Lessons Learned: The IBM Bribery Investigation

Last week news broke about the settlement IBM struck up with the Securities and Exchange Commission (SEC).

Posted by Joe Gerard in Code of Conduct, Human Resources on March 28th, 2011

Last week news broke about the settlement IBM struck up with the Securities and Exchange Commission (SEC). Following an investigation, the SEC accused IBM of bribery for activities that the company engaged in between 1998-2002, and again from 2004-2009. I guess you could say that people aren’t joking when they claim it can time a long time to detect and investigate bribery. IBM didn’t own up to committing bribery, nor did the company deny the charges. IBM will pay a total of $10 million to settle the charges.

Bribery Allegations

In the complaint filed by the SEC, from 1998-2002, employees from some of IBM’s subsidiaries and a majority-owned JV gave money, gifts, entertainment and travel to government officials in South Korea and China. From 1998-2003, employees at IBM Korea, along with members from IBM subsidiaries and a JV, gave payments to government officials in South Korea to secure business deals. From 2004-2009 IBM China employees:

“Engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials. The misconduct in China involved several key IBM-China employees and more than 100 IBM China employees overall.”

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Lessons Learned

A lot of people scratch their heads when they hear stories about ongoing bribery – how do employees continue to get away with it?! The IBM case demonstrates exactly what can go wrong when decisions aren’t reviewed at the top of an organization.

1. Insufficient Internal Controls

The complaint filed by the SEC specifically called out the lack of sufficient internal controls at IBM. Once again, we are dealing with a company that had an employee code of conduct, compliance and ethics program and more. However, failure to monitor and enforce the policies throughout the entire company resulted in illegal conduct. The complaint states:

“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; 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.”

2. Faulty Bookkeeping

Throughout 1998-2009, gifts, travel and other bribes were falsely recorded on the company’s books as legitimate business expenses. Employees at IBM China used slush funds that they created at travel agencies in China to pay for travel for government officials. According to the SEC complaint, IBM China employees also used the slush funds to pay for “training” travel:

“Between 2004 and 2009, IBM’ s internal controls failed to detect at least 114 instances in which (1) IBM-China employees and its local travel agency worked together to create fake invoices to match approved DTRs (Delegation Trip Requests); (2) trips were not connected to any DTRs; (3) trips involved unapproved sightseeing itineraries for Chinese government employees; (4) trips had little or no business content.”

Purchase requests for these trips were submitted and disguised as costs for training services. When a large volume of travel is required for training, the costs add up. You’d think that someone at IBM’s home office would have questioned the expenses or done some research to investigate their legitimacy. Sometimes expenses can’t be taken at face value. To reduce the opportunity for false expenses, ask for additional detail when purchase requests are submitted. If something seems a bit off, chances are your instincts are probably right.

3. Lacking Oversight

No one at the top questioned the activities going on in China and South Korea. China is a country that’s known for corrupt business practices and the acceptance of bribes for business. Executives at home offices need to pay closer attention to activities at their offices and subsidiaries overseas. When employees are aware that no one is watching them, they will do whatever they want to secure business contracts. Employees need to be held to the same standards and accountability – regardless of the location of the office they operate out of.

Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

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