Tag Archives: Foreign Corrupt Practices Act

Would You Catch Corrupt Practices In Your Firm?

We suspect that IBM’s $10 million settlement with the U.S. securities regulator over accusations that it gave cash and gifts to Chinese and South Korean government officials in violation of the U.S. Foreign Corrupt Practices Act represents business as usual more than the rare bad apple. For the several years that what the U.S. Securities and Exchange Commission called IBM’s “conduits for bribes” continued, the company had anti-bribery policies in place, yet failed to detect the alleged transgressions. The question for Western multinationals operating in China to ask themselves now is whether they would have done better.

IBM neither admits nor denies wrongdoing, as is the practice in such cases. In its complaint filing the SEC, which handles Foreign Corrupt Practices Act cases; the U.S. Department of Justice would only be involved in a criminal case, said:

From at least 2004 to early 2009, employees of IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd. (collectively, “IBM-China”), both wholly-owned IBM subsidiaries, 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-Chipa employees and more than 100 IBM China employees overall.

The SEC accused IBM employees of creating slush funds that were used to pay for overseas excursions by Chinese government officials masquerading as offsite training courses. IBM employees are also alleged to have given gifts, such as cameras and laptops to the officials.  This how the SEC said it all worked:

As part of its business, IBM-China entered into contractual agreements with its government-owned or controlled customers in China for hardware, software, and other services. These contracts contained provisions requiring IBM-China to provide training to the employees of these customers given the high-tech nature of IBM’s products and services. In some cases, IBM held this training offsite and required the customers to travel. In advance of any training trips, IBM-China employees were required to submit a Delegation Trip Request (“DTR”) detailing the business purpose of the trip, all planned sightseeing or entertainment activities, and anticipated expenses. The DTRs required approval by IBM-China managers. IBM-China’s policies required customers to pay for side-trips and stopovers unrelated to the training.

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; (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; (5) trips involved one or more deviations from the approved DTR; amI (6) trips where per diem payments and gifts were provided to Chinese government officials. Moreover, IBM-China personnel also used its official travel agency in China to funnel money that was approved for legitimate business trips to fund unapproved trips. IBM-China personnel utilized the company’s procurement process to designate its preferred travel agents as “authorized training providers.” IBM-China personnel then submitted fraudulent purchase requests for “training services” from these “authorized training providers” and caused IBM- China to pay these vendors. The money paid to these vendors was used to pay for unapproved trips by Chinese government employees.

The takeaway for multinationals doing business in China is that 114 instances over at least five years slipped through IBM’s internal policies and controls designed to prevent or detect such violations of the U.S.’s Foreign Corrupt Practices Act. Remember, it is not just the bribes that the act goes after, it is also the accounting tricks that companies employ to cover them up. For whatever reason, in this case those controls proved deficient in preventing employees of IBM’s subsidiaries and, in the South Korean case, joint ventures from using local business partners and travel agencies as “conduits for bribes or other improper payments to government officials over long periods of time.” Are you confident yours would?

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