Corruption in the telecoms sector: beware the elephant in the room

Are you expanding? You’re a target.

Industries or sectors which show strength, rapid expansion and innovation often become the next subjects of investigations and regulatory action. Against that background, the relative strength and continued growth in the telecommunications sector is likely to attract heightened scrutiny and investigative focus. 

An often-cited example of an entity engaging in illegal practices to rapidly expand their business is Telefonaktiebolaget LM Ericsson (Ericsson). Following investigations, Ericsson entered into a $1 billion criminal settlement with U.S. authorities in 2019.

Ericsson admitted to a campaign of corruption through, amongst other material failures, improper payments to secure lucrative government contracts, and collusion to falsify its account books. There are perhaps further issues arising for Ericsson through its involvement in high-risk jurisdictions. In February 2022 it disclosed that an internal investigation had found that it may have been making payments to the Islamic State militia in Iraq since 2011. As part of a project to modernise LTE services in the region, Ericsson allegedly made payments to facilitate the transport of its goods through ISIS controlled areas, as well as for the 'protection' of its offices. These allegations prompted a further investigation into its conduct by the SEC which is still ongoing.

Korea Telecommunications Corporation (KT), similarly to Ericsson, also recently entered into a settlement with the SEC, following allegations that KT had violated provisions of the FCPA by making donations, payments, bonuses and gift and hospitality favours to government officials in Korea and Vietnam. In Korea, this took the form of a range of secret slush-funds which were used to make regular payments to Korean lawmakers sitting on committees responsible for the Korean telecommunications industry, and in Vietnam, the company allegedly paid bribes through intermediaries to secure the award of two government contracts. Critically, one aspect of KT’s failure was a lack of sufficient and effective internal controls (notably in respect of anti-bribery and corruption policies and processes) to monitor illicit operations. KT consented to the SEC’s order to pay more than $6.3 million in fines.  

The KT settlement is particularly interesting as it evidences the clear recent trend of an increase in multi-jurisdictional FCPA cases. We now see that others are increasingly adopting and enforcing their own anti-corruption laws similar to those in the FCPA, and some have even started to cooperate directly with the DOJ and SEC in FCPA cases. There are also recent signs of greater interest in the sector from the Serious Fraud Office in the UK.

Learn from their mistakes

The telecommunications sector operates in a fast paced, competitive and global sphere, and we expect investigations to only increase in frequency. To counter the risks of enhanced scrutiny, the shortcomings of Ericsson and KT serve as useful case studies of practices to avoid. 

We observe that there are particularly high risks when seeking to obtain licences and concessions for new contracts, especially for those with official counterparties, in developing jurisdictions. Ericsson serves as a reminder to prioritise compliance over the desire to obtain first mover advantage by engaging in corrupt practices. Additionally, KT clearly demonstrates the issues for firms which have insufficient oversight and monitoring to identify corruption, and the significant risks posed by having an inadequate gifts and hospitality procedure. 

Doubling down on effective and robust compliance

It’s been over 10 years since the Bribery Act came into force and the challenges arising after Covid-19 make this one of the most critical periods for compliance functions since 2010. Supply chain crunches caused by conflicts, raw material shortages and inflationary pressures create the perfect conditions for a request for an improper payment or for a party to think that a “facilitation” payment to speed things up is justified. The resurgence of in-person events following the pandemic has led to the return of lavish gifts and hospitality budgets, which creates its own risks. When seeking new opportunities for growth, or maintaining your supply chain, you must ensure to maintain exceptional standards and records of compliance and anti-corruption. Now is not the time to be complacent. 

Help is at hand for companies who want to be at the forefront of management and detection in their supply chains, procurement processes and business retention. We have seen companies increasingly turn to new and innovative risk-management technologies through artificial intelligence and “big data” analytics to spot and assess patterns of problematic conduct, quickly and efficiently. We anticipate that this is a trend which will continue to evolve at a fascinating rate.

Compliance functions must double down on their efforts to ensure that robust and efficient processes and practices are not only implemented, but are also frequently stress-tested and critically reviewed to prevent and detect instances of bribery and corruption. Sofia Wickberg’s commentary that the telecommunications sector “is particularly vulnerable to corruption”[1] remains as true today as it was in 2014. Compliance functions need to react, and quickly so, to this changing and challenging landscape. Any failure to do so is likely to be an expensive oversight, both financially and reputationally.

Authored by Crispin Rapinet, Liam Naidoo, Reuben Vandercruyssen, and Nick Roper.

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