Alibaba chief executive, operating officers resign over massive internal fraud

Business-to-business marketplace Alibaba has seen its chief executive and operating officers resign over a massive internal fraud that saw about one hundred employees assist fraudsters in bypassing verification procedures.

KPMG fraud expert Gary Gill says the incident serves as a warning for businesses conducting transactions online, and says Australian businesses need to conduct regular security audits to stamp out any type of fraud.

“With online business, it’s always susceptible to fraud. If you look at the surveys we’ve completed, most fraud in organisations happens internally – that seems to be the case here as well.”

Alibaba announced the development overnight, saying in a statement that an internal investigation had found 2,300 sellers on the site committed fraud – and in some cases were aided by the company’s staff.

“The methods of the perpetrators suggest that they have engineered an organised and systemic attack on the integrity of the Alibaba.com platform for illegal gains,” the company said.

Alibaba works as a platform for businesses to sell products and components to other businesses. It oversees the Taobao eCommerce site, along with the Alipay payments system.

The company said chief executive David Wei and chief operating officer Elvis Lee, while not having been involved in the fraudulent activity, will nevertheless be stepping down. It said the pair wish to take responsibility for the “systemic break-down” of the business.

The issue is that on the site, sellers can display that they are “Gold Suppliers”, meaning they have been verified using a process administered by the company. However, sales personnel were found to have been “directly responsible in allowing the fraudsters to evade” those procedures.

As a result, buyers were tricked into doing business with these fraudsters and never received goods for which they paid. The average value of each fraud was about $1,200 and were typically in the electronics sector.

The fraud comes in the middle of a long-term strategy to gain prominence in the Asian market as it works to become one of China’s key suppliers, a strategy led by Wu and to be continued by the new chief executive Jonathon Lu.

The company has been recording solid financials – it recorded a 55% increase in third quarter net profit to $US55.7 million last year.

Lu runs the Taobao.com site as well.

Non-executive chairman Jack Man said in a statement that the company values integrity. “We must send a strong message that it is unacceptable to compromise our culture and values,” he said.

“It saddens me to see talented people leave the company, but David and Elvis are doing the honourable thing to accept full responsibility for this, and I want to thank them for their tireless service to the company.”

The company will be working with law enforcement to hunt down the fraudsters.

Gill says the issue highlights the fact that no business is safe from fraud.

“From an Australian perspective, there are lots of people buying goods online now, and with the dollar being at parity it’s a good time to think about the risks.”

“When you go online, are you buying from a reputable retailer? Does the site distribute these goods or does someone else do it? Do you know them? Are they legitimate? You need to weigh up the risks in your transactions.”