Ericsson: suspected Isis payments point to federated failures

Corporate spin has its limits. Ericsson stretched them to breaking point with its characterization of possible payments to Isis terrorists in Iraq. Detecting these was a triumph for internal audit, the Swedish telecoms manufacturer suggested.

Dishing out employee of the month awards was not the first priority for investors. Instead, they saw a potentially massive moral failure that could prompt steep fines or settlements. The shares fell by as much as 14 per cent.

Chief executive Borje Ekholm said Ericsson had paid to transport equipment through territory controlled by violent extremists as far back as 2014.

Admitting to a problem does not exonerate you as HSBC and Danske Bank have found. The UK-listed bank had to pay a $ 1.9bn fine a decade ago for money laundering whose beneficiaries included Mexico’s murderous Sinaloa drugs cartel. Its Danish peer is still struggling to resolve allegations that it laundered billions for wealthy Russians via Estonia.

No wonder markets took fright at Ericsson’s announcement. After all, it only settled with the US Department of Justice in 2019 over alleged corruption between 2000 and 2016. That cost the company more than $ 1bn, about twice the reported illicit profits made from these bribes.

Ericsson says it has begun a second externally led investigation of payments. Apparently, the outcome of the previous expenses audit did not meet the “materiality threshold” for wider release. The International Consortium of Investigative Journalists has been examining the case. This may have made Ericsson more communicative.

There is no clear link of payments to Isis. Ericsson does admit payments were for “alternative transport to circumvent Iraqi Customs”. Whether Ericsson benefited financially will be among the concerns of watchdogs.

Heavy penalties and reputational damage may follow. But much of that is already priced in. The share price drop equates to a loss of value of more than $ 5bn. Bad news easily triggers panic selling at present, as markets reconfigure for higher rates. Ericsson shares trade at less than 6 times its forward ebitda, near decade lows.

Too little is known about Ericsson’s possible lapses to judge them. Executives can still learn from a repeated failing of multinationals. Far-flung operations foster federated structures and a compartmentalized culture. Moral relativism is one risky consequence. Big companies should only follow business practices common in Iraq or Belarus when they would not scandalize prosecutors and investors in Washington DC and Stockholm.

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