This time last week I became aware of a brewing story alleging corruption that involves senior leadership at SAP's South African office. The story emerged from amaGhungane, which goes by the strapline 'Digging dung. Fertilizing democracy.' This is not the kind of story anyone here wants to see, let alone cover but at diginomica we have always been very clear - good, bad or ugly makes no editorial difference. If there's an important story that has a public interest element then we want our readers to see it here and understand it in the context it arises.
The allegations are straightforward to understand. In August 2015, SAP contracted with a third party called CAD House which acted as a kind of sales agent in relation to a contract SAP wanted to win at Transnet SOC Ltd, a publicly owned railways business with which SAP has a relationship going back to 2000.
The commission under the contract was R100 million (around $7.8 million), worth 10 percent of a deal valued at $78 million. CAD House has links to both South African president Jacob Zuma via his son Duduzane Zuma and the Gupta family. Both Gupta and Jacob Zuma stand accused of multiple cases of corruption. The contract document explicitly excludes payments to political associates at paragraph 3.7 (see image below.)
At first, local officials denied any wrong doing but once the story hit Bloomberg, SAP was quick to act, issuing a strongly worded press release that said - among other things:
SAP has initiated an independent investigation spearheaded by a multinational law firm and overseen by Executive Board Member Adaire Fox-Martin to vigorously review contracts awarded by SAP South Africa.
SAP has also launched an internal review as part of its utmost commitment to compliance and will make the results of the investigation public once it is concluded.
Consistent with company policy, SAP has brought in senior expert staff across all relevant functions while the current management team has been placed on administrative leave pending the findings of the review.
That was followed by a further statement last Friday that said:
Claas Kuehnemann will step into the role of acting Managing Director for Africa while the company’s investigation into its South Africa business is conducted.
Kuehnemann, who has been with the company since 1992, will assume all Managing Director responsibilities across the company’s Africa portfolio, totaling 51 countries. His track record with SAP dates back more than two decades from when he first started at the newly formed SAP subsidiary in South Africa.
Kuehnemann will be supported by Peter David, Regional Chief Financial Officer, SAP EMEA as acting CFO, SAP Africa. In addition, the South African Democratic Alliance has said it will lay both money laundering and corruption charges against SAP.
I wanted to speak with Adair Fox-Martin, who leads SAP's entire EMEA business and who also sits on the SAP Board because for me, there are a good number of unanswered questions.
An immediate problem comes in the shape of past corruption issues, the most recent of which was settled in 2016 between SAP and the SEC over alleged government corruption involving entities in Panama. SAP agreed to pay $3.9 million in exchange for the familiar 'no admission of guilt' wording that accompanies such settlements. Once is bad luck but twice? That suggests a different kind of problem.
Rather than speculate, I spoke with Ms Fox-Martin to better understand what happened and where the company is at today. I acknowledged that it is early in the process, what with external counsel and specialist advisors in the mix. This is what I learned:
Qu: What went wrong because in a deal of this size, surely others must have been involved?
A: It is too early to say and every contract is different. There are circumstances where the signing off will happen locally, where the process requires additional information that becomes part of the document pack but I don't have the main document to hand so it is not possible for me to comment at this time. In any event, we want the external advisors to look thoroughly at this. Don't misunderstand me, SAP understands compliance. The book on this is like a Bible but it is too early. The head of compliance is in the region.
Qu: Have the staff most closely associated with this issue which include the South African office CEO and CFO been removed from office?
A: The fours staff remain SAP employees and are on administrative leave. There has to be a presumption of innocence until the facts show otherwise.
Qu: What's happening now and how far have the investigation teams got?
A: We established early on what's called a 'chain of custody' process that includes devices which will be forensically examined for evidence in the matter. This is as much to do with protecting the affected employees as it is to safeguard SAP. We have to not only do, but be seen to be acting fairly while being transparent and that's why this is in the hands of outside experts with long experience of these matters. It is too early to say but we expect the matter to takes weeks and not months to reach a resolution. As you can imagine, there's a lot of emotion around this from employees but also partners and customers. It is unfortunate that these were the circumstances of my first visit to South Africa but I have been encouraged by the offers of help from both customers and partners. Employees are shocked yet have a lot of enthusiasm for what SAP is offering to the country. One of my goals was to reassure them that we are committed to South Africa and that we will act transparently. (Editors' note: the appointment of interim CEO/CFO serve that purpose for the time being besides providing SAP leadership with a short line of command back to the SAP Board.)
Qu: Has SAP received any notification of criminal charges or seen any inquiry from the SEC?
A: I don't know of anything on those lines.
Ms Fox-Martin has only been in post a matter of weeks so to have this dropped on her desk is a massive challenge I do not envy.
Even so, this is a problem for SAP that wont go away in a hurry because apart from anything else, South Africa is considered to have a thoroughly corrupt leadership, with ties to a corrupting family of murky interests in the guise of the Guptas.
There are many unanswered questions and it is too early in the process for anyone to be certain where this problem starts and ends. While others have raise eyebrows about the commission size that of itself doesn't mean anything. My concern is that there is an internal control problem somewhere, a topic that Ms Fox-Martin understandably chose not to discuss in this context, instead of which, she broadly laid out the many ways compliance works in different scenarios. I get all that but it leaves the burning question - was there a hole through which a murky deal could readily pass?
It is important to note that SAP is hardly alone in having this type of problem. BT recently had to get rid of its entire Italian leadership team in similar circumstances while Oracle, Intel, Microsoft and HP - just to name a few - have had their own bloody noses on this topic. As she correctly pointed out, SAP is a global company and that while it has a comprehensive set of compliance policies, there is always the risk that something will go wrong.
Our job today is to discover what happened, learn from any mistakes, fix any problems and be transparent along the way.
I don't think you can ask much more at this stage although I have little doubt fresh questions will be raised in the coming days. SAP is due to announce its Q2 results on Thursday and we will see if this becomes part of the narrative.