December 9, 2019
Between 2000 and 2016, Ericsson paid out tens of millions of dollars to bribe customers in China along with high-ranking government officials in Africa and the Middle East, said the US Department of Justice. Using sham contracts and slush funds, the Swedish equipment maker was able to net hundreds of millions in profits through what US officials have now described as a "large-scale bribery scheme."
Ericsson had already warned the market to expect fines of around $1 billion for earlier wrongdoing, but the alleged details of its activities -- disclosed in various statements published at the weekend -- will trouble investors and risk damage to the firm's reputation as it tries to land new 5G deals. Nor could Ericsson rule out the possibility of further probes in other jurisdictions following the US investigation.
During a Saturday morning phone call with reporters and financial analysts, CEO Börje Ekholm was also forced to defend his own reputation over the affair. While Ekholm did not become CEO until January 2017, he was on Ericsson's remuneration committee as long ago as 2006 and has sat on its board for more than a decade. That puts him at Ericsson when bribes were being paid.
"It was only over time that the severity of the issues became clear and the board appointed an independent external advisor in 2016," said Ekholm when quizzed about his own responsibility for the scandal. "It was not until 2016 that we had indications the program was not good enough."
Today, the official Ericsson line is that executives in several markets used "sophisticated schemes" to hide wrongdoing. It has agreed to pay a fine of exactly $520,650,432 to the Department of Justice (DoJ) to settle criminal charges. A separate payment of $458,380,000, along with additional interest fees of $81,540,000, will go to the Securities and Exchange Commission (SEC) in relation to civil charges. This overall payment of $1.06 billion is covered by the provision of 11.5 billion Swedish kronor ($1.2 billion) that Ericsson made in its recent third quarter, when it first warned shareholders of the financial impact.
The good news for Ericsson is that it can easily cough up the penalty thanks to its strong balance sheet position, which included SEK76.2 billion ($8 billion) in gross cash and SEK37.4 billion ($3.9 billion) in net cash at the last reckoning. "While the amount is significant, I can confirm that we will be able to manage the associated cash outflow with available funds," said Carl Mellander, Ericsson's chief financial officer. The company's financial targets, which include an operating profit margin of more than 10% next year, remain unchanged.
But the separate statements published by the DoJ and SEC will make board members squirm. Starting in 2000, Ericsson lavished gifts, entertainment and travel expenses on foreign officials in China to secure contracts with state-owned firms, the DoJ said. As recently as 2013 to 2016, it made payments of $31.5 million under sham contracts for services that were never performed.
The corruption was not confined to one country or region, though. Between 2010 and 2014, Ericsson paid $2.1 million to high-ranking government officials in Djibouti to land a €20.3 million ($22.5 million) contract with the state-owned telecom incumbent. Another $4.8 million went to a consulting company in Vietnam between 2012 and 2015. Those funds were used to set up slush funds, allowing Ericsson to pay third parties that would not have passed the company's due diligence processes.
Over the same period, similar behavior took place in Indonesia, where as much as $45 million was paid to a consulting company to create off-the-book slush funds. In Kuwait, Ericsson made illegal payments to secure a contract worth $182 million with a state-owned service provider.
Through bribing officials in just three markets -- China, Djibouti and Saudi Arabia -- Ericsson was able to obtain business valued at approximately $427 million, according to the SEC.
Ericsson's response to the scandal has included the dismissal of 49 employees it describes as the "key individuals," including some high-level executives. While none has been identified at this stage, Ericsson is now considering the possibility of legal prosecution. "It is fair to say that we want all the wrongdoers to be held accountable for their actions and we are looking into and evaluating options to take action against employees," said Ekholm.
As part of its settlement with the DoJ and SEC, the Swedish vendor will retain an independent compliance monitor for three years. Since late 2016, just before Ekholm took charge, it has also been working with a compliance advisory firm on changes. "This has resulted in significant improvements," said Xavier Dedullen, Ericsson's chief legal officer.
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Ekholm and his lieutenants must hope the settlements with the DoJ and SEC draw a line under the entire affair, but the grisly details may raise awkward questions for the Swedish vendor.
The most glaring is how such widespread corruption went unnoticed for so many years. The sums of money that illegally changed hands do not look insignificant, and nor do some of the contract awards.
Ericsson's willingness to cooperate voluntarily with US authorities is also in doubt after the DoJ said it had failed "to voluntarily disclose the conduct to the department and the nature and seriousness of the offense." The company was further criticized for holding back some details, handing over information in what the DoJ calls "an untimely manner" and not disciplining some of the employees involved in corruption.
Two risks remain. One is that legal authorities in other countries launch separate investigations into Ericsson, or that US agencies uncover evidence of further wrongdoing. The DoJ's statement points out that: "Ericsson has agreed to cooperate with the department in any ongoing investigations and prosecutions relating to the conduct, including of individuals."
The other is that some customers take a principled stand against Ericsson and turn to other suppliers. Fortunately, there is little sign of any backlash. "To date we have not had any negative comments to the effect that it would affect future business, but it is something we will continuously discuss with customers," said Ekholm.
Even if service providers are worried about corruption within equipment vendors, safe alternatives may be hard to find. China's Huawei faces US charges of stealing intellectual property and lying to financiers about activities in Iran. ZTE, a smaller Chinese vendor, was recently penalized for breaching trade sanctions against Iran and North Korea. And Nokia this year flagged compliance issues related to Alcatel-Lucent, the equipment maker it bought in 2016.
"The resolution of this matter could result in potential criminal or civil penalties, including the possibility of monetary fines, which could have a material adverse effect on our business, brand, reputation or financial position," said the Finnish vendor in a March statement.
— Iain Morris, International Editor, Light Reading
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