Could Bribery and Kickbacks Happen at Your Company?

Posted on Thursday, March 02, 2017

In a highly publicized case of government corruption awhile back, former U.S. Congressman Randy "Duke" Cunningham pleaded guilty to receiving approximately $2.4 million in bribes from defense contractors. While conducting the investigation, authorities discovered a handwritten "bribe menu" that Cunningham prepared on his House of Representatives notepaper.

Corruption is defined as when fraudsters wrongfully use their influence in a business transaction in order to procure some benefit for themselves or another person, contrary to their duty to their employers. (Common examples include accepting kickbacks, and engaging in conflicts of interest.)

- Association of Certified Fraud Examiners

Conflicts Can Lead to Bribery and Corruption

In one case involving a large manufacturing company, the chief financial officer (CFO) and the general counsel entered into a verbal agreement that paid the general counsel a "commission" for accounts receivable balances that were collected by staff in the legal department. As part of the scheme, the company's accounts receivable department was required by the CFO to assign highly collectable accounts to the law department. Further, in order to hide the commission payments, the general counsel asked that a fake vendor account be created so that he could receive them once they were "earned."

There was a reason why the CFO felt compelled to create the illicit arrangement. Previously, the general counsel investigated and dismissed a claim of sexual harassment against the CFO by another staff member. In exchange for the dismissal, the general counsel wanted a kickback in the form of the accounts receivable agreement.

Not surprisingly, the agreement was not disclosed to the CEO or the holding company that ultimately fired the CEO, CFO and general counsel.

The menu detailed how much the contractors needed to pay Cunningham in order for him to direct government contracts their way. For example, one column offered $16 million in contracts in exchange for a boat worth $140,000.

Within the corporate world, commercial bribery can result in significant economic loss, as well as legal risks and damage to a company's reputation. Many corporate investigations don't uncover evidence as compelling as the bribe menu scribbled by Cunningham, who was sentenced in March 2006 to eight years and four months in federal prison.

However, corporate bribes do create a document trail that can be readily identified by a skilled forensic accountant.

For example, in one case, a hospital employee was charged with conspiracy and mail fraud for approving significantly inflated invoices associated with the construction of a new hospital wing. Kickbacks were accepted from the building contractor in the form of cash, cars, exotic vacations and construction on the employee's home.

As this example illustrates, kickback schemes are almost exclusively focused on the purchasing function at a company including selecting vendors and approving purchases. Once that function has been compromised, the company that paid the bribe no longer has an economic incentive to provide a quality product at a competitive price.

Even worse, the victimized company often ends up paying for the kickbacks in the form of higher prices that the purchasing manager must now accept. In some cases, companies pay for products and services they never even receive.

For example, a Los Angeles meat distributor orchestrated a scheme in which he paid kickbacks to restaurant purchasing agents. According to the Justice Department, the restaurant owners wound up paying inflated prices for the food or paid for products they never received. Most of the time, the meat distributor mailed cash kickbacks directly to the purchasing agents at their homes.

How can you determine if kickbacks are being paid to your company's employees? And how can you detect and prevent conflicts of interest? There are no easy answers. After all, this type of fraud is by its very nature difficult to detect.

Fortunately, a forensic accountant can assist you by:

1. Supplying your company with a detailed overview of the types of behavior you should watch for in employees and suppliers.

2. Providing a number of highly effective data mining techniques that can determine if fraudulent accounts payable activity is taking place.

3. Drafting policies that clearly define what constitutes conflicts of interest.

A multi-pronged approach is your best defense in combating bribes, corruption and conflicts of interest.

Posted in Fraud & Forensics Group

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

"Bruner Dental has been with DWD for well over 15 years. The entire team at DWD has been helpful in many ways. From simple questions day to day, to audits, payroll needs, and much more; they…"

Rondell Nelson

Bruner Dental