Overseas firms treading SA’s minefield need to know what the bombs look like
Has the South African market become a graveyard for the global reputations of companies that enter the market without taking account of its sensitivities or its politics?
Over the past week Swedish retailer H&M has been in the spotlight globally and under attack from the EFF locally for the racism of its “monkey in the jungle” advert, while Londonbased law firm Hogan Lovells has been in the spotlight at the House of Lords for an investigation its local office conducted for the South African Revenue Service (SARS).
It was an investigation that, said Lord Peter Hain, enabled “a corrupt money launderer to be returned to his post as second in command of the critically important SARS”.
H&M and Hogan Lovells are both relatively recent entrants to the South African market, which is seen as a platform for expansion into Africa. They sure have been making a name for themselves lately in these markets, but not in a good way.
The racism tag is a disaster for a retailer that’s trying to build its brand out to consumers in SA and the continent. The allegation that a law firm exercised poor judgment, at best, is bad news for a firm whose clients hire such firms precisely for their probity and independence.
Nor is Hogan Lovells the first professional services firm to put its reputation at risk, here and abroad, because of the way it conducted a forensic investigation for SARS. KPMG’s SARS work was one of the disasters that has put the very survival of the global audit firm’s South African operation at risk.
For law firms, as for accounting firms, reputation depends on being able to ask the right questions, to stand up to pressure from clients and to connect the dots in an investigation.
Hain has referred Hogan Lovells to the UK’s Solicitors Regulation Authority and has asked it to withdraw the firm’s authorisation. In a harsh speech in the House of Lords this week he accused Hogan Lovells of being complicit in covering up state capture and serious financial crimes by SARS commissioner Tom Moyane and his deputy, Jonas Makwakwa.
Hogan Lovells was hired by SARS in 2016 to investigate Makwakwa after the Financial Intelligence Centre reported millions of rand worth of suspicious and unusual payments into Makwakwa’s account and that of Kelly-Ann Elskie. The law firm devised and agreed perfectly appropriate terms of reference with SARS, which covered investigating possible criminal and corrupt activity as well as tax evasion, money laundering and contraventions of internal SARS policies by Makwakwa and Elskie.
But Hogan Lovells ended up conducting a much more limited investigation — on the basis of which Moyane declared that Makwakwa had been “cleared” of wrongdoing and reinstated him. SARS has argued Hogan Lovells was only supposed to do the labour law part of the investigation while PwC looked at the tax side and the Hawks at the criminal side, but the firm has come under fire from parliamentarians in SA and from Hain for not, apparently, even asking to see the PwC findings.
Even if Hogan Lovells was just naïve, not actively complicit, lawyers from rival firms ask how the firm could have accepted a mandate so clearly poisonous. It’s not as if there weren’t already big question marks over Moyane and SARS at the time Hogan Lovells took the job.
These forensic investigations are sensitive at the best of times, and firms need to be very careful about clients trying to circumscribe the mandate for the investigation so it delivers the finding the client wants.
Forensic investigations into alleged corruption have been a big growth market for lawyers and other professionals in SA in recent years. They have been a lucrative source of business at a time when the economy is weak and the market for professional services firms is tough. In law, the competition has become ever more fierce as at least 10 international law firms have set up offices in Johannesburg over the past five years, Hogan Lovells among them.
But a series of firms found themselves at the wrong end of highly controversial and tainted investigations undertaken for public sector clients. At least one big Johannesburg-based law firm is asking itself now whether it really wants to stay in this business, given the reputational risks involved.
One interesting question is what will happen to the more high-profile forensic work related to corruption in state-owned enterprises and other public entities such as SARS if the law enforcement authorities start doing their work without fear or favour again — as this week’s sudden spurt of action on state capture by the National Prosecuting Authority and Asset Forfeiture Unit suggested.
Ideally, if the new leadership in the ANC and in the government deliver on their promises to stamp out corruption, there could ultimately be a lot less public sector forensic work – and the politics of it might be less poisonous. For now, though, firms need to be wary that the risks to reputation don’t outweigh the financial rewards of forensic work.