Corruption Scandal Expected to Cost Ericsson $1.2bn

Leading telecoms network manufacturer Ericsson has announced they will make a SEK12bn (USD1.2bn) provision in their accounts to cover penalties and other expenses relating to corrupt business activities in six countries, reports Reuters. Ericcson anticipate that authorities in the USA will levy USD1bn in fines, and the remainder of the provision has been set aside for the cost of investigations and compliance work.

Last week Ericsson publicly concluded that they had broken the US Foreign Corrupt Practices Act and violated their own code of ethics in China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam. This follows a series of enquiries by US authorities beginning with the Stock Exchange Commission in 2013. In recent years Ericsson has repeatedly briefed the press and shareholders about the progress of those investigations and the need to address past failings.

The USD1.2bn provision is worth approximately 4.5 percent of the market valuation of Ericsson, or 6 percent of their global sales last year. It will be booked in the third quarter of their financial year. Bankers at UBS have said the costs will likely reduce Ericsson’s net cash at year end from SKR19bn to about SKR7bn (USD0.7bn). This will seriously impact Ericsson’s ability to compete with Nokia and Huawei in the key battle for 5G network contracts. However, the news did not come as a significant surprise to the market, and Ericsson’s share price was largely unaffected.

The additional costs included in the provision make allowance for the ‘monitorship’ of Ericsson’s subsequent compliance. “It is not unusual to end up with a monitorship,” said Xavier Dedullen, the Chief Legal Officer of Ericsson, during a conference call for journalists and analysts. Monitorships typically last two or three years. However, Ericsson could not predict whether there would be further corruption investigations and penalties levied by authorities outside of the USA.

Ericsson executives say they have made extensive changes to their ethics and compliance programs in recent years. “Where there is a risk of money laundering, we have taken proactive measures to address those,” said Dedullen. 49 employees have been sacked already; it is unknown if any of them will face criminal charges. 16 other employees are still being investigated.

David Morrow’s exploration of the roots of the Ericsson corruption scandal ranks amongst the most popular Commsrisk articles of all time. These articles once again generated a spike in traffic over the weekend as readers worldwide sought to learn from Ericsson’s mistakes. You might also want to go back and review how Ericsson fell into a pattern of paying bribes to secure contracts, and so got themselves into this mess; see here and here for parts one and two of Dave’s analysis.

Update 08:00UTC 30 September 2019: Swedish business newspaper Dagens Industri has reported rumors that Ericcson CEO Borje Ekholm will soon announce his departure. Ekholm has been managing the fallout from the corruption crisis since his appointment in January 2017. Outgoing Saab CEO Hakan Buskhe is said to have been lined up as Ekholm’s replacement.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.