Late last Friday, the DOJ and SEC announced (here and here) a record-setting Foreign Corrupt Practices Act action Swedish telecom company Ericsson (a company with American Depositary Shares traded in the U.S.). The $1.06 billion settlement amount is the largest net FCPA settlement amount in history surpassing the $850 million FCPA enforcement action against Russian telecom company MTS in March 2019 (see here).
The enforcement action concerned conduct in Djibouti, China, Vietnam, Kuwait, Indonesia, and Saudi Arabia.
As highlighted below, the enforcement action involved a DOJ and SEC component. The DOJ matter involved a one count criminal information against Ericsson subsidiary Ericsson Egypt Ltd. charging conspiracy to violate the FCPA’s anti-bribery provisions resolved through a plea agreement and a criminal information against Ericsson charging conspiracies to violate the FCPA’s anti-bribery, books and records, and internal controls provisions resolved through a deferred prosecution agreement. The DOJ matter was resolved through payment of a $520 million criminal penalty.
The SEC matter involved a civil complaint against Ericsson charging violations of the FCPA’s anti-bribery, books and records, and internal controls provisions. The SEC matter was resolved through payment of $540 million in disgorgement and prejudgment interest.
DOJ
Ericsson Egypt
This criminal information against Ericsson Egypt (described as a majority-owned subsidiary and operating entity of Ericsson whose books, records and accounts were included in the consolidated financial statements of LM Ericsson filed with the SEC) concerns a bribery scheme in Djibouti and alleges in summary fashion:
“In or about and between 2010 and 2014, LM Ericsson, through certain of its agents, including Ericsson Egypt, Ericsson AB, Employee 1 (described as the Head of the Customer Unit in North East Africa), Employee 2 (described as the VP of New Business Development for the Horn of Africa), Employee 3 (described as a high-level executive in the Middle East and Africa region), Employee 4 (described as the Customer Unit Controller for North East Africa), and others knowingly and willfully conspired and agreed with others to corruptly provide approximately $2,100,000 in bribe payments to, and for the benefit of, foreign officials in Djibouti, including Foreign Official 1 (described a high-ranking government official in the executive branch of the Djibouti government who had influence over decisions made by a state-owned telecommunications company), Foreign Official 2 (similarly described), and Foreign Official 3 (described as the CEO of the state-owned telecom company), in order to secure an improper advantage in order to obtain and retain business with Telecom Company and to win a contract valued at approximately €20,300,000 with Telecom Company (the “Telecom Company Contract”).
In order to conceal the true nature of the approximately $2,100,000 in bribe payments, Employee 2 completed a draft due diligence report that failed to disclose the spousal relationship between the owner of Consulting Company (described as a consulting company that was formed in Djibouti and registered to the spouse of Foreign Official 2 and in which Foreign Official 2 acted as a representative) and Foreign Official 2. Further, certain agents of LM Ericsson caused Ericsson AB’s branch office in Ethiopia to enter into a sham contract with Consulting Company and to approve fake invoices in order to further conceal the bribe payments.
In furtherance of the scheme, conspirators, including Employee 2 and Foreign Official 2, used U.S.-based email accounts to communicate with each other and other individuals about the scheme.
In addition, the $2,100,000 in bribe payments that LM Ericsson, through certain of its agents, including Ericsson AB, Ericsson Egypt, and an employee of Ericsson Egypt made and caused to be made to Consulting Company were routed into and out of correspondent bank accounts at financial institutions in New York, New York.”
According to the information, in 2010 Employee 2 informed Employee 1 that Ericsson AB could win the Telecom Company Contract if Ericsson AB paid bribes to Djibouti officials. The information then alleges various conduct that occurred between 2010 and 2012 in furtherance of the scheme such as the use of Consulting Company which requested payment for 5,000 hours of purported work that was never performed. According to the DOJ, this was a sham contract to conceal the bribe payments and the culpable employees completed a draft due diligence report that failed to disclose the spousal relationship between the owner of the Consulting Company and Foreign Official 2.
The information alleges:
“Ericsson AB continued to perform on the Telecom Company contract through 2014. In or about January 2014, Ericsson AB sent an invoice to Telecom Company A in order to receive the final payment under the Telecom Company A contract. On or about January 31, 2014, Ericsson AB received its last payment for its performance on the Telecom Company A contract. LM Ericsson, through Ericsson AB, earned approximately $7,000,000 in profits from the Telecom Company A contract.”
Based on the above, the information charges conspiracy to violate the FCPA’s anti-bribery provisions.
The charged against Ericsson Egypt was resolved through this plea agreement.
LM Ericsson
This criminal information against LM Ericsson involves the same Djibouti bribery scheme highlighted above as well as additional schemes in China, Vietnam, Indonesia, and Kuwait.
As to China, the information alleges in summary fashion:
“In or about and between at least 2000 and 2016, LM Ericsson, through certain of its employees and agents, including CBC (Ericsson China Communications Co. Ltd), EHK (Ericsson Hong Kong), ENC (Nanjing Ericsson Panda Communications Company Ltd), Employee 5 (a high-level executive in the Asia Pacific Region), Employee 6 (a high-level executive in China), Employee 7 (a high-level executive in China and Hong Kong), Employee 8 (a high-level executive in China), and Employee 9 (a high-level executive in China and Hong Kong), caused tens of millions of dollars to be paid to various agents, consultants, and service providers in China, at least a portion of which was used to provide things of value, including leisure travel and entertainment, to foreign officials, including employees of Telecom Company B (described as a state-owned telecommunications company in China).
Additionally, in or about and between 2013 and 2016, LM Ericsson, through certain of its employees and agents, including CBC, ENC, Employee 5, Employee 6, Employee 7, Employee 8, and Employee 9, made payments 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. LM Ericsson, through certain of its employees and agents, knowingly mischaracterized these payments and improperly recorded them in LM Ericsson’s consolidated books and records.”
According to the information, between 2013 and 2016, LM Ericsson, through certain of its employees and agents, including Ericsson China, made approximately $31.5 million in payments pursuant to sham service provider agreements under which no legitimate services were rendered.
According to the information, in 2011 LM Ericsson instructed senior executives that all sales agent agreements needed to be terminated and in 2013 LM Ericsson formalized this policy change to prohibit the use of third party agents, except in cases where legally required or necessary for a specific business reason (the so-called New Agency Policy). However, according to the information, certain employees “determined that it was important for LM Ericsson’s business in China to continue to engage third party agents that had strong connections to LM Ericsson’s state-owned customers” and certain employees “created a structure that would allow Ericsson China to continue to work with an pay third party agents despite the New Agent Policy.” Thereafter, the information alleges that certain employees created “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 in violation of the New Agent Policy.”
According to the information:
“Certain employees and agents of LM Ericsson 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.”
The information alleges that there existed an expenses account (the Travel Expense Account) that covered expenses on behalf of agents and customers in China, including gifts, travel and entertainment for customers from state-owned telecommunications companies, that had no legitimate business purpose.
“The Travel Expense Account was largely associated with Sales Agent 2 (a sales agent for Ericsson China who helped obtain business from state-owned customers in China) and was used to pay for gifts, travel, and entertainment for Ericsson’s state-owned customers in China, including Telecom Company B, as well as to cover Sales Agent 2’s own travel expenses. Certain employees of LM ERICSSON and Ericsson China used the Travel Expense Account to win business with state-owned customers, including Telecom Company B. The total historical spend through the Travel Expense Account was tens of millions of dollars.
The Travel Expense Account covered travel for delegations of Chinese government officials and sales and procurement managers of state-owned customers, including Telecom Company B, on trips to international destinations, including to the United States, which had little to no apparent business purpose.”
Among the trips were:
- “a 16 day trip to Canada, the United States, and the Caribbean, including a week-long luxury cruise that included ports of call in Barbados, St. Lucia, Antigua, and St. Martin. Only two hours of the 16-day trip were reserved for meetings at Ericsson’s offices in Canada.”
- “a trip to the Untied States and the United Kingdom, with stops in Palo Alto, CA (with accommodations at the Four Seasons Hotel), Las Vegas, NV, Phoenix, AZ, Chicago, IL, and London England.”
As to Vietnam, the information alleges in summary fashion:
“In or about and between 2012 and 2015, LM Ericsson, through certain of its employees and agents, including Ericsson Malaysia, Ericsson Vietnam, Employee 9 (a high-level executive in China and Hong Kong), and Employee 10 (Customer Unit Head of Vietnam), made approximately $4,800,000 in payments, sometimes in cash, to Consulting Company B (a consulting company formed in Thailand who was retained by Ericsson Vietnam to assist in obtaining business in Vietnam) 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, and Employee 9.
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.
The payments to Consulting Company B were made pursuant to sham contracts between Ericsson Malaysia, Ericsson Vietnam, and Consulting Company B for services that were never performed. Sales Agent 4 also set up a means by which Sales Agent 4 could quickly transfer cash to third parties.
[…]
Employee 10 understood that the slush funds managed by Sales Agent 4 were associated with LM Ericsson’s customers in Vietnam [all of which were state-owned]. A portion of the slush funds managed by Sales Agent 4 were given to customers as cash gifts.”
As to Indonesia, the information alleges in summary fashion:
“In or about and between 2012 and 2015, LM Ericsson, through certain of its employees and agents, including Ericsson Indonesia, Employee 5 (a high-level executive in the Asia Pacific Region), and Employee 9 (a high-level executive in China and Hong Kong), made approximately $45,000,000 in payments to Consulting Company C (a consulting company formed in Indonesia and Singapore) in order to create off-the-books slush funds to be managed by Consulting Company C, with oversight and direction from employees and agents of LM Ericsson and its subsidiaries, including Ericsson Indonesia, Employee 5, and Employee
LM Ericsson, through its agents and employees, took active steps to conceal these payments on Ericsson’s books and records.
The payments to Consulting Company C were made pursuant to sham contracts between Ericsson Malaysia, Ericsson Indonesia, and Consulting Company C for services that were never performed.”
As to Kuwait, the information alleges in summary fashion:
“In or about and between 2011 and 2013, LM Ericsson, through certain of its agents, including Ericsson AB, Employee 3 (a high-level executive in the Middle East and Africa), and Employee 11 (an employee of Ericsson AB), made a payment of approximately $450,000 to Consulting Company D (a consulting company former in Qatar that was hired to help obtain business with a state-owned telecommunications company in Kuwait), at the request of Sales Agent 5, a representative of Consulting Company D. The payment was not made in compliance with LM Ericsson’s internal accounting controls.
In order to conceal the payment to Consulting Company D, agents of LM Ericsson, entered into a sham contract with Consulting Company D and approved a fake invoice for services that were never performed in order to paper over the payment.”
Under the heading “LM Ericsson’s Willful Failure to Implement and Maintain Sufficient Internal Accounting Controls,” the information alleges:
“During the relevant time period, LM Ericsson, through certain of its employees and agents, together with others, knowingly and willfully failed to implement and maintain sufficient internal accounting controls, which facilitated the payment of bribes.
Specifically, certain employees of LM Ericsson, Ericsson AB, and subsidiaries thereof, including Employee 3, Employee 4, Employee 5, Employee 6, and Employee 7, who were responsible for implementing and overseeing a system of reasonable internal accounting controls, were made aware of significant control weaknesses, including actions taken by employees and high-level executives to make improper payments to third party agents, yet knowingly and willfully failed to implement sufficient controls, which facilitated the payment of bribes.
For example, with respect to the conduct in Djibouti, Employee 3, Employee 4, and others, who were in a position to oversee and implement LM Ericsson’s internal accounting controls, knew that the Company’s internal accounting controls were insufficient to identify that the third party consultant in Djibouti was engaged in bribery, was being paid pursuant to fake invoices, was being paid pursuant to a sham contract, and was being paid despite not performing the services described in the invoices, and Employee 3, Employee 4, and others willfully failed to implement sufficient accounting controls to prevent transactions from being improperly executed, and to prevent the Company’s assets from being misused, in order to continue the bribery scheme.
With respect to the conduct in Kuwait, Employee 3 and others, who were in a position to oversee and implement LM ERICSSON’s internal accounting controls, knew that the Company’s internal accounting controls were insufficient to identify that a third party consultant in Kuwait was being paid pursuant to a fake invoice, was being paid pursuant to a sham contract, and was being paid despite not performing the services described in the invoice, and Employee 3 and others willfully failed to implement sufficient accounting controls to prevent transactions from being improperly executed, and to prevent the Company’s assets from being misused.
With respect to the conduct in China, Employee 5, Employee 6, Employee 7, and others, were in a position to oversee and implement LM Ericsson’s internal accounting controls, knew that the Company’s internal accounting controls were insufficient to identify that third party agents in China were engaged in providing gifts, travel, and entertainment to employees of state-owned customers, were being paid pursuant to fake invoices, were being paid pursuant to sham contracts, and were being paid despite not performing the services described in the invoices, and Employee 5, Employee 6, Employee 7, and others willfully failed to implement sufficient accounting controls to prevent transactions from being improperly executed, and the Company’s assets from being misused, in order to continue the improper payments.
With respect to the conduct in Vietnam and Indonesia, Employee 5 and others, were in a position to oversee and implement LM Ericsson’s internal accounting controls, knew that the Company’s internal accounting controls were insufficient to identify that third party agents in those countries were being paid pursuant to fake invoices in order to manage off-the-books slush funds, were being paid pursuant to sham contracts, were being paid despite not performing the services described in the invoices, and Employee 5 and others willfully failed to implement sufficient accounting controls to prevent transactions from being improperly executed, and to prevent the Company’s assets from being misused.
In sum, despite the fact that LM Ericsson, through certain of its high-level executives in Asia and its employees and agents elsewhere, knew that the internal accounting controls were inadequate, LM Ericsson, through certain of its high-level executives in Asia and its employees and agents elsewhere, nevertheless knowingly and willfully failed to implement sufficient controls, which facilitated the payment of bribes.
The failures to implement internal accounting controls included, but were not limited to, controls relating to: (a) proper documentation and accounting for payments to agents and consultants, including the ultimate recipients of the payments and the reasons for the payments; (b) due diligence for the retention of third party agents and consultants; (c) ensuring due diligence was completed and a fully executed contract was entered with a third party before the third party could begin providing services; (d) ensuring that payments were commensurate with the services to be performed by third parties and that the services paid for were performed; and (e) oversight procedures by personnel at LM Ericsson for third party retention and payment.”
Under the heading “LM Ericsson’s Falsified Books and Records,” the information alleges:
“As a result of LM Ericsson’s failure to implement effective internal accounting controls, LM Ericsson, through certain of its agents, disguised in its books and records the $2,100,000 in bribe payments to, and for the benefit of, foreign officials in Djibouti. LM Ericsson, through certain of its high-level executives in Asia and employees and agents elsewhere, also failed to properly record approximately $51,500,000 in payments to third party service providers in China, a subset of which was used to fund gifts, travel, and entertainment for Chinese foreign officials; the $4,800,000 in payments to a consultant in Vietnam; the $45,000,000 in payments to a consultant in Indonesia, and the $450,000 payment to a consultant in Kuwait.
In connection with these payments, LM Ericsson, through certain of its high-level executives in Asia and employees and agents elsewhere, knowingly and willfully created or facilitated the creation of fictitious contracts, invoices, and purchase orders for services that were not rendered and were never intended to be rendered. The payments were falsely or misleadingly characterized in LM Ericsson’s books and records, including as consulting expenses, costs of sale, “external hardware” expenses, “corporate marketing fees,” “service fulfillment of contract,” or administrative or research and development costs.”
Based on the above allegations, the information charges conspiracy to violate the FCPA’s anti-bribery, books and records, and internal controls provisions.
The charges against LM Ericsson were resolved through this DPA with a term of three years. The DPA describes the following “relevant considerations.”
“a. The Company did not receive voluntary disclosure credit pursuant to the FCPA Corporate Enforcement Policy … or pursuant to the United States Sentencing Guidelines because it did not voluntarily self-disclose to the Fraud Section and the Office the conduct described in the Statement of Facts;
b. The Company received partial credit for its cooperation with the Fraud Section and the Office’s investigation, including conducting a thorough internal investigation; making regular factual presentations to the Fraud Section and the Office; providing facts learned during witness interviews conducted by the Company; voluntarily making foreign-based employees available for interviews in the United States; producing extensive documentation, including documents located outside of the United States as well as translations of foreign language documents; and proactively disclosing some conduct of which the Fraud Section and the Office were previously unaware;
c. The Company did not receive full credit for cooperation and remediation pursuant to the FCPA Corporate Enforcement Policy, because it did not disclose allegations of corruption with respect to two relevant matters, produced certain relevant materials in an untimely manner, and did not timely and fully remediate, including by failing to take adequate disciplinary measures with respect to certain executives and other employees involved in the misconduct;
d. Although the Company had inadequate anti-corruption controls and an inadequate anti-corruption compliance program during the period of the conduct described in the Statement of Facts, the Company has been enhancing and has committed to continuing to enhance its compliance program and internal accounting controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement (“Corporate Compliance Program”), which is incorporated by reference into this Agreement;
e. Because the Company has not yet fully implemented or tested its compliance program, the Company has agreed to the imposition of an independent compliance monitor to reduce the risk of misconduct;
f. The nature and seriousness of the offense conduct, including the payment of bribes to high-level government officials in Djibouti, as well as significant books and records and internal controls violations in Djibouti, China, Vietnam, Indonesia, and Kuwait, over a period of years which included the involvement of high-level executives at the Company;
g. The Company has no prior criminal history;
h. The Company has agreed to continue to cooperate with the Fraud Section and the Office in any ongoing investigation
i. The Company has agreed to resolve with the U.S. Securities and Exchange Commission (“SEC”) through a civil complaint and injunction … relating to the conduct described in the Statement of Facts, as well as conduct in Saudi Arabia, and has agreed to pay $458,380,000 in disgorgement and pre-judgment interest of $81,540,000.
j. Accordingly, after considering (a) through (i) above, the Fraud Section and the Office believe that the appropriate resolution in this case is a deferred prosecution agreement with the Company; a criminal monetary penalty of $520,650,432, which reflects an aggregate discount of fifteen percent off the bottom of the otherwise-applicable U.S. Sentencing Guidelines fine range; the imposition of an independent compliance monitor; and a guilty plea by the Company’s subsidiary Ericsson Egypt Ltd. (“Ericsson Egypt”).
The advisory Guidelines range set forth in the DPA for the conduct at issue was $612 million – $1.22 billion.
Pursuant to the DPA, Ericsson is required to engage an independent compliance monitor for a three-year period.
In the DOJ’s release, Assistant Attorney General Brian Benczkowski stated:
“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.”
U.S. Attorney Geoffrey Berman of the Southern District of New York stated:
“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.’ [This] 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, IRS Criminal Investigation stated:
“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.”
SEC
This civil complaint alleges in summary fashion:
This matter arises from violations of the anti-bribery, record-keeping, and internal accounting controls provisions of the FCPA by LM Ericsson (“Ericsson”), a multinational networking and telecommunications equipment and services company headquartered in Sweden.
From 2011 through early 2017, Ericsson subsidiaries paid approximately $62 million in bribes to government officials through third parties in Djibouti, Saudi Arabia, and China to obtain or retain business. Ericsson realized approximately $427 million in profits from business obtained through the use of these illicit payments. Ericsson’s practice involved either entering into agreements with third party consultants who had connections with or access to public officials, and/or paying for travel and entertainment expenses for foreign officials and sometimes their families in order to influence their decision-making.
In Vietnam and Indonesia, Ericsson subsidiaries used consultants to create slush funds of approximately $56 million and the ultimate recipients of these funds were unknown. The consultants in Vietnam and Indonesia served strictly as intermediaries to transfer money to third parties.
In China, Ericsson subsidiaries made approximately $31.5 million in payments pursuant to sham service provider agreements under which no legitimate services were provided. These payments were made so as to continue to use and pay third party agents in China in contravention of Ericsson’s policies and procedures.
Ericsson also made a payment in the amount of $450,000 through a subsidiary to a consulting company in Qatar that was not in compliance with Ericsson’s internal accounting controls. Employees of the Ericsson subsidiary, at the direction of a senior employee, created a sham consultancy agreement to disguise the payment to the consultant.
These illicit payments were improperly characterized in the books and records of Ericsson’s subsidiaries as legitimate expenses and consolidated in Ericsson’s financial statements, which were filed with the SEC throughout the relevant period.
As a result of its conduct in Djibouti, Saudi Arabia, and China, Ericsson, through its subsidiaries, violated [the FCPA’s anti-bribery provisions] when it authorized or paid bribes to foreign officials in order to obtain or retain business.
As a result of its conduct in Djibouti, Saudi Arabia, China, Vietnam, Indonesia and Kuwait, Ericsson, through its subsidiaries, violated [the books and records provisions] when it created false books and records by failing to accurately or completely record payments to third parties and to foreign officials. Ericsson also violated [the internal controls provisions] by failing to have sufficient internal accounting controls in place to detect and prevent the authorization or payment of improper payments.”
The conduct alleged in the complaint concerns the same conduct alleged in the DOJ action regarding Djibouti, China, Vietnam, Indonesia and Kuwait.
As to Saudi Arabia, the SEC alleges:
“In 2012 and 2013, Ericsson, through the Saudi Arabia branch of EAB, made payments to two consultants in Saudi Arabia (“Saudi Consultant A” and “Saudi Consultant B”) in connection with securing business from a state-owned telecommunications company (“Saudi SOE”).
Saudi Consultant A and Saudi Consultant B were retained because the head of EAB’s Saudi branch believed that their owners had influence over Saudi SOE officials making decisions on contracts pertaining to Saudi SOE.
The head of EAB’s 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.
For example, the contracts with both consultants described identical services. The services contemplated in the contract were never intended to be performed.
In fact, besides its owners, Saudi Consultant A had only one employee. Additionally, Saudi Consultant A had only one client – EAB’s Saudi branch. Saudi Consultant A was formed in January 2012, 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. Similarly, one of Saudi Consultant B’s references was a senior official at Saudi SOE.
EAB’s Saudi branch employees did not follow Ericsson’s internal policies in retaining the two consultants. EAB’s Saudi branch employees completed the due diligence on Saudi Consultant A and Saudi Consultant B 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.
In or around December 2012, in connection with payments made to both consultants, a senior foreign official with decision making authority at the Saudi SOE pressured the head of EAB’s Saudi branch to make higher payments to Saudi Consultant A and Saudi Consultant B.
Saudi Consultant B claimed to be based in Saudi Arabia, yet some of the payments EAB made through its Saudi branch to Saudi Consultant B were sent to a Channel Islands bank account. Some of the payments to Saudi Consultant B were made on the same day as the payments made to Saudi Consultant A.
Between March 2012 and February 2013, Ericsson, through EAB’s Saudi branch, paid a total of approximately $40 million to the two Saudi Consultants and received nine contracts from Saudi SOE valued at more than $700 million.
Internally, EAB employees referred to these payments as “corporate marketing fees” which some employees believed to be code for bribes. Additionally, one EAB executive acknowledged that the payments to the consultants were extraordinarily large.
An employee of EAB’s Saudi branch communicated with the owners of Saudi Consultant A and Saudi Consultant B regarding the sham consulting agreements using U.S.- based email servers. Ericsson recorded the payments to Saudi Consultant A and Saudi Consultant B on the books of EAB’s Saudi branch as cost of sales. The financial results of EAB’s Saudi branch were consolidated into Ericsson’s financial statements.”
Similar to the China trips alleged by the DOJ (as well as the SEC), the SEC alleges the following Saudi trips:
“Between 2015 and 2017, EAB’s Saudi branch paid for lavish non-business related trips for two Saudi SOE employees who had decision-making authority at the Saudi SOE. At that time, the Saudi SOE had contracts with several different telecommunications companies. EAB, through its Saudi branch, paid for travel and entertainment expenses for the Saudi SOE employees, and occasionally one of their spouses, in order to secure an advantage over Ericsson’s competitors in obtaining additional and continuing orders from the Saudi SOE.
For example, EAB’s Saudi branch paid for plane tickets, which cost approximately $70,000, for a Saudi SOE executive and seven of his family members to travel from Riyadh, Saudi Arabia to Los Angeles, California, between August 8 and September 15, 2016. Additional pleasure trips to Paris were provided to the two Saudi SOE employees. EAB’s Saudi branch paid for spa services, shopping, and accommodations at five star hotels on some of these trips.”
Under the heading “Ericsson’s Willful Failure to Implement and Maintain Sufficient Internal Accounting Controls,” the SEC alleges:
“During the relevant period, Ericsson knowingly and willfully failed to implement adequate internal accounting controls with respect to retention of consultants and agents, payment of bribes, and making improper payments.
In particular, Ericsson failed to implement controls to ensure the effective enforcement of its policies and procedures that, among other things, (a) required employees properly to document and account for payments to agents and consultants, including the ultimate recipients of the payments and the reasons for the payments; (b) required adequate due diligence for the retention of third-party agents and consultants; (c) required completed due diligence and a fully executed contract with a third party before the third party could begin providing services; (d) required that agreed-upon payments be commensurate with the services to be performed and that the services paid for were performed; (e) prohibited certain compensation arrangements with third parties, such as advance payments; and (f) established oversight procedures, by personnel at Ericsson’s headquarters and others, to ensure that third parties were retained and paid pursuant to appropriate controls.
As an example, Ericsson failed to implement an effective system of internal accounting controls over its third-party consultant in Djibouti. EAB, through its branch in Ethiopia, entered into a consultancy agreement with the Djibouti Consultant before the due diligence on the Djibouti Consultant was completed. Additionally, the agreement with the Djibouti Consultant deviated from Ericsson’s standard template agreement, was not properly executed and approved, and provided that the Djibouti Consultant would receive an advance payment, contrary to Ericsson’s policies and procedures. Likewise, the due diligence report on the Djibouti Consultant was not signed or approved in compliance with Ericsson’s established management approval requirements, and omitted reference to the high-level official in the government of Djibouti who controlled the Djibouti Consultant. Further, in order to process payments to the Djibouti Consultant on an expedited basis, employees bypassed Ericsson’s policies, procedures, and internal accounting controls relating to payment to agents and consultants, at the direction of Ericsson’s head of Northeast Africa.
In Saudi Arabia, an EAB Saudi branch employee completed the due diligence on Saudi Consultant A and Saudi Consultant B almost one year after the agreements with the consultants were signed. The due diligence was conducted only because it was required before making payments.
In China, Ericsson failed to implement an effective system of internal accounting controls to prevent or detect the creation of sham service provider arrangements facilitated by fake purchase requests and invoices submitted by third party service providers for services that were never provided. Additionally, Ericsson China employees were able to provide foreign officials with leisure trips and gifts without detection.
In Vietnam and Indonesia, neither Ericsson Vietnam nor Ericsson Indonesia had adequate internal accounting controls to identify the significant red flags raised by the payments to Vietnamese Consultant and Indonesian Consultant.
In Kuwait, the $450,000 payment to the Kuwait Consultant was not approved or paid in compliance with Ericsson’s internal accounting controls. There was no written consultancy agreement in place with the Kuwait Consultant and no due diligence was completed at the time the purported services were performed.”
Under the heading “Ericsson’s Falsified Books and Records,” the SEC alleges:
“Due to Ericsson’s failure to implement and enforce effective internal accounting controls, employees were able to disguise the true nature and purpose of certain transactions in Ericsson’s books and records.
Ericsson, through its employees and agents, including senior-level employees, paid millions of dollars to various agents, consultants, and service providers who were not approved or paid in compliance with Ericsson’s internal procedures. Some of the payments were made in cash and were used to create slush funds, the purpose and recipients of which are unknown. Other payments were made pursuant to sham service provider agreements under which no legitimate services were provided to Ericsson, so as to continue to use and pay agents in contravention of the Company’s policies and procedures.
In connection with these payments, Ericsson, through its employees and agents, including senior-level employees, knowingly and willfully created or facilitated the creation of fictitious contracts, invoices, and purchase orders for services that were not rendered and were never intended to be rendered; used secret code names for certain expenditures; and bypassed Ericsson’s standard vendor sourcing process, including by using hard copy, rather than electronic, documentation to evade detection. The payments were falsely or misleadingly characterized in Ericsson’s books and records, including as consulting expenses, cost of sales, “corporate marketing fees,” “other external services” or “service fulfillment of contract.”
Ericsson, through its employees and agents, disguised in its books and records the approximately $2.1 million in bribe payments to, and for the benefit of, foreign officials in Djibouti.
Ericsson, through its employees and agents, disguised in its books and records approximately $40 million in improper payments in connection with obtaining business in Saudi Arabia. Payments for lavish trips and entertainment intended to influence Saudi foreign officials also were disguised in Ericsson’s books and records.
In connection with the conduct described above in China, approximately $31.5 million in payments to third party service providers were inaccurately recorded in Ericsson’s consolidated books and records. An additional $19.5 million which was paid to third party consultants to fund gifts and leisure trips given to Chinese foreign officials, was also inaccurately characterized in Ericsson’s books and records.
In connection with the conduct described above in Vietnam, approximately $11.4 million in payments to the Vietnamese Consultant were inaccurately recorded in Ericsson’s consolidated books and records.
In connection with the conduct described above in Indonesia, approximately $45 million in payments to the Indonesian Consultant were inaccurately recorded in Ericsson’s consolidated books and records.
With respect to the conduct described above in Kuwait, the $450,000 payment to the consultant was inaccurately recorded in Ericsson’s consolidated books and records.”
As stated in the SEC’s release, Ericsson agreed to pay more than $539 million in disgorgement and prejudgment interest to resolve the matter.
In the release, Steve Peikin (Co-Director of the SEC Enforcement Division) states:
“As we allege in our complaint, Ericsson engaged in an egregious bribery scheme for years, spanning multiple continents, by surreptitiously using slush funds and funneling money through sham intermediaries. The remedial measures required by our settlement, including the appointment of an independent compliance monitor, reflect the Commission’s commitment to preventing these serious violations of our laws.”
Michele Wein Layne (Director of the SEC’s Los Angeles Regional Office) stated:
“[This] settled action seeks to hold Ericsson accountable for the profit it obtained as a result of these unlawful bribes and ensure that robust remedial compliance measures are put into place.”
This Ericsson release states:
“The resolution relates to historical FCPA breaches ending Q1 2017. While the Company had a compliance program and a supporting control framework, they were not adequately implemented. Specifically, certain employees in some markets, some of whom were executives in those markets, acted in bad faith and knowingly failed to implement sufficient controls. They were able to enter into transactions for illegitimate purposes and, together with people under their influence, used sophisticated schemes in order to hide their wrongdoing.”
In the release, Börje Ekholm (President and CEO) stated:
“I am upset by these past failings. Reaching a resolution with the US authorities allows us to close this legacy chapter. We can now move forward and build a stronger company. The settlement with the SEC and DOJ shows that we have not always met our standards in doing business the right way. This episode shows the importance of fact-based decision making and a culture that supports speaking up and confronting issues. We have worked tirelessly to implement a robust compliance program. This work will never stop.”
Ronnie Leten (Chair of the Board of Directors) stated:
“Ultimately we can only be successful if we have an entrenched ethics and compliance culture. I am confident that with the significant steps already undertaken we are better equipped to execute on our strategy without compromising on our values.”
(See also this presentation by the company).
Cheryl Scarboro (the former FCPA Unit Chief at the SEC), Joshua Levine and Diana Wielocha (all attorneys at Simpson Thacher) represented the Ericsson entities.
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