Telecoms vendor Ericsson’s Foreign Corrupt Practices fine of around US$1 billion puts the spotlight on Djibouti Telecom – Who took the bribe? Who authorized it?

27 September 2019

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Every few years a corruption case under the US Foreign Corrupt Practices Act blows the lid off Africa’s often seamy way of doing business in the telecoms sector. Russell Southwood looks at the recent case of Ericsson and looks at how Chinese vendors do things.

According to a company announcement on Thursday:”Ericsson has been co-operating voluntarily since 2013 with an investigation by the United States Securities and Exchange Commission (SEC) and, since 2015, with an investigation by the United States Department of Justice (DOJ) into Ericsson's compliance with the U.S. Foreign Corrupt Practices Act (FCPA) and the process is still ongoing. The investigation covers a period ending Q1 2017 and revealed breaches of the Company's Code of Business Ethics and the FCPA in six countries: China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam”.

The statement identified the financial provision it will be making to meet fine that will be coming:” While Ericsson cannot comment in detail on the ongoing process with the U.S. authorities, the Company can with current visibility now estimate the cost and thus make a provision, which will impact the third quarter 2019 results by SEK 12 b. The provision constitutes the Company's current estimate of expenditure related to resolving the U.S. investigations, of which the combined monetary sanctions from SEC and DOJ is estimated at USD 1 b., and the remainder pertains to other costs related to resolving the investigation”.

On a press call on Thursday company representatives described it as “a sad chapter in the proud history we have” and assured those on the call that it was “doing everything to assure it will never happen again”. It said that it's then compliance programme was “not fit for purpose”. The call identified that the investigation was focused on a timeline between 2013 and 2015.

In September 2011 (before this period), Djibouti’s monopoly operator Djibouti Telecom signed a deal with Ericsson to build its 3G network and improve its 3G network. The deal was announced by Carlo Alloni, president, Ericsson North East Africa. Commenting on the tie-up, the operator’s CEO Abdulrahman Mohamed Hassan said: ‘We have grown rapidly as a company and in order to maintain the momentum and build on it we have chosen Ericsson as a partner to assist us in improving our services.’

The roll-call of previous companies caught violating the US Foreign Corrupt Practices Act is worth remembering:

-> In 2006, case taken against VoIP carrier ITXC identified corrupt deals it had done. During the process of selling to Teleglobe, ITXC’s in-house attorney asked its sales department to provide a list of ITXC agents who also worked for telcos. On 27 October 2003, this person sent the following list: Sonatel, Nitel (through Standard Digital), Telkom Kenya (through Adwest), Ghana Telecom and Angola Telecom. Three former ITXC employees were charged under the US Foreign Corrupt Practices Act and got fines and jail sentences. Subsequently Teleglobe was sold to Tata’s VSNL. The case focused on the following carriers: Nitel (then the Nigerian Government incumbent), Rwandatel (the Rwandan Government incumbent), Sonatel (France Telecom-owned), Sotelma (the then Malian incumbent) and Ghana Telecom (the then Ghanaian Government incumbent). In three of the cases a more junior employee took the bribe before being forced to share it with the Managing Director or CEO. The arrangements were often made through agents.

-> In 2006 Siemens was raided by 270 tax inspectors, police officers and investigating officers. According to Spiegel Online, two board members of Siemens COM, the fixed line communications division of the company are under investigation as part of a dozen people who were the focus of the investigation. The “dirty dozen” were being investigated for using company money to bribe their way into winning contracts, channelling cash through Swiss bank accounts, and from there to offshore firms via dummy companies. “Based on our investigation so far, we have reason to suspect that Siemens ran black accounts .… that allowed it to open new markets through secret payments to potential and existing business partners,” said Jeanette Balmer, as spokeswoman for prosecutors in Ber, Switzerland. According to a report in the German weekly Focus it could have involve sums in excess of US$128 million. Earlier in May 2002 Algerian police probed allegations of bribery in the award of a tender for an addditional 400,000 GSM lines for the state-owned Algérie Télécom that had been awarded to Siemens. Algeria's regulatory commission first became suspicious when reviewing the final bidding report submitted to it by the Ministry of Post and Telecommunication (MPT). The watchdog branded MPT's justifications for ruling out bidders Alcatel, Motorola and Ericsson, as insubstantial. Siemens subsequently merged this division with Nokia.

-> At the same time it was also alleged that French telecoms equipment manufacturer Alcatel funneled US$13 million of bribes in Kenya, Tanzania, Nigeria and Sudan through Swiss company Telliac SA. Paris magistrate Philippe Courroye investigated two alleged payments made by Alcatel to Swiss financial vehicle Telliac SA as part of a probe into the Swiss company’s transfers, according to the web site.

-> Under the US Foreign Corrupt Practices Act US military and intelligence contractor Titan (owner of the defunct Titan Wireless) was fined USD28 million for paying a USD2 million bribe to the 2001 re-election campaign of President Mathieu Kerekou of Benin to secure the purchase of state incumbent OPT with a dowry to carry out capital projects.

The impact of all of this? There are now only four major telco vendors competing for the lucrative African market: Huawei, Nokia, Ericsson and ZTE. According to Balancing Act’s report 4G and 5G in Africa: launches, subscribers, data prices and trends:” Factoring in the comments from Huawei into the network infrastructure providers and projects researched, it would be a fair assessment that the company potentially has a 50%-60% market share, followed by Ericsson, Nokia and ZTE”.

On 11 February 2019, the Voice of America website published a summary of the corruption allegations and charges against Huawei. A summary of cases is instructive:

-> In 2012 (Huawei), along with ZTE, was found guilty of bribery in Algeria and fined $39,000 and excluded from public contracts for two years. Local French language news site Presse-DZ reported that international arrest warrants had been issued for ZTE's Dong Tao and Chen Zhibo and Huawei's Xiao Chunfa. A fine of three million dinars (£25,117) each was also levied and the firms were banned from public tenders for two years as punishment for “corruption and influence peddling”. The three were charged as part of a wider corruption scandal involving former Algérie Télécom exec Mohamed Boukhari, and businessman Chami Madjdoub who were given a sentence of 18 years in jail and fined five million dinars after receiving suspicious payments and money laundering between 2003-6. The report alleges that the ZTE and Huawei execs effectively bribed Boukhari by paying $10m (£6.5m) into offshore accounts set up by Madjdoub. The Shenzhen headquartered telecoms kit makers both expressed concern at the news.

-> In Zambia, it was probed over allegations of bribery involving a multi-million-dollar contract to build cell towers in rural areas.

-> In the Solomon Islands, it was accused of offering millions of dollars to the ruling party in exchange for an undersea fiber optic cable contract. In all three cases – and half a dozen others in recent years – the alleged perpetrator was Huawei.

-> In Ghana, Huawei has confronted accusations of illegally funding the ruling party, a charge Huawei and other Chinese companies have faced in other countries. In 2012, an opposition group disclosed what it claimed was evidence that Huawei had made illegal campaign contributions to the ruling National Democratic Congress in exchange for a $43 million tax exemption. Alliance for Accountable Governance (AFAG) produced invoices and other documents showing the Chinese telecom company had paid for millions of dollars worth of campaign paraphernalia for the ruling party’s 2012 election campaign. In return, the group alleged, the government awarded “one of the juiciest contracts to be doled out by the government” – a $150 million contract to build an e-government platform. Huawei and the government denied the charges.

The company has denied the allegations of corruption and said it has strong safeguards against corporate graft. In a statement on its website, Huawei says it has a “zero-tolerance” policy on graft. ”Huawei believes that corruption severely damages fair market competition and is a threat to the development of our society, economy and enterprises,” the statement said. In the last 12 years, Huawei and its smaller Chinese rival ZTE have been “investigated or found guilty of corruption” in as many as 21 countries, according to Andy Keiser, a former US House Intelligence Committee professional staffer. These include a dozen African countries such as Algeria and Ghana as well as the Philippines, Malaysia, Norway, Papua New Guinea, Mongolia, the Solomon Islands and China itself, according to Keiser.

The transaction cost of Huawei’s corrupt business deals runs in the billions. RWR Advisory Group, a consulting firm that tracks Chinese investments around the world, estimates that Huawei has entered into more than $5 billion worth of business deals involving allegations of bribery and corruption.

Corruption is a waltz that takes two parties to dance. In the Ericsson case, the individuals involved at Ericsson will likely soon be identified. Therefore there are three outstanding questions:

  1. Who at Djibouti Telecom took the bribe?
  2. Who authorized the taking of the bribe and shared in it?
  3. What action is being taken against them?

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