Ericsson Expects $1B US Fine for Corruption, Warns Non-US Investigations May Follow
Ericsson says it expects a US fine of $1 billion for corruption in six countries and that it will take a hit of 12 billion Swedish kronor ($1.23 billion) when it reports third-quarter results to cover the penalty and related costs.
The Swedish vendor said it was facing reputational damage and would not rule out the possibility of further investigations by non-US authorities. "Nothing has started at this point in time … it is a risk factor going forward," said Börje Ekholm, Ericsson's CEO, during a call with analyst and reporters this morning.
The update comes almost a year after the Swedish vendor first indicated that a US investigation into corrupt practices could land it with a "material" fine. At the time, Ekholm told reporters that around 50 employees had been sacked after the company's own internal investigation found evidence of corruption.
Ericsson shed further light on the issue in a statement published this morning, indicating that breaches of the Foreign Corrupt Practices Act occurred in China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam.
It has been cooperating with an investigation by the US Securities and Exchange Commission since 2013 and supporting the Department of Justice with a separate investigation since 2015. The process is still ongoing, said Ericsson, but covers a period ending in the first quarter of 2017, when Ekholm joined as CEO.
The company said it would book SEK12 billion ($1.23 billion) as an additional operating expense in the third quarter. That amount is expected to cover the actual fine as well as related costs, which might include arrangements for a so-called "monitorship" demanded by compliance watchdogs.
"It is not unusual to end up with a monitorship," said Xavier Dedullen, Ericsson's chief legal officer. "Monitorships are typically between two and three years and we have to see where we come out with authorities."
While the SEK12 billion ($1.23 billion) provision equals about 6% of global sales last year, Ericsson is maintaining its financial guidance of a 10% operating margin next year and one of 12% in 2022. "We can confirm that we will be able to manage cash outflow with available funds," said Carl Mellander, Ericsson's chief financial officer. "The balance sheet strength we reported in Q2 included a gross cash amount of SEK69 billion [$7.1 billion] a net cash amount of SEK39 billion [$4 billion]."
Expressing deep regret, Ekholm described the episode as a "sad chapter in an otherwise proud history" and said his leadership team was doing all it could to ensure there will never be a repeat.
Ericsson has accordingly made sweeping changes to its ethics and compliance program in the past two years, said executives. "Where there is a risk of money laundering, we have taken proactive measures to address those," said Dedullen when quizzed on some of the details. "We have also been working on making internal controls more robust and relying more on digitalization to detect and pre-empt suspicious transactions."
It also emerged that exactly 49 employees have already been sacked in connection with the affair and that another 16 members of staff are still under investigation.
Ekholm declined to answer questions about an investigation by Greek authorities into former Ericsson employees and whether this had formed part of the US investigation. "The reality is the investigation by US authorities covered a long period and many geographies and it is very hard to go into details at this point in time," he said. "We need to conclude negotiations with US authorities before we start to comment on activity."
In mid-2017 Ericsson issued a statement indicating it was "aware" of a recent Greek decision to indict six current and former employees regarding defense contracts signed in 1999.
Despite today's upset, Ericsson's share price had barely moved in Stockholm, possibly because shareholders had already been warned of the fine. The decision to maintain financial targets will also have helped to overcome any anxiety.
But there will be some concern about the possibility of further investigations outside the US. Additional penalties on top of the one Ericsson now anticipates could force it to lower its targets and hinder efforts to challenge Huawei and Nokia, its main rivals, in the nascent market for 5G equipment and products.
On the issue of reputational damage, another worry is that customers will look for alternatives to Ericsson, although Ekholm said there had been no such impact so far. "This is well known to customers for a long time," he said. "That has been no secret. We have been very clear to customers and not seen any effect."
Ericsson's share price in Stockholm was trading at SEK79.50 ($8.16) at the time of publication, unchanged compared with the figure a year ago.
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— Iain Morris, International Editor, Light Reading