Author: Susan Comrie – amaBhungane
Newly-leaked documents show that the global software giant knew it was dealing with the Guptas more than a year before the #GuptaLeaks allegations emerged. Despite acknowledging that its global practice of paying “business development partners” to secure deals was fraught with corruption risk, SAP continued to pay millions to Gupta companies before finally being caught out.
“The accusations… are unfounded and unsubstantiated,” SAP South Africa blustered on 11 July 2017. “SAP has taken strong exception… and is investigating various possible actions.”
The accusations, published as part of the #GuptaLeaks, were that the global software giant had paid roughly R100-million in “commissions” (that looked like kickbacks) to a Gupta-linked company in order to secure contracts from Transnet and Eskom.
Except the allegations were not unfounded. And a long list of SAP executives stretching from the local South African office to Germany and the United States knew that.
A trove of documents, recently leaked to the SABC and amaBhungane, show that SAP knew it was doing business with the Guptas for more than a year before the #GuptaLeaks allegations emerged. The documents also show that the majority of the “commissions” – about R73-million – were paid after the company was warned about the Guptas’ role in April 2016.
Included in the newly-leaked evidence is a memo showing that SAP acknowledged its global practice of paying “business development partners” to secure deals was fraught with the risk of corruption.
Yet, when red flags from their own staff and their lawyers started going up around the Guptas, SAP did not terminate the relationship.
Instead the Guptas simply transferred their interest to a front company and SAP chose to look away. This arrangement allowed the Guptas to continue to extract highly questionable “commissions” from SAP’s deals with state-owned companies.
And it allowed SAP to proceed with a R495-million deal with Eskom – one of the largest in the company’s 28-year history in South Africa – based on the same dubious commission structure.
SAP only agreed to provide a short statement on the record, partly because it is co-operating with a US department of justice probe, but we tested the allegations with several SAP executives with knowledge of the investigation and although they were divided on our interpretation of the leaked documents, they confirmed that the documents and emails were real.
We have taken all these views into consideration. It did not, however, convince us that there was no story to tell.
The #GuptaLeaks effect
Deena Pillay probably knew SAP was in trouble as soon as he got off the phone with amaBhungane in June last year.
We had arranged to interview SAP to discuss “commissions” it had paid to Cad House, a small Gupta-controlled company in Centurion that sold 3D printers.
Pillay, SAP Africa’s chief financial officer, and Candice Govender, head of legal, had been delegated the task of defending the payments.
Paying commissions to shadowy third parties to win large contracts is an inherently high-risk sales method – and we told them we had seen evidence that SAP had signed a lucrative commission deal with Cad House in August 2015 to act as a “business development partner” to help SAP secure a R100-million contract from Transnet.
In response they tried to argue that Cad House had provided real sales value and was not simply a channel to exert undue influence on decision-makers.
Business development partners are “small guys who would go out there and identify business for us… and come to SAP with that opportunity,” Pillay began.
But, we pointed out, this was a huge deal with an established SAP customer and Cad House was a small company that had no expertise in SAP software.
As the interview progressed the two SAP executives struggled to explain what Cad House had done to deserve R17-million on a single Transnet deal.
“CAD House was an existing vendor at Transnet,” Pillay told us (a claim Transnet denied). “And we were looking at doing 3D models for [Transnet] to show them the value and the benefit of using our solution…”
When we expressed incredulity at using 3D models to sell business software, Govender said they were not privvy to the “technical detail”.
In fact, despite SAP paying Cad House more than R100-million in “commissions” between 2015 and 2016, SAP seemed unable to articulate what Cad House had done to earn these astonishing fees.
Significantly, the contract SAP and Cad House signed in 2015 said that if Cad House was the “effective cause” of SAP securing a contract, it would be entitled to 14.9% of the deal.
When we raised the Gupta connection, Govender confirmed that SAP was aware Cad House was connected to the Gupta computer firm Sahara.
But Pillay emphasised: “At the time we did the due diligence there was no linkage to any of the Guptas. I look at the company, I think we probably did a due diligence on them around 2015. At that time it was all clear, there were no issues. It was an external reputable company that did the due diligence. There were no red flags.”
Now the new leaked documents show us just how contrived that statement was.
“Legitimate, value add services unlikely”
SAP was well aware of the risks of “business development” contracts.
For instance, in January 2016, global compliance head Melissa Lea sent out a memo reminding staff about the high risk of corruption when dealing with “business development partners”.
“Commissions are the highest risk method of engaging with partners largely because the partner’s role in the deal is usually not transparent.
“It is possible the customer may not even know the partner was involved, which would make the likelihood that the partner performed legitimate, value add services unlikely.”
The memo, which forms part of the cache leaked to the SABC and amaBhungane, went on to warn that because business development partners “could hide entirely behind the scenes”, “this model is subject to abuse and is most often at the centre of corruption cases you may read about globally”.
AmaBhungane understands this was not the only warning SAP received about the high risk of corruption with “business development” payments.
Considering that SAP’s global footprint exposes it to some of the most punitive anti-corruption legislation in the world, it would be reasonable for SAP executives to be paranoid about who they did business with.
Yet Lea’s memo – and her later direct involvement in signing off further deals with Gupta-tainted companies – shows that SAP considered these potentially corrupt arrangements to be the cost of doing business.
Due diligence, it seems, was a box-ticking exercise, a fig leaf to cover what the company should have recognised as kickbacks for influence pedlars.
July 2015: The IT expert from Kolkata
There was, according to the Cad House due diligence report, dated 31 July 2015, nothing noteworthy about Santosh Choubey, an IT expert from Kolkata, India.
As part of SAP’s “rigorous” vetting process, SAP hired Fluxmans Attorneys to conduct a due diligence on Cad House and its dirctors, including Choubey.
Under the headings “Noteworthy… Information” and “Political Connections of Links”, Fluxmans’ attorney Peter Kemp had declared that there was nothing to report about either Cad House or Choubey. The Guptas were not mentioned at all.
In fact, had Kemp done an ordinary consumer search, as amaBhungane did at the time, virtually the only information he would have found about Choubey was his link to the Guptas and Sahara Computers.
A story published online the same day as Kemp’s report to SAP proclaimed openly that Cad House had recently sold a 50% stake of its business to Sahara Systems, of which Choubey was the chief executive.
Kemp now says that back in 2015 the Guptas were not seen as the politically toxic persons they are now.
But yet another story published on the same day of Kemp’s report might have set alarm bells ringing.
On 31 July amaBhungane published “Kickback scandal engulfs Transnet” which revealed that executives of telecoms firm Neotel had been suspended after it emerged they paid tens of millions of rands in “commissions” to a Gupta-linked letterbox company to clinch deals from Transnet.
Three weeks later, on 21 August 2015, SAP went ahead and signed the commission contract with Choubey.
April 2016: SAP gets a Gupta alert
Eight months later in April 2016, while conducting a due diligence on another Gupta-linked company, Kemp alerted SAP to the Gupta connection. This time the due diligence was peppered with words like “Zuma” and “State Capture”.
“There are numerous incidents published in the South African press and elsewhere concerning the involvement and role of the Gupta family and the entities that they control in the award by the South African Government, its Departments and State Owned Companies to these Gupta controlled entities – allegedly as a result of undue influence exerted by the [Gupta family] or their business associates upon members of the South African government and in particular, the President of South Africa [Kemp’s emphasis].
“These allegations have not been tested in a court of law but the fact that the principal bankers of the Gupta family… have terminated their banking and related facilities… lends sufficient credence to the allegations because (it is widely reported that) the said banks would not have taken such a drastic step unless they had sufficient and compelling information concerning… the cash flows between the Gupta family, the entities that they control and 3rd parties,” Kemp wrote.
By May 2016, it was obvious to SAP that at least three Gupta-controlled companies – Cad House, Global Softech Solutions (GSS) and Cutting Edge – were trying to extract exorbitant “commissions” from it for helping secure contracts with state-owned entities.
“SAP’s local compliance team independently discovered that Cutting Edge was linked to the Gupta family. The local compliance team also determined on its own that GSS and CAD House were connected with Cutting Edge, and that all were Gupta-connected,” SAP confirmed in its brief written statement to us.
“Local SAP compliance notified SAP global compliance, which promptly placed on hold [i.e. stopped] … any new compliance approvals relating to these [Gupta] parties.”
This is where the story should have ended.
At this point the software giant could still try to claim that its dealings with the Guptas had been accidental – the result of a shoddy due diligence or duplicitous local sales staff – and not the inevitable consequence of its global practice of asking too few questions about the millions paid out in questionable commissions.
But this is not where the story ends.
Instead over the next year SAP executives at a local, regional and global level gave the green light for another R73-million to be paid to Cad House to secure new deals at Transnet and Eskom.
Doing so required both local and global SAP executives to ignore every red flag it had warned its own staff to avoid.
May 2016: The Future arrives… and it looks a lot like the Guptas
What we can piece together from leaked documents and various sources is that at some point after the Guptas were benched in April 2016, SAP and its attorneys Fluxmans told Cad House that it could only continue working with the company if the Guptas sold their shares.
Lo and behold in May 2016 a new IT company called Futureteq was registered. Four days later, it started buying the Guptas’ shares in Cad House, GSS and Cutting Edge.
It was clear from Lea’s earlier memo warning about the risks of commission payments that SAP should have been suspicious of Futureteq.
The memo had warned staff to make sure that the companies they dealt with were “properly funded and resourced IT compan[ies] – and not just a shell company that was newly formed weeks or even days before a deal by the brother of a decision maker … (or something similar)”.
She could have been talking about Futureteq: one of the two shareholders was the brother of a senior Gupta lieutenant. The other worked for the Guptas’ Sahara Systems on the SAP account.
Internally at SAP South Africa, there were those who voiced concerns that Futureteq was exactly what it looked like: a paper-thin cut out for the Guptas. But according to one source, the local sales team used their authority to bulldoze over any concerns.
10 September 2016: “…Guptas are still acting in the background”
On 10 September 2016 Anette Higginson, the local compliance officer responsible for South Africa, sent a 6am email to Lea, SAP’s head of global compliance in Philadelphia. The subject: “CONFIDENTIAL URGENT: Request for Global Compliance review of SAP partners in South Africa.”
The named partners were Cad House, GSS and Cutting Edge.
“In South Africa, a local family ‘the Guptas’ has received a wide range of press, business and government attention due to their connections to our State President and influence in government,” Higginson conceded.
But, she suggested, the problem was in the past and there were deals on the line.
“SAP sales management is requesting resolution to this matter as these partners have urgent opportunities in the pipeline with which we need to proceed,” Higginson wrote.
“We found evidence that Sahara Systems (Gupta owned) acquired majority shareholding of the aforementioned SAP partners… Subsequently, Sahara Systems have sold their shareholding to Futureteq (no Gupta ownership)…
“The new owner of Futureteq is the brother of the Sahara Systems owner [but the] forensic report confirms he manages his own affairs independently of his brother.”
The “forensic report” was actually three updated due diligence reports by Fluxmans’ Kemp.
In fact, Kemp’s new reports, which Higginson forwarded to Lea and at least one other senior executive in SAP compliance’s division, were replete with red flags and caveats.
On Cad House, Kemp noted: “We are not able to verify that Sahara Systems does not [still] hold any rights and/or beneficial interests in CAD House and its business.”
Higginson was of the view that this was a risk SAP should take.
She told Lea: “From a Compliance perspective all reasonable steps were taken to [ensure] the Gupta Family has moved out of these companies. Nevertheless there might still be the possibility that the Guptas are still acting in the background,” she wrote, before adding: “This is a risk we cannot avoid.”
Lea, who had written the memo warning staff about the huge risks of corruption in these types of contracts, sent a two-line reply from her iPhone: “Excellent work here, seems all steps have been taken to do the best validation possible. I approve continuing the partnerships.”
Just like that the Guptas were back in.
16 September 2016: Cad House: first Transnet, now Eskom.
A week after global compliance gave the green light, the next big deal was formally presented to senior SAP executives. The R495-million contract with Eskom has been described by one source as the software equivalent of an all-you-can-eat buffet.
Although it was a renewal of an existing contract, sales executives seemed either incapable or unwilling to close the deal – one of the largest ever for SAP South Africa – without Cad House’s help.
According to Lea’s January memo, it was a major red flag for Cad House to be approved as a sales agent in respect of multiple customers within the space of a year.
Yet we have seen no evidence that SAP asked the simple question: what expertise did Cad House have that allowed it to close a deal SAP’s top sales executives could not? And what allowed Cad House to seamlessly transfer its “expertise” from Transnet to Eskom?
Instead of probing, SAP signed another 14.9% commission deal with Cad House to help it land the Eskom contract.
28 September 2016: “R1-billion fine or life imprisonment”
Officially, the Gupta dilemma had been solved when Melissa Lea approved a continued relationship with Cad House, GSS and Cutting Edge – but it seems that doubts still lingered.
AmaBhungane has seen a “privileged and confidential” memo from law firm Baker McKenzie to SAP, dated 28 September 2016.
It is clear the topic was the Eskom deal and payments that had been promised to unnamed “subcontractors”, understood to be Cad House and a second consulting firm, Lejara Global Solutions.
Baker McKenzie was not given any specifics, but warned of the “risks and prospective liability” should the subcontracts be “found to be relationships through which facilitation payments have been made, or which constitute fronting”.
It is understood that the memo was requested by SAP’s legal head in London after Eskom demanded that at least 25% of the SAP deal be allocated to “supplier development”, in other words, small, black-owned companies.
Such a request is not abnormal, except that in this case Eskom was buying software licenses so there was little opportunity to subcontract work to a local company.
Kemp told amaBhungane this kind of demand places international software firms in an invidious bind if the set-asides are not realistic.
Eskom, however, told us the request was not unreasonable because the contract would include additional services including maintenance and training which could be subcontracted to black-owned companies.
Over six pages Baker & McKenzie laid out the legislation that would apply if any of the payments to subcontractors turned out to be illicit, including the UK Bribery Act, the US Foreign Corrupt Practices Act, and the local Prevention of Organised Crime Act, which alone carried penalties of up to “ZAR 1,000 million or life imprisonment” (Baker McKenzie’s emphasis).
Were SAP’s lawyers just being over-zealous or was SAP’s legal department concerned that the Guptas were lurking behind the Futureteq façade?
The solution to Eskom’s 25% demand, described in SAP’s internal records, was to keep Cad House’s sales commission at 14.9% but to pay another 10.1% to Lejara, which would provide Eskom with consulting services to this value.
The soluton appeared to be a gross distortion of the principles of “supplier development”, but the two firms – Cad House and Lejara – would together be entitled to a whopping 25% of a R495-million deal.
Later, after the #GuptaLeaks exposés prompted an internal probe by SAP, the investigation findings labelled Lejara another “Gupta-related” entity.
SAP disclosed it made a payment of nearly R22-miilion to Lejara in June 2017, but had stopped a further R17.7-million that had been due.
Lejara director Lucas Mothupi told amaBhungane that Lejara was in no way Gupta-linked and he was suing SAP.
November 2016: 13 yes-men and women
Thuli Madonsela’s State of Capture report arrived officially via email just after 4pm on Wednesday 2 November. It painted an astonishing and damning picture of how the Guptas and their business partner Essa had captured and then systematically milked Eskom.
More importantly for SAP it confirmed Fluxmans’ earlier warning that the Guptas and Essa used their proximity to the president to influence how contracts were awarded at state-owned entities.
The documents leaked to SABC and amaBhungane give no clues as to how the news was received and whether anyone at SAP paused to ask how the now supposedly Gupta-free Cad House would achieve the same feats that the Guptas had become infamous for.
All we can see is that over the next eight days, 13 SAP executives – at local, regional and global level – said “yes” to the deal with Eskom. The final signature came from Robert Enslin, the global president of SAP’s cloud business and a member of SAP’s global board.
For acting as the “business development partner”, Cad House – the small 3D printer company – was paid a R73.7-million commission.
Now: The US DOJ on the horizon
In July 2017 it took just over 24 hours for SAP’s global office to move in once the #GuptaLeaks allegations broke. Having initially called the allegations “unfounded and unsubstantiated”, SAP now said it was launching an investigation and placing four executives on “administrative leave”.
It took another eight months for SAP to admit that its post-#GuptaLeaks investigation found that Gupta representatives continued to be involved with Cad House and the other Gupta fronts.
“Unfortunately, the investigation found that… Gupta representatives continued to be involved with these entities and related SAP transactions… information that was not shared with Compliance,” SAP told the SABC in a statement shared with amaBhungane.
Asked why SAP had gone ahead with the Eskom deal despite the many red flags, SAP told us in a written statement: “SAP’s global compliance agreed that the hold… be lifted on the express understanding and representation that the interests owned by Gupta-related parties would be sold to an independent third party and that all reasonable steps had been taken to ensure the Gupta family were no longer involved with the intermediaries.”
At the time, Futureteq had “no known or identifiable Gupta-linked ownership”, SAP said, adding that the investigation has found “no evidence that SAP’s global Compliance team or SAP’s [global] Board ever knowingly approved the use of any third party that was Gupta-related”.
Instead SAP has been keen to shift the blame to unnamed local staff members who they say were in regular contact with Gupta representatives without alerting SAP to the ongoing Gupta connection.
“[G]iven the prominence of the Guptas in South Africa and maybe the surroundings and rumours we are a bit surprised that SAP leaders are meeting with representatives of the Guptas and are not telling,” SAP executive Philipp Klarmann told amaBhungane in March this year.
That response ignores the inherent implausibility of the role of Cad House – whether or not the Guptas were involved – and shifts the blame from SAP’s global policy of using commission payments to gain business.
Meanwhile, the three executives who were placed on leave over the allegations have since resigned, leaving the charges against them to quietly evaporate.
But if anything is keeping SAP’s global executives awake at night it should be clause 3.12 of the SAP sales commission agreement.
The clause empowered SAP – at the first whiff of corruption – to audit Cad House, to determine whether Cad House was being used as a conduit for corrupt payments.
If SAP had looked, back in April 2016, it would have seen the signs that Cad House had been a vehicle for the Guptas from day one.
Immediately after receiving payments from SAP, Cad House disbursed nearly all the money to the Guptas’ Sahara Systems, to their two Indian banks, and to an obscure letterbox company called Birsaa Projects.
For its multi-million rand “services”, Cad House got to keep almost nothing.
The question of who at SAP knew about the Guptas and when is still disputed territory, but with the US department of justice on the horizon the phrase that matters is “wilful blindness”.
In terms of established precedent under the Foreign Corrupt Practices Act, SAP executives can be found guilty under US law if they “deliberately closed [their] eyes to what otherwise would have been obvious”.
At the height of state capture, SAP walked into Transnet and Eskom – “ground zero” of the Guptas’ project to capture state-owned entities – and walked off with contracts worth more than R600 million after promising to pay R100-million to Gupta-controlled companies. To most South Africans that would be obvious enough.
Read memo below:
This story was produced by amaBhungane Centre for Investigative Journalism, an independent non-profit organisation. Visit amaBhungane.co.za.