Company doesn't fight allegations of cash payments, gifts, and travel perks to South Korean and Chinese government officials by managers of the firm's foreign subsidiaries.
IBM will pay $10 million in fines to settle a suit filed by the Securities and Exchange Commission alleging its overseas subsidiaries bribed South Korean and Chinese government officials with cash, goods, and improper travel, and entertainment benefits in exchange for ordering its computers and technology products.
The company neither admitted nor denied the alleged wrongdoing detailed by the SEC in an 11-page complaint filed March 18 in U.S. District Court in Washington, D.C. The SEC said that IBM had failed to maintain adequate internal control systems to detect and prevent the payments and recorded the payments improperly in violation of the U.S. Foreign Corrupt Practices Act (FCPA).
As a result, IBM agreed to pay the SEC $5.3 million in ill-gotten profits incurred from the sales dating back to 1998, $2.7 million in interest, and $2 million in civil penalties. The settlement was announced by the SEC on the same day that it filed its court complaint leading to the assumption that IBM and the government had been in quiet discussions about the investigation and alleged wrongdoing for some time.
During the 1998–2009 period when the alleged violations occurred, IBM had corporate policies in place prohibiting bribery. It had other written procedures relating to compliance with the Foreign Corrupt Practices Act, the government acknowledged. However, a lack of internal controls allowed employees in several IBM subsidiaries and a joint venture to use local business partners and travel agencies as conduits for bribes and other improper payments to South Korean and Chinese government officials, the complaint said. A failure to maintain adequate internal control systems apparently by itself is a violation of the Act.
The violations involved IBM-Korea, a South Korean corporation that sells IBM products in South Korea, which is wholly owned indirectly by IBM International Group B.V.—in turn wholly owned by IBM; LG-IBM, a South Korean joint venture between IBM-Korea and LG Electronics, Inc., and IBM-China, used for direct sales to IBM customers in China, and which is owned by IBM China/Hong Kong, Ltd, a Hong Kong-based company that is ultimately owned by IBM, according to the SEC.
According to the complaint, managers at the subsidiaries devised various schemes to pay cash bribes, confer gifts of cameras and laptops, and arrange for unauthorized side trips and entertainment during travel associated with attending training seminars. Some 100 employees of IBM subsidiaries were involved in the alleged violations, according to the SEC.
In some cases, IT officials were given shopping bags filled with cash at drop-off points near their work or home, in other instances, government employees were given free notebook computers to entice them to buy IBM products. Along the way, there were alleged instances of the IBM subsidiary managers submitting phony low bids, which were later replaced with higher ones, and ignoring or covering up benchmark tests on problematic PC equipment, where the reviewing official was later rewarded for looking the other way. There was billing for software services that were never provided, and paying for inside confidential information regarding product specifications contained within a request for procurement.
Hiding the cash used to buy perks and travel benefits also got creative with one of the LG-IBM managers depositing a refund from a business partner into his personal bank account, then drawing upon the money to fund gifts and entertainment of government officials. The "hostess in a drink shop" was the beneficiary of some of these funds, according to the SEC, when the LG-IBM manager made a deposit directly into her bank account, presumably for her extraordinary service while entertaining South Korean government officials. The purpose of all this, the SEC alleges, was to persuade South Korean government employees to purchase IBM products.
IBM-China managers also liked slush funds, only they created them at local travel agencies in China, and the money was used to pay for overseas and other travel expenses by Chinese government officials. Between 2004 and 2009, there were at least 114 instances in which IBM-China employees and their local travel agency worked together to create fake invoices that didn't reflect the sightseeing and itinerary deviations for the Chinese government officials attending training. Preferred travel agents soon became "authorized training providers," and fraudulent purchase requests for training services were submitted, but the money went to pay for unauthorized trips of government officials.
Company managers also created other slush funds at their business partners and used them to make cash payments and pay for expensive technology gifts for their government customers, according to the SEC.
In addition to the fines, IBM consented to a final judgment that permanently enjoins the company from violation of the books and records and internal control provisions of the FCPA and Securities Exchange Act.
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