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Ericsson Iraq scandal is major embarrassment for CEO

Not long after he took charge of Ericsson in 2017, Börje Ekholm discovered bits of the sprawling international business had gone rogue well before his tenure. Using slush funds, former employees had paid tens of millions of dollars to bribe customers in China as well as high-ranking government officials in Africa and the Middle East. After confessing Ericsson's sins in detail, vowing to do better and paying a $1 billion fine to US authorities, Ekholm must have hoped scandal was in the past. But it has resurfaced in Iraq.

The latest affair risks being a lot more embarrassing for Ekholm because it extended into his period in office, raising questions about oversight and the effectiveness of his policing reforms. An internal investigation, triggered by what Ericsson calls "unusual expense claims," has found that payments flowed to unknown parties, with Ericsson staff using "alternate transport routes" to evade local officials. This, Ericsson points out, was at a time when Islamic State, a terrorist organization, controlled some of Iraq's roads.

Ericsson CEO Borje Ekholm faces questions over activities in Iraq. (Source: Ericsson)
Ericsson CEO Börje Ekholm faces questions over activities in Iraq.
(Source: Ericsson)

The suggestion, included in Ericsson's statement, is that employees of the Swedish vendor helped fund terrorism in the Middle East. The company's investigation found no evidence of this, but nor does Ericsson appear to rule out the possibility. As it says elsewhere, investigators "could not determine the ultimate recipients of these payments."

Staff connected with the scandal have been "exited from the company," according to Ericsson. It has also taken other "remedial actions" to improve internal processes, it says. The trouble is that Ericsson should already have been a pristine model of corporate ethics after the changes it made last time round. If this could happen now, with Ericsson under such intense scrutiny, it can surely happen again, observers will fear.

Jitters

Markets are clearly worried. In Stockholm, Ericsson's share price fell one tenth this morning, although it remains above its level at the beginning of this year. The US Department of Justice (DoJ) has so far had nothing to say, but the Americans would probably be more worried about illicit payments to Islamic State than Ericsson's previous misdemeanours, when the word "terrorist" never cropped up.

Another $1 billion fine might be harder to bear, as well. When Ericsson last settled with the DoJ, it could boast (and did) gross cash of 69 billion Swedish kronor (US$7.5 billion) and net cash of SEK39 billion ($4.2 billion) on its balance sheet. But a $6 billion takeover of Vonage, announced in late 2021 and to be funded entirely through cash, seems likely to wipe out its reserves. In January, Ekholm told investors that high levels of profitability meant Ericsson could operate "with much less capital" than previously.

Ericsson's share price in last month (SEK)
(Source: Google Finance)
(Source: Google Finance)

"And basically, that allows us to pay cash for the Vonage acquisition," he said on the call about financial results. "At the same time, it does not impede our ability to invest in growing the rest of our company and the rest of our business."

Ekholm could easily distance himself from the previous scandal, sounding as upset as his Swedish composure allows. This time is harder because the wrongdoing might not have ended until 2019 (judging by Ericsson's statement), at least two years after he replaced Hans Vestberg as Ericsson CEO. Moreover, it only appears to have come to public attention because the Swedish media were asking lots of awkward questions.

Effective policing

The bigger one in the era of globalization (albeit an era that may be ending) is whether huge multinational corporations, active in some of the most troubled countries, can ever be effectively policed from headquarters. Both Telia and Telenor, Scandinavian operators with major overseas interests, have had their own run-ins with the DoJ over corruption in central Asia. Operating in turbulent regions can be dangerous for other reasons, too. Telenor is trying to sell its Myanmar subsidiary following that country's military coup. It previously quit India, where authorities remain hostile to foreign investors.


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With governments looking for any excuse to be protectionist, reputational damage could shrink Ericsson as new suppliers turn up. The UK is a prominent example of a country trying to seed a market of local alternatives to the big kit vendors. Last year, it accounted for 3% of Ericsson's sales, making it the company's fourth-biggest market. A boost came after authorities banned Huawei, an Ericsson rival, because of suspicions about that organization's links to the Chinese Communist Party. Forever cozying up to America, its government would be nervous about relying on a vendor that has repeat clashes with the US.

It seems inconceivable that Ekholm is not trying to make Ericsson a good corporate citizen. In its favor, too, is the current lack of alternative mobile infrastructure suppliers. With Huawei now shut out of the UK and other Western countries, Finland's Nokia remains the only other mainstream option. It fell behind its rivals at the start of the 5G race after hitting product difficulties and looked in catch-up mode until recently. After news of Ericsson's problems this morning, its share price was up 2% in Helsinki.

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— Iain Morris, International Editor, Light Reading

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