Ericsson’s ISIS fallout could go beyond big fines

LONDON, Feb 16 (Reuters Breakingviews) – Appearing in the same sentence as Islamic State is a bad day at the office for any company. It’s especially troubling for Ericsson (ERICb.ST), which was only recently fined $1 billion by the United States for paying bribes to secure telecommunications contracts in five countries including Vietnam. Chief Executive Börje Ekholm’s disclosure on Tuesday that payments in Iraq may have ended up in the hands of the militant group makes things much worse.

Ekholm’s excuse for not fessing up earlier is that the transactions it uncovered from 2011 to 2019 didn’t meet Ericsson’s “materiality” threshold read more . That’s unlikely to sit well with the U.S. Department of Justice (DOJ), which takes a dim view of anything less than full disclosure in anti-corruption probes. Given the damage that ISIS inflicted on Western interests, including significant civilian and military casualties, it will also go down badly with the general public. Little wonder Ericsson shares fell more than 10%, wiping $4 billion off its market value.

It’s possible that approximates the size of the DOJ penalty. The $37 billion company’s 2019 settlement over graft in China, Vietnam, Indonesia, Kuwait and Djibouti made clear that the hefty size of the fine was partly due to Ericsson’s foot-dragging. Keeping any Iraqi skulduggery under wraps while in negotiations with the Feds is a distinctly bad look.

Yet the market reaction may also reflect the potential impact on Ericsson’s strategy. Ekholm had been a beneficiary of Washington’s diplomatic push against Huawei Technologies, which squeezed the Chinese tech group – the biggest provider of 5G mobile phone kit – out of the United States and most European markets. In the final quarter of last year, Ericsson’s North American sales, which account for nearly a third of revenue, leapt 17% year-on-year. That more than compensated for the $800 million decline in China, as Beijing exacted revenge for Huawei on Western equipment providers.

With Finland’s Nokia (NOKIA.HE) the only other major Western 5G kit maker, Ericsson’s position in America had looked secure. However, South Korea’s Samsung Electronics (005930.KS) is muscling in fast, having snaffled a $6.6 billion supply deal with U.S. carrier Verizon (VZ.N) in 2020. Amazon Web Services is also making moves. If Ekholm’s Iraqi mess leads to ongoing distrust in America as well as China, fines will be the least of his problems.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

– Ericsson said on Feb. 15 a 2019 internal investigation had found “serious breaches” of its compliance rules in Iraq from 2011 to 2019.

– The Swedish telecommunications equipment provider said it could not identify if any of its employees had “directly” financed Islamic State, the militant group also known as ISIS that controlled swathes of Iraq in 2014 and 2015.

– However, it said it had identified payments to intermediaries and “use of alternate transport routes in connection with circumventing Iraqi customs at a time when terrorist organisations, including ISIS, controlled some transport routes”.

– Ericsson shares were down 9.3% at 105.4 Swedish crowns by 0952 GMT on Feb. 16.

Editing by George Hay, Karen Kwok and Oliver Taslic