At one end of the main street in Vrede, a dust-blown farming town in South Africa's Free State province, stands a stone Dutch Reformed Church. At the other is a scattering of car-repair shops, a petrol station, a bank and a hairdresser. In between is the incongruously grand Vrede Hotel, where the clientele – almost exclusively white – is, these days, determined by out-of-reach prices rather than racist laws.
For those without work in Vrede, hardly uncommon in a province where two-thirds of black households live below the official poverty line, there’s not a lot to do. “They drink and drink and step over each other,” is how one female security guard, herself from the black township on the outskirts, puts it, poking her head through the bars of an imposing metal gate.
The gate in question, flanked by a sign showing a pistol and warning against unauthorised entry, belongs to a dairy farm located where the tarmac road ends and a dirt one begins. How money that should have been spent providing jobs on this farm ended up being lavished on a luxury wedding is a microcosm of the biggest scandal to have engulfed post-apartheid South Africa.
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The Vrede farm is one small sliver of a rotten empire. At the centre are three Indian businessmen, the now infamous Gupta brothers, who stand accused of nothing less than buying a president and selling the future of a nation.
So close have Ajay, Atul and Rajesh "Tony" Gupta become to Jacob Zuma, the controversial president, that South Africans have coined a term – "the Zuptas" – to describe their symbiotic bond. The tangle of corruption and political skulduggery will be at the heart of the five-yearly conference of the African National Congress next month, when the future leadership of the ruling party and, thus, the direction of the entire nation will be decided.
"The essence of this is that you compromise the head of state, that you have the head of state in your pocket," says Sipho Pityana, a disillusioned veteran of the ANC's struggle against apartheid and chairman of mining company AngloGold Ashanti. "You disable all the law enforcement institutions and you enable unfettered access to people who owe their positions in office to the pleasure of the president," he says.
“You have virtual, unfettered right to appoint and fire very senior people in government, including cabinet ministers, intelligence officers, state-owned enterprise people and all key strategic appointments that you think would obstruct or enable your way into the state coffers,” he says. “It is a single-minded penetration of state resources.”
State capture goes beyond simple corruption. It involves the systematic ransacking of institutions, so that the nation's laws and regulations, as well as the people in positions of power, work for the financial benefit of groups or individuals. "The singular aim of state capture," says Lawson Naidoo, executive secretary of the Council for the Advancement of the South African Constitution, "is to facilitate the plunder of state resources for the benefit of politically connected individuals and their corporate vehicles". It amounts, he says, to "institutional vandalism on a massive scale".
How one immigrant family managed in effect to "capture" a country might be considered an overblown work of fiction – if it did not happen to be broadly substantiated. So familiar to South Africans are many elements of the story that the term "state capture", once confined to academic studies of the former Soviet Union, is now the stuff of tabloid headlines and barroom chat. The Guptas themselves are a household name. "Everyone," says the security guard at Vrede, "knows the Guptas."
Case study in corruption
The story of the brothers' involvement in South Africa is really an example of how hopes for a reborn nation can sour. "As South Africa made its transition from an apartheid state to one founded on lofty democratic principles enshrined in our constitution, the nation and society were presented as a potential paragon of change," said Kgalema Motlanthe, a former president of the country, at a recent lecture in Johannesburg.
Instead, the evolution of post-apartheid South Africa has become a case study of how difficult it is to overcome the dead weight of history and how corruption can seep into the cracks of even the most uplifting national experiment.
Neither is the saga of the Guptas merely a South African affair. It has gone global. As revealed by the Financial Times in October, the FBI has begun an investigation into US ties to alleged corrupt transactions involving the Gupta brothers, who adopted South Africa as their home – and a money-making opportunity.
The FBI investigation, at least in part, involves cash transferred from a Gupta-linked company in the United Arab Emirates to one in Texas whose directors are nephews of the Guptas. In the UK, the Financial Conduct Authority, the Serious Fraud Office and the National Crime Agency are all investigating allegations that HSBC and Standard Chartered handled illicit funds connected with the Gupta family via Hong Kong and Dubai.
Over lunch recently at Johannesburg’s Hyatt Regency, a banker’s hand darts past plates of braised sunflower seeds and lime-crusted chicken to borrow a notebook. He begins sketching an iceberg. “Here is what we know about the Guptas,” he says, cross-hatching where the iceberg rises from the water. “We find out more every day. But what we don’t know is still far bigger. And it includes how they have moved their money around,” he continues, his pen trailing to the edge of the paper. “My working assumption is that 90 per cent of the ill-gotten gains are already out of the country.”
The scandal has entangled some of the biggest names in global business, damaging the reputation of a who's who of financial and professional firms. McKinsey, KPMG and the German software company SAP have all been sullied by their association with Gupta companies. Bell Pottinger, a PR firm that survived business relationships with the likes of Chilean dictator Augusto Pinochet and Syria's Assad family, has disintegrated after getting too close to the family.
Even the story of the small Vrede dairy farm, allegedly little more than a Gupta scam to siphon off state funds, has rippled overseas. On November 1st, in the second reading of a money-laundering bill, the UK politician Peter Hain, who was an anti-apartheid activist in South Africa as a student, stood up in the rarefied atmosphere of Britain's House of Lords to tell the sordid tale.
In February 2013, the Free State government announced a plan to spend 340 million rand, about €20 million, to build a dairy farm in Vrede, Lord Hain explained to the assorted peers. The new venture, he said, was part of an attempt by successive governments to create businesses run by black people that would begin to redress the historical wrongs of apartheid.
For the Guptas, it was more like easy pickings. The contract to run the farm, which was never put out to tender, was won by a company called Estina, whose sole director was an IT salesman with no farming experience. The firm was effectively a front for the Gupta family. The Free State government paid Estina an initial $8 million (€6.7 million), which was immediately transferred to another Gupta company in the United Arab Emirates and from there to three UAE-registered shell companies, according to Hain, as well as to leaked emails seen by the Financial Times.
Some $2.6 million of the money that should have gone to help impoverished people in Vrede instead, allegedly ended up paying for the nuptials of Vega Gupta, the brothers’ 23-year-old niece. The ceremony, in the upmarket Sun City complex near Johannesburg, was held over four days in the spring of 2013.
Extravagant even by the standards of Indian weddings, according to You magazine, 130 chefs were flown in from India to cater to the guests, the most important of whom were assigned personal servants. Invitees were given gifts of scarves with a total value of nearly $160,000. At least four South African cabinet ministers attended.
The wedding became notorious for something else. The Guptas had flown guests from India on an Airbus plane, which landed at Air Force Base Waterkloof, normally reserved for military flights and heads of state. On touchdown, Atul Gupta greeted partygoers without the usual customs or immigration checks. It was a flamboyant declaration that, for the Guptas, the normal laws of South Africa did not apply. In retrospect, it was probably the beginning of their downfall.
Hain found the whole episode disgusting. “At about the same time that the Guptas were celebrating at the wedding,” he told his fellow peers, “veterinarians in the town of Vrede were called to the dairy farm because of the reeking stench of dead animals.”
It was starved of funds and incompetently run; animals were dying, often of malnutrition, Hain said. There were many questions relating to the sorry story of Vrede farm. Not least why KPMG, which audited the Guptas’ accounts for 15 years, saw fit to write off the wedding costs as a business expense. The head of KPMG in South Africa and several executives resigned in September this year.
There is, however, a bigger question, one that goes to the heart of the “state capture” story. How were the Guptas able to win a contract that gave them no-questions-asked access to hundreds of millions of rand of state funds in the first place? And how had they repeated the trick again and again – and on an altogether grander scale– in the process turning themselves into some of the most powerful, and richest, people in the country?
Liberation struggle
The three Gupta brothers were born in the late 1960s and early 1970s in Saharanpur in Uttar Pradesh, north of Delhi. Their father was Shiv Kumar Gupta, a small-scale industrialist who traded in everything from fertiliser and chemicals to spices and soapstone and who encouraged his three sons to go out into the world. Ajay went to Russia, Rajesh to China. Atul, the middle son, ended up in Johannesburg where he began, humbly enough, selling shoes.
The year was 1993. Nelson Mandela had been released from prison three years earlier and the apartheid regime was crumbling. The ANC, which became the unifying voice of the liberation struggle, had been unbanned. Within a year, the Rainbow Nation was born when Mandela headed South Africa’s first black majority government and set about the task of reconciliation. Perhaps more important still was the job of transforming the lives of black people who had been systematically crushed under apartheid.
"As a 23-year-old young boy, he loved this place and he wanted to be a part of this," said Ajay Gupta of his younger brother Atul, in a rare interview last year. Ajay, considered the most charming of the three brothers, spent two hours with the Financial Times in a private dining room of the Saxon hotel, not far from the family's palatial home. "He believed in the democracy that was coming in this country," he said of Atul.
It was a time of wide-eyed optimism. South Africa adopted a new constitution, considered one of the most progressive in the world. The new republic created strong, independent institutions, had the best roads, rail and ports in Africa and the continent’s biggest industrial base. After years of sanctions, money flooded in. The booming economy provided hope that the new ANC government would have sufficient resources to begin to heal the scars of centuries.
Atul sensed a business opportunity. In 1994, he set up Correct Marketing, later Sahara Computers. Sahara cobbled together computers from different parts – a motherboard from here, an Intel chip from there – and slapped on its logo. Atul drove a hard bargain and the business began to flourish. His two brothers started visiting and, eventually, they too settled in Johannesburg.
Atul's entry into the uplands of South African politics came two years later, courtesy of an ANC activist called Essop Pahad. Pahad was one of the closest aides to Thabo Mbeki, then deputy president, and introduced Atul to him. Atul accompanied Mbeki on a business trip to India. Later, his brother Ajay became a member of the influential International Marketing Council, which promoted South Africa abroad.
The Guptas had placed their chips on various politicians, including a certain Jacob Zuma. Ajay Gupta remembers Pahad introducing him at a business dinner. They struck up a rapport. “No doubt he’s charming,” he said. “And he loves the country and loves the upliftment of the country and the people.”
Back then, Zuma, a former ANC security chief, did not look like a promising bet. True, he was elected deputy president of the ANC in 1997 and became deputy president of the nation two years later under Mbeki. But his star seemed to be on the wane when, in 2005, his financial adviser got 15 years in prison for taking bribes on Zuma’s behalf in a deal to buy frigates for South Africa’s navy.
Mbeki fired Zuma and, in 2007, prosecutors charged him with more than 700 counts of racketeering, money laundering, corruption and fraud. He had already faced a charge in 2006 of raping the HIV-positive daughter of a friend. He famously told the court that sex had been consensual (and non-protected) and that he had showered afterwards to “prevent infection”. The judge acquitted him.
The charges connected to the arms deal were dropped on procedural grounds, though they have not gone away. Against all the odds, he defeated Mbeki to become head of the party in 2007 and, in 2009, president of South Africa. The Guptas stuck with him throughout.
By the time Zuma became president, Duduzane, one of his sons, had worked for several years at Sahara Computers, eventually becoming a director. Duduzane was also a shareholder in several Gupta-related companies. In the FT interview, Ajay conceded that the family might have made him a “very small loan” to help pay for his stakes. Asked why they had such a close relationship with the president’s son, Ajay said that the young Zuma was talented. “He is working very hard. I always say that he works 16-18 hours. He doesn’t sit in an air-conditioned office and count money.”
In 2008, Zuma’s daughter, Duduzane’s twin sister Duduzile, also became a director at Sahara, though she later resigned. Separately, the Guptas’ JIC Mining Services recruited one of Zuma’s four wives as a communications officer, although she also left. Of this appointment, Ajay said that she too got the job on merit and “we didn’t know she was the First Lady”. His family’s relationship with the president was unrelated to business, he insisted. “Once you are a friend, you are a friend for ever. This has nothing to do with his post.”
Still, as far as posts go, president was not a bad one. “With Zuma, they got lucky,” says Naidoo. “In fact, they got far more than they bargained for. They couldn’t believe how pliable he was and how far he was prepared to go to facilitate their looting spree.”
Gupta demands
There is another gate in the Gupta story, besides the one protecting the Vrede farm. It is the tall security gate at Number Five Saxonwold Drive, a three-mansion compound in Johannesburg's most exclusive suburb. Inside the heavily guarded concrete perimeter wall is a helipad and a cricket pitch. Number Five is home to the Guptas. Many consider it a rival – in terms of power – to the Union Buildings, South Africa's equivalent of the White House.
Some people have described feelings of foreboding as the heavy gates close behind them. Themba Maseko, however, was not afraid. As he stood waiting at the gate in late 2010, he was angry. Maseko (56) is bespectacled with a broad face. During a recent interview he recalled how on that particular day he had driven to Saxonwold from the Pretoria offices of the South African government's communication service of which he was head.
For weeks, the Gupta family had been bugging him about a meeting. Finally, Maseko relented. A few minutes after he had set out, he received a call. He recognised the number immediately. It was from the president. “Mfokababa” – my brother – “there are these Gupta guys who need to meet with you and who need your help,” he recalled Zuma saying in isiZulu. “Please help them.”
Inside the compound, Maseko was shown to a room where he was greeted by Ajay Gupta, but ignored by Atul, who briefly joined them. Then came Ajay’s bombshell. The Guptas, whose business interests had expanded into mining and media, were starting a newspaper and a TV station, he said. Maseko would be required to transfer the government’s full 600 million rand advertising budget to them.
Startled – not least because Ajay knew the correct figure for that year’s unreleased budget – Maseko explained that spending on advertising was decided ministry by ministry. “I’ll deal with the ministers if they’re trouble,” Maseko remembered Ajay saying. “I’ll summon them personally.” He was “very aggressive, almost obnoxious”. After a while, Maseko left, saying he could not help. The encounter had lasted barely 20 minutes. Maseko needed a drink.
Of the instructions from Zuma, Maseko said: “They got him to call me, either to put pressure or to demonstrate their power, that they had access to the highest office in the land.” By doing their bidding, he said, Zuma had cheapened the presidency.
Maseko's dealings with the Guptas were not over. A few weeks later, he was planning a weekend away with his wife. The Guptas' newspaper, the New Age, was about to launch. On the Friday evening of his trip, a family representative phoned to demand a meeting first thing on Monday. Maseko said he already had a meeting scheduled for that time. About an hour later, his phone rang again.
“Themba, I hear you’re being difficult,” he remembered Ajay Gupta saying. The meeting that Maseko had declined for Monday would now take place on Saturday, Ajay said. Once more Maseko refused. He was no Gupta employee. At that point, Ajay threatened to sort him out. “F*** you,” Maseko replied. The call ended, but Maseko’s troubles were only just beginning.
A couple of months later, he was fired. He had already heard something on the grapevine. Mzwanele "Jimmy" Manyi, his replacement, had been asking colleagues where his parking spot would be. Eventually, the sacking was confirmed. Like many other officials, including cabinet members dismissed by Zuma, he heard it on the news.
Kickbacks
Maseko’s experience fits a pattern. Slowly but surely, the Guptas’ influence spread through government. Many of the key figures in the drama, offered jobs or leant on for favours, passed through the gates of the Gupta compound. Capturing the state meant wielding influence over the heads of the big state-owned enterprises (SOEs) that dished out contracts, over the regulators that set and enforced rules, and over the ministers who helped write the laws.
In March 2014, one of the biggest SOEs, Transnet, which operates South Africa's rails, pipelines and ports, announced it was spending 50 billion rand on 1,000 new locomotives, the biggest such deal in the country's history. Transnet's chief executive was Brian Molefe, a regular visitor to Saxonwold.
Half of the contract ended up going to two Chinese companies, one of which had formed a partnership with the Guptas. According to whistleblowers and leaked emails, the contract included 5 billion rand of alleged kickbacks from China South Rail to Gupta-controlled firms. Whistleblowers say that proceeds made their way through Dubai and Hong Kong, where they passed through accounts of companies linked with the Guptas. Records indicate HSBC handled the payments. China South Rail did not respond to a request for comment.
Not long after that deal went through, Molefe popped up at an even bigger SOE. Eskom supplies electricity to all of South Africa and is the world’s seventh-largest utility in terms of generating capacity. The Guptas had set up a coal business, Tegeta, and were angling to buy a coal mine, owned by Switzerland’s Glencore, that supplied Eskom.
“The reason Brian Molefe moved to Eskom was because the chief executive they had appointed there was not as gullible as they thought,” says AngloGold’s Pityana. They needed someone they could rely on.
The allegations are complex. Essentially, under Molefe, Eskom started playing hardball with Glencore, levying a huge fine for supplying allegedly under-quality coal and refusing to budge on prices. Eventually, Glencore gave up and sold the mine to Tegeta, in which Duduzane, Zuma’s son, owned a 28.5 per cent stake. Eskom effectively helped buy the mine, by paying Tegeta in advance for its coal. It also reduced the fine once Tegeta took over. During this period, phone records obtained by the public protector, an ombudsman, showed that Molefe and Ajay Gupta traded more than 50 calls.
“Who are the beneficiaries?” asks Pityana. “The Guptas and the president’s son – who is a shareholder in their companies - and therefore the president. It’s as blatant as that.”
Back at Saxonwold, the people going through the gates were getting more powerful by the day. In October 2015, Mcebisi Jonas, then the deputy finance minister, had been asked by Duduzane Zuma to visit the Guptas’ home. Later, in a sworn affidavit to the public protector, he stated that the Guptas had offered him 600 million rand to take the top job at the Treasury, providing he made a few changes to personnel. If he had bags to carry the money, he could take away 600,000 rand immediately in cash.
Jonas, shocked at the offer, left in a hurry. A few days later, he told his boss, Nhlanhla Nene, the respected head of the Treasury, that he had been offered his job. Nene laughed. He was fired a few weeks later. The job went to Des van Rooyen, a relatively unknown member of parliament with little financial experience, who was in the Saxonwold area before his appointment, according to phone records obtained by the public protector.
In a report, she said she found the coincidence “worrying”. In what became known, almost inevitably, as “Nenegate”, the sacking triggered a slide of the rand, adding to a crisis of investor confidence that had seen South Africa’s economy in the doldrums for years. Both Duduzane and the Guptas have denied any meeting with Jonas ever occurred. A different set of phone records obtained by the public protector, however, appears to corroborate Jonas’s story.
State capture
Investigators with knowledge of the financial web around the Guptas estimate that the family has earned 30 billion rand, about €1.8 billion, from their various lines of business facilitated by connections to the state. The Guptas have previously said that only 9 per cent of their various business revenues comes from state contacts, but this does not count their alleged activities as “brokers”, bringing state business to third parties.
The rottenness goes far beyond Saxonwold. State capture is not unique to South Africa. In comparison with countries such as Brazil and Russia, state looting in South Africa is probably on a fairly modest scale. Even the US, where former Goldman Sachs staff line the Treasury and foreign policy is run by ExxonMobil's former chief executive, is hardly immune from criticism about the overlapping interests of business and government.
Yet South Africa, where the inequalities born of apartheid are vast, cannot afford to divert a penny from the job of improving the economy and creating opportunity for the black majority. That is what prompted Hain's anger over the funds diverted from Vrede. It is also what makes so devastating what Prince Mashele, a political scientist, calls the "criminalisation of the ANC". The party, once a symbol of moral righteousness, has become what one civic rights activist terms a "patronage machine".
Things have reached another level under Zuma, who rose to the top under a mountain of debt and a cloud of graft allegations. In The President's Keepers, investigative journalist Jacques Pauw describes what he calls a "shadow mafia state". "Under [Zuma's] rule," writes Pauw, "South Africa has become a two-government country. There is an elected government, and there is a shadow government – a state within a state."
Pauw alleges, among much else, that Zuma has failed to submit tax returns during his presidency and that he dismantled the unit within the tax office that was investigating his affairs. He also alleges that well-known cigarette smugglers are linked with Zuma’s family and are financing the election campaign of Nkosazana Dlamini-Zuma, the president’s former wife, who Zuma is backing to replace him as ANC president in party elections next month.
Pauw accuses Zuma of “capturing” the security and prosecution services, purging it of anyone who takes too close an interest in his own affairs or those of his friends. For Pauw, the Guptas are by no means the only people who profit from close ties to the highest office in the land.
“I don’t think the president has only the Guptas,” says someone else who knows Zuma well, and who pursued state capture until he was fired from his job. “Zuma always creates a shadow structure. He has one-to-one relationships with hundreds of people. He doesn’t run a government. He runs individuals.”
Pauw’s book is part of a fightback by civil society. The country’s independent press has come out with a stream of stories about Zuma and the Guptas. The courts – not yet captured – have checked some of the president’s excesses, for example insisting that he repay part of the state funds he lavished on his Nkandla homestead.
Perhaps most important, before she left office last year, the public protector, Thuli Madonsela, published a 355-page report on the allegedly nefarious activities of the Gupta family and their influence on Zuma's shadow state. She called for a full inquiry into their political influence – something the family has said it would welcome to clear its name – and concluded that Zuma may have repeatedly violated ethics laws. The title of the report was State of Capture.
The pushback has had an impact. Nearly every bank in the country now refuses to do business with the Guptas and, after the experience of McKinsey, KPMG and others, international professional firms will not come anywhere near them. Duduzane has quit the board of Sahara and the Guptas have sold – albeit often to close associates – some of their key businesses.
Zuma is unrepentant about his friendship. Of his son’s close association with South Africa’s most notorious family, he said last year: “Is there anything wrong if Duduzane, as a son of Jacob Zuma, in his own right, joins companies or forms companies with other people? What is the problem?”
The succession
In 2019, Zuma will no longer be president of South Africa and will lose the protection from prosecution that his office still provides. Pauw and others say that his main preoccupation is not to make more money, but to stay out of jail. If his former wife becomes head of the ANC, and then likely president of the country, the betting is she will use her power to protect him.
If, however, the party goes in a different direction, most likely by electing Cyril Ramaphosa, a former union boss-turned-businessman, some still believe the ANC can roll back the tide of corruption before it is engulfed.
Pravin Gordhan, a former finance minister who has crossed swords with the Guptas on many occasions and may have lost his job as a result, says Ramaphosa, currently vice-president, offers the best hope of "turning the country around". "If the good guys win in South Africa, we can restore our credibility," he says. "I'm just one of many who want to see Mandela's legacy return."
Sipho Pityana says the situation has gone beyond the capacity of any one individual to salvage, particularly if that person has served by Zuma’s side for so long. The ANC as a whole, he says, needs to “affirm it believes in our constitution and will act, without fear or favour, against those who have undermined it.” It must, in short, “take on the barons of corruption”.
As for the Guptas, in spite of the intense pressure against them, they still spend much of their time in South Africa, though they also have a home in Dubai. Last year, before the public protector’s “state capture” report laid out its evidence, Ajay was adamant that nothing untoward was going on. “For me to believe that our elected leaders are captured is unbelievable,” he said. If it were true, he added, “then we have messed up this democracy. We have messed up this democracy very badly”. – Copyright The Financial Times Limited 2017
