IKEA Scandal – Furniture Giant’s Corruption Troubles Far from Over [Updated]

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I couldn’t help but notice the high level of traffic – 10 percent of which came from IKEA servers – my humble blog received for my post on the firing of two top expat executives from IKEA Russia on allegations of “condoning” bribery. Obviously, I wasn’t the one who “broke” this story – Johan Wallqvist of Expressen in Stockholm deserves all the credit. But like so many others I couldn’t look away as a company widely considered to be progressive, innovative, and ethical had its reputation dragged through the mud. And while the major media outlets have started referring to IKEA’s Russian corruption problems in the past tense, nothing could be further from the truth.

What follows are the CliffsNotes version of what’s happened over the past month-and-a-half. Once again, the world has Mr. Wallqvist and his stalker-like access to IKEA secrets to thank for much of the details being public.

Ongoing Legal Battle with Russian Service Providers

Recall that IKEA’s temporary ‘fix’ to not having electricity hooked up to its MEGA-Parnas shopping center in SPB was to hire local Russian companies who provide commercial-grade power generators (i.e., the kind of generators that can power an entire mall). Allegedly, personnel at both IKEA and the generator companies – OOO “Sistemy Avtomnogo Energosnabzheniya” and OOO “ISM” – used the unusual arrangement to steal from IKEA by inflating the rental contract prices and splitting the windfall. IKEA and these generator companies have been in some stage of litigation for several years now. Most recently, IKEA has been attempting to recover RUR 1.353 billion (approx. $46 million) from the Russian companies for breach of contract. IKEA lost an appeal a few weeks ago, though I’m sure the company will pursue this up to the Supreme Arbitrazh Court if necessary.
Not only is IKEA losing all of its appeals, but Expressen has confidential reports from a U.S.-U.K. risk management agency – Diligence – to IKEA with details on strategic responses which are highly questionable and likely illegal under both Russian and Swedish law (note: it wouldn’t be the first time that Diligence embarrassed itself in Russia). The two ‘hottest’ ideas that Diligence included in its report:
1. “Criminal Strategy” – induce the Moscow Police to initiate an investigation into Konstantin Ponomarev, the owner of OOO “ISM” – Diligence met with a top official at the Moscow Police who expressed that this idea was feasible. Diligence noted in its report, “The Moscow Police believe that the investigation will be sufficient to induce Ponomarev to cooperate, back down, and more supportive of IKEA.”
2. “Judicial Strategy” Explore Possibilities of Influencing the Judges – apparently at IKEA’s request, Diligence also undertook a review of senior Russian judges, including Olga Komarova of the Moscow Federal Arbitrazh Court, and Liudmila Tutubalina of the Moscow tribunal. Alas, both women responded the same way: “not interested.” Indeed, Tutubalina reportedly said, “Just because IKEA is a major foreign investor it cannot expect to be treated differently than others.” Diligence’s backup plan was to hire an intermediary for EUR 350,000 (approx. $472k) to ensure that an appeals court judge would remand the case to a “friendly” Arbitrazh Court judge, if a procedural issue permitted remand. That amount also includes the necessary transactions for ensuring a positive result in the Aribtrazh court of first instance.
Simmering Questions Boil Over
Ultimately, none of these strategies were pursued. But, I think it’s important to review the timeline:
  • June 2009 – IKEA announced that it was halting any further investment in Russia “because of pervasive corruption and demands for bribes.”
  • August 11, 2009 – on an email copied to most of IKEA’s top execs in the region (including the General Counsel), Stefan Gross, Dir. of Real Estate for IKEA MOS, specifically approved that a bribe be paid by Renaissance Construction, IKEA’s General Contractor for the SPB outlets.
  • August 20, 2009 – IKEA reportedly met with Diligence at global corporate HQ in Dutch Leiden, where they discussed the scope of work for Diligence described above.
  • January 2010 – Ingvar Kamprad receives fax from INGKA Holding B.V. regarding the electrical system at MEGA stating, “”The whole system is improperly installed and was constructed without getting the project approved.  Today, it has been authorized and approved by the Russia utility authorities after our Country Manager allowed our general contractor to use bribes in buying the approval.”
  • February 12, 2010 – IKEA announces the firing of the two executives, reportedly within hours of Expressen informing the company that it would publish the story that day.
In my last post, I saw the major outstanding question was who knew what, when at IKEA HQ. When you see what is apparently coordinated action like this, it looks like top decisions makers may have just decided to risk at and “play the game” in Russia. In this case, observers in Sweden are speculating that it goes to IKEA founder Ingvar Kamprad himself. Assuming this is true, my hypothesis is that there is some high-level VP at IKEA HQ who is strongly against what is going on but doesn’t have the internal pull to stop it. So, he or she leaked all of these confidential and incriminating documents – which so far have included emails, faxes [to corp HQ], reports, etc. – to Wallqvist at Expressen. I highly doubt this is the work of hackers, but rather is an ‘informant’ situation.
In response to these recent revelations, Helen Duphorn of IKEA Group Corporate Communications stated that IKEA will use the materials revealed by Expressen in shaping their [supposedly] ongoing internal investigation. She added that IKEA anti-corruption policy is clear – the company “neither gives nor receives bribes.”
Vague references to an internal investigation are apparently not enough to put Russian and Swedish prosecutors at ease. Two weeks ago, Russian prosecutors opened a criminal investigation against IKEA in connection with the MEGA-Parnas corruption allegations. Also, after the newest reports from Expressen, Chief Prosecutor and Director of Swedish Anti-Corruption Policy, Gunnar Stetler stated, “I will be contacting the Russian prosecutors to assist them in their investigation of IKEA, and possibly open a Swedish inquiry into IKEA.” Stetler added, “Even if a crime is committed abroad, it may still be regarded as committed in Sweden. For example, [this would apply] if planning occurred in the territory of Sweden and if a person has sent letters from here.” Swedish law could also apply even if the crimes were committed abroad, and Stetler said that based on the facts contained in Expressen‘s articles, “there is reason for me to act.”

Section 17, Subsection 7 of the Swedish Penal Code defines the crime of bribery:

A person who gives, promises or offers a bribe or other improper reward to an employee or other person defined in Chapter 20, Section 2, for that person or for anyone else, for the exercise of his/her duties, shall be sentenced for bribery to a fine or imprisonment for at most two years. If the crime is gross, imprisonment for at least six months and at most six years shall be imposed.

Chapter 20, Section 2 defines who is a foreign official under Swedish anti-bribery law:

  1. A minister of a foreign state, member of the legislative assembly of a foreign state or a member of a body of a foreign state, including members of a directorate, administration, board, committee or other authority belonging to a foreign state, a municipality, county council, or other association of local authorities;
  2. A person who does not fall into the previous category, and exercises public authority in a foreign state or a foreign assignment as arbitrator (skiljemannauppdrag);
  3. A member of a supervisory body, governing body or parliamentary assembly of a public international or supranational organization of which Sweden is a member; and
  4. A judge or official or an international court whose jurisdiction is accepted by Sweden

Clearly, if it is found that IKEA offered bribes to Russian judges, it would likely be criminally liable under this statute. The answer is less obvious, however, in the case of MEGA-Parnas. There, IKEA allegedly authorized its general contractor to pay officials at Lenenergo, a state-owned power company.  It seems highly likely that such employees would be covered under the law as “employees,” a term which the OECD reports is “interpreted in a very broad manner and covers, inter alia, any official or agent, irrespective of whether they are employed in Sweden or abroad.” In fact, the Swedish statute even criminalizes bribing employees of foreign private companies, something which even the infamously broad U.S. Foreign Corrupt Practices Act does not do (though U.S. prosecutors can still use state commercial bribery statutes through the Travel Act). 

What about the fact that IKEA made the payments through its general contractor, who may have in turn used some additional third party? Still no luck for IKEA. The same OECD report states that the Swedish statute also includes bribing through an intermediary, and cites a 1994 case where a regional manager authorized a sales manager to pay the travel costs of a public official. The regional manager was charged with bribery through an intermediary (i.e., the sales manager).
So, IKEA and its executives face serious consequences at home if the Swedish authorities decide to prosecute. As for the Russian investigation, I will try to do a post on it when more information is available.
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3 Responses to IKEA Scandal – Furniture Giant’s Corruption Troubles Far from Over [Updated]

  1. mitchdcba says:

    As a fast developing market, Russia presents opportunities for many products and services.doing business in russia

  2. Krister says:

    I worked with these people in Russia for a long time (fired or present).There are always opportunities in Russia to go one way or the another.My experience is that Ikea does not accept any deviations from their policy. This is confirmed by the actions of the board and the loyalty to their principals.The "whistle blower" is somebody that is very disappointed of his departure, with no legal backup for his claims as I can see it (I know him as J.V.). Ikea is paying for their incompetence (or innocence), selecting unexperienced management for this great emerging market.What a pity!Life goes on…Krister Hellkvist

  3. Jesse says:

    Krister,Thank you for reading and for your insider perspective. Whistle blowers are often paradoxical characters, with their own [hidden] agendas and the inevitable "skeletons in the closet". I also share your dismay over IKEA's troubles in Russia – I am a fan of the company and was always impressed over its broad expansion in Russia, while other Western retailers nervously watch from the sidelines. I am confident IKEA will move past this event and continue to be a leading foreign investor in Russia.

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