Kickback schemes are some of the most common forms of fraud, after bank fraud, securities fraud, and embezzlement. They are also some of the hardest schemes to investigate and prove. In order to bring a case, the prosecutor must prove that the remuneration between two parties occurred as well as bad intent.
The reason kickback schemes are difficult to spot is that it is easy to hide them in the corporate books. The investigator must notice the subtle red flags indicating bribery or a kickback agreement.
What is a Kickback?
Corporate bribery – or kickback – happens when the agent of one company offers money or something of value to the agent of another company for the purpose of inducing them to reciprocate. The kickback can be offered or solicited. Participation is usually voluntary although sometimes extortion may be involved.
A kickback need not be in the form of cash. They can be interest-free loans, expensive entertainment, airline tickets, gifts, promises of future employment, even prostitutes and narcotics. Indeed, kickbacks normally do not take the form of cash or financial transactions which would leave a paper trail.
The absence of competitive bidding. When contracts are awarded without bidding or over the bids of other lower cost vendors, this may suggest an agreement that would qualify as a kickback.
Lack of supervision of purchasing. When the supervisors take their eyes off the purchaser, it leaves room for kickbacks.
Prices of goods and services those are higher than market value. Especially if the goods or services are paid in cash, which is also common in money laundering.
The promotion of an unpopular vendor. If someone in the company is lobbying for a vendor that others in the industry avoid, something may be up. When that vendor has a history of legal or regulatory infractions, which is a double red flag.
The purchaser and vendor having a particularly close relationship, such as being related or spending large amounts of time outside of work together, can be a red flag.
When employees are seen accepting gifts, favors or entertainment from a vendor, one should always look deeper for the suggestion of quid pro quo. Conversely, when a manager pressures employees to use a particular vendor, this may also suggest an improper relationship.
Industries where kickbacks and bribery are common always need closer watching. The relationship of the pharmaceutical industry with doctors – the only people who can prescribe their products – is notorious for kickbacks. Even though they used to be much more lavish than today, they still exist.
When a company continues to use goods and services of poor quality when better quality goods and services can easily be had, that’s a red flag.
Red flags, by definition, are not proof of illegal activity, but they should not be taken lightly. Kickback investigations can be very disruptive. But failing to investigate possible kickbacks can result in financial harm to you and your business. Perform due diligence.