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.