SEC Hits IBM With Bribery-Related Lawsuit, Big Blue Settles For $10 million
Regulators filed a lawsuit in federal district court, alleging employees of IBM's subsidiaries in China and South Korea, as well as a South Korean joint venture, paid government officials cash bribes, provided free computers and covered their entertainment costs as a means to secure sales. While allegations of bribery are cited in the lawsuit, the SEC filed two claims against the computer maker. One is for failing to accurately reflect its transactions and disposition of its assets in its books, records and accounts. The second claim is for failing to develop an adequate internal accounting control system to ensure its policies were being followed.
IBM settled the case without admitting or denying the allegations.
A Large Envelope of Cash
In South Korea, , the lawsuit alleges, employees of IBM's Korean subsidiary and joint-venture LG IBM PC paid out around $207,000 in cash bribes. Citing one particular case, regulators allege an IBM Korea territory manager met with a South Korean electronic operations division chief on a regular basis over a three-year period -- giving that individual an IBM Korea shopping bag containing a large envelope with cash. Ultimately, the lawsuit claims, IBM Korea paid out $76,372 in bribes to the operations chief, in exchange for receiving a preferred mainframe computer supplier status and receiving payments from the government at higher prices than warranted.
Cash, Free Computers, Gifts and a Slush Fund
The lawsuit also alleges LG-IBM not only provided cash bribes to South Korean government officials but also free computers to land their business. The alleged activities in South Korea spanned five years, ending in 2003. But around 2004, the alleged activities shifted to China and lasted another five years, according the SEC lawsuit.
In China, wholly owned subsidiaries IBM Investment Co. Ltd. and IBM Global Services allegedly created a slush fund at local travel agencies and with business partners. According to the lawsuit, the fund was designed to pay for non-business related travel expenses, cash bribes, and also improper gifts like cameras and laptop computers. Two key managers with IBM China, as well as 100 IBM China employees, engaged in the misconduct, the SEC alleges.
Internal Monitoring Questioned
During the course of five years, IBM's internal controls failed to discover at least 114 cases in which IBM China employees and the local travel agencies allegedly created fake invoices to match off-site customer training sessions. As part of its contract with customers in China, IBM would provide training to customers' employees. Under its internal policies, however, Big Blue refused to pay for any side-trips and stopovers not related to its training.
IBM, according the lawsuit, had anti-bribery policies in place but didn't adequately monitor them for compliance:
In an emailed statement, IBM reiterated its policies, saying: "IBM has agreed to settle an enforcement action with the US Securities and Exchange Commission relating to activities by employees of IBM Korea and IBM China during the period from 1998 through 2009. IBM insists on the highest ethical standards in the conduct of its business and requires all employees to follow its policies and procedures for conducting business."Despite its extensive international operations, IBM lacked sufficient internal controls designed to prevent or detect these violations of the FCPA. During the period 1998 to 2009, IBM had corporate policies prohibiting bribery and procedures relating to compliance with the FCPA [Foreign Corrupt Practices Act of 1977]; however, deficient internal controls allowed employees of IBM' s subsidiaries and joint venture to use local business partners and travel agencies as conduits for bribes or other improper payments to South Korean and Chinese government officials over long periods of time.
During the period 1998 to 2009, IBM failed to make and keep books and records that accurately reflected the improper payments made in South Korea and China. Instead, these payments were recorded as legitimate business expenses.
By its conduct, defendant IBM violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.c. §§ 78m(b)(2)(A) and 78m(b)(2)(B)] by failing to maintain an adequate internal control system to detect and prevent improper payments and by improperly recording these payments in its books and records. Unless restrained and enjoined by the Court, defendant IBM will continue to engage in acts and practices that constitute, or will constitute, violations of these provisions.