Why Zondo must summon banks, lawyers and consultants to answer for enabling state capture

In many ways, the Estina dairy farm near Vrede, about two hours from Joburg, was ground zero for state capture. It all began in February 2013, when then Free State premier Ace Magashule used his state of the province address to declare that his government would set up a state-of-the-art dairy farm in Vrede to process up to 100Kl of milk a day.

Magashule promptly booted the existing tenant off on the 4,439ha land, and handed it, rent-free, to empowerment company Estina. His government committed to give R342m to Estina for the "mega-project". It was meant to be a model of empowerment for local communities. It ended up as a blueprint for how to rob a country.

Not only was there no tendering process, but Estina’s business plan was full of holes. A National Treasury investigation into the project in December 2013 was scathing, saying the costs were "not reasonable or market-related". The project, the Treasury said, was "too risky and not sustainable".

No wonder. Estina’s only director was Kamal Vasram — an IT salesperson with zero farming experience, whose day job was managing Toshiba’s relationship with Sahara Computers, owned by the then influential Gupta family.

In the end, more than R280m was paid by Magashule’s government to Estina, according to new figures supplied to the Zondo commission — R106m of it after the contract had been cancelled.

Most of this money vanished into the pockets of the Gupta money-laundering factory. Of that R280.2m, R59m went to a company called Vargafield, controlled by a key Gupta lieutenant; R34m was paid to the SA Revenue Service (Sars) for VAT; and R229m was paid to Gateway Ltd, a Gupta-controlled company based in Dubai.

Just 7% of the money — R21m — went on salaries and to pay suppliers of what was supposed to be an empowering agricultural project.

This emerges from a submission made by nonprofit organisations Open Secrets and Shadow World Investigations (SWI) to the Zondo commission this week.

The aim of the submission is to shift the focus to the enablers of state capture: the private sector companies that greased the wheels of corruption — the lawyers, consultants, banks and accounting firms.

Open Secrets/SWI is calling on the commission chair, deputy judge president Raymond Zondo, to summon five banks — Standard Bank, Nedbank, First National Bank (FNB), HSBC and the Bank of Baroda — as well as auditing firm KPMG, and consultants McKinsey and Bain & Co, to publicly answer six specific questions.

Open Secrets/SWI believes those answers will allow Zondo to make effective recommendations about legal action against private sector companies and the executives who enabled this corruption.

The submission to Zondo includes three case studies, detailing the role that the banks, lawyers and consultants played in the looting of Eskom, Transnet and the Estina Dairy.

While some of these companies, like Standard Bank and KPMG, have appeared at the Zondo commission already, they’ve tried to paint themselves as innocent parties — the victims of political pressure in the wider state capture enterprise.

But the evidence doesn’t tally with this narrative. In the most benign cases, there was gross negligence. In other cases, the facts suggest intentional complicity. In all instances, there was a failure to fulfil legal or professional duties.

To see why this is so, it’s worth digging further into the Estina case.

The laundromat

Estina was a state capture project that fleeced the fledgling black-owned dairy industry in one of the neediest districts of the Free State. It was, it seems, an outright criminal exercise, developed by the Gupta enterprise to extract nearly R300m in state money — and the banks provided the key.

The Gupta laundromat, which channelled that money into overseas bank accounts, was far more sophisticated than many suspect.

Locally, the laundromat comprised Estina’s accounts with Standard Bank, FNB and the Bank of Baroda. The money was then pushed overseas through a foreign laundromat, using four United Arab Emirates companies: Accurate Investments, Fidelity Enterprises, Gateway and Global Corp.

Here’s a practical example of exactly how this happened.

On May 8 2013, the Free State government paid R19m ($1.98m) into Estina’s investment account at asset manager Stanlib. The cash sat there for three months, before being shifted to Estina’s Standard Bank account on August 5 2013. That $1.98m was then swiftly transferred to the Dubai account of the Gupta-owned Gateway, held at Standard Chartered.

One week later, $1.6m of this cash was sent to the account of Global Corp. A day later, it was split into two and diverted to the account of Accurate Investments. There, it was reintegrated with the other $400,000, which arrived a few days later. Then, within hours, all the cash was transferred to Gupta-owned Linkway Trading.

There were other payments, but this was the basic methodology.

If it sounds like a confusing web of cash transfers that makes little sense, you’d be right. The aim was to throw anyone tracking the money off the scent.

But to make the payment to Linkway look legitimate, the Guptas needed a ruse. So, in July 2013, Linkway drew up an "invoice" for R30m, addressed to Accurate Investments, for costs relating to the notorious Gupta wedding held at Sun City. It included items such as "dancers" (R331,427) and "beverages" (R364,243).

Voila! The Gupta wedding at Sun City was used to generate an invoice that then allowed the money — which had originated in the Free State department of agriculture — to be laundered back into SA. All of this was facilitated by the banks, and signed off by auditor KPMG.

It was KPMG’s Jacques Wessels who signed off Linkway’s accounts, without detecting that Linkway and Accurate were "related parties".

Last year Wessels was struck from the roll of auditors by the Independent Regulatory Board for Auditors for, among other transgressions, a "failure to investigate seven unusual transactions … including the Gupta family wedding", acting dishonestly, and failing to apply his mind to money laundering rules.

But consider the red flags the banks missed too. For one thing, large deposits were immediately spirited off to external beneficiaries; large, unexplained payments were made to one single offshore entity, Gateway; and concerns had already been raised publicly about Estina and the Guptas.

In March last year, Standard Bank’s Ian Sinton was subpoenaed to appear before the Zondo commission. But he didn’t reveal whether the bank had filed any "suspicious transaction reports" with the Financial Intelligence Centre over these payments.

Asked a series of questions by Open Secrets/SWI for its submission, Standard Bank said only that it has "complied with its regulatory responsibilities" and cannot "divulge any confidential information relating to its clients".

FNB faces similar questions. It not only operated Estina’s business banking account, but also oversaw the payment of R106m from the Free State department of agriculture to that account in May 2015. Of that money, R85m ended up with the aptly named Gateway.

But no-one at FNB seemed to have noticed that in April, a month before that money was transferred, the contract between Estina and the government had been officially cancelled.

Asked about this by Open Secrets/SWI, FNB said it "cannot comment on specific bank accounts".

The bank that seems to have been most complicit in the Estina laundering is the Bank of Baroda.

The Indian bank ultimately received much of the Estina money, supposedly as repayments for "loans" that had been artificially created at the bank.

At the same time, the Gupta Leaks show, Bank of Baroda staff received lavish gifts, including holidays in Cape Town, Sun City and Victoria Falls in Zimbabwe.

While there isn’t sufficient evidence to suggest a quid-pro-quo agreement or criminal conduct, it is highly unusual for a bank’s employees to enjoy such largesse from their clients — particularly when considered against the bank’s failure to identify, report and halt suspicious payments. It is worthy of rigorous investigation.

The banks might argue that they did what they could. But there’s an awfully inconvenient fact: the behaviour of their peer, Standard Chartered.

While the British-headquartered bank ran Gateway’s accounts for the Guptas, it closed the family’s accounts in early 2014 — nearly two years before FNB, Standard Bank and the Bank of Baroda did the same.

Transnet tales

The banks come in for similar unflattering scrutiny in the study of Transnet’s purchase of 1,259 electric and diesel locomotives. It’s a case that would seem to exemplify the manner in which the Gupta racketeering enterprise operated.

There, over a quarter of the R56.5bn spent on the locomotives ended up enriching a few people and companies linked to the Gupta family.

But in that case Standard Bank was the banker for three companies paid millions in Transnet funds: Regiments Capital, shelf company Homix and Business Expansion Structured Products, or BEX.

In his evidence to Zondo on June 10 2019, SA Reserve Bank official Shiwa Mazibuko explained that the Homix transactions raised almost every single known red flag for money laundering — and that it was inexplicable that Standard Bank did not pick up on these, or if it did, that it did not act on the warning signs.

For one thing, the bank accounts were dormant most of the time, after which they received a huge deposit, which was then immediately spirited off to another account.

However, HSBC was arguably the most important enabler for the looting of Transnet. It handled most of the transactions of the Gupta front companies — CGT, JJT, Tequesta and Regiments Asia — through which billions of rands in alleged kickbacks flowed.

Gupta lieutenant Salim Essa registered both Tequesta and Regiments on the same day in Hong Kong. These companies ended up receiving and dispersing more than $100m of money from Transnet between 2014 and 2017.

But even though HSBC, by then, must have known Essa’s links to the Guptas, its attempts to shut down the accounts were three years too late.

Peter Hain, in 2017, claimed in the British parliament that HSBC’s SA staff had warned the London head office of possible theft and money-laundering. But the London HQ ignored the warning.

Now, compare HSBC’s action with that of Mercantile Bank, the SA branch of which has just been bought by Capitec.

Mercantile was the SA bank for Homix — a shelf company that helped Neotel "land the contract" to supply telecoms services to Transnet. Neotel then immediately forked over R41m to Homix — seemingly a kickback — which Homix promptly paid to front companies in Hong Kong.

But in this case, Mercantile flagged those transactions as "suspicious" within four days and told the SA Reserve Bank. The regulator then told Mercantile to close Homix’s accounts — which it did within 11 days.

So, in sharp contrast with the HSBC case, Mercantile’s response shows that banks can act quickly on suspicious transactions — when they want to.

Culpable deniability

The role of management consultants, specifically McKinsey and Bain, also needs to be scrutinised far more thoroughly by the Zondo commission.

McKinsey, a consultancy with global revenue of more than $10bn, employing 17,000 people across 66 countries, is contracted by 90 of the world’s top 100 companies. Yet its conduct at Transnet and Eskom suggests it’s a company willing to place profit above principle, and perhaps even the law.

This isn’t exactly new: the consultancy has worked for entities with atrocious human rights records before.

For example, after the murder of Washington Post journalist Jamal Khashoggi in the Saudi Arabian consulate in Turkey, The New York Times revealed that McKinsey had provided the Saudi government with the names and details of dissidents who were subsequently targeted by the government.

But the tale of how McKinsey bent over backwards to help Regiments and Gupta-linked company Trillian to extract millions from Eskom and Transnet adds a particularly unsavoury episode to this canon of ethics-free business decisions.

First, as transaction adviser on Transnet’s 1,064-locomotive deal, McKinsey partnered with Regiments Capital, part-owned by Essa, to rewrite the business case and justify a R16bn escalation in cost.

This pushed the cost to R54.5bn, 21% of which was then seemingly paid in bribes and commissions.

A forensic report by Fundudzi concluded this escalation had been "overstated by R9.2bn".

Second, McKinsey not only overcharged Eskom vastly for a project to improve capacity, but it also took Trillian, run by Eric Wood, as its empowerment partner.

This allowed Trillian to extract R565m from Eskom — even though no contract was ever signed.

Worse, when cornered, McKinsey initially lied, claiming it had no relationship with Trillian. But after advocate Geoff Budlender released an independent report confirming this, it began grovelling.

McKinsey has since agreed to return R902m to Eskom, and its new managing partner, Kevin Sneader, has spoken of how his firm was "not careful enough about who we associated with".

And yet, McKinsey has faced little true accountability.

Neither has Bain & Co, a company that has long had the reputation of being "the KGB of management consultancy" for the code names it gives clients to hide their identities.

In SA, Bain was contracted in 2015, purportedly to review the organisational structure of the Sars and improve it.

Instead, the company was complicit in destroying the tax authority’s capacity by creating a "flawed operating model" and sidelining key executives.

It was Bain, more than anyone else, that enabled Tom Moyane to insert himself as Sars commissioner and begin purging key officials.

As judge Robert Nugent later put it, Bain was involved in a "premeditated offensive against Sars". The interests of the company and the commissioner, Nugent said, were symbiotic but not the same: "Moyane’s interest was to take control of Sars. Bain’s interest was to make money."

Bain MD Vittorio Massone had met then president Jacob Zuma 12 times between 2012 and 2014 — before the company was appointed. The company has since paid back the R217m it earned from the Sars contract — a payment clearly inadequate, given the R100bn estimated to have been lost in tax revenue.

Vulture lawyers

Lawyers also played a critical role in the most recent phase of state capture, though their conduct remains one of the less-told stories of the enablers of these economic crimes.

But when Essa or the Guptas needed a front company set up or a bank account opened, it was the lawyers who would do it — creating camouflage for the cover-up.

At the top of the list is Stein Scop, the Joburg-based law firm that acted for Gupta-linked investment company Trillian Asset Management.

Besides the mundane facilitation, Stein Scop spent months prosecuting Mosilo Mothepu, the woman who blew the whistle on Trillian’s dealings, while simultaneously employing a Stalingrad strategy to stave off investigations.

For this, Stein Scop is reported to have been paid more than R100m. Considering that Trillian claims it doesn’t have the R595m a court has told it to repay Eskom, the lawyers might be a good place to look for the cash.

Questions also arise for Anglo-American law firm Hogan Lovells, one of the 10 largest in the world, with an eye-watering revenue of more than $2bn in 2017.

In 2016, Hogan Lovells was hired by Moyane to investigate mysterious cash payments of R2.4m into the account of his second-in-command and ally at Sars, Jonas Makwakwa. Only, the firm was accused of rigging the investigation to ensure Makwakwa was cleared by accepting an artificially narrow mandate. Then, even when Moyane deliberately skewed the findings of its investigation to parliament, the firm remained largely silent, citing confidentiality.

There are other questions for the lawyers.

Werksmans, for example, made R300m thanks to its forensic arm’s investigation into the Passenger Rail Agency of SA (Prasa). Are such fees ethical, when the intention was to serve the working-class train commuters adversely affected by the conduct of the Prasa state-capture clique?

The six questions Zondo should ask

• Were you an active and knowing partner in the illicit activity?

• If not, did you satisfy your legal and professional duty to stop becoming an unwitting accomplice to criminal activity?

• Why did you not identify the suspicious transactions sooner and, when you did, why did you not act sooner to stop them?

• Do you acknowledge that a reasonable and responsible professional in your position should have done more to identify the criminal intentions behind many of the transactions and deals you facilitated?

• How much did you profit from these deals? How much has been repaid, if anything?

• What punitive action have you taken against executives and employees complicit in that illegal activity? And what structural changes have you made to prevent similar conduct in future?

—  The six questions Zondo should ask

It’s debatable: clearly, an investigation was needed, and with the state’s capacity to catch criminals at close to zero, you could argue that you need high-priced lawyers to catch other shady lawyers and accountants.

Similarly, the contracts for the 1,064 locomotives at the centre of Transnet corruption allegations were drafted and negotiated for Transnet by Webber Wentzel. Its role must also be questioned by the Zondo commission — simply put, was the law firm unable to detect any of the corruption and, if so, why?

There are deep implications for the legal profession here.

First, while the public has in the past relied on professional associations, such as the Law Society, to self-regulate the conduct of lawyers, this has proven inadequate.

The Legal Practice Council has established a regulatory authority to oversee lawyers, but it remains to be seen if this is any improvement.

Legal reforms needed

The Zondo commission would do well to identify a comprehensive list of lawyers and firms that benefited from state capture so it can, where appropriate, recommend their criminal prosecution.

If Zondo takes a microscope to the private sector, as he should, he could make recommendations that, if implemented, would go far to prevent the ease with which criminals shift, hide and benefit from stolen money.

Among the legal reforms he should suggest, for example, is a far greater regime of transparency in company records. As it stands, members of the public cannot access any registry showing beneficial ownership of private companies.

Though the Companies & Intellectual Property Commission does require companies to submit annual returns, these aren’t publicly accessible. Considering how front companies were used to launder the proceeds of state capture, it’s a gaping hole that needs to be fixed.

The Guptas needed help from lawyers, accountants and auditors for their schemes to succeed — and they got it

—  What it means:

But the first step is that these private sector companies — the lawyers, accountants and bankers — should come to the Zondo commission and offer a frank account of the role they played. And they should agree to pay back all fees, with full interest, from any illicit contracts.

They could go further: the CEOs who led them during this period should forgo all bonuses, and implicated corporations should create a fund to address the costs of grand corruption and build a more transparent, accountable and responsive state.

The fact remains that those who stole hundreds of millions of rands from poor farmers in the Free State, or who extracted billions in kickbacks, couldn’t have succeeded by just capturing a minister or corrupt provincial department.

They needed the banks to move their money; they needed agents to set up shell companies for them around the world; and they needed accountants to sign off everything as "business expenses".

Sadly, they had no trouble finding these participants.

This report was produced by Open Secrets and Shadow World Investigations.

Open Secrets is a Cape Town-based nonprofit organisation, headed by Hennie van Vuuren, which undertakes in-depth investigations into private sector economic crime. It is funded by donors, including Luminate, the Joffe Charitable Trust, the Open Society Foundation and Heinrich Böll Stiftung.

Shadow World Investigations, founded last year by former ANC MP Andrew Feinstein and Paul Holden, is a successor of Corruption Watch UK. Also funded by donors, it specialises in investigating grand corruption and corporate malfeasance, with a focus on the global arms trade.

—  Who are Open Secrets and Shadow World Investigations?