Microsoft terminated longstanding partner agreements with JSE-listed technology services group EOH after an anonymous whistle-blower filed a complaint about alleged malfeasance involving a South African department of defence software procurement deal with the US Securities & Exchange Commission (SEC).

TechCentral has seen correspondence that corroborates this and spoken to well-placed sources who say the whistle-blower lodged the complaint with the SEC at the end of November 2018 under the US’s tough anti-graft legislation, the Foreign Corrupt Practices Act.

At the same time, the whistle-blower, through a firm of attorneys, wrote to Seattle, Washington-headquartered Microsoft’s board of directors, asking it to investigate the matter and take appropriate action, the correspondence shows.

The allegations centre on a contract, worth R120-million, awarded by the department of defence in 2016 to the EOH subsidiary, EOH Mthombo.

Following receipt of the letter, a Microsoft board committee, acting promptly on the allegations, hired Seattle law firm Perkins Coei to probe the matter. TechCentral can reveal that the whistle-blower’s complaint and the subsequent investigation by Perkins Coei led to an instruction by Microsoft to its South African subsidiary to terminate its agreements with EOH.

A spokeswoman for Microsoft South Africa said on Monday that the company is legally precluded from commenting further on the matter. However, she emphasised that the decision to end the agreements with EOH was “not taken lightly”. She firmly denied that the recent resignation of Microsoft South Africa MD Zoaib Hoosen was in any way related to the EOH developments or the department of defence contract.

Took fright

TechCentral reported last Monday evening that Microsoft terminated its Licensing Solution Provider and Microsoft Partner Network agreements with EOH Mthombo, leading to a 34% intraday collapse in the IT services group’s share price on Tuesday as investors took fright amid a lack of reasons supplied by both parties for the decision.

EOH has not said why Microsoft terminated the relationship with EOH Mthombo, while the software giant declined to provide reasons when contacted last week, citing confidentiality.

However, TechCentral can now reveal for the first time that Microsoft took the unusual step after the whistle-blower reported allegations of corruption in the software supply agreement between EOH Mthombo and the department of defence. The whistle-blower claimed the government department overpaid Mthombo to the tune of millions of dollars for Microsoft software licences.

The whistle-blower alleged that Microsoft was “complicit” in allowing EOH Mthombo to engage in a “corrupt” licensing transaction with the department of defence (DoD). Among key allegations are that:

The DoD concluded the deal indirectly through EOH, whereas it is typical for South African government agencies to procure software licences directly from Microsoft.
Though EOH Mthombo offered little by way of value-added services, it received a US$5-million margin, where EOH received $8.4-million for the deal and Microsoft $3.4-million. “EOH essentially made this massive sum for doing paperwork as a middleman for the deal,” the whistle-blower said in the letter to Microsoft’s board. EOH allegedly made more in profit from the deal than Microsoft made in revenue. “At the risk of stating the obvious, this amount of margin on a straight licensing deal was not just a red flag for corruption, but was a cannonball shot across (Microsoft) compliance’s bow that was ignored.”
EOH should have received between 1% and 3% of the amount owing for the supply of the software licences, or between $80 000 and $240 000, for related “advisory services”.
EOH Mthombo provided about 5 000 licences less than promised – 15 000 versus the promised 20 000 – to the DoD;
The DoD agreed to pay the three-year licence renewal to EOH upfront – “a red flag for corruption”. A former senior DoD official, whose name is known to TechCentral, is accused by the whistle-blower of pushing this payment through ahead of his retirement in 2017. There is, however, no direct evidence yet implicating the official in a corrupt act, and TechCentral has decided not to publish his name at this juncture.
The deal was flagged to a compliance officer in Microsoft South Africa, but no action was taken by the company against EOH. The whistle-blower suggested no action was taken because EOH was helping Microsoft at the time with a large, $50-million-plus contract with the South African Police Service, which was said to be the biggest-ever such contract for the software company’s local subsidiary.

Asked to comment on the allegations, EOH Holdings CEO Stephen van Coller said via a text message on Monday that he could confirm that EOH hired law firm ENSafrica last week to start reviewing all licensing contracts in the past five years with all public-sector entities.

“ENS was instructed to start with the Microsoft licensing contracts,” Van Coller said. “ENS is continuing with this review and giving us regular updates.”

The allegations, and a possible SEC probe, are potentially very serious for Microsoft. Approached for comment, specialist US attorneys Andy Rickman and Chris Connors told TechCentral that US-traded companies may face “significant penalties” — in some cases up to hundreds of millions of dollars — for violating the US Foreign Corrupt Practices Act.

“Whistle-blowers who report corruption relating to technology companies may receive 10-30% of the entire penalty levied upon the company by the US government, resulting in multimillion-dollar rewards,” they said in e-mailed comments. Rickman and Connors specialise in getting rewards for whistle-blowers who report corruption under a piece of legislation known as the Dodd-Frank Wall Street Reform and Consumer Protection Act.

On Friday, EOH “proactively initiated” an internal investigation into EOH Mthombo’s channel partner business unit.

In a detailed statement to shareholders, issued through the JSE’s stock exchange news service, EOH said it was working with Microsoft “to better understand the concerns and rationale for the action”.

‘Fruitful meeting’

“Following a recent fruitful meeting between EOH and Microsoft leadership, Microsoft has advised that it is taking the EOH proposals under consideration and further review,” EOH said.

It said EOH was “committed to ensuring ethical leadership throughout the group”.

Among other initiatives, it has retained the services of ENSafrica to “perform an independent, ongoing risk-based monitoring and oversight role in all the group’s major public-sector bids, contracts and engagements”. The law firm is also “overseeing EOH’s review of all material current public-sector contracts to ensure that governance relating to these contracts were adhered to”.

ENSafrica was also part of a “broadened review of large public-sector licensing agreements”, EOH said.