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IBM accused of bribery in China, South Korea

SEC says thanks for $10m fine

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The US Securities and Exchange Commission has filed a lawsuit against IBM, alleging that the company paid bribes to government officials in China and South Korea to secure deals for the sale of mainframe and PCs among different government agencies.

The lawsuit, which was filed in the US District Court for the District of Columbia, alleges that Big Blue violated the Foreign Corrupt Practices Act of 1977, the same act that ensnared Sun Microsystems in May 2009 and Hewlett-Packard in September 2010.

The FCPA, which you can learn about from Department of Justice here, was passed by the US Congress and signed into law more than three decades ago after more than 400 companies admitted that they had paid over $300m in bribes to foreign government officials, politicians, and political parties in the mid-1970s to win deals. The law has been updated twice - in 1988 and again 1998 - and is enforced by the DoJ with the SEC doing the investigating.

According to the complaint filed by the SEC, between 1998 and 2009, employees of IBM subsidiaries and majority-owned joint ventures provided bags of cash, improper gifts, and travel and entertainment reimbursements through travel agencies to government officials in South Korea and China.

In South Korea between 1998 and 2003, the SEC alleges, employees of IBM Korea and a PC partnership operated by IBM and LG Electronics paid an estimated $207,000 in bribes. According to the suit, various IBM China subsidiaries provided travel, entertainment, and improper gifts to Chinese government officials; high-level employees in the IBM China organization were involved, and over one hundred IBM China employees were involved in the bribery scam to win deals for Big Blue.

The SEC said that IBM Korea and LG-IBM employees paid 135,000 and $71,599 in cash bribes to sixteen different government agencies in South Korea as well as covering entertainment expenses. One deal from December 1998 involved a cash bride of 20 million South Korean won (just over $19,000) in a shopping bag containing an IBM Korea envelope stuffed with the cash, and the chief of operations for the South Korean government agency allegedly received a total of $76,372 in trade for designating IBM Korea as a preferred supplier of mainframes.

The irony, of course, is what options do mainframe shops really have with Fujitsu and Hitachi basically out of the mainframe biz and Unisys being incompatible with IBM gear? The arrangement between IBM Korea and this agency official also allegedly compelled this government agency to pay higher prices than it otherwise might have for those mainframes.

In another related scheme, an IBM Korea manager allegedly paid another official at the same South Korean agency $21,000 in cash, left in the agency parking lots or at his office complex, to ensure that IBM won bids on mainframes and storage arrays worth $21m. In another South Korean deal in 2002, the suit says, this same manager paid another IT manager at a different agency another 20 million SKW to ensure that a $13m mainframe deal closed.

According to the suit, the LG-IBM employees paid off another set of South Korean agencies to make sure IBM won PC procurement deals, and gave away free PCs to people in the agencies' IT departments; the bribes covered many millions of dollars in PCs, which were secured with tens of thousands of dollars in bribes. In at least one deal, the suit says, LG-IBM paid to cover the cost of a "hostess in a drink shop." (I am not sure if that is a euphemism.)

Meanwhile, over at IBM China, the SEC alleges that officials created a "slush fund" to pay for travel and entertainment expenses in order to help IBM win deals between 2004 and 2009. The SEC contends that the trips and entertainment expenses covered by the slush fund had little or nothing to do with business meetings or training.

IBM has rules against paying bribes to government officials or any other IT executive involved in a deal, but the SEC says IBM did not institute sufficient controls on its employees or those of its partnerships to prevent the actions.

Before the ink was even dry on the lawsuit filed by the SEC today, IBM did an 8K filing with the stock regulator, saying it had settled the matter. (That must be some sort of land speed record.)

"As part of the settlement, IBM has consented to the entry of a judgment relating to the books and records and internal control provisions of the securities laws," the company said in the short filing. IBM has also agreed to pay a total of $10m. That figure includes $5.3m for the profits the company gained from all of the deals in South Korea and China where bribes were given, $2.7m in prejudgment interest on that $5.3m, and $2m to cover the civil penalty for breaking the FCPA. ®

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