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:

  1. DOJ Press Release (Press Release);
  2. SEC Complaint against Ericsson (SEC Compliant);
  3. DOJ Deferred Prosecution Agreement with Ericsson (DPA);
  4. Ericsson Egypt Ltd. Plea Agreement (Ericsson Egypt Plea Agreement);
  5. DOJ Superseding Information with Ericsson Egypt (Ericsson Egypt Information); and
  6. 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.

Djibouti

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.

China

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.

Vietnam

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.”

Indonesia

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.

Kuwait

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.

Saudi Arabia

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.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2019

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 begin with an introduction and overview of the matter.

The documents reference herein consist of the following:

  1. DOJ Press Release (Press Release);
  2. SEC Complaint against Ericsson (SEC Compliant);
  3. DOJ Deferred Prosecution Agreement with Ericsson (DPA);
  4. Ericsson Egypt Ltd. Plea Agreement (Ericsson Egypt Plea Agreement);
  5. DOJ Superseding Information with Ericsson Egypt (Ericsson Egypt Information); and
  6. DOJ Information with Ericsson (Ericsson Information)

Announcing the decision via a Press Release, Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division said, “Ericsson’s corrupt conduct involved high-level executives and spanned 17 years and at least five countries, all in a misguided effort to increase profits. Such wrongdoing called for a strong response from law enforcement, and through a tenacious effort with our partners in the Southern District of New York, the SEC, and the IRS, today’s action not only holds Ericsson accountable for these schemes, but should deter other companies from engaging in similar criminal conduct.”

US Attorney Geoffrey S. Berman of the Southern District of New York, where the case was fined, noted, “Today, Swedish telecom giant Ericsson has admitted to a years-long campaign of corruption in five countries to solidify its grip on telecommunications business. Through slush funds, bribes, gifts, and graft, Ericsson conducted telecom business with the guiding principle that ‘money talks.’ Today’s guilty plea and surrender of over a billion dollars in combined penalties should communicate clearly to all corporate actors that doing business this way will not be tolerated.” Don Fort, Chief, Internal Revenue Services (IRS) Criminal Investigation, added,  “Implementing strong compliance systems and internal controls are basic principles that international companies must follow to steer clear of illegal activity. Ericsson’s shortcomings in these areas made it easier for its executives and employees to pay bribes and falsify its books and records. We will continue to pursue cases such as these in order to preserve a global commerce system free of corruption.”

Dick Cassin, writing in the FCPA Blog, said, “The resolution [totaling approximately $1,060,000] is the second biggest FCPA case, behind only Petrobras’s $1.78 billion global settlement in 2018. Ericsson becomes the fourth mobile phone company to appear on the FCPA Blog’s current top ten list, joining Sweden’s Telia, MTS of Russia, and VimpelCom of Holland.” Cassin also noted,  “Ericsson’s $540 million payment to the SEC is the second biggest FCPA disgorgement, also behind only Petrobras.” This now makes numbers 2-5 of the FCPA Blog’s Top Ten FCPA Enforcement Actions consist solely of telecom companies.

The bribery schemes were pervasive, long running, had senior management support and involvement and were run on a global scale. It led to a criminal plea by Ericsson’s Egyptian subsidiary, Ericsson Egypt, of one count of conspiracy to violate the FCPA. The countries where bribes were paid included Djibouti, China, Kuwait and Vietnam.

Many of the bribes paid across the globe were funded out of Ericsson Egypt. While the bribery schemes were massive in scope, they were almost pedestrian in execution. Some of the bribery schemes and payment amounts, as set out in the Ericsson Information, included the following. In Djibouti, between 2010 and 2014, Ericsson, via a subsidiary, made approximately $2.1 million in bribe payments to high-ranking government officials in order to obtain a contract with the state-owned telecommunications company valued at approximately €20.3 million to modernize the mobile networks system in Djibouti.

In China, between 2000 and 2016, Ericsson subsidiaries caused tens of millions of dollars to be paid to various agents, consultants and service providers, a portion of which was used to fund a travel expense account in China that covered gifts, travel and entertainment for foreign officials, including customers from state-owned telecommunications companies. In addition, between 2013 and 2016, Ericsson subsidiaries made payments of approximately $31.5 million to third party service providers pursuant to sham contracts for services that were never performed.

Additionally, in China, another $19.5 million was paid to third party consultants to fund gifts and leisure trips for Chinese foreign officials and were inaccurately characterized in Ericsson’s books and records. Ericsson used the travel expense account to win business with Chinese state-owned customers. This included travel to a large number of locations where Ericsson did not have operations such as locations in the US, including Palo Alto, Las Vegas, Phoenix, Chicago, trips to London and the Caribbean, including a week-long luxury cruise that included ports of call in Barbados, St. Lucia, Antigua and St. Martin.

In Vietnam, between 2012 and 2015, Ericsson subsidiaries made approximately $4.8 million in payments to a consulting company in order to create off-the-books slush funds, associated with Ericsson’s customers in Vietnam, that were used to make payments to third parties who would not be able to pass Ericsson’s due diligence processes.

In Kuwait, between 2011 and 2013, an Ericsson subsidiary promised a payment of approximately $450,000 to a consulting company at the request of a sales agent and then entered into a sham contract with the consulting company and approved a fake invoice for services that were never performed in order to conceal the payment.

Ericsson did not self-disclose its FCPA violations and apparently continued to try and hide additional violations even after it was initially confronted by the DOJ. Further, while Ericsson did receive some credit under the DOJ’s FCPA Enforcement Policy for cooperation and its remediation efforts, it did not receive full credit available, according to the Press Release “it did not disclose allegations of corruption with respect to two relevant matters; it produced certain materials in an untimely manner; and it did not fully remediate, including by failing to take adequate disciplinary measures with respect to certain employees involved in the misconduct.” At the end of the day, Ericsson received a 15% discount under the FCPA Corporate Enforcement Policy for its actions.

Apparently, the DOJ and SEC were not satisfied with neither the cooperation of Ericsson nor its remediation as was required to maintain a corporate monitor for three years after entry of the DPA. The case has been assigned to US District Judge Alison J. Nathan of the Southern District of New York.

Join me tomorrow where I consider the bribery schemes utilized by Ericsson.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2019