In the last decade, there has been an increased use of simulated consultancy agreements in Southern Africa, as a mechanism to facilitate fraud or corrupt dealings.
Recent examples of such agreements include:
- the “consultancy arrangements” between the Middle Eastern ship manufacturer Privinvest and former Credit Suisse bankers Andrew Pearse and Surjan Singh, in regards to the corruption scandal involving Mozambican state owned companies Proindicus, EMATUM and MAM; and
- the numerous consultancy contracts which the Gupta linked “consultancy” firm Homix entered into. Homix was in fact just a shell company used to funnel money away from ailing and captured South African state owned enterprises.
The challenge facing many regulators and courts is how to discern the difference between legitimate and simulated consultancy agreements. The difficulty lies in the fact that many simulated contracts are designed, often by lawyers, to look and feel like genuine consultancy arrangements.
On paper, they may seem legitimate, but under the surface, they are nothing more than an architected sham.
South African courts have, however, become mindful of the use of simulated consultancy arrangements and have started placing increased scrutiny on the collective pieces of consultancy agreements.
In the recent South African Supreme Court case of Scholtz & others v The State 2018, ZASCA, the court noted that in determining the existence of corruption, the view is that “corruption is all too often an issue which has to be determined by way of inference drawn from the proven facts. In this regard, like pieces in a jig-saw puzzle, a number of events need to be taken into account to determine the full factual matrix from which inferences may permissibly be drawn.”
While courts have not specifically pronounced on what the puzzle pieces look like, it’s becoming clear from the all too many public examples available. The following factors have collectively been seen to typify simulated consultancy agreements:
- Excessively high contract values when viewed against the consultancy services to be provided
- Contract values not being market related or commercially justified in the circumstances;
- Vague description of the consultancy services to be rendered;
- Non or poor delivery of the consultancy services;
- The use of unjustifiable payment mechanisms, such as pre-payments, success fees, risk based payments, etc; and
- The use of unjustifiable payment mechanisms not linked to the consultancy services.
While South Africa’s corruption issues are far from over, we can take comfort in the fact that its courts have started to demonstrate a mature understanding of the complicated structures designed to facilitate and shield corruption. It’s hoped that, through the lessons learnt from the ongoing and very public Judicial Commission of Inquiry into State Capture, South Africa will be able to develop world leading compliance and regulatory standards.