Ericsson Has to Sleep in the Bed it Made in Iraq

After years of investigation, Ericsson has said that its employees may have funded terrorism in Iraq and the Middle East. While it remains under investigation, the statements issued by the Swedish telecom giant have all but confirmed it. The telecom gear maker finds itself in hot water again, after the US Department of Justice slapped it with a $1 billion fine in 2017. Back then, former Ericsson 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.

This development in Iraq has massive implications on Ericsson, as well as the CEO Börje Ekholm, who would have been happy divorcing himself from anything that happened before his time. This time though, it will prove harder to do, as Ericsson itself reported that the illicit payments might not have stopped until 2019, two years after Ekholm took charge.

What's more worrying is that the matter only came to light after Swedish media started asking awkward questions; the first media release, issued on 10th February, started with "Ericsson has received questions from media regarding past compliance related matters in Iraq".

Here's a look at the latest Ericsson blunder, this time in the Middle East.

An Iraqi Affair

The whole thing started in 2018 when these so-called "unusual expense claims" came to light. Ericsson, of its own volition, started an investigation into the same the next year. According to its reports, the telecom gear maker's Iraqi employees, vendors, and suppliers' conduct. Notably, the company has noted that during a period that lasted the entire 2010s, it found "serious breaches" of compliance rules and the Code of Business Ethics.

A media statement issued on 15th February read, "It identified evidence of corruption-related misconduct, including: Making a monetary donation without a clear beneficiary; paying a supplier for work without a defined scope and documentation; using suppliers to make cash payments; funding inappropriate travel and expenses; improper use of sales agents and consultants".

Let us break this down.

1. Making a monetary donation without a clear beneficiary: means that company funds were misappropriated, potentially going towards funding terrorist activities in Iraq and the Middle East.
2. Paying a supplier for work without a defined scope and documentation: a way to cover up the transfer of funds.
3. Funding inappropriate travel and expenses: using money to bribe ISIS for access to certain roads. This could also be used as a method to cover up fund transfers to terrorist beneficiaries.
4. Improper use of sales agents and consultants: this can mean a lot of things, such as sales agents being used as middlemen, to begin with.

Furthermore, the investigating team also identified payments to intermediaries and the use of alternative transport routes in connection with circumventing Iraqi Customs, at a time when terrorist organizations, including ISIS, controlled some transport routes. This means that Ericsson intended to avoid Iraqi authorities, and as such, paid money to ISIS and other terrorist organizations controlling some routes at that time.

Of course, the investigators could not determine the ultimate recipients of these payments. However, Ericsson did note that that did create a risk of money laundering.

All of this points to a serious implication; Ericsson, whether unwittingly or otherwise, funded terrorist activities during the time. However, Ericsson has said that none of its employees were "directly involved" in funding any terrorist organization. Which really is not a great defense, to be honest.

Since then, however, the company has "exited" the staff connected with this mess. Along with this, Ericsson claims to have taken multiple remedial actions to improve internal processes. However, Ericsson should have already done this, after the scandal in China and Africa. And sadly, it has happened again, raising questions on these so-called "changes" that Ericsson has been bringing.

Can Ericsson Take Responsibility?

Right now, markets are looking on with caution. Of course, immediately after the news broke, the shares tanked by 10%, and over the past 5 days, it has sunk by 15%.

Compared to the time when the DoJ slapped Ericsson with a $1 billion fine for its misdemeanors in China and Africa, the Swedish telco has bigger reasons to worry; the Americans will take more interest in Ericsson paying money literally to the Islamic State. With the word "terrorist" being thrown around, the telco should probably prepare itself for another fine.

But, can it really pay up?

Last time around, Ericsson had money to throw around; it had gross cash reserves of about $7.5 billion, or SEK69 billion, and net cash of $4.2 billion, or SEK39 billion. However, this time around, that might prove a bit of a pain. Late last year, Ericsson acquired Vonage for $6.2 billion in cold, hard cash, wiping out most of its cash reserves. And in January, Ekholm told investors that high levels of profitability meant Ericsson could operate "with much less capital".

Therefore, all indicators point that the Swedish telecom gear maker is in no position to bear another pricey settlement. What's more, it remains embroiled in what looks like a lengthy and expensive legal battle with Apple. All of these factors mean that if the DoJ does fine Ericsson a second time in 5 years, the telecom gear maker will find itself in trouble in more ways than one.

Ericsson Needs to Clean Up its Act

This raises an important question; can huge MNCs be policed effectively from the headquarters?

Ericsson's case, while serious, is not unique. Telia and Telenor, two of the largest telcos based in Scandinavia, have had fines imposed by the DoJ, and have major overseas operations. The DoJ had charged both of the telcos for corruption in Central Asia. Telenor, in particular, has had a rocky time in Asia. First, it had to exit India as it found itself unable to compete; Indian authorities still don't like the idea of foreign telcos. That might change soon, though. Second, following the military coup in Myanmar, Telenor has been trying to sell off its business there. This points to the risks of operating in unstable regions.

This debacle will chip away at Ericsson's reputation globally. A second major scandal in 5 years can prove highly damaging, and with governments increasingly cozying up to the US, Ericsson might find its market share shrink, with its run-ins with the US DoJ. When the US banned Huawei, Ericsson saw a boost in its market share; this time around, it might receive a knock down. Countries such as India and the UK have been stressing on local alternatives for telecom gear already, and Ericsson will do good to maintain a proper image, or risk losing important markets.

We can trust that Ekholm has been trying to polish up Ericsson and fix up internal policing. What's more, right now, the only mainstream alternative any telco has is Nokia, the Finnish telecom giant. While Nokia first fell behind in the 5G race, it has started catching up; its shares have risen 2% since the Ericsson news broke. This does not mean that Ericsson has the time to grow complacent; it needs a policy overhaul, and fast.