IBM: The Paperwork Made the Payments Look Ordinary

In the IBM FCPA case announced in 2011, the company agreed to pay $10 million over SEC allegations involving cash, gifts, travel and entertainment for government officials in South Korea and China. An earlier Argentina action showed how a payment could disappear into an ordinary expense category: the SEC described money reaching bank directors through a subcontractor. For someone in procurement, finance or government sales, the revealing connection is between what the payment bought and what the paperwork said it bought.

The Securities and Exchange Commission addressed the Argentina transactions in a December 21, 2000 administrative order. Its March 18, 2011 announcement concerned a separate civil court action against International Business Machines Corporation over the Asian transactions. Both actions concerned the Foreign Corrupt Practices Act and reached the parent’s accounting, but they involved different subsidiaries, payment methods and periods.

Argentina’s 2000 Action and the Bank Subcontract

The Securities and Exchange Commission traced the Argentina action to a $250 million systems integration contract at Banco de la Nacion Argentina, a government-owned commercial bank. According to its order, IBM-Argentina proposed modernizing and connecting the computers in the bank’s main and branch offices in January 1994, and the bank awarded the contract the following month.

That kind of project made the subcontractor’s promised work a central business question. The order said Capacitacion Y Computacion Rural, known as CCR, purportedly agreed to provide services that included an alternative banking software system. It described a procurement process requiring formal evaluations of the technical and cost feasibility of major subcontracts. Someone who knew the software, the project requirements or the proposed price had a reason to examine that work.

According to the order, IBM-Argentina’s general manager and vice presidents of operations and finance caused the subsidiary to hire CCR without the knowledge or approval of any IBM employee in the United States. The Commission said they overrode the procurement procedures that were supposed to review the subcontract.

The order put the CCR subcontract at $37 million. According to the Commission, IBM-Argentina paid approximately $22 million under it during 1994 and 1995, and CCR transferred at least $4.5 million to several bank directors.

The Commission described the official payments as presumably illicit. It said management hid the subcontract’s details from the technical and financial reviewers assigned to the bank project and supplied procurement with fabricated documents, including a backdated authorization letter and inaccurate reasons for hiring CCR.

According to the order, those documents produced the purchase order that allowed the payments to proceed. We see the absurdity: a review built to test the subcontract was handed fabricated reasons to approve it. Approval by fabrication.

The Subcontractor Expense Reached IBM’s Accounts

The Commission’s Argentina findings followed the transaction from the local purchase order into the parent’s financial reporting. The order identified the expense description that carried it:

According to the order, when IBM consolidated its subsidiaries’ results, that information entered its 1994 annual report filed with the SEC. The Commission concluded that IBM failed to ensure that the Argentine subsidiary kept records accurately reflecting the subcontract transactions. It found that the records omitted the presumed illicit payments to officials and inaccurately described the provider’s services.

This is why foreign subsidiary accounting matters to an insider far from headquarters. A local description can travel into the parent’s accounts while the person who knows what the vendor actually did remains on the project team.

The order also described IBM’s response after officials learned that local management had circumvented company procedures. IBM dismissed the operations vice president, requested and received the other managers’ resignations, stopped future payments to CCR and strengthened its controls for compliance with the Foreign Corrupt Practices Act. The Commission ordered IBM to stop the inaccurate recording and future books-and-records violations.

China and South Korea in the 2011 Settlement

The 2011 IBM settlement concerned alleged books-and-records and internal-control failures involving officials in South Korea and China. The Commission tied the South Korean benefits directly to sales of IBM products.

The Securities and Exchange Commission alleged that employees of IBM Korea and LG IBM PC paid cash bribes and provided improper gifts, travel and entertainment to South Korean government officials from 1998 through 2003. IBM held a majority interest in LG IBM PC.

The China allegations covered at least 2004 through early 2009. The Commission alleged that employees of IBM China Investment and IBM Global Services China, both wholly owned subsidiaries, engaged in a widespread practice of providing overseas trips, entertainment and improper gifts to Chinese government officials. Travel and hospitality supplied value to the people on the customer side, so the purpose and approval of an expense mattered alongside its accounting description.

IBM agreed to return $5.3 million in profits and pay $2.7 million in interest and a $2 million civil penalty. The Commission also reported that IBM consented to a final judgment prohibiting future books-and-records and internal-control violations.

What an Insider Can Connect

The useful whistleblower evidence connects the decision, the payment and the false record. IBM’s Argentina action shows why the accounting requirements of the Foreign Corrupt Practices Act reach beyond the ledger: the Commission described a backdated approval and false reasons for selecting a subcontractor. An insider may know what happened before the expense reached the books.

A technical reviewer may know what work the subcontract actually required and what information management withheld. Someone in procurement or finance may know how the authorization, purchase order and expense description came together. Those perspectives can expose the difference between a completed approval file and a review that actually tested the deal. The Commission alleged that false business justifications also helped fund improper payments at Microsoft Hungary.

For a sales or travel employee, the equivalent connection is between the official receiving the benefit, the business being sought and the reason recorded for the expense. The South Korean allegations expressly tied the benefits to product sales. Our whistleblower experts work with the person who knows that connection, bringing the commercial explanation and the payment records into the same account.

Whistleblower Rewards for Foreign-Bribery Information

For eligible foreign-bribery information, SEC whistleblower awards can be 10% to 30% of qualifying sanctions the government collects. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. These are separate programs, and both IBM actions described here were brought by the Securities and Exchange Commission. We work with you and FCPA whistleblower lawyers to assess the program that fits the transactions you know.

The March 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, hosted by MIT Sloan, studied companies exposed to state False Claims Acts through public pension-fund ownership. It reported a 5% to 9% decrease in estimated fraud probability, measured using financial-statement indicators known as the F-score and M-score.

You Know Why the Expense Was Approved

If you know the subcontract, customer benefit or approval that the books misdescribe, speak with our whistleblower experts about the transaction. We build your case around that knowledge and bring in FCPA whistleblower lawyers who understand foreign sales, intermediaries and subsidiary accounting. We stay beside you from the first explanation of the expense through the pursuit of a government recovery.