‘Exhibit A’: How McKinsey got entangled in a bribery casehttps://indianexpress.com/article/business/companies/exhibit-a-how-mckinsey-got-entangled-in-a-bribery-case-5516438/

‘Exhibit A’: How McKinsey got entangled in a bribery case

The story of McKinsey’s role in the episode has remained hidden from public view for 12 years.

Boeing, McKinsey & Co, Boeing McKinsey partnership, McKinsey bribery case, business news, Indian Express 
Dmitry Firtash, a Ukrainian billionaire, in his office in Vienna, Dec. 6, 2018. Firtash was indicted in the United States on charges of directing .5 million in bribes to Indian officials on Boeing’s behalf. (James Hill/The New York Times)

Written by Walt Bogdanich and Michael Forsythe

Boeing was in a tight spot. Just as it was preparing to roll out its innovative 787 Dreamliner — the plane that was supposed to lead the aircraft manufacturer into the future — a shortage of strong but lightweight titanium parts threatened production.

With titanium prices rising and delivery dates looming, Boeing knew it needed help, so in 2006 it did what many companies do when faced with vexing problems: It turned to McKinsey & Co., the consulting firm with the golden pedigree, purveyor of “best practices” advice to businesses and governments around the world.

Boeing asked McKinsey to evaluate a proposal, potentially worth $500 million annually, to mine titanium in India through a foreign partnership financed by an influential Ukrainian oligarch.

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McKinsey says it advised Boeing of the risks of working with the oligarch and recommended “character due diligence.” Attached to its evaluation was a single PowerPoint slide in which McKinsey described what it said was the potential partner’s strategy for winning mining permits. It included bribing Indian officials.

The partner’s plan, McKinsey noted, was to “respect traditional bureaucratic process including use of bribes.” McKinsey also wrote that the partner had identified eight “key Indian officials” — named in the PowerPoint slide — whose influence was needed for the deal to go through. Nowhere in the slide did McKinsey advise that such a scheme would be illegal or unwise.

McKinsey declined to provide The New York Times with its full report or any evidence that it had objected to the paying of bribes. But the consultancy denied recommending “bribery or other illegal acts.” For his part, the Ukrainian oligarch, Dmitry V. Firtash, denies that he paid or recommended bribes, or had any dealings with McKinsey or knowledge of the document.

The story of McKinsey’s role in the episode has remained hidden from public view for 12 years. Even today the firm’s ultimate recommendation and how its client, Boeing, responded remain something of a mystery, cloaked in the secrecy of grand jury proceedings. But McKinsey’s reference to illegal acts has thrust the firm into a tangled international battle over the extradition of Firtash, who has been charged in the United States with bribing Indian officials in anticipation of getting titanium for Boeing.

Should he be brought to trial, McKinsey, and the document it produced, stand to play a major role in the outcome — a well of potential embarrassment that underscores the risks that McKinsey and other US consulting firms face as they, and clients like Boeing, do business in countries where ethical standards and practices diverge from those at home.

McKinsey initially refused to confirm that the report even existed. But after learning that The Times had obtained a copy, the firm issued a statement acknowledging that McKinsey employees had indeed written it. Neither McKinsey nor Boeing agreed to an interview.

This account is based on an examination of public and confidential records, as well as interviews in the United States and Europe.

When Boeing went looking for titanium in 2006, it tentatively agreed to buy the metal through a company controlled by Firtash, who had made billions of dollars brokering gas sales to Ukraine from Russia and former Soviet republics.

The deal did not end well.

The mining venture never materialized, but Firtash was indicted on charges of directing $18.5 million in bribes to Indian officials for mining permits.

Firtash was a big catch for the Americans, who saw him as close to the Russian president, Vladimir Putin, capable of leading a wavering Ukraine away from a Western economic alliance and into the Kremlin’s camp. In Vienna, where Firtash was arrested and remains free on a $174 million cash bond, an extradition judge accused US officials of using the prosecution in service of its geopolitical interests.

Neither McKinsey nor Boeing was charged in the case, and Boeing has not been accused of paying bribes. But several employees of the two companies are believed to have testified before a grand jury. Boeing continued to pursue the venture even after being advised that its partner’s plans included paying bribes, records show.

In a recent interview in Vienna, Firtash said that neither he nor any of his representatives had any connection to the McKinsey document.

“We never worked with McKinsey,” he said. He said he had been unfairly singled out by prosecutors because of false media reports tying him to Putin, and an unconsummated business deal with Paul Manafort, the former Trump campaign chairman recently convicted of tax violations related to his work in Ukraine.

— The Hunt for Titanium

For Boeing, the early 2000s were a time to roll the dice. As its chief competitor, the European consortium Airbus, moved toward bigger planes, Boeing countered with a design that promised better fuel efficiency and easier maintenance: the 787 Dreamliner, a lighter, more durable aircraft with a higher percentage of titanium and composite materials.

As orders flooded in, Boeing executives knew well what was at stake. In an article about the Dreamliner, The MIT Technology Review quoted a manager saying, “If we get it wrong, it’s the end.”

Boeing hit a crosswind: an industrywide shortage of fasteners — the seemingly mundane items like nuts, bolts, rivets and washers that literally hold planes together. Thousands were needed for each aircraft, and for the lighter Dreamliner, they had to contain more titanium.

Desperate for new supplies, Boeing latched onto a promising lead. A group of six international businessmen with plentiful financing had offered to mine and process 5 million to 12 million pounds of the metal annually, much of it for sale to Boeing. The group, Bothli Trade AG, had signed a memorandum of understanding for a joint mining venture with the Indian state of Andhra Pradesh.

Environmental concerns arose, and when a land survey was conducted on the proposed mining site, residents “reacted violently,” according to government records.

But Boeing faced a more basic question: Should it even be doing business with this group — largely little-known figures from India, Sri Lanka and Hungary? The exception was the leader and leading financier, Firtash, who had expertise as the owner of titanium processing plants in Ukraine.

This was the business plan that McKinsey was brought in to assess, the plan that its report described as including the paying of bribes.

Ultimately, the deal fell apart. Boeing found other sources of titanium and McKinsey continued to advise the company on the supply chain. But McKinsey’s report on India would remain buried until it came to light years later in a legal storm.

— The Fight to Extradite

In June 2013, a federal grand jury in Chicago secretly indicted Firtash and five others, including an Indian official, on bribery charges. Still, it would be nine months before Firtash was taken into custody, where he remained for a little more than a week until a Russian billionaire, Vasily Anisimov, posted his $174 million bond. Anisimov is an associate of Putin’s friend Arkady Rotenberg.

So began a highly unusual four-year tug-of-war between two allies, the United States and Austria. Extradition requests between the United States and other Western nations are hardly ever rejected, said Lanny J. Davis, one of Firtash’s lawyers and a former special counsel to President Bill Clinton.

This extradition case would play out differently.

In August 2014, five months after Firtash’s arrest, a document unexpectedly arrived via email and Federal Express at the Austrian Justice Ministry in Vienna. It would raise profound questions about the direction of the case.

To US prosecutors, it was known simply as “Exhibit A.” A single PowerPoint slide, written in 2006 and attached to a much longer evaluation of the India mining venture, it laid out the alleged bribery scheme.

The slide stated that Firtash’s group, Bothli Trade, “has identified key Indian officials and has crafted a strategy to gain their influences.” That strategy included investing in infrastructure and jobs and respecting the traditional use of bribes. Those key officials were named, along with their positions. A footnote attributed this information to Bothli’s business plan and interviews with unidentified individuals.

Exhibit A couldn’t have come at a better time for the prosecutors. Their extradition case appeared to be falling short, dependent largely on unidentified witnesses, records that purportedly showed bribe money disguised as legitimate business transactions and meetings between Boeing officials and members of Firtash’s group. The Austrian judge wasn’t buying it.

If US officials wanted to try Firtash in Chicago, the judge said, more evidence of criminal conduct was needed, including the names of cooperating witnesses and what they were expected to say. The Americans refused, saying that to identify them would put their lives at risk, since Firtash was “associated with an upper-echelon member of the Russian mafia, Semion Mogilevich.” Firtash adamantly denies having had any business relationship with Mogilevich.

That was when prosecutors discovered Exhibit A in Boeing’s files. Rarely does someone put in writing the need for bribes. Yet now, more than a year after the indictment, prosecutors had a document that they called “very clear proof” that Firtash’s enterprise had advised Boeing “of the plan to bribe Indian public officials, which was already underway.”

— A Vital Piece of Information

The Austrian judge, Christoph Bauer, had more questions.

Why, he wondered, had prosecutors waited so long after the indictment to arrest Firtash? He was not hiding, the judge said, adding that US officials should have known that Firtash had visited France, Germany and Switzerland and made a very public appearance when he ceremoniously opened the London Stock Exchange one day in October 2013.

And then there was the curious timing of the Americans’ pursuit of Firtash, which the judge suspected was linked to his influence in Ukrainian politics, especially his help in electing the president, Viktor Yanukovych, in 2010.

Three years later, Yanukovych was wavering over whether to sign an economic agreement with the European Union or to align with Russia. He also faced re-election.

As soon as it became clear that Yanukovych, under pressure from Russia, was reconsidering signing the European Union agreement, the judge pointed out, an American delegation traveled to Kiev to bring him in line.

Facing the prospect that Firtash might sway Yanukovych and use his connections to help him remain in power, the United States asked Austria to arrest the oligarch, the judge said.

Indeed, documents show that in fall 2013, Austrian authorities had received an “urgent message” from US prosecutors: Firtash was expected in Vienna on Nov. 4. Arrest him.

Then, a few days before the planned arrest, the documents show, came another urgent message: “As part of a larger strategy, US authorities have determined we need to pass up this opportunity.” No arrest. No explanation of the larger strategy.

According to Bauer, though, that was when Yanukovych appeared to be rejecting Russia. But when the president turned back toward Russia five months later, the Americans renewed the request and Firtash was taken into custody.

Yanukovych was ousted in February 2014 amid violent protests. He now lives in Russia.

To the surprise of US officials, the judge denied extradition on the grounds that the request was politically motivated, whether or not Firtash was “sufficiently suspected” of breaking the law.

The United States appealed, and last year a higher Austrian court overturned Bauer’s ruling. That decision is under final review.

But, Firtash’s lawyers point out, the Americans did not share a vital piece of information with the Austrian courts: After the prosecutors spent months insisting that Exhibit A proved that the oligarch had recommended bribes, it emerged in the United States that the document had in fact been written by consultants from McKinsey.

In response to questions from The Times, Dan Webb, one of Firtash’s lawyers and a former US attorney in Chicago, said his client had nothing to do “with the creation or presentation of the PowerPoint slide proposing bribery and used by US prosecutors to support extradition of Firtash.” He accused prosecutors of falsely telling Austrian officials that the slide constituted “clear proof” that Firtash was behind the bribery scheme, adding that “US prosecutors never withdrew their false statement.”

The US attorney’s office in Chicago did not respond to messages seeking comment.

While McKinsey declined to provide its full report to The Times, it said it contained a section “noting unique risks that an association with Firtash would pose.” The firm said it was cooperating with the Justice Department and was not the focus of the investigation.

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For its part, Boeing said in a statement that it had cooperated with the Justice Department and was “not accused of any wrongdoing.”