Mon, Jan 8, 2018

The Gupta Scandal in South Africa

Extreme but not the only risk when business and politics meet.

Barely a day goes by without references to reputational risk appearing in the international and South African press in relation to the Gupta scandal. Even companies who do not appear to have direct involvement risk being associated with firms who have. Some are deciding to exit long-standing business relationships. Although the scandal is evolving into one of the most high-profile examples in recent times – highlighting the commercial impact of reputational damage – the underlying situation is not uncommon.

“State capture” as displayed in the South African context, and the illicit and non-transparent private gains obtained through exerting influence on political decision-making, is only one form of risk posed by the confluence of business and politics. The overlap of these spheres – albeit often more subtle and not always encompassing allegations of contract irregularities and corruption – presents a multitude of challenges to doing business in the region. At Kroll, these risks are a key consideration in our work consulting with clients operating in or considering entering Sub-Saharan African markets.

In one example, a global corporate had to weigh up the viability of continuing in-country operations against the potential politically motivated backlash for shutting down other, job-creating parts of their business. In another situation, an investor became aware that their local partner’s management decisions were being influenced by local and regional political demands, in areas such as the selection of suppliers. There was a danger that decisions were being made in order to serve a political purpose, as opposed to being based on sound commercial reasons.

Other market participants have had to consider the potential distortion of fair competition and the sustainability of their business when faced with politically well-connected competitors. Specifically, business rivals with the ability to influence regulatory policy and public investment strategies, and the capability to gain preferential access to commercial opportunities. Legacy connections, used to obtain licences or conclude deals through close links to previous administrations, can also lead to future risks of being – rightly or wrongly – targeted for investigation or rejected for business by an incoming government.

None of these scenarios are particular to Sub-Saharan Africa but they are examples of the many permutations of risk that we have seen facing both existing participants and new market entrants in the context of closely intertwined business and politics. Rarely is the potential outcome from these risks as public, wide-ranging and “toxic” as in the Gupta scandal in South Africa, but they can nevertheless cause reputational and operational damage, and crucially, with significant commercial consequences.

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