The IBM Hall of Shame: A (Semi) Complete List of Bribes, Blunders and Fraud

Just over a year ago, in October 2015, IBM disclosed to its shareholders that the company was facing (yet another) SEC investigation. This time, federal agents opened up a probe into how Big Blue reported revenue on “certain transactions” in the United States, the UK, and Ireland. In layman’s terms, it means that the SEC is looking into whether or not IBM is cooking the books.

Surprised? I’m not.

The jury’s still out on that particular case, but I’ve been doing my own research and investigation into IBM for the last decade, and the new revelations fits within a certain pattern: IBM gets implicated or accused of some corporate wrongdoing, the company “cooperates” with investigators, and then — just maybe — the government will slap them with a relatively minor fine. But more often than not, it seems to me, nothing happens, and it’s business as usual.

Don’t believe me? Well, that’s why I’ve compiled this handy guide that exposes the long and sordid history of IBM’s alleged violations, both domestic and abroad. Though the company has defended itself in every single case, the list does not paint a pretty picture: There are multiple cases of bribery, fraud, corruption, and bid-rigging. And they appear to be happening with increasing frequency.

But I suppose I’ll just let the information speak for itself…

Argentinian police. Via flickr @jglsongs

1993 — 2000, Argentina: Bribery through Swiss bank accounts

Let’s begin with one of the first IBM bribery cases on record.

In Argentina, the scandal was front-page news: Three high-level executives at IBM were caught bribing government officials with multi-million dollar kickbacks, routed through Swiss bank accounts, in order to win a $250 million contract to modernize the computer system of Argentina’s largest government-owned bank.

The “IBM affair,” as it was referred to locally, began in 1993 and lasted for several years. In total, four IBM executives were issued arrest warrants, according to CNN, and ten people were charged with crimes. As The Economist noted back in 1998: “Mention IBM in most countries and people think of high technology. Mention it in Argentina and these days many people think of scandal.”

One of the key questions of the case was whether or not executives back in Armonk, New York knew about the bribery that had taken place. The IBM-Argentina managers said that headquarters were “aware of the bribes,” while IBM officials — and the SEC — said that New York had no knowledge of scheme, according to a report The Washington Post.

Ultimately, despite the violation, IBM faced a relatively minor penalty, in our view: The SEC required the company to pay a $300,000 fine, though the company did not have to admit any wrongdoing. However, the company did pledge to never bribe officials ever again.

A pledge they apparently broke within a few years.

South Korea police via @PINOY PHOTOGRAPHER

2004–2009, South Korea and China: Slush funds and fake invoices with more than 100 IBM employees involved.

Only a few years after the Argentina scandal, IBM was accused of another overseas bribery case — this time in South Korea and China.

What was truly remarkable about this particular case was the scope of it: According the 2011 suit, over 100 IBM employees were in on the graft. Those employees were pretty bold about what they did, too. This is how the scam worked, according to the lawsuit:

To sum it up, from at least 2004 to early 2009, IBM-China employees created slush funds at local travel agencies in China that were then used to pay for overseas and other travel expenses incurred by Chinese government officials.

In addition, IBM-China employees created slush funds at its business partners to provide a cash payment and improper gifts, such as cameras and laptop computers, to Chinese government officials.

Specifically, more of those bribes in China included:

…payments to the bank account of a “hostess in a drink shop,” as well as on travel and entertainment expenses…

In South Korea, the bribes were equally shocking and overt, in our view. As reported by WSJ:

“From 1998 to 2002… IBM employees in South Korea paid off 16 South Korean government officials, including stuffing cash into shopping bags and IBM envelopes and handing them over in secret meetings in parking lots near an official’s office and home.”

In 2011, IBM settled the lawsuit with the SEC, which alleged that IBM gave cash and gifts totaling $207,000 to Chinese and South Korean officials in connection with about $54 million in government contracts.

So, what’s the punishment for stuffing cash into shopping bags and creating fake slush funds for the sole purpose of bribery? A total fine of $10 million, according to the SEC. (And oh, in case you were wondering, IBM did not admit any wrongdoing in this case, either.)

Now, here’s where things get really juicy: Though the case was settled in 2011 when IBM paid the $10 million, the settlement still needed to get an official blessing from a federal judge. Unfortunately for IBM, they ran into Judge Richard Leon.

To settle the deal, Judge Leon wanted IBM to report within 60 days of learning that it is the subject of ‘any investigation or enforcement proceeding by any federal government agency.” IBM rejected that deal, saying it would be too onerous. So they went to court.

And in court, Judge Leon was seemingly baffled by the SEC’s decision to support IBM in the case. “For reasons the Court the cannot fathom, the SEC appears to agree with the defendant,” Judge Leon said in court, according to a transcript by CorporateCrimeReporter.com. “I, of course, continue to disagree.”

Leon added:

“I am not going to just roll over like the SEC has — this is too burdensome for IBM…You are going to need data to satisfy me. So you better sit down with those folks at the SEC and figure out how you are going to get them the data and how long it’s going to take.

In July 2013, Judge Leon finally approved the deal, but not before noting: “If there’s a problem in the next two years, obviously it won’t be a day like today, it won’t be a happy day.”

Sure enough, there was a problem — already happening two months before Judge Leon warned IBM. In May 2013, IBM disclosed that the Department of Justice was investigating them regarding potential corruption violations in four countries overseas.

2013, Poland, Argentina, Bangladesh and Ukraine: “Allegations relating to transactions…”

For this case, it looks like the SEC took a break and let the Department of Justice try its hand at investigating the overseas alleged fraud. As IBM first noted in May 2013:

In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company’s global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter.

The truth is, we don’t know much about what happened in Argentina, Bangladesh and Ukraine — because neither the DOJ or IBM (or some intrepid investigative reporter) has released any new information.

But one case I’ve been following closely is the Poland bribery case, which I have written extensively about. (The short of it: IBM has been accused by Polish prosecutors of bribing a Polish official in order to win large government contracts. This past summer, Polish investigators raided IBM’s office — for the second time in two years.)

Remarkably, while the federal government has all this information about IBM’s actions in Poland for four years — they have apparently yet to investigate further.

2011–2014, India: Did top IBM executives cook the books in India?

The important thing to know about IBM’s troubles in India is the scope of what happened: repeat accounting troubles over a period of several years. While this may have been swept under the rug in American media, after doing my own research, IBM’s trouble in India (where it has likely over 100,000 employees) gives me a lot of concern.

It began in 2011, when, according to the Times of India, executives there began to overstate revenues on the corporate balance sheets by about $8 million. This apparently continued for over year, into 2012.

Ultimately, IBM laid off about 24 executives when it uncovered the fraud. As the Times of India noted: “The incident has put the spotlight on how senior executives are increasingly under pressure to demonstrate growth in challenging times, pushing them sometimes to resort to unethical accounting practices.”

It appears the SEC or DOJ has yet to investigate this one.

Then, about a year after that round of layoffs, it looks like IBM India encountered another fraud scandal related to Airtel’s $2.5 billion contract with IBM. As TechCrunch’s Pankaj Mishra reported in March 2014:

I have been tracking the internal fraud at IBM India and even the negotiations that could see its biggest outsourcing contract in the country reduced by over half. Now, sources at IBM and those in the industry are telling us there’s much more to the recent firing of dozens of senior and mid-level staff than just a cost-cutting move being executed globally.

2013, USA: IBM under investigation for how it reports cloud revenue

May 2013 was apparently busy month at IBM and the SEC.

As noted above, in the spring of 2013, the SEC opened up investigations into IBM abroad. But at the same time, SEC also apparently opened up an inquiry into IBM in the United States.

The government’s investigation specifically related to how the company reports its cloud revenue on balance sheets. (Right around the same time, IBM spent $2 billion to acquire SoftLayer, a cloud computing firm.)

However, less than a year later, the SEC closed its investigation without announcing why. To me, that was strange. The investigation, in my view, was a major signal that not all was well at the company. As the Probes Reporter pointed out around that time:

Even when the SEC closes investigations without taking enforcement action, as happened here, there still can be consequences for investors later. Just as the instinct is to pull your foot off the gas when seeing a police car on the highway, SEC pressure can trigger similar reflexes inside public companies.

2013–2016, Australia: “The worst failure of public administration in Australia’s history” — IBM is banned from doing business with Queensland’s government

The average American probably has no idea that IBM is completely banned as a contractor within Queensland’s government. Yes, really.

It all started back several years ago when the Queensland government hired Big Blue for a large IT project related to the government’s payroll system, but IBM apparently totally bungled it.

To see what went wrong, in 2013, the Queensland government launched an investigation and interviewed more than 50 witnesses. As one Australian IT news site summarized:

The commission, headed by former supreme court judge Richard Chesterman, tied a number of IBM employees working on the contract bid to serious ethical transgressions, including using leaked information about competitors to gain advantage and attempting to access tender responses by opposing bidders Logica and Accenture.

In other words, the investigation found that IBM employees had used bid-rigging to win the contract, which is both unethical and illegal.

In Australia, the Queensland government then banned IBM as a contractor — a ban which still lives today. Queensland’s former premier, Campbell Newman, called it “arguably the worst failure of public administration in Australia’s history.”

(IBM has been accused of this sort of thing in the United States, as well. Judge Thomas Wheeler, for instance, said in 2013 that IBM used “gamesmanship” in its bid for the $600 million cloud computing project with the CIA, which IBM lost to Amazon.)

2015, Canada: Another bribery case at IBM

More allegations continue to surface that IBM is bribing government officials.

In March 2015, three IBM employees were arrested on bribery charges related to a $24 million contract with Quebec’s tax agency, according to Canadian media. Again, not many details have been reported — and IBM has not acknowledged the case in recent filings — but some information was reported by Canadian media.

As CBC writes:

Seven people, including Revenue Quebec employees and officials with computer companies IBM and EBR, were arrested this morning in connection with an alleged corruption scheme aimed at obtaining a government IT contract worth $24 million….
…Éric Caire, Coalition Avenir Québec (CAQ) MNA, is calling for the government to launch a public inquiry into corruption in government IT contracts. “These fiascos have been piling up for months and it leads us to believe that the events of this morning are just the tip of the iceberg,” said Caire.

We’ll continue to monitor this one. (Also, as a matter of record, not one major US-based newspaper reported on this case. )

2015 — Present:

Bribery always involves phony books and records — it’s necessary to hide the transactions on the balance sheet. And in order to circumvent internal controls, bribery usually requires the involvement of senior management.

So when the SEC announced yet another accounting investigation last year, this one in the USA, it really makes one wonder…

“Big Blue faces an investigation into how it records revenue,” CNBC wrote on Oct. 28, 2015. “The company disclosed on Tuesday that the SEC is looking into the “accounting treatment of certain transactions in the U.S., U.K. and Ireland.’” (IBM says it’s cooperating with investigators.)

So, my question: How has IBM been able to sidestep punishment for so many years, in the face of numerous accounting-related allegations? With allegations of bribery, bid-rigging and phony books and records in four continents and more than ten countries, why has there been no significant actions from the federal government?

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