SEC accuses IBM of misconduct in providing gifts to Korean, Chinese officials

March 18, 2011

The Securities and Exchange Commission accused IBM on Friday of bribing government officials in South Korea with cash payments and free laptop computers.

One payment was delivered in a shopping bag in the parking lot of a Japanese restaurant, the SEC alleged. Another was deposited in the bank account of a “hostess in a drink shop.”

The bribes helped IBM win Korean contracts worth millions of dollars, the agency charged.

IBM was also charged with creating slush funds to bestow gifts such as cameras, laptops and overseas trips on government officials in China.

The misconduct in China alone involved two key managers of IBM’s China operation and more than 100 IBM-China employees, the SEC said.

IBM agreed to pay $10 million to settle the civil charges. The company neither admitted nor denied wrongdoing.

IBM spokesman Douglas O. Shelton said by e-mail that the company “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.”

The charges are part of a federal crackdown on overseas bribery by U.S. companies that has in recent years brought charges against such well-known companies as Tyson Foods, Halliburton, ABB and Daimler.

Together, the cases suggest that the payment of bribes can be a routine part of doing business abroad.

The SEC said that IBM’s misconduct occurred from 1998 to 2003 in South Korea and from 2004 to 2009 in China. The bribes in South Korea totaled $207,000, the agency said.

“Despite its extensive international operations, IBM lacked sufficient internal controls designed to prevent or detect these violations,” the SEC said in a lawsuit filed in U.S. District Court for the District of Columbia.

The SEC charged that IBM recorded improper payments as legitimate business expenses, violating the requirement that it maintain accurate books and records.

In China, the SEC said, IBM frequently paid for government-related clients to take trips that involved “unapproved sightseeing itineraries” and “little or no business content.” In at least 114 instances, IBM employees worked with a local travel agency to create fake invoices, the SEC said.

Chinese government officials who took the trips received gifts and per diem payments, the agency said.

The SEC did not go so far as to call the misconduct in China bribery, and it did not say how if at all IBM benefited from the gift-giving.

The charges about IBM’s business in South Korea were more explicit.

“The purpose of these payments was to secure the sale of IBM products,” the SEC said.

Several of the handovers allegedly took place in parking lots. In 1998, an IBM “Territory Manager” gave an official of a South Korean government “entity” a shopping bag containing “a large IBM-Korea envelope” filled with $19,093, the SEC said. Similar payments were made to the same official in later years in exchange for having IBM designated a “preferred supplier” and paid higher prices, the SEC said.

Another IBM manager delivered envelopes and bags of cash to other Korean officials for help winning contracts worth $21 million and $13 million, the SEC said.

Some of the alleged bribes involved an IBM joint venture with LG Electronics. After problems were detected in a test of the joint venture’s computers, jeopardizing a sale, an LG-IBM sales manager asked a South Korean official for help. The sales manager directed a colleague to “express his gratitude” to the official through a payment of $14,320, the SEC said.

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