On Monday, a major scandal broke out of Alibaba’s B2B market.  Over 2000 of its paid member (called golden suppliers) deliberately cheated overseas buyers.  The company launched an internal investigation and both its CEO, David Wei, and COO, Elvis Lee stepped down.

Alibaba’s B2B market, Alibaba.com, doesn’t sell goods to the public, or arrange auctions like eBay. It helps businesses find trading partners online. And one way it attempted to monetize the process, and offer some protection from fraud for businesses, was by creating levels of trust for suppliers. Even though it warned all companies to be wary of fraud, it claimed that those it labeled “Gold Suppliers” had been checked out by Alibaba and found to be reliable.

What was particularly jolting for the company was that the fraud it uncovered was among these Gold Suppliers. And, even worse, they operated with the complicity of the Alibaba.com sales staff, who had a financial interest in boosting sales because they were paid commissions.  Here is an article about the incident from Alibaba, http://alizila.com/details/index.php/news/2011-02/92/.

The “phony suppliers” would establish a presence on the site, the article said, by selling consumer electronics at very low prices. Then they took large orders from overseas businesses that paid upfront and received nothing in return.

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 $2.8 million.

I think the most shocking part of the whole incident is that: quite many Alibaba internal staff  were involved in the fraud – 100 is not a small number.  And they have been doing that for 2 years.

The company’s stock price on the Hong Kong Stock Exchange dropped 8 percent on Tuesday.  It might dropped further, as this is an incident with long term impact.

I was hoping Alibaba will have a good results in the coming quarter, as it raised its price last September.  Now, I guess it will take much longer, as it has to fix the fraud problem and rebuild buyer confidence about its B2B market.

Author of Red Wired: China's Internet Revolution, the first book to completely survey the nature of China's internet. (http://redwiredrevolution.com/) She previously was the lead China technology reporter...

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