Exclusive: McKinsey worked with S.African firm after learning of Gupta links - sources

By Joe Brock and Ed Cropley

JOHANNESBURG (Reuters) - Global consultancy McKinsey worked with a firm in South Africa for four months after learning it was controlled by the Gupta brothers, business friends of President Jacob Zuma accused of corruption, four sources familiar with the deal said.

Their comments contradict media statements by McKinsey that it ceased work with the firm, local consultancy Trillian, in March 2016 -- after due diligence by external consultants showed the links to the Gupta family, accused by South Africa's anti-corruption watchdog of siphoning public funds.

McKinsey, which says it never signed a separate contract with Trillian, also ignored warnings by senior staff in South Africa not to partner Trillian in a deal to advise state utility Eskom which is being investigated for fraud, the sources said. The senior staff were troubled by Eskom's demand that Trillian must be involved in the deal despite having little experience.

It then took a year for McKinsey to act on calls for an internal inquiry into the relationship with Trillian, the sources said.

Two of McKinsey's global directors -- Europe-based Pal Erik Sjatil and Africa chief Georges Desvaux -- and South African office head Saf Yeboah-Amankwah told concerned partners the situation was "under control", three former McKinsey employees said.

Six sources with direct knowledge of the matter -- four former McKinsey employees and two current employees -- said there was no investigation until July 2017. McKinsey declined to comment on this allegation.

Sjatil and Desvaux were on McKinsey's Shareholder Council, its highest leadership body.

Sjatil, Desvaux and Yeboah-Amankwah declined to comment for this story. Eskom, McKinsey and Trillian have denied wrongdoing.

The sources' disclosures are the first indication that McKinsey's work with Trillian on the 1.6 billion rand ($113 million) contract to turn around Eskom continued until July of that year -- when Eskom cancelled the deal.

Asked about the sources' comments, McKinsey told Reuters by email on Thursday: "McKinsey never had a supplier development partnership with Trillian. We terminated our discussions in March 2016 and notified the client and Trillian."

HOPES FOR A "SOLUTION"

Eskom had told McKinsey it must use Trillian as a partner to secure the "turnaround" contract under a black empowerment programme, but by July it had become clear that McKinsey would not sign a formal contract with it.

Four people involved in the contract with Eskom said McKinsey's work with Trillian continued until then, with one saying "the team hoped a solution could be found right up until Eskom cut ties."

McKinsey and Trillian had wanted to extend their advisory partnership at Eskom for four years in a deal that could earn them $700 million, according to documents setting out the firms' cooperation plans seen by Reuters.

Sources at McKinsey confirmed the documents' authenticity. Asked about the documents, a McKinsey spokesman did not deny they were genuine.

McKinsey said in its email to Reuters that Eskom knew Trillian would not be McKinsey's partner and added: "Any questions about why Trillian remained at Eskom (after March 2016) and what they did, should be directed to Eskom.

The disclosures are likely to form part of an investigation launched by South Africa's parliamentary committee on public enterprises into whether McKinsey knowingly let funds from Eskom be diverted to a Gupta-linked company as a way of securing the deal, a source close to the committee said.

Trillian was owned at the time by Salim Essa, a business partner of the Guptas and of the president's son, Duduzane Zuma.

McKinsey's global risk committee, a vetting body, gave the partnership with Trillian initial approval, pending due diligence, but senior managers in Johannesburg did not inform the committee fully about how Trillian hid its ownership and why costs for Eskom were unusually high, three former partners said.

In the end, McKinsey launched a full internal investigation into its handling of the partnership with Trillian in July this year, after local media published a letter from a senior McKinsey manager dated Feb. 16, 2016 asking Eskom to pay Trillian as a McKinsey subcontractor.

McKinsey said the letter "inaccurately characterised" the relationship with Trillian. The manager has since left the firm.

McKinsey said on Oct. 17 the preliminary findings of the inquiry, approved by global head Dominic Barton, found "violations of our professional standards" but did not uncover any corruption.

In its email on Thursday, McKinsey did not comment directly on the timing of its internal inquiry, directing Reuters instead to its Oct. 17 statement.

($1 = 14.1047 rand)

(Editing by Timothy Heritage)