Alibaba Group Holding Ltd. has a “credibility crisis” fueled by its failure to crack down on shady merchants, counterfeit goods, bribery and misleading promotions in online malls, the Chinese government said.

The scathing report by the State Administration for Industry & Commerce accused Alibaba of allowing merchants to operate without required business licenses, to run unauthorized stores that co-opt famous brands and sell fake wine and handbags. Alibaba employees took bribes, and the e-commerce giant didn’t fix flaws in customer feedback or internal credit-scoring systems, the report said.

“For a long time, Alibaba hasn’t paid enough attention to the illegal operations on its platforms, and hasn’t effectively addressed the issues,” the report said. “Alibaba not only faces the biggest credibility crisis since its establishment, it also casts a bad influence for other Internet operators trying to operate legally.”

Bob Christie, a spokesman for Alibaba, said the Hangzhou-based company couldn’t immediately comment. At a meeting with SAIC officials in July, Alibaba acknowledged that problems exist on its platform and said it would improve monitoring efforts and increase communication with regulators, the government said.

Selling Contraband

Though the meeting was held in July, the report wasn’t published until now to avoid affecting Alibaba’s initial public offering, the government said. The Hangzhou-based company held a record $25 billion IPO in September.

“The SAIC is now teaching Alibaba a lesson and telling it to learn its place,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP by phone. “Many Chinese government agencies are probably not too happy with Jack Ma’s high profile, his initiatives in the financial sector and impact on the retail sector.”

Alibaba said in its IPO prospectus that there were allegations in the past, and likely would be in the future, that the company’s platforms were selling goods that were counterfeit or infringed on other copyrights including music.

“We also have been and may continue to be subject to allegations that we were participants in or facilitators of such allegedly unlawful activities,” the company said in the prospectus.

Weibo Posting

Wednesday’s release came the day after a posting on one of Alibaba’s official Weibo accounts said government inspectors applied standards inconsistently and didn’t give merchants enough time to respond to accusations. The post was written as a letter to the official responsible and said he wasn’t treating China’s biggest e-commerce operator fairly and his methods were flawed.

Last week, founder Jack Ma said Alibaba would only share user data with Chinese authorities if they were investigating terrorism or other crimes. "The rest, no,” Ma told Charlie Rose during a Jan. 23 interview in Davos, Switzerland.

Alibaba has worked to get rid of counterfeits as it expands internationally, saying it removed 90 million listings for products that breached intellectual-property rights before its IPO. The crackdown is part of Alibaba’s plan to build its reputation now that it is Asia’s largest technology company with a market value of $254 billion.

In December, Alibaba said it spent $160.7 million from the beginning of 2013 through November to block counterfeit products and boost consumer protection. Ma, China’s richest man, said last week he wants to reach 2 billion customers through his websites.

Fake Transactions

SAIC said Alibaba was still allowing the sale of contraband such as fake cigarettes and alcohol, and items “that threaten public safety” such as knives and phone-tapping devices.

“A huge number of merchants” haven’t registered for operating licenses and are engaging in illegal behavior that includes bribing Alibaba employees and misleading customers during sales promotions on Nov. 11 and Dec. 12, it said.

“Some operators on the platform have created fake transactions and deleted negative comments to improve their own and others’ reputations,” the report said.

In a separate Jan. 23 report on China’s e-commerce industry, SAIC said it found that sites sold fake cigarettes, wine, mobile phones and handbags. Only 19 of 51 samples sold via Alibaba’s were authentic, a second report said.

Shares of Alibaba closed yesterday at $102.94 in New York after selling stock in the IPO at $68 apiece.

(Source: Bloomberg)