Alibaba allowed unlicensed merchants to use its sales platforms and failed to protect consumers' rights adequately, according to the sternly worded report by the State Administration of Industry and Commerce.
The report was the result of a meeting in July between regulators and Alibaba Group Ltd. management. It said the release was postponed to avoid affecting progress toward Alibaba's stock market debut. The company went public in September after raising a record $25 billion in an initial public stock offering.
An Alibaba spokesman said the company was preparing a public statement about the report.
The U.S. government and others have accused Alibaba of allowing sales of counterfeit goods but Wednesday's report was the first time the Chinese government has criticized a company that is a leading star in an Internet industry communist leaders are eager to develop.
Alibaba's services include Taobao, a consumer-to-consumer platform, and Tmall for consumer brands. The two outlets have a total of more than 50,000 merchants.
"Illegal business exists on Alibaba Group's trading platforms, and for a long time the company has failed to pay adequate attention and failed to take measures to stop it," the report said. "This not only is the biggest crisis of integrity faced by the company since its founding, but also has hurt other Internet companies that try to operate legally."
It said Alibaba allowed "illegal advertising" that misled consumers with false claims about low prices and other details. It said some Alibaba employees took bribes and the company failed to deal effectively with commercial fraud.
The report said regulators and Alibaba would work together to improve management but gave no details of planned changes.
The U.S. Commerce Department added Taobao in 2011 to a blacklist of "notorious markets" linked to sales of pirated and fake goods. The company was removed the following year.
In December, the company said it had removed 90 million listings for goods that might have violated intellectual property rights. The company said it had spent $161 million from the start of 2013 through late 2014 on blocking counterfeit goods and improving consumer protection.
In January, Alibaba and the U.S. Consumer Product Safety Commission announced an initiative under which the Chinese company will prevent vendors from exporting to the United States goods that are the target of recall orders.