McKinsey's Eskom Fees Face Seizure by South African Prosecutors

(Bloomberg) -- South African prosecutors have filed a lawsuit aimed at recouping 1 billion rand ($79 million) in consultancy fees they say were unlawfully paid to McKinsey & Co. Inc. by the state power utility, after talks with the U.S. firm about voluntarily repaying the money stalled.

The case is the latest twist in a series of scandals that saw billions of rand looted from state companies during Jacob Zuma’s nine-year tenure as president and has drawn in several international companies, a number of senior officials and politicians and business executives with close ties to Zuma. Zuma, who has denied wrongdoing, was forced to resign as president in February, and was replaced by Cyril Ramaphosa, who is spearheading a crackdown on graft.

The National Prosecuting Authority’s Asset Forfeiture Unit filed the case against McKinsey in the North Gauteng High Court in the capital Pretoria on May 25, legal papers obtained by Bloomberg show. The authority alleges that power utility Eskom Holdings SOC didn’t follow proper procedures when it paid McKinsey to work on a turnaround plan and the consultancy was in possession of the “proceeds of unlawful activity.”

Last year, McKinsey denied any wrongdoing but offered to pay back the money anyway as a public uproar intensified about contracts being awarded to politically connected businesses. That never transpired and on Dec. 14 the Asset Forfeiture Unit obtained an order to freeze the money while negotiations about an out-of-court settlement continued.

The talks reached an“impasse,” and a seizure order was needed before the asset preservation order expired to ensure the money would be recouped, the unit said in its court papers.

McKinsey partnered with Trillian Capital Partners Pty Ltd., which at the time was majority owned by Salim Essa, an associate of the Gupta family who had business dealings with one of Zuma’s sons. While prosecutors last year froze 600 million rand that Eskom paid to Trillian, it hasn’t yet moved to seize its assets. Trillian, Essa and the Guptas deny wrongdoing.

McKinsey said it remains committed to repaying the fees it received from Eskom as soon as possible.

“We need a court-endorsed process the public can have full confidence in,” the company said in an emailed response to questions on Friday. “However, the Asset Forfeiture Unit is taking some legal steps before it can sign up to an agreement. We expect this matter can be settled amicably, as the sole purpose of the Asset Forfeiture Unit’s involvement was to assist the voluntary return of the fee to Eskom.”

--With assistance from Paul Burkhardt and Robert Brand.

To contact the reporter on this story: Sam Mkokeli in Johannesburg at mmkokeli@bloomberg.net

To contact the editors responsible for this story: Karl Maier at kmaier2@bloomberg.net, Mike Cohen, Antony Sguazzin

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