Bribery and corruption fuel the steady decline in foreign investment in Iraq

Bribery and corruption fuel the steady decline in foreign investment in Iraq

Bribing public officials, paying kick-backs to fixers, and financing slush funds. What reads like an indictment of some prolific crime syndicate is in reality a summary of the recent allegations of misconduct levelled at telecom giant Ericsson and its actions in Iraq.

For the last few weeks, Ericsson has been hard at work to stem the reputational bleeding. In a recent interview given to the financial publication Dagens Industry, CEO Börje Ekholm appeared to come clean by admitting that payments intended to secure access to transport routes may have gone to “terrorist organisations, including ISIS”.

However, more revelations from an investigation conducted by the International Consortium of Investigative Journalists (ICIJ) – the ‘Ericsson List’ – have ensured that the spotlight remains firmly on the Swedish telecom firm. Having analysed leaked internal company documents, the ICIJ established that the payments referenced by Mr. Ekholm, amounting to around $171,000, were in reality bribes paid to ISIS militants.

In response to these most recent revelations, the US Department of Justice (DoJ) notified Ericsson on Wednesday that they breached the terms of their Deferred Prosecution Agreement for a second time. News of the DoJ’s move further fanned the flames of the crisis engulfing the company, whose stock value plummeted by around 13% in a single day.

Ericsson’s misdeeds

The ‘Ericsson List’ also reveals that ISIS militants were not the sole beneficiaries of Ericsson’s bribes. Improper payments and job offers were dangled to curry favour with a number of influential families and politically connected fixers.

This appears to have been precisely the approach employed by the company to secure the patronage of some of the most influential Kurdish oligarchs. Chief among them is Sirwan Barzani, a powerful politician in Kurdish Iraq and a major shareholder of Korek Telecom, a mobile network operator in the region.

The ICIJ’s analysis reveals evidence that Ericsson had donated $50,000 to Sirwan Barzani under the pretext of a charitable donation. The real purpose of the payment, disclosed by an Ericsson executive, was however to “try to get mileage from the Korek chairman.”

Other attempts to gain the Barzani’s blessing included paying another member of the family – Rasech Barzani – $1.2 million for a consultancy position, in which he was meant to provide “business intelligence and facilitation to the chairman of Korek.”

By carefully evading scrutiny, Ericsson was able to engage in corruption and financing of illicit groups in Iraq with relative impunity for the best part of a decade. As a result of recent leaks, however, the chickens have come home to roost.

Honest investors beware

Aside from shining a light on Ericsson’s unethical corporate practices, the revelations are a reminder about the trials of doing business in Iraq. In the face of pleasant instability and systematic corruption, investors are risking to fall victim to criminal behaviour with impunity for those who perpetrate it.

This became apparent in 2011, when two major foreign telecoms players – France’sOrange and Kuwait-based Agility – invested in the Barzani-controlled operator Korek by acquiring a 44% stake in the company.  However, just three weeks before these investors were poised to exercise an option giving them majority control, the Iraq’s telecoms regulator (NCMC) stepped in. Citing the alleged failure to ensure full national coverage, the NCMC stripped both companies of their stakes without compensation. The ultimate beneficiary of this move was – unsurprisingly – Sirwan Barzani, who retained majority ownership of Korek.

An investigation by the Financial Times gives us some clues into the potential motivations behind the regulators’s decision. Among them are perhaps the personal links between Sirwan Barzani and the CEO of the regulator, Ali Naser Al-Khwildi, who was found to have stayed until 2018 in a Wembley house owned by Korek’s chairman.

The effects of corruption: Iraq’s tanking FDI

What the actions of the Iraqi regulator and the Ericsson scandal have in common, aside from the involvement of the Barzani family, is that they both offer cautionary tales for businesses looking to invest in Iraq. Refusing to bend to the demands of the corrupt players may leave investors vulnerable to financial loss, while playing ball is likely to lead to the huge reputational damage incurred by Ericsson. In both cases, the risks posed by corrupt notaries and all-powerful families can be significant for investors.

 The issue of corruption is one that has been significantly undermining Iraq’s reputation on the international stage. In the annual survey published by Transparency International, Iraq was ranked as the 22nd most corrupt country in the world. As a result, international investors have been increasingly weary to invest their money in the market. According to the World Bank, Iraq has been steadily losing foreign direct investments every year since 2012, with over 3 billion USD of outside investment leaving the country in 2021 alone.

Although the current state of affairs is unquestionably concerning, there are also reasons to be upbeat. A report by Chatham House, provides a blueprint to turn the tide of endemic corruption blighting Iraq. Its authors single out the need to “bring accountability to the senior ranks of the civil service” as the crucial first domino needed to instigate a wider package of reforms.

While such long-term reform plans will take some time, they reflect the ambitions of a country determined to fight corruption. Ambitious initiatives, such as the €15 million allocated by the European Union Delegation to Iraq, the United Nations Development Programme (UNDP), and Iraqi government should encourage renewed efforts by the international community to support Iraq in this new battle.

Image: Rossella/Flickr

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