How to Detect and Investigate Kickback Schemes
Re-published with permission from White-Collar Crime Fighter, www.wccfighter.com.
After bank fraud, securities fraud and corporate embezzlements, kickback schemes are the most common type of fraud of $1 million or more.
However, of all the different types of white-collar crimes, kickback schemes are among the toughest for forensics specialists to detect and investigate.
Major reason: Kickback schemes can't easily be discerned in a company's books and records. Financial records must be examined by someone who thoroughly understands the particular industry and notices subtle red flags indicating the possible presence of a bribery or kickback arrangement.
What is a Kickback Scheme?
Kickback schemes -- also known as corporate bribery--take place when the owner or employee of one company (the vendor) offers money or another consideration to an employee of another company (the buyer). The purpose, of course, is to induce the employee of the buyer to purchase or recommend the purchase of a product or service offered by the vendor. Sometimes the vendor freely offers the kickback and sometimes the employee of the buyer solicits it. Although some kickbacks are extorted from a vendor, the schemes are usually voluntary transactions made by consenting parties.
What Forms Do Kickbacks Take?
Not all kickbacks take the form of cash in brown envelopes, passed underneath a table. Kickbacks can also appear in the form of interest-free loans...lavish entertainment...free travel...prostitutes...narcotics...expensive gifts...free use of the vendor's credit cards...free use of the vendor's goods or services...promises of future employment, etc.
The important lesson is that because kickbacks don't normally appear as checks or bank drafts, the lack of a paper trail makes an investigation that much more difficult.
Red Flags of Kickback Schemes
- Lack of competitive bidding procedures... or bids from lower cost vendors are ignored.
- Poor supervision of the purchasing function.
- Prices of goods or services appear to be higher than market value.
- Employees promote or lobby for a vendor who others in the industry shun.
- The vendor has constant legal or regulatory problems.
- Employees appear to be unusually chummy with a particular vendor.
- Employees are observed accepting favors or entertainment from a vendor.
- Management applies heavy pressure on purchasing employees to use a particular vendor.
- The vendor is in a highly competitive industry where kickbacks and bribery are commonplace.
- Employees continue to use a vendor who has poor quality goods or services.
- Promised delivery dates are often missed.
Important: Like all red flags, these are not absolutely indicative of illegal activity. However, the more red flags observed, the more likely something is amiss.
Following Up On Suspicious Signs
Never take kickback investigations lightly. Kickback investigations are often ugly because they can cause innocent employees and vendors to fall under suspicion that may never be completely removed. Employee lawsuits and vendor litigation can follow. However it's equally risky not to investigate possible kickbacks, since they can result in financial harm to the business as well as tarnish the business's reputation.
Once a company has decided to conduct an investigation, an experienced kickback/bribery investigator should be retained to lead the investigation. In addition, the investigation must be conducted on a strict "need to know" basis and all interviewees should be asked to keep silent about the issues discussed.
Once allegations or red flags of kickback schemes become apparent, there are eight steps that the investigator should follow to successfully pursue the case...
- Thoroughly interview all informants. If the information came from a competitor, vendor employee, company employee or other individual(s) the individual(s) must be thoroughly interviewed by the investigator to determine the exact nature of the scheme ...how the information is known to the informant and the informant's motivation for coming forward.
- Evaluate the allegations as they relate to the employee. The investigator should review all appropriate documents and determine whether or not the violations are possible when combined with the information obtained from interviewees.
- Determine whether or not the potentially guilty employee has the behavioral characteristics -- previous disciplinary actions, financial problems, recent divorce, alcohol or drug abuse, lifestyle above one's means, suspicious work habits, etc.-- of someone who would be in a position to accept or solicit bribes.
A covert background investigation of the employee should be done. Other investigative techniques such as surveillance, trash covers, covert review of computer information and other legal techniques can be considered.
- Search desks and file cabinets for evidence.
Caution: Check with your attorney for state laws governing these activities.
- Research the company alleged to be giving or offering the bribe. Research local databases to determine if the vendor has a history of bribery or kickbacks. Remember that ethical companies can be undermined by unscrupulous employees.
Note: At this point the investigator should review all information with members of senior management. A decision must be made about whether the investigation should go forward because doing so involves potentially confrontational stages of the investigation which will include interviews of the suspect employee and the vendor.
- Conduct an initial interview of the suspect employee. The investigator should advise the suspect that information has come from many sources...and that there have been allegations of improprieties against him or her. The employee should be told that the investigator has been hired to help the employee "lift the dark cloud that is over his head."
At this point, the employee will usually deny any knowledge or involvement in the scheme and will become defensive or hostile. Show the employee whatever evidence you have turned up and ask the suspect to comment on it.
The investigator might ask for personal travel receipts, or other purchase receipts. The investigator has no right by law to see these documents but an employee desiring to exonerate himself/herself should cooperate.
- Conduct an initial interview of the suspect vendor. The investigator should meet with the CEO, owner or general counsel of the suspect vendor company. He should explain the allegations and request that the company allow him to review all books, records, contracts, etc. pertaining to the buyer company.
If the vendor refuses to cooperate, the investigator must be empowered to advise the vendor that its goods and services will no longer be purchased by the buyer. If the vendor cooperates, the investigator must conduct the appropriate document review and interviews based on his/her knowledge of what exactly the kickback was alleged to be.
Conduct a second interview of the suspect employee. At this point the suspect employee will have brought in relevant personal financial documents. The investigator must determine if the proper documents have been surrendered and must analyze the documents to determine whether or not there are suspicious transactions. Unfortunately, evidence of the kickback will not always be apparent in employee's personal financial records. The documents may contain information that refutes the allegations.
- Conduct an internal controls review. The investigator must review the events that led to the allegations and review the information developed during the investigation.
Important: Recommendations of internal control changes should be made to management. The changes are likely to be a tightening of the bidding procedure, an enhanced ethics program that would include all vendors as well as all employees and enhanced supervisory monitoring of vendor relationships.
- Complete a final review. All information is now in and management decisions must be made. If the information is conclusive, a decision to terminate and prosecute the employee should be made by management. Make a decision about whether to terminate the relationship or prosecute the vendor. If the information disproves the allegations, the employee must be told that he has been exonerated.