a recommendation from Transnet that it hire a company called Regiments Capital to help oversee the purchase of a fleet of 1,064 rail locomotives. The locomotives were initially estimated to cost $2.6 billion, but their price inexplicably rose, almost overnight, by about $1 billion.

McKinsey has said it played no role in the decision to pay the extra money. But Matthew Chaskalson, a member of a judicial commission investigating suspicious contracts with state-owned agencies, said in a 2020 hearing that after hiring Regiments, McKinsey received “an extraordinary succession of sole-source contracts” during which its fees increased “exponentially.” Subsequent investigations by the media and the commission discovered that Regiments had links to the politically powerful Gupta family — three brothers who for years hid their ties to companies that were improperly securing lucrative state contracts.

By the end of 2020, the judicial commission had uncovered three tainted McKinsey contracts, including ones with the state-owned airline and the nation’s power company, Eskom. McKinsey said it knew nothing about the improprieties, nor was any evidence introduced that indicated that the firm had been aware of them. McKinsey voluntarily returned about $100 million.

“We publicly apologized and took action where we made mistakes,” the McKinsey spokesman said in the statement. “We also returned our full fees with interest for those projects. We did this because of our firm belief that it was the right thing to do. We cooperated with all authorities and shared everything we found from our own extensive internal investigations.”

A focal point of the government’s investigation is Mr. Sagar, a leader in McKinsey’s consulting work on behalf of Transnet and Eskom.

Before joining McKinsey, Mr. Sagar studied at the University of Michigan and received an M.B.A. from the Wharton School at the University of Pennsylvania in Philadelphia. Mr. Sagar rose quickly through the ranks at McKinsey’s South African office. He was popular, with a vivacious personality and a noted interest in fashion, but he was also a risk taker, one who once arranged for McKinsey employees to write part of a thesis on behalf of a senior official at Transnet. An internal investigation concluded that Mr. Sagar had done nothing illegal. Later, he left the firm amid an investigation into his undisclosed ties to politically connected individuals.

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