Picture: BUSINESS DAY
Picture: BUSINESS DAY

JAPANESE conglomerate Hitachi Ltd paid African National Congress (ANC) front company Chancellor House a $1m "success fee" and $5m in "dividends" in connection with contracts to build the Medupi and Kusile power stations, the US Securities and Exchange Commission (SEC) charged on Monday.

The watchdog said Hitachi had agreed to pay $19m to settle the charges, without admitting or denying the allegations.

It would be permanently enjoined from future violations. The settlement is subject to court approval.

Chancellor House was, until last year, empowerment partner of Hitachi subsidiary Hitachi Power Africa, in which it was a 25% shareholder. In 2007, the company won Eskom contracts valued at R38bn at the time.

After intense public pressure, Hitachi Power Africa divested from Chancellor House but not before about R50m in dividends had flowed in its direction and the arrangement had been red-flagged by the US securities watchdog.

The awarding of the contracts to an ANC-linked company and the substantial flow of dividends to Chancellor House, which in 2005 acquired its stake in Hitachi Power Africa for only R1.25m, has long been regarded as suspicious.

As Hitachi Ltd, which was the parent company at the time of the transaction, had a New York listing the SEC investigated for violations of the Foreign Corrupt Practices Act.

The SEC claimed on Monday the rot went deeper. Not only were handsome dividends received but a $1m "success fee" — a term commonly used to describe influence peddling or bribery — was also paid, weakly disguised as a consulting fee.

The SEC said it had charged Hitachi Ltd "with violating the Foreign Corrupt Practices Act when it inaccurately recorded improper payments to SA’s ruling political party in connection with contracts to build two multibillion-dollar plants."

The SEC said the arrangement in which Hitachi sold a stake to a company "serving as a front for the ANC … gave the front company and the ANC the ability to share in the profits from any power station contracts that Hitachi secured".

In addition to this, "through a separate, undisclosed arrangement, Hitachi paid the front company an additional $1m in ‘success fees’ that were inaccurately booked as consulting fees without appropriate documentation. Hitachi’s lax internal control environment enabled its subsidiary to pay millions of dollars to a politically connected front company for the ANC to win contracts with the South African government," said Andrew Ceresney, director of the SEC’s enforcement division.

"Hitachi then unlawfully mischaracterised those payments in its books and records as consulting fees and other legitimate payments," he said.

Hitachi Power Africa claimed it had no knowledge Chancellor House was an ANC front company. But the SEC claims that it knew during the bidding process that Chancellor House "was a funding vehicle for the ANC".

In its complaint, the SEC says that despite this knowledge "Hitachi nevertheless continued to partner with Chancellor House and encourage the company to use its political influence to help obtain government contracts from Eskom".

MD of Chancellor House Mamatho Netsianda could not be reached for comment on Monday. ANC spokeman Keith Khoza said the ANC was "not apprised of the matter".

David Milner, spokesman for Hitachi Power Africa, now Mitsubishi Hitachi Power Systems Africa, said he was not aware of the settlement. "It involves the parent company in Japan, which will need to be contacted."