Tuesday, October 20, 2020

Ericsson brace for huge fine in U.S. corruption probes sets aside $1 Billion

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Ericsson AB said it expects to pay US$1 billion to resolve investigations by

United State authorities into business ethics breaches in six countries including China, in one of the costliest corruption cases on record.

The Sweden-based telecommunications equipment maker on Thursday said in a statement it has made a provision of 12 billion kronor (US$1.2 billion) to cover the penalty, and this will dent third-quarter earnings.

It added it could not comment on details of the process with the US Securities and Exchange Commission and Department of Justice.

Ericsson has cooperated with investigators since 2013, when the SEC began its probe into possible Foreign Corrupt Practices Act violations.

It has not disclosed details of the ethics breaches under investigation, though it said at the time that the probe related to a payment system used to win contracts in the 1990s.

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Ericsson on Thursday said the investigation covers a period ending in the first quarter of 2017 and involves FCPA breaches in China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam.

“We are ashamed about the historical conduct and we’re very unhappy about that and sad about being in this position, but we are confronting the issue,” Borje Ekholm, Ericsson’s chief executive officer, said in a phone interview.

“Our compliance programme has not been fit for purpose, so over the last two years, we have worked very hard to strengthen our programme to do what is in our power to avoid these type of situations,” he said.

Ericsson shares fell 0.9 per cent and traded at 79.10 kronor at 12.05pm local time. They have gained about 3 per cent this year compared with a 16 per cent advance for the benchmark OMX Stockholm 30 Index.

The FCPA prohibits American companies and overseas firms with stocks trading on US exchanges from paying bribes to foreign officials.

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Ericsson is moving to resolve the probes as it battles Nokia Oyj for 5G network supply contracts and looks to win customers amid a US-led boycott against rival vendor Huawei Technologies.

Ericsson said in July the first big deployments in Asia will gradually pull down margins, although not enough to jeopardise profitability targets for 2020.

Asked in a phone interview whether the ethics breaches will make it harder for the company to win 5G contracts, Ekholm said that “of course there is a risk” but that the company’s “focus on making sure we have a very competitive product portfolio is still in place”.

Ekholm took over as CEO in 2017 to turn Ericsson around after fierce competition from Chinese rivals and dwindling carrier spending on fourth-generation wireless gear led to a plunge in the company’s shares. The new tech offers a chance to boost sales as companies invest big on equipment in a global market dominated by just three players.

Third-quarter net income is expected to drop about 15 per cent to 2.3 billion kronor, according to the average of analyst estimates compiled before Ericsson’s Thursday statement.

Ericsson’s announcement has “some clear negative implications” with “meaningful cash outflows down the line”, analysts at Citigroup, including Amit Harchandani and Robert Lamb, said in a note. They also see potential risks of prosecution or charges against executives.

“It’s very hard for us to assess” the risk of employees getting prosecuted, Ekholm said. “Criminal charges will be decided by the US authorities or authorities in general and I cannot speculate about that.”

Penalties of US$1 billion would surpass the US$965 million payment imposed on Sweden-based Telia Co in 2017 after the telecommunications carrier admitted to paying hundreds of millions of dollars in bribes to a government official in Uzbekistan.




Ericsson’s estimate of the charges it faces is “within the ballpark” of similar settlements, such as Telia’s, the Citigroup analysts said. The “overhang” around the case would probably go away by next year, they said.

The SEC has undertaken 11 enforcement actions under the FCPA this year, including fines against Walmart, Microsoft, Deutsche Bank AG and Telefonica Brasil SA, according to the regulator’s website. Petróleo Brasileiro SA agreed to pay US$1.78 billion last year over a bribery and bid-rigging scandal.

Ericsson has acted to address shortcomings after identifying breaches of its code of business ethics and the FCPA, it said in the statement. The company also said it failed to react to red flags, enabling some employees to circumvent internal controls.

“We have over the last two years taken steps to address those gaps and shortcomings and now we have a programme that is much more fit for purpose, and we’re ensuring that the company and every employee in the company follow our code of business ethics,” Ekholm said in the phone interview.

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“The reality is that in a company of 100,000 employees, there will be some rogue employees,” he said, adding that what was key now was that Ericsson had a programme in place to identify any misconduct and then take action quickly.

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