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IBM Bribery Scandal: What Was It Thinking?

Don Tennant

As IBM celebrates its 100th anniversary this year, it can point to some outstanding technological achievements and commercial accomplishments that have benefited, quite literally, billions of people. So it's a shame that the celebrations have been tarnished by, of all things, a bribery scandal.

 

As The Wall Street Journal reported earlier this month, IBM paid $10 million to settle a lawsuit brought by the U.S. Securities and Exchange Commission, which alleged that IBM's subsidiaries in China and South Korea had engaged in bribing government officials in those countries. According to the WSJ report, IBM didn't admit or deny the charges, but did say that it has taken "appropriate remedial action" to address the issues raised in the suit.

 

Here's a summary of the allegations:

 

  • During the period from 1998 through 2009, in violation of the Foreign Corrupt Practices Act of 1977 (FCPA), employees of IBM subsidiaries and a majority-owned joint venture provided cash payments, improper gifts, as well as improper travel and entertainment to government officials in South Korea and China.

 

  • From 1998 to 2003, employees of IBM-Korea (an IBM subsidiary), and LG IBM PC Co. (LG-IBM, a joint venture in which IBM holds a majority interest), made payments to various government officials in South Korea. The purpose of these payments was to secure the sale of IBM products through IBM-Korea and LG-IBM's business partners. During the relevant period, these managers paid approximately $207,000 in cash bribes to South Korean government officials, including providing improper gifts and payments of travel and entertainment expenses.

 

  • From at least 2004 to early 2009, employees of IBM-China engaged in a widespread practice of providing overseas trips, entertainment and improper gifts to Chinese government officials. The misconduct in China involved more than 100 IBM-China employees, including several key employees.

 

  • Despite its extensive international operations, IBM lacked sufficient internal controls designed to prevent or detect these violations of the FCPA. During the period from 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 an extended period of time.

 

  • From 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.

 

I know, IBM didn't admit to the charges, and you're innocent until proven guilty. But since IBM did feel compelled to pay a $10 million penalty, and did say that it had taken appropriate remedial action to address the issues raised in the suit, let's proceed with the understanding that there were indeed issues to be remedied.

 

This wasn't the misdoing of a handful of rogue employees. If you read the facts of the case as laid out in the SEC complaint, you'll see that this was an institutionalized business practice that spanned more than a decade. While it's unclear how many IBM employees in South Korea were involved, we know that the number in China topped 100. We also know that $10 million is a rounding error for a company the size of IBM, so the monetary price it paid for its egregious actions is negligible.

 

China executes government officials who accept bribes, typically by means of a bullet in the back of the head. Under any circumstances, that IBM could have allowed itself to engage in bribing government officials for the sake of winning computer contracts would be saddening. Under these circumstances, it's sickening. IBM's centenary celebrations will no doubt hark back to the company's retired corporate motto, "Think." Perhaps it's time for IBM to revive that admonition, and take its own sage advice.


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