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Naomi Rovnick

Sophie Yu

Alibaba has always claimed that integrity was its core value, yet on Monday the e-commerce giant that matches up international buyers including Wal-Mart Stores and Procter & Gamble with mainland suppliers revealed that 2,325 vendors had used its platform to defraud customers.
The company admitted that 100 of its 5,000 sales staff aided the  scams, in which bogus merchants created fake  shopfronts to win sales but did not deliver any goods.
Some analysts believe customers may now lose trust in Alibaba.
The fraudulent merchants found out by Alibaba were business-to-business sellers in its category of 'China Gold Suppliers', a premium group of firms that the internet company claims to have vetted.  
'There must have been a very serious lack of internal controls,' said Peter Gallo, head of Hong Kong-based corporate investigator Pacific Risk. 'There was either a sequence of multiple failures in the vetting and monitoring process or the standards that did exist were easily circumvented by corruption.'
Alibaba's chief executive David Wei Zhe and chief operating officer Elvis Lee Shi-huei resigned on Monday. Its stock has plunged 11 per cent, wiping almost HK$10 billion off its market capitalisation.
Alibaba  stressed the frauds it discovered involved just 0.8 per cent of 'Gold' suppliers. 'We went public on our own initiative,' spokesman John Spelich said. 'One of our most important principles is integrity.'
But Citi analyst Alicia Yip said the fact that Alibaba employees were not properly trained to spot bogus merchants 'raises the alarm'. She said it could take the company a long time to re-educate its 14,000 employees.
It is unclear whether the Securities and Futures Commission or the Independent Commission Against Corruption is investigating. 'We have not been contacted by any Hong Kong law enforcement authorities,' Spelich said. An SFC spokesman did not return an e-mail seeking comment. Spelich said they had handed information about supplier and employee fraud to mainland police.
Alibaba's woes highlight a wider problem of cybercrime. Internet forums, including Alibaba's customer discussion pages, are ablaze with complaints from people having received low-quality goods or nothing at all from internet retailers.
'Criminal activity in the e-commerce space and the efforts to combat it are a whole new field in China,' said Benjamin Simar, Beijing-based consultant at corporate investigator Control Risks.  
Beijing resident Ma Lin, 26, said he unsuspectingly bought a fake Levi's shirt on Alibaba's sister site Taobao last year. 'I was very careful, because everyone knows the danger of buying fake brands online,' he said. 'I called the vendor and he reassured me it was real. It was only 128 yuan [HK$151], so I didn't bother to ask for money back. Now I don't buy clothes on Taobao, only cat food.'



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