Why Western Accounting and Consulting Firms Are Facilitating Global Corruption, and How To Stop Them

In 2016 the then-president of Angola, José Eduardo dos Santos, appointed his daughter, Isabel dos Santos, as chairwoman of Sonagol, Angola’s struggling state oil company. Ms. dos Santos quickly recruited the management consulting firms Boston Consulting Group (BCG) and McKinsey and Company to help restructure the company. BCG and McKinsey were not paid directly by Sonangol, however, but rather by a holding company controlled by Ms. dos Santos, Wise Intelligence Services. On paper, Wise Intelligence Services oversaw the consulting firms’ work, but in reality this payment plan enabled Ms. dos Santos to embezzle millions of dollars from the Angolan treasury by overcharging for the consultants’ work and then pocketing the difference. The firms, of course, still received enormous fees, and do not appear to have raised any concerns or objections regarding the highly unusual and suspicious payment arrangements. BCG and McKinsey were not the only Western professional services firms to profit from working with Ms. dos Santos. The accounting firms PwC, Deloitte, KPMG, and Ernst and Young all audited some of the companies owned by Ms. dos Santos and signed off on those companies’ contracts with the Angolan government. In January 2020 Angolan prosecutors announced that they would charge Ms. dos Santos—whose personal wealth is estimated at around $2 billion—with embezzlement of state funds in connection with her business relationships with the Angolan government.

This is far from the first corruption scandal that has implicated the same cohort of large professional services firms. McKinsey has received enormous criticism for its partnership with a company connected to the kleptocratic Gupta family in a $700 million contract with the South African government to resuscitate the country’s failing state-owned power company. Deloitte, Bain, and KPMG have also faced scrutiny for their respective roles in facilitating or otherwise enabling South Africa’s myriad corruption scandals. In Mongolia, McKinsey partnered with a firm owned by a top government official in a contract to reshape the country’s rail system; Mongolian officials ultimately levied corruption charges against three different Mongolians involved in brokering that deal.

These and numerous other scandals illustrate that, far too often, professional services firms have either facilitated, or at best been passively complicit in, the theft of massive sums from state coffers. Why have professional services firms been repeatedly implicated in corruption scandals involving their public sector work? Part of the explanation is simply the inherent risk associated with settings in which developing-country governments, where corruption risks are high to begin with, are handing multi-million dollar contracts to Western firms in an effort to modernize their national infrastructure. But in addition, two structural issues help to explain why accounting and management consulting firms are particularly susceptible to these sorts of problems.

  • First, in the United States, no industry-wide statutes or regulations mandate that consulting and accounting firms adopt anticorruption safeguards and conduct due diligence on their potential clients. In the EU, accounting firms—but not consulting firms—are ostensibly governed by these requirements, but several reports have shown that they are often lax to the point of negligent in complying. This is in sharp contrast to the financial sector. The US Bank Secrecy Act and the EU’s Anti-Money Laundering Directives, for example, impose strict customer due diligence (CDD) and know-your-customer (KYC) controls on banks and financial services companies, and require even more rigorous scrutiny when potential customers are “politically exposed persons” (PEPs), a category that includes government officials and their family members and close associates. When CDD and KYC measures raise red flags, financial services firms are expected to decline the customer’s business, and may face civil fines and criminal penalties if they fail to do so. Ms. dos Santos’s status as a PEP caused many Western banks to refuse her as a client; one advisor said that banking officials ran “like the devil from the cross” when approached to work with her. Accounting and consulting firms, however, had no such reservations. Indeed, both BCG and PwC continued working with Ms. dos Santos for years after Western banks declined her business. Although financial services institutions are not immune from corruption inquiries stemming from their work in developing nations—Goldman Sachs’ role in the 1MDB fiasco is one notable example—the frequency in which accounting and consulting firms are implicated in these scandals demonstrates the impact of the absence of meaningful due diligence measures in their industries.
  • Second, many of the leading accounting and management consulting firms, though organized under a common international brand name, in fact operate as decentralized partnerships; specific teams or offices are often de facto fiefdoms run by the senior partners in those units, with minimal oversight from the firm’s international headquarters. In practice, that decentralization leaves the central leadership of these firms with little ability to control the activities of far flung teams and offices, and inhibits the adoption of uniform anticorruption practices. (To take one example, while McKinsey likes to tout its “nonhierarchical” structure, an anonymous McKinsey consultant described the firm’s organizational setup as more akin to “anarchy,” with senior leaders unable to wrangle individual partners who manage their projects as they see fit.) Similarly, a 2014 investigation by the International Consortium of Independent Journalists into corrupt practices among leading accounting firms noted that these firms were run “as decentralized alliances of local partnerships in different countries.” That decentralization allows partners to accept lucrative public-sector contracts with potentially corrupt clients without any meaningful oversight from their central management.

Recognizing these two challenges naturally suggests two straightforward and complementary solutions, one from governments and the other from the firms themselves:

  • First, lawmakers in the US, EU, and elsewhere should extend or otherwise tighten their CDD and KYC requirements to accounting, management consulting, and other professional services firms. To be clear, not all of the rules that apply to banks should be applied to professional services firms, given the very different services these different entities perform. The crucial reform would be to impose the CDD and KYC requirements that precede beginning a business relationship with a potential client, especially in the context of public sector ventures. To be sure, this reform would not fully prevent professional services firms from entering into suspect contracts, any more than the existing regulations have squeezed all dirty money out of the financial system. But those existing regulations have succeeded in getting banks and financial service companies to develop extensive compliance departments and protocols—vital safeguards that accounting and consulting firms now lack. Imposing a stricter regulatory regime would likely halt the most flagrant partnerships between professional services firms and corrupt actors like Ms. dos Santos.
  • Second, the leaders of large professional services firms should impose stricter internal controls on their offices and teams, particularly when it comes to accepting public sector contracts. The scorching criticism directed at the consulting and accounting firms caught up in recent scandals has already prompted some minor improvements in this direction. For example, McKinsey overhauled its South African office after its partnership with the Guptas came to light. But office-by-office reforms will not suffice, given the oversight deficiencies of the current decentralized model. Total centralization of all operations is not needed; McKinsey and other firms can continue to celebrate their “nonhierarchical” business model in other respects. But stricter and more uniform standards, particularly with respect to taking on clients for public sector work, is essential.

While these reforms are straightforward in principle, in practice they are likely to spark vigorous resistance. Previous attempts to regulate professional services firms have failed due to intense lobbying, and regional offices are likely to oppose any effort to curtail their power and autonomy. But the tide may be turning, as incidents like the scandals described above may be demonstrating to these firms’ leaders that the alternative to meaningful legal and organizational reform is ferocious criticism, drawn-out investigations, damage to brand image, and lost business. And even if the firms remain reluctant to embrace reform, governments and activists are waking up to the fact that these professional services firms have been complicit in defrauding governments of developing nations, and that significant reforms are essential.

4 thoughts on “Why Western Accounting and Consulting Firms Are Facilitating Global Corruption, and How To Stop Them

  1. Great, thorough post Eric! Law firms might be good candidates for inclusion here for some of the same reasons you’ve already set out, but also because law firm client accounts pose unique bribery and AML risks. US law firms hold commingled client funds in interest-bearing trust accounts known as IOLTAS, and remit third-party payments on behalf of their clients. But US law firms have no obligation to undertake customer due diligence or report suspicious activity. Of course, FATF has been recommending globally that law firms adopt BSA-type controls since at least 2013. But in the US, law firms may voluntarily adhere to ABA guidelines to detect and prevent money laundering for fear that something more compulsory would undermine the attorney-client privilege and its attendant confidentiality. Nearly one billion dollars of Malaysian state funds were apparently laundered through Shearman & Sterling and DLA Piper IOLTA accounts, for example. There is one backstop for the AML risks posed by professional services firms: the BSA imposes obligations on their US banking institutions, which should be aware of heightened risks posed by any bank account that processes third-party payments, including a law firm client account. I’m not sure how satisfactory a backstop this tends to be in practice though.

  2. Hi Eric, thanks so much for this informative post and straightforward proposed solutions for addressing the negative role accounting and consulting firms can play in facilitating corruption. I agree that getting meaningful reform is challenging because of power dynamics and incentive problems but would hope that rising concern and condemnation around some of these firms’ actions (which include helping divert funds away from citizens to corrupt leaders, often in developing countries) would prompt some fundamental change. I assume that the response of some of these firms when confronted with these allegations is that instances of corruption were just a few “bad apples” and that the overwhelming number of projects they undertake are anticorruption compliant/free. Did you come across data that showed how widespread these corruption cases were within companies? The stories you mentioned were big headline scandals but I wonder how high the incident rates are. If you did have access to such data, did incident rates vary across the big firms? I also wanted to ask your opinion regarding what kind of pressure would work in getting consulting firms to take legal and organizational reforms more seriously. Essentially, what kind of pressure and from whom would be the most effective in getting these firms to adopt news standards (i.e. would a coalition of developing nations refusing to work with the big firms unless they established more stringent due diligence measures be feasible/powerful enough to elicit policy changes)?

  3. Hi Eric. Thank you for this interesting post. Your suggestions are very good, but I think that the first one is not feasible in many countries, because your comparison between banks and accounting or consulting firms would not apply. For example, in Brazil, banks are strictly regulated and supervised, due to their importance to the economic system and to the need of preventing the so-called “systemic risk”. Thus, they depend on authorization from the central bank and are submitted to extensive regulation and permanent oversight. That is not the situation of accounting and consulting firms, composed of professionals whose activity does not have the potential of affecting the economy at large. Hence, it would be more difficult to justify stricter regulation of those enterprises. The Brazilian constitutional principle of freedom of profession would be a hindrance.

  4. Pingback: The Climate-Corruption Connection | Harvard Political Review

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