Alibaba: The Case of Massive Fraud in China

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The website Alibaba.com claims to be “the global leader in e-commerce for small businesses.” It acts as a platform for global trade involving millions of buyers and suppliers around the world and is known as the largest B2B commerce site in China and one of the biggest in the world. Any way you put it, Alibaba.com is a success. Or was.

It seems the folks running the site were not so successful in one area of business: fraud prevention. The site allowed phony suppliers to set up accounts on the site and sell their goods (mostly low cost electronics) to buyers. Once actually supplying the small amounts of goods to buyers, the sellers moved on to high-ticket items and would take large orders from overseas businesses who paid upfront. The sellers would never deliver.

What’s more troubling is that most of these sellers were labeled “Gold Suppliers” by Alibaba.com, meaning they were checked out by the Alibaba staff and were deemed reliable and trustworthy. Some reports claim the Alibaba staff turned the other other way since they work on commission for each sale.

Though the company said only about 100 of 5,000 sales employees were implicated in the fraud, during the past two years more than 2,300 complaints were filed. According to the numbers the company supplied, the total losses suffered approached .

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8 million. The company’s stock price on the Hong Kong Stock Exchange dropped 8% Tuesday. And though management did take some measures to respond, the company’s top leaders deemed them inadequate.

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The board of directors’ investigation found that “sales people were incentivized to bring in as many paid suppliers as possible without regard to quality. There was a breakdown of the company’s internal check-and-balance systems.”

After news of the fraud was made public, David Wei, chief executive since 2007, and Elvis Lee, the company’s chief operating officer, stepped down.

Though it is Alibaba’s responsibility to police its website, ensuring fraudulent activity of any kind is prevented, it is also the responsibility of the consumer to do a little research of their own. With a Google search of Alibaba, I came across a site solely intended to publicize the wrongdoings of Alibaba.

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com and its staff. The site, appropriately named AlibabaScam.com, lists hundreds of complaints, some dating back years, from buyers who were ripped off, giving detailed information regarding the con artist’s name, email address, website URL and Paypal account name used. It makes one wonder why it took so long for any action to be taken against such a fraudulent company. Buyer beware. Always.

More from the Economist blog.

New Zealand Hit By Another Devastating Earthquake

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For the second time in the past six month, Christchurch, New Zealand’s second largest city, has been stuck by a catastrophic earthquake. The first was powerful enough to bend train tracks and, according to CNN, at least 65 people have been reported dead following this most recent magnitude 6.3 quake. (Photo above on a fallen Catholic church via The Atlantic)

“This is just heartbreaking,” New Zealand Prime Minister John Key said during a trip to survey the damage. “This may be New Zealand’s darkest day.”

The 6.3-magnitude quake struck Christchurch during the lunchtime rush. Frantic rescuers scrambled to reach those trapped beneath the rubble hours after the earthquake hit. Dazed, bleeding residents wandered through streets strewn with debris and piles of concrete.

The human toll will likely continue to mount as rescuers attempt to minimize casualties and overburdened hospitals triage the wounded.

In terms of economic loss, it’s obviously way too early to know anything for sure, but catastrophe modeling firm Eqecat expects the damage to be in the billions.

Estimating damages from this event is very challenging. The most fragile buildings were already damaged in September. Extensive damage from the September event is only partially repaired, and the state of repairs may have left many buildings in a more vulnerable position awaiting repair completion. EQECAT is researching this area more extensively to develop a method to separate the new damage estimate, but current indicators are that damage from this new event will exceed $1 Billion (USD).

Here is video of the disaster.

via CNN

10 Enterprise Risk Management Criteria

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Mash Risk Television has put together a new video documenting what it considers to be “The 10 Key Enterprise Risk Management Criteria.” I’m not going to pretend that this as engaging as an episode of Mad Men or anything, but Sim Segal, the guy doing the talking, does use some examples from the Titanic, AIG and others to drive home some insightful points about ERM.

Here are the 10 critieria:

  1. Enterprise-wide
  2. Includes all risks
  3. Focuses on key risks
  4. Integrates across risk types
  5. Aggregates metrics
  6. Includes decision making
  7. Balances risk and return management
  8. Makes appropriate risk disclosures
  9. Measures value impacts
  10. Focuses on primary stakeholders

Enjoy the show.

Financial Institutions Further Embracing ERM: Deloitte

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The failure of numerous banks and financial institutions during the past several years has shown, in its harshest fashion, that such institutions did not fully embrace a strict risk management regimen. Things have changed since then, however, and Deloitte’s Global Risk Management Survey shows just that.

Deloitte surveyed 131 financial institutions from around the world with total assets of more than trillion.

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The following are a few key findings from the report:

  • Roughly 90% of institutions had a defined risk governance model and approach, and 78% reported that their board of directors had approved their risk management policy or ERM framework
  • 86% of institutions had a CRO or equivalent position, up from 73% in 2008 and 65% in 2002
  • 79% of institutions reported having an ERM program or equivalent in place or in progress, an increase from 59% in 2008 (see below)

  • For insurance institutions subject to Solvency II, 70% or more said they plan to focus over the next 12 months on program initiation, gap analysis, and planning; risk governance; and Own Risk and Solvency Assessment (ORSA)
  • 88% of institutions used stress testing for risk factors affecting their credit portfolio, an increase from 79% in 2008, while 74% conducted stress testing for market risk in their trading book
  • 60% of executives considered their operational risk assessments and internal loss event data to be extremely or very well developed, an increase of 40% in 2008 (see below)

In all, Deloitte’s report is optimistic. It clearly shows financial institutions (finally) taking certain aspects of risk management, such as ERM, capital reserves, governance and, to an extent, technology risk assessments, very seriously.

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This is promising and can provide a certain amount of relief to those worrying about another catastrophic financial collapse of the U.S. economy. Of course, we can never say never, but with financial institutions continuing to fully embrace risk management in all its forms, we can all sleep a little better.

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