Kickbacks

1
Kickbacks

• Tim Satrom
• April 7, 2003

2
Bribery Schemes

• A bribe is an illegal or unethical business
  transaction
• A person buys influence with the bribes he/she
  pays
• Bribery schemes can usually be categorized as
  either a kickback or bid-rigging scheme

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Definition

• Kickbacks are undisclosed payments made by
  vendors to employees of purchasing companies
• A kickback is one of the most serious of business
  crimes and it leads to other frauds and abuses,
  including bid rigging

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Kickbacks

• A kickback is not necessarily in the form of
  money, and often is not
• Things of Value
• Expensive gifts, free travel, entertainment
• Hidden interests in business transactions
• Loans, whether repaid or not
• Overpaying for purchases (e.g., paying 10,000
  for a car only worth 5,000)

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Kickbacks

• Kickbacks are classified as corruption schemes
  rather than asset misappropriations because they
  involve collusion between employees and vendors
• These schemes almost always attack the purchasing
  function of the victim company, usually by an
  employee with purchasing responsibilities

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Example

• A vendor submits a fraudulent or inflated invoice
  to the victim company and an employee of that
  company helps make sure that a payment is made on
  the false invoice
• For his assistance, the employee-fraudster
  receives some form of payment from the vendor.
  This payment is a kickback.

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Kickback Crackdown

• MacNeil, received a phone call from a would-be
  supplier accusing Adams of accepting kickbacks
  from Equipment Inc.
• Equipment Inc. had received the maintenance
  contract in each of the past 3 years

• Equipment Inc. was owned by Brown, a former
  employee who had lost his job shortly after
  MacNeil was hired
• MacNeil hired an independent CFE to conduct an
  investigation

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Kickback Crackdown

• The CFE met with the companys controller and
  discovered she had raised concerns in the past
  about how Adams had accepted Equipment Inc.s bid
  without taking bids from other companies

• Examination of documentation of second year
  showed bids from other companies
• Other two bids were photocopies while Equipment
  was original
• After contacting bidders, the CFE found out the
  bids had been changed

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Kickback Crackdown

• Further analysis of records produced a file of
  invoices for Equipment Inc.
• All were approved by Adams
• Extra charges above the contract price
• Legitimacy was doubtful
• None were for a large amount, but after three
  years the total extras charged almost equaled the
  amount of the contract

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Kickback Crackdown

• Opportunity
• General Manufacturing had bad internal controls
• Because of personnel cutbacks, Adams had
  incompatible responsibilities
• Adams supervisor, who would have had oversight,
  was let go and his position was eliminated

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Kickback Crackdown

• Pressure
• It is assumed that both Brown and Adams had
  families to support
• Brown had already lost his job at the company,
  and Adams had the possibility to be laid off as
  well

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Kickback Crackdown

• Rational
• Adams wanted to provide Brown, a 16 year veteran
  of the company with employment
• Brown rationalized the payment of kickbacks to
  Adams as compensation for bonuses that were no
  longer given since the bonus plan was no longer
  used
• Adams also claimed he didnt know what he was
  doing was wrong

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Prosecution

• Kickbacks can be prosecuted as a conflict of
  interest, as well as bribery. A conflict of
  interest case might be easier, as the prosecution
  need show only that the kickbacks, which can be
  in the form of gifts and favors, were not
  disclosed, rather than having to prove corrupt
  intent

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Red Flags

• Improper selection of a vendor or bidding policy
  not being followed
• Unjustified favoritism of a certain vendor
• Approval of high prices
• Excessive purchases
• Continually accept low quality goods

• Increased use of certain vendor(s)
• Unnecessary middleman involved in transactions
• Cost of materials or services not competitive
• Extravagant lifestyle of the fraudster

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Detection

• Kickbacks can be very difficult to detect
• Interview people in the know
• Examine related documents
• Expert interviews of people in Adams and Browns
  positions

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Prevention

• Effective internal controls
• In the case, Adams had incompatible duties
• Clear anti-fraud policies
• General Manufacturing did not have anything that
  clearly stated what actions and behaviors were
  accepted
• Fraud awareness training

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Conclusion

• Kickbacks can never be completely eliminated, as
  fraudsters usually find a way to circumvent even
  the most rigid controls
• But the potential for them to occur can be
  reduced through effective controls and proper
  oversight

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Questions