Telecom giant Ericsson continued doing business in areas that fell to ISIS, internal report finds

It was one of the largest fines ever for corporate fraud, a billion-dollar penalty that telecommunications giant Ericsson paid to avoid U.S. prosecution for corrupt schemes in foreign markets from China to East Africa.

But even as it signed that 2019 settlement, the Swedish company was withholding knowledge from the public about another corruption scandal, one in which workers’ lives had been imperiled.

Executives were confronting an internal investigation that documented “a range of misconduct perpetrated by Ericsson employees and third parties” in Iraq over nearly a decade, according to findings that have not previously been disclosed.

The internal report identifies wrongdoing including “bribes and kickbacks,” “fraud and embezzlement,” and the use of smuggling routes to bypass official Iraqi customs authorities. It describes an enterprise so out of control that auditors couldn’t figure out who pocketed payments totaling as much as $10.5 million, fake purchase orders used in creating an “uncontrolled slush fund” and a dubious donation to a purported charity run by a ruling clan in the Kurdistan region of Iraq.

Investigators also uncovered disturbing details about Ericsson’s decisions to send workers into territory overrun by Islamic State fighters, the handling of a worker’s kidnapping by terrorists, and transportation contracts that probably involved paying cash to militants – money that Ericsson feared had made its way into the Islamic State’s war chest.

Even beyond that chilling prospect, the Ericsson probe has security implications for the United States and its allies.

The report describes extensive management failures at a firm that Western governments see as a crucial alternative to the Chinese company Huawei, whose devices have been banned by the United States and other countries over suspicions that they are rigged for espionage. Ericsson and Nokia, based in neighboring Finland, are Huawei’s main rivals in the global race to build next-generation, or 5G, wireless networks.

At the same time, the Ericsson investigation amounts to another grim assessment of the legacy of American intervention in Iraq after the 2003 invasion. The United States spent trillions of dollars seeking to transform the country into an exemplary democracy, but the portrait of Iraq that emerges from the Ericsson report is one of endemic corruption exacerbated by foreign corporations.

The revelations are contained in a 73-page document obtained by the International Consortium of Investigative Journalists and shared with The Washington Post. The report indicates that its findings are based on interviews with dozens of current or former Ericsson employees and a review of 22.5 million emails and other documents.

Despite the scale of the corruption alleged, there is no mention of Iraq in Ericsson’s deferred prosecution agreement with the U.S. government in which Ericsson admitted to fraud in China, Vietnam, Indonesia, Kuwait and Djibouti. That calls into question whether Ericsson fully disclosed the alleged abuses in Iraq, including possible payments to the Islamic State, to U.S. officials. The company was required to report the discovery of any additional corruption under the terms of its settlement with the Justice Department and the Securities and Exchange Commission.

Both agencies declined to comment on the Ericsson case. The company’s chief executive, Borje Ekholm, has said that the settlement agreement “limits our ability to comment.”

After receiving a letter with detailed questions from ICIJ, The Post and other media partners, Ericsson issued a news release on Feb. 15 publicly acknowledging for the first time “serious breaches of compliance rules” and circumvention of Iraqi customs authorities using routes controlled by “terrorist organizations, including ISIS.” The release also said that Ericsson was “committed to conducting business in a responsible manner, applying ethical standards in anti-corruption, humanitarian and human rights terms.”

Ericsson’s stock price plunged 10 percent, wiping away $4.4 billion in market value, after the disclosure.

Any failure by Ericsson to fully disclose the findings of its internal Iraq probe or a follow-on investigation by the Justice Department could expose the company to new legal peril despite already paying $1 billion to shield itself from criminal charges.

Ericsson’s internal report focuses on the company’s operations in Iraq from 2011 to 2019, when its business there generated revenue of about $1.9 billion, according to the document.

The investigation was carried out by internal auditors at Ericsson and the report says that it was “drafted at the request of counsel.” The document, completed just weeks after the company reached its settlement with the Justice Department, indicates that the sweeping internal probe grew out of a smaller inquiry that was initially focused on suspicious travel and expense claims submitted by one of Ericsson’s senior managers in Iraq.

Ericsson was among dozens of companies that rushed into Iraq to capitalize on the massive rebuilding effort that followed the 2003 U.S. invasion and occupation. The mobile phone business seemed particularly promising. Cellphones had been banned under former dictator Saddam Hussein, creating pent-up demand in a market of nearly 30 million people.

When the U.S.-backed Iraqi government sold $1.25 billion licenses to a trio of cellphone companies in 2007, Ericsson set out to sell them the cell towers, software and other systems needed to bring Iraq into the er
a of modern mobile communications.

Replicating an approach that had led to abuses in other countries, Ericsson relied heavily on regional managers who enlisted local firms that took large sums – sometimes in cash – to handle nearly every aspect of the company’s operations, according to the company’s findings.

One of the main alleged conduits was a consulting firm, Al-Awsat Telecommunications Services, founded by Jawhar Surchi, a member of a wealthy and influential family in the semiautonomous Kurdistan region of northern Iraq. Al-Awsat, which means “The Middle,” became an indispensable partner for Ericsson, steering it to lucrative contracts and helping it navigate Iraq’s tax authorities and telecommunications regulators.

In an interview with The Post, Surchi said his connections were so crucial for Ericsson that the company gave him legal authority to sign contracts and conduct other business on its behalf in Baghdad. “My strength was I knew the people, knew all the prime ministers . . . the defense minister, the foreign minister, the intelligence minister,” he said. Of Ericsson, he said, “They didn’t know anything about Iraq. It all depended on us.”

Between 2013 and 2018, Ericsson paid Al-Awsat about $90 million, according to the report, and it concluded that substantial portions were used to pay bribes or flowed into foreign accounts whose purpose and ownership eluded investigators.

The report provided a range of evidence for this determination. In 2013, for example, Ericsson worked through Al-Awsat to pay $500,000 to the chief executive of Asiacell Communications, a Qatari-owned company that had won a mobile license in Iraq and became a major client of Ericsson, according to the investigation. One of Ericsson’s managers told internal investigators that “the CEO of Asiacell wanted the money for Ericsson to win more business during 2014,” the report said. It called the money “a commission payment to the chairman of Asiacell.”

To generate the money, Ericsson managers “facilitated two [purchase orders] totaling $500,000 to be paid to Al-Awsat.” The transactions were recorded on Ericsson’s books as “warehouse security,” according to the report.

Asiacell did not respond to requests for comment.

Surchi denied that he played any role in any payment to the Asiacell chief executive and said that neither he nor anyone affiliated with his company had engaged in bribery or other corrupt conduct. “This is a complete lie, false information,” he said about the reported payment to the chief executive of Asiacell. He described him as “one of the richest men in Iraq” and asked, “What kind of bribe” would influence him? “For him, $1 million is peanuts,” Surchi said.

The reported payment to the Asiacell chief executive represented just a small fraction of the money that was diverted or went unaccounted for during Ericsson’s business with Al-Awsat before the relationship was severed in 2018, according to the report.

The document refers to a previous audit showing that “most of the incoming payments to Al-Awsat [had] been transferred directly to Jawhar Al-Sourchi’s personal bank account in Jordan.”

Surchi acknowledged this was the case, saying that problems with the Iraqi banking system prompted use of accounts in other countries.

The relationship between Ericsson and Al-Awsat deepened when Surchi urged the Swedish firm to engage a “sister company” in Jordan to handle purchases of equipment, and Ericsson proceeded to pay $10.5 million to the Jordanian firm, Alawsatiya, the report said. Ericsson investigators later determined that registration records that firm had provided were “fake” and that it was secretly owned “by an old school friend” of Surchi. The investigators said that they were “unable to ascertain who the ultimate beneficiary owner was for all this money.”

Again, Surchi denied any wrongdoing and said that Alawsatiya functioned as a “secondary contractor” used for overseas transactions. It was “just a name,” he said. The “transferred money went to Awsat.”

Surchi cast the allegations against him as a smear campaign. “Somebody is trying to discredit” us, he said. “They knew the rules. We knew the rules. Whatever is said is from jealousy.”

Another payment that came under suspicion involved one of the ruling families in the Kurdistan region of Iraq. In 2014, Ericsson managers approved a request for $50,000 in cash from Sirwan Barzani, who was both chairman of Korek, a cellphone company and Ericsson client, as well as “de facto head of the Kurdish Army,” the report said.

Barzani had asked that the money be given to a charity he controlled that claimed to provide shelter and medicine to displaced Iraqis, according to the report. But Ericsson investigators uncovered an array of suspicious details, including a supposed receipt for the gift that came from an entity with a different name and appeared to have a forged signature.

Barzani did not respond to questions about the payment or other aspects of Korek’s business with Ericsson. In a statement, a spokesman for Barzani and Korek said that Barzani had stepped back from managing the cellphone company in 2014 “to return to the front line to defend his country and the Western world from the threat that [the Islamic State] posed.”

Emails showed that the payment was cleared by Rafiah Ibrahim, a Malaysian-born executive then in charge of Ericsson’s business across the Middle East and Africa. Approving the expense, she wrote that the donation should be used to “try to get mileage from Korek.”

Ibrahim, who did not respond to requests for comment, was promoted by Ekholm to a senior “executive team” in 2017 but left management ranks in 2019 in the midst of the Iraq probe. She continues to be listed online as an adviser to Ekholm.

Ericsson’s problems took an ominous turn in 2014, when the Islamic State group began a gruesome campaign of staged executions in northern Iraq and declared a caliphate based in Mosul.

That city was a focal point of Ericsson’s projects.

On June 18, 2014, eight days after Mosul fell to Islamic State militants, a senior Ericsson executive urged the company to invoke “force majeure,” a clause that allows companies to abandon contracts in locations where natural disasters or armed conflict make work too dangerous, the report said.

But Ibrahim and other Ericsson executives refused, according to the report, saying it would “destroy our business.”

A month
later, an engineer supervising tests of Ericsson cell towers in Mosul was kidnapped by Islamic State militants. One of his captors forced him to place a call to a senior Ericsson manager in Sulaymaniyah, then threatened to blow up Ericsson’s facilities, warned that its employees were “infidels” and demanded “1000s of shedd” – slang for stacks of cash – to resume work in Mosul.

The engineer, who worked for a subcontractor, Orbitel Telecommunications, said in recent interviews with reporters from ICIJ and a media partner that his abduction came after he had been pressured to take a letter to Islamic State leaders seeking permission for Ericsson and Asiacell to continue working on the cell towers. He spoke on the condition that he be identified only by his first name, Affan, citing concern for his safety.

The mission backfired, Affan said, tipping off Islamic State operatives to the fact that Ericsson, a company with $25 billion in revenue that year, was sending employees and equipment into the heart of the caliphate.

Affan said that militants “put a black hood over my head” and drove him around for hours before placing him under house arrest for nearly a month. He said he witnessed the “sheik” call to the supervisor, “who sounded like someone who wanted to cry. His reaction was terrified. The supervisor ‘turned off the phone’ and thereafter refused to answer.”

Affan said he later fled to the Kurdistan region and has never heard from the company since.

Ericsson’s report makes no mention of any attempt to reach Affan or speak with officials at Orbitel or Asiacell about his abduction. The report says that Asiacell “made arrangements to obtain the release of the hostage and to let Ericsson continue the work in Mosul” but does not specify the nature of these “arrangements.”

Orbitel did not respond to a request for comment.

Rather than retreat in the face of such threats, Ericsson plunged ahead with its Iraq projects.

The company made cosmetic tweaks to security measures, at one point instructing contractors to no longer display the Ericsson logo. After Orbitel balked at going back to areas marked by violence, Ericsson turned to companies less daunted by the dangers.

Among them was a transportation firm, Cargo Iraq, that was hired to move Ericsson equipment from Irbil in northern Iraq to Ramadi in the center of the country. Cargo Iraq offered two tiers of service: a “normal” package that went through proper Iraqi customs sites and a “Speedway” option that cost far more but promised faster deliveries across territory controlled by militants, according to Ericsson’s internal findings. Ericsson chose the latter, according to the report, which described Speedway as an “illegal” scheme “to circumvent the official customs.”

The report includes a list of 20 shipments in 2016 and 2017 from Ericsson’s warehouse in northern Iraq to locations that would have been almost impossible to reach without encountering Islamic State checkpoints, where militants routinely demanded payments.

An Iraqi truck driver familiar with the “Speedway” route described it as “isolated and terrifying” in an interview with ICIJ partners. He said the route was besieged by armed militants who kidnapped travelers and extorted money from their families.

Cargo Iraq managed to avoid these hazards and charged rates that were astronomical. Ericsson paid between $3,000 and $7,000 per vehicle at a time when the cost “normally falls below 1,000 USD,” the report said.

Investigators determined that Ericsson was paying those exorbitant fees while Cargo Iraq was “passing through ISIS controlled areas.” As a result, the report said, “it cannot be excluded” that Ericsson had indirectly contributed to “the illicit financing of terrorism.”

To pay Cargo Iraq in cash, according to the report, Ericsson routed money through a supplier, Security and Logistic Services, or SLS, that was reimbursed using purchase orders “for services which did not match the known transportation methods.” SLS charged “markup fees of 15 percent,” the report said.

Bahez Abbas, owner of Cargo Iraq, denied in an interview that his company paid the Islamic State, though he said payments were made to other militant groups controlling checkpoints. “All companies pay,” he said. “This is something normal.” He said he was not familiar with SLS.

In a written statement, SLS acknowledged that it had been approached by Ericsson as part of its internal investigation and said the probe “concluded that there was no wrongdoing or criminal acts perpetrated by SLS.”

The allegations came to light in 2018 when Ericsson auditors began scrutinizing suspicious expense reports filed by one of its Iraq managers who had used the same supplier, SLS, to embezzle $308,000, the internal report said. Ericsson recovered that money and fired the employee in 2019.

For more than two years, Ericsson executives were aware of the wide-ranging problems investigators had uncovered in Iraq but did not provide that information to investors and the public. Ekholm, the company’s chief executive, recently said that “the materiality” of the investigation’s findings “did not pass our threshold to make a disclosure.”

The company’s stance changed earlier this month after it received detailed questions about the Iraq investigation from ICIJ, The Post and other media partners. Within days, Ericsson issued a news release summarizing the findings of its internal probe.

Ekholm then granted interviews with news organizations – even as he refused to make himself available to journalists involved in the ICIJ project – in which he acknowledged evidence of fraud in Iraq and admitted that the company had possibly made payments to terrorists. The company did not directly respond to the questions submitted by ICIJ and its partners.

In the recent disclosures, Ericsson has cited a commitment to transparency and integrity. But in his appearances, Ekholm has made no mention of other internal probes described on a separate, smaller set of Ericsson documents obtained by ICIJ and reviewed by The Post.

On one page is a spreadsheet listing suspected cases of bribery, money laundering and other types of fraud involving Ericsson employees in 10 other countries. Among them is the United States, where five employees were fired or resigned over allegations of fraud and “bribe taking” that were referred to the FBI, according to the spreadsheet. Others countries listed on the spreadsheet and ensuing pages include Brazil, Angola, Libya and Lebanon.

– – –

The Washington Post’s Mustafa Salim contributed to this report.