Last week the Justice Department (DOJ) announced a resolution of the long stand Foreign Corrupt Practices Act (FCPA) enforcement action involving Telefonaktiebolaget LM Ericsson (Ericsson), a multinational networking and telecommunications equipment and services company headquartered in Sweden. The matter was stunning in the total amount of fines and penalties assessed, coming in at over $1 billion, consisting of a criminal fine assessed by the DOJ at just over $520 million. Separately the Securities and Exchange Commission (SEC) assessed profit disgorgement of nearly $540 million. Over the next several blog posts, I will be considering the Ericsson FCPA enforcement action. Today, I consider the bribery schemes used by the company.
The documents reference herein consist of the following:
- DOJ Press Release (Press Release);
- SEC Complaint against Ericsson (SEC Compliant);
- DOJ Deferred Prosecution Agreement with Ericsson (DPA);
- Ericsson Egypt Ltd. Plea Agreement (Ericsson Egypt Plea Agreement);
- DOJ Superseding Information with Ericsson Egypt (Ericsson Egypt Information); and
- DOJ Information with Ericsson (Ericsson Information)
Even with the massive scale of the Ercisson bribery and corruption, the bribery schemes used were almost pedestrian. Part of that may be because of the length of time of the corruption, going back as a far as 2000 but even in the later phase, from 2013-2016, the same schemes continued. I will break down the bribery schemes by country.
Here the bribery scheme was payments to third party controlled by the spouse of the corrupt government official. According to the Ericsson Information, Ericsson AB’s branch office in Ethiopia and Consulting Company A signed a consulting agreement. During the relevant time period, Consulting Company A was registered to the spouse of a corrupt foreign official and that same corrupt foreign official acted as the representative of Consulting Company A. In order to conceal the true nature of the approximately $2,100,000 in bribe payments, an Ericsson employee completed a draft due diligence report that failed to disclose the spousal relationship between the owner of Consulting Company A and the corrupt foreign official. Ericsson AB’s branch office in Ethiopia entered “into a sham contract with Consulting Company A and to approve fake invoices in order to further conceal the bribe payments.” Finally, the services contemplated in the contract were never intended to be performed and the corrupt foreign official sent the same Ericsson employee who forged the due diligence an invoice requesting payment of €1,000,000 for 5,000 hours of purported work that was never performed.
As previously noted, there were two types of bribery schemes in China. In the corrupt payment scheme, payments were made through certain Ericsson employees and agents to third party service providers pursuant to sham contracts for services that were never performed. The purpose of these payments was to allow Ericsson China to continue to use and pay third party agents in China in contravention of Ericsson’s policies and procedures. These same employees knowingly mischaracterized these payments and improperly recorded them in Ericsson’s consolidated books and records.
China business unit management decided that it had to have solid relationships with Chinese government officials. To facilitate this decision, they created a structure that would allow Ericsson China to continue to work with and pay third party agents despite a company policy which prohibited the conduct. Certain employees entered into False Service Agreements and to sign purchase requests and approve invoices with pre-existing approved service providers. The services contemplated in the False Service Agreements, purchase requests, and invoices were never intended to be provided. Further, the False Service Agreements were entered into for the purpose of continuing to make payments to third party agents in violation of the Agent Policy.
But it got worse, as around 2015 China business unit employees worked to create a new and more complicated structure of agreements with third party providers to enable Ericsson China to continue working with and paying third party agents. The China business unit created and then entered into False Service Development Agreements and to sign purchase requests and approve invoices with newly established third party service provider companies, all of which were associated with pre-existing agents. Moreover, “the services contemplated in the False Service Development Agreements, purchase requests, and invoices were never intended to be provided.” Further, the False Service Development Agreements, were entered into for the Ericsson policy. Finally, certain employees knowingly “caused the payments related to the False Service Agreements and the False Service Development Agreements to be mischaracterized in LM ERICSSON’s consolidated books and records.”
In China there was also travel and entertainment which was used for illegal purposes. The payments for illegal travel expenses were made through an arrangement with a consulting company to cover the expenses associated with the Travel Expense Account, and then to seek reimbursement for the associated expenses. Ericsson also provided Letters of Guarantee to “certain vendors, including a luxury hotel and a travel agency, associated with the Travel Expense
Account in order to guarantee that” it would be responsible for any expenses that these corrupt agents incurred. These same corrupt employees later moved to reimburse the corrupt agent through False Service Agreements and the False Service Development Agreements.
In Vietnam, the bribery scheme was about as open and obvious as you could get. Between 2012 and 2015, certain Ericsson employees made approximately $4,800,000 in payments, sometimes in cash, “to Consulting Company B in order to create off-the-books slush funds to be managed by Sales Agent 4 (a representative of Consulting Company B) and Consulting Company B, with oversight and direction from employees and agents of LM ERICSSON’s subsidiaries Ericsson Malaysia and Ericsson Vietnam”. The slush fund accounts were sometimes used to “make payments to other third parties who Ericsson employees knew would not be able to pass Ericsson’s due diligence processes.” These payments to the corrupt consulting company were made pursuant to sham contracts for services that were never performed.
A portion of the slush funds managed by the corrupt sales agent were given to foreign officials as cash gifts. Certain Ericsson employees “knowingly mischaracterized these payments and improperly recorded them in ERICSSON’s consolidated books and records. Some of these payments were improperly recorded as “[Consulting Company B] Supply Cost HQM” to an “External HW, Material Consumption” account.”
Here certain Ericsson employees made approximately $45,000,000 in payments to a corrupt consulting company “in order to create off-the books slush funds to be managed by” it, with oversight and direction from employees and agents of Ericsson. The Ericsson employees involved took active steps to conceal these payments on Ericsson’s books and records. These corrupt payments were made pursuant to sham contracts between Ericsson and the corrupt consulting company for services that were never performed. Finally, toward the end of the scheme, Ericsson made termination payments to the corrupt consulting company but “improperly recorded these payments in a “Customer Service” account connected with a “Cost of Sales” account.
In Kuwait the bribe payments were a straight-forward scheme. Corrupt Ericsson employees made a payment of approximately $450,000 to corrupt a consulting company, at the request of a corrupt sales agent 5, a representative of the same consulting company. The payment was not made in compliance with Ericsson’s internal accounting controls. In order to conceal the payment, Ericsson entered into a sham contract and approved a fake invoice for services that were never performed in order to paper over the payment.
Here we look to the SEC Complaint for the underlying bribery schemes. The head of the Saudi branch and “the head of Ericsson’s Middle East region signed these consulting agreements and authorized the payments to the consultants while knowing or recklessly ignoring red flags which indicated a high probability that at least a portion of these commissions were intended for, or would be passed to, foreign officials at Saudi SOE to obtain or retain telecommunication contracts.”
Some of these red flags included, (1) the contracts with both consultants described identical services. The services contemplated in the contract were never intended to be performed. (2) One of the consulting companies had only one employee and it had only one client. (3) It was formed almost one year after the agreement was signed, specifically for the purpose of receiving payments pursuant to the consulting agreement with EAB’s Saudi branch. (4) The due diligence on the corrupt Saudi consultants was completed “almost one year after the agreements with the consultants were signed. The due diligence was a sham and was conducted only because it was necessary to begin making payments.” (6) Finally, although the Saudi consultants were located in Saudi Arabia, payments for the alleged services were made in the Channel Islands.
Join me tomorrow where I look at the internal control failures of Ericsson.
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© Thomas R. Fox, 2019