BRIBERY AND CORRUPTION Flashcards
Corruption: main forms of corruption and its significance in occupational fraud and abuse
The most common area for corruption?
It can take on many forms, including bribery, kickbacks, illegal gratuities, economic extortion, and collusion.
It is one of the three major forms of occupational fraud and abuse (along with asset misappropriation and fraudulent statements).
The most common area for corruption in an organization is in the purchasing environment, and most corruption schemes involve employees acting alone or in collusion with vendors/contractors.
Bribery: definition, distinctive features, main types
Bribery may be defined as the offering, giving, receiving, or soliciting of corrupt payments (i.e., items of value paid to procure a benefit contrary to the rights of others) to influence an official act or business decision.
- bribery schemes can be difficult to detect;
- bribery schemes tend to be much more costly than other forms of occupational fraud;
- bribery involves collusion between at least two parties;
- bribery schemes are classified into two types: official bribery and commercial bribery.
Official bribery refers to the corruption of a public official to influence an official act of government.
In contrast, commercial bribery refers to the corruption of a private individual to gain a commercial or business advantage.
*Commercial bribery may or may not be a criminal offense. (for example, in the United States, there is no general federal law prohibiting commercial bribery in all instances). But generally, commercial bribery is a civil offense in most jurisdictions, and it can often be pursued in a civil action as breach of fiduciary duty or conflict of interest.
Kickbacks: definition, distinctive features, main schemes
Bribery often takes the form of kickbacks. Kickbacks are improper, undisclosed payments made to obtain favorable treatment.
- usually, kickback schemes are similar to the billing schemes. They involve the submission of invoices for goods and services that are either overpriced or fictitious. Kickbacks are classified as corruption schemes rather than asset misappropriations because they involve collusion between employees and third parties.
- kickback schemes can be very difficult to detect. In a sense, the victim organization is being attacked from two directions — externally and internally.
- most kickback schemes attack the purchasing function of the victim organization; therefore, these frauds are often undertaken by employees with purchasing responsibilities.
Kickback schemes include:
1. Diverting Business to Vendors
In some kickback schemes, an employee-fraudster receives a kickback for directing excess business to a vendor. In these cases, there might not be any overbilling involved; the vendor simply pays the kickbacks to ensure a steady stream of business from the purchasing company - a vendor is no longer subject to the normal economic pressures of the marketplace. In these circumstances, the purchasing company almost always ends up overpaying for goods or services (once a vendor knows it has an exclusive purchasing arrangement, it is motivated to raise prices to cover the cost of the kickback).
2. Overbilling Schemes
- EMPLOYEES WITH APPROVAL AUTHORITY: the ability of the employee to authorize purchases, including the ability to authorize fraudulent purchases, is usually a key to kickback schemes.
- FRAUDSTERS LACKING APPROVAL AUTHORITY:
When an employee cannot approve fraudulent purchases himself, he can still orchestrate a kickback scheme if he can circumvent accounts payable controls by:
- filing a false purchase requisition. Such schemes are generally successful when the person with approval authority is inattentive or is forced to rely on his subordinate’s guidance in purchasing matters;
- corrupt employees might also prepare false vouchers to make fraudulent invoices appear legitimate - the fraudster might forge the signature of an authorized party on the purchase order to show that the acquisition has been approved;
- if the company’s payables system is computerized, an employee with access can enter the system and authorize payments on fraudulent invoices.
- in less sophisticated schemes, a corrupt employee might simply take a fraudulent invoice from a vendor and slip it into a stack of prepared invoices.
3. Other Kickback Schemes
Kickbacks are not always paid to employees to process phony invoices. Some outsiders seek other fraudulent assistance from employees of the victim organization.
Illegal Gratuities: definition, major threat of it
Illegal gratuities are items of value given to reward a decision, often after the recipient has made the decision. Illegal gratuities are similar to bribery schemes except that, unlike bribery schemes, illegal gratuity schemes do not necessarily involve an intent to influence a particular decision before the fact.
Often, an illegal gratuity is merely something that a party who has benefited from a decision offers as a “thank you” to the person who made the beneficial decision.
Most organizations’ ethics policies forbid employees from accepting unreported gifts from vendors. One reason for such blanket prohibitions is that illegal gratuities schemes can (and do) evolve into bribery schemes.
Economic Extortion: definition
An extortion case is often the other side of a bribery case. Extortion is defined as the obtaining of property from another, with the other party’s consent induced by wrongful use of actual or threatened force or fear. Economic extortion is present when an employee or official, through the wrongful use of actual or threatened force or fear, demands money or some other consideration to make a particular business decision. That is, economic extortion cases are the “Pay up or else …” corruption schemes.
To constitute extortion, the threat must be the controlling reason that the victim gives up a right or property.
Collusion
Collusion refers to an agreement between two or more individuals to commit an act designed to deceive or gain an unfair advantage. Typically, collusion involves some sort of kickback, which can result in fraudulent billing or inferior goods.
Methods of Making Corrupt Payments
- Gifts, Travel, and Entertainment
- Cash Payments
- Checks and Other Financial Instruments: when such payments are made, they must be disguised
- Hidden Interests: the payer might give the recipient a hidden interest in a joint venture or other profit-making enterprise. Such corrupt payments are hard to detect for a number of reasons. The recipient’s interest might be concealed through a straw nominee, hidden in a trust or other business entity, or included by an undocumented verbal agreement. Also, even if such payments are identified, proving they originated with corrupt intent is also difficult to demonstrate.
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Loans: three types of “loans” often turn up in corruption cases:
- an outright payment that is falsely described as an innocent loan
- a legitimate loan in which a third-party—the corrupt payer—makes or guarantees the loan’s payments
- a legitimate loan made on favorable terms (e.g., an interest-free loan)
- Credit Cards: a corrupt payment can be in the form of credit card use or payments toward a party’s credit card debt.
- Transfers Not at Fair Market Value
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Promises of Favorable Treatment: such promises commonly take the following forms:
- a payer might promise a government official lucrative employment when the recipient leaves government service.
- an executive leaving a private company for a related government position might be given favorable or inflated retirement and separation benefits.
- the spouse or other relative of the intended recipient might also be employed by the payer company at an inflated salary or with little actual responsibility.
Red Flags of Corrupt Employees
Some common red flags of a corrupt employee include:
- a high success rate in markets where competitors are known to bribe
- reputation for regularly accepting inappropriate gifts
- extravagant lifestyle
- reputation for taking action on his own or directing subordinates to bend, break, or ignore standard operating procedures or rules to benefit the payer
- tendency of an employee to insert himself into areas in which he is normally not involved
- propensity to assert authority or make decisions in areas for which the employee is not responsible
- inclination to make excuses for deficiencies in a third party’s products or services, such as poor quality, late deliveries, or high prices
- circumstances that generate extreme personal pressures, such as ill family members or drug addiction
- history of not filing conflict of interest forms
- frequent hospitality and travel expenses for foreign public officials
- friendly social relationship with a third-party contractor
- wheeler-dealer attitude
Red Flags of Corrupt Third Parties
Some common red flags of a corrupt third party include:
- routinely offers inappropriate gifts, provides lavish business entertainment, or otherwise
- tries to ingratiate himself into an organization
- consistently awarded work, without any apparent competitive advantage
- poor-quality products or services but is continually awarded contracts
- unjustified high prices or price increases for common goods or services
- fees are paid in cash
- fees are made in a country different from where the underlying business takes place
- no apparent value to the organization
- high commissions
- claims of special influence with a specific buyer
- due diligence reveals any of the following indicators suggesting that the third party is not qualified:
- Inadequate financial resources
- Operating in a region with a history of corruption
- Decentralized operations
- Lack of qualifications or experience
- Poor performance record
- Reputation for dishonesty
- Past complaints or criminal or civil actions against the third party
- A history of fraudulent conduct
- Undisclosed interests in a company or business owned by an employee
- Family ties with an employee
- Does not relate well to competitors
- Address, telephone number, or zip code matches an employee’s address, the address of an employee’s outside business, or an employee’s relative’s address
- Incomplete address (e.g., it is only a PO Box, it gives no telephone number, or it gives no street address)
- Multiple addresses listed for the third party
- Third party, third party’s industry, or third party’s country has a reputation for
corruption - Third parties who are independent sales representatives, consultants, or other middlemen that do not have the reporting and internal control requirements of their larger, publicly held competitors
Internal Control Red Flags of Corruption
Common red flags of corruption that occur in an organization’s internal controls include:
- poor internal controls over key areas, such as purchasing, inventory receiving, and warehousing
- poor recordkeeping
- poorly defined roles and responsibilities
- insufficient capacity to monitor high-risk employees or units
- inadequate anti-corruption control plan
- poor separation of duties in purchasing
- lack of transparency in expenses and accounting records
- poor enforcement of existing policies on conflicts of interest or acceptance of gratuities
- poor documentation supporting award of contracts or subcontracts
- inadequate monitoring procedures
Methods of Proving Corrupt Payments
There are three basic ways to prove corrupt payments.
- First, the fraud examiner may seek to prove illicit funds by turning an inside witness. This approach—assuming the testimony can be corroborated—has obvious advantages and should be pursued whenever feasible.
- Second, the fraud examiner may engage in a covert “sting” operation to secretly infiltrate or record ongoing transactions. A covert “sting” operation might be effective if the scheme is ongoing and the subject is not aware of the investigation. But there are legal and security issues associated with this approach, which requires considerable experience.
- Third, the fraud examiner may identify and trace the corrupt payments through audit steps.
When identifying and tracing corrupt payments through audit steps, the fraud examiner might focus on the point of suspected payment (i.e., from where the funds are generated, earned, stolen, or otherwise begin their journey), point of receipt (i.e., from where the illicit funds are deposited, spent, or invested), or both.
In general, there are two methods used to conceal corrupt payments in a business: on-book schemes and off-book schemes.
- *On-book schemes** are those that occur within an organization. Usually, such transactions will be disguised as some type of legitimate expense, fee, commission, or payment to a subcontractor.
- *Off-book schemes** refer to those in which the suspect transactions do not appear anywhere on the payer’s books or records. That is, off-book schemes leave no direct audit trail. Therefore, off-book schemes are more difficult to trace than on-book schemes. Even though off-book schemes do not leave a paper trail, business and financial records might contain indirect evidence of off-book sales or income.
As a general proposition, suspected on-book schemes are best approached from the point of payment, and off-book schemes are most easily identified at the suspected point of receipt, through the use of an inside witness, or through surveillance.
When conducting an investigation that involves corrupt payments moving through business accounts, the fraud examiner should develop business profiles of the involved entities. Not only will creating business profiles help the fraud examiner gain an understanding of the involved entities and their industries, but it will help him identify any unusual and noncustomary occurrences that are present in those organizations.
