Ch 10 - Corruption Flashcards
Corruption
conflicts of interest, bribery, illegal gratuities, economic extortion
Illegal payment to public officials or private corporation insiders for preferential treatment
bribery
offering, giving, receiving, or soliciting any thing of value to influence an official act buys influence of the recipient commercial bribery kickbacks bid-rigging schemes
kickback schemes
involve submission of invoices for goods and services that are either overpriced or completely fictitious
involve collusion between employees and vendors
almost always attack the purchasing function of the victim company
diverting business to vendors
-vendor pays the kickbacks to ensure a steady stream of business from the purchasing company
-no incentive to provide quality merch or low price
-almost always leads to overpaying for goods or services
overbilling schemes: employees with approval authority
- vendor submits inflated invoices to the victim company
- overstates the cost of actual goods or services or reflects fictitious sales
- ability to authorize purchases is key to the scheme
overbilling schemes: employees lacking approval authority
- circumvent purchasing controls
- may prepare false vouchers to make it appear that the invoice is legit
- may forge an approval signature or have access to a restricted password in a computerized system
- difficult to detect since the victim company is being attacked from 2 directions
other kickback schemes
discounts are given in exchange for bribes
slush funds
slush funds
funds can be paid from other accounts or paid as “consulting fees”
other side of the transactions
detecting kickbacks
normal controls may not detect kickback schemes
look for price inflation
monitor trends in COGs and services purchased - often start small but increase over time
look for excessive quantities purchased
investigate inventory shortages
look for inferior goods purchased
compare actual to budgeted
preventing kickbacks
assign an employee independent of purchasing to routinely review buying patterns
make sure all contracts have a “right to audit” clause
establish written policies prohibiting employees from soliciting or accepting fits
expressly forbid employees from engaging in an undisclosed personal interest
implement ethics policy
bid-rigging schemes
all bidders are expected to be on an even playing field - bidding on the same specifications
the more power a person has over the bidding process, the more influence he or she can exert over the selection of the winning bid
potential targets include: buyers, contracting officials, engineers and tech reps, quality of produce assurance reps, subcontractor liaison emplyoes
pre-solicitation phase
need recognition schemes-employee of purchasing company convinces the company that a particular project is necessary, has the specifications tailored to the strengths of a particular supplier
trends indicating a need recognition scheme is occurring
higher requirements for stock and inventory levels, writing off large numbers of surplus items to scrap, defining a need that can only be met by a certain supplier, failure to develop a satisfactory list of backup suppliers
specification schemes
specs include: list of elements, materials, dimensions, and other relevant requirements
set the specs to a particular vendor’s capabilities
use “prequalification” procedures to eliminate certain vendors
give a vendor the right to see the specs before his competitors get the specs
the solicitation phase
restricting the pool of vendors frm which to choose
bid pooling
fictitious suppliers
restricting the time for submitting bids
soliciting bids in obscure publications
publicizing the bid during holiday periods
the submission phase
fraud in the sealed bid process
-last bid was submitted is the one that is awarded the contract
-winning bidder finds out what the other competitors are bidding
-winning bidder may see the other competitors’ bids before submitting his bid
gets help on preparing the bid
the phases of bid-rigging
pre-solicitation phase, solicitation phase, submission phase
detection of bid-rigging schemes
look for
unusual bidding patterns, low bids followed by change orders, a very large unexplained price difference among bidders, contractors who big last and repeatedly receive the contract, a predictable rotation of bidders, losing bidders who become subcontractors, vendors with the same address and phone number, fewer bidders than expected for the project, projects that have been split into smaller ones
something of value
cash, promises of future employment, promise of ownership in the supplier’s firm, gifts, payment of credit card bills, loans on very favorable terms, transfers of property
illegal gratuities
given to reward a decision rather than influence it, decision made to benefit a person or company but is not influenced by any sort of payment, may influence future decisions
economic extortion
“pay up or else”
employee demands payment from a vendor in order to make a decision in the vendor’s favor
conflicts of interest
employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the company
victim organization is unaware of the employee’s divided loyalties
purchasing & sales schemes
difference between conflict of interest and bribery
in conflict of interest, the fraudster approves the invoice because of his own hidden interest in the vendor
purchasing schemes
overbilling schemes and turnaround schemes
overbilling schemes
bill originates from a real company in which the fraudster has an undisclosed economic or personal interest
fraudster uses influence to ensure the victim company does business with this particular vendor
does not negotiate in good faith or attempt to get the best price for the employer
turnaround sales
the employee knows that the company is seeking to purchase a particular asset and purchases it himself then turns around and sells it to the company at an inflated price
sales schemes
under billings and writing off sales
underbillings
goods are sold below FMV to a customer in which the perpetrator has a hidden interest
writing of sales
purchases are made from the victim company and credit memos are later issued
other conflict of interest schemes
business diversions, resource diversions, financial disclosures
business diversions
siphoning off clients of the victim company to the employee’s own business
resource diversions
diverting funds and other resources for the development of the employee’s own company
financial disclosures
inadequate disclosures of related-party transactions to the company
prevention/detection of conflict of interest
implement, communicate, and enforce an ethics policy that addresses conflict of interest offenses
require employees to complete an annual disclosure statement
establish an anonymous reporting mechanism to receive tips and complaints
compare vendor address and telephone files to employee address and telephone files for matches
Define corruption
An act in which a person uses his position to gain some personal advantage at the expense of the organization he represents
Illegal payment to public officials or private corporation insiders for preferential treatment
Identify the four categories of corruption
Conflicts of Interest
Bribery
Illegal Gratuities
Economic Extortion
Define bribery
Offering, giving, receiving, or soliciting anything of value to influence an official act Buys influence of the recipient Commercial bribery Kickbacks Bid-rigging schemes
Compare and contrast bribery, extortion, and illegal gratuities
Whereas bribery schemes involve an offer of payment intended to influence a business decision, economic extortion schemes are committed when one person demands payment from another.
Bribery, illegal gratuities, and economic extortion cases all bear a great deal of similarity in that they all involve an illicit payment from one party to another, either to influence a decision or as a reward for a decision already made.
A conflict of interest occurs when an employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the organization.
But whereas in bribery schemes a fraudster is paid to exercise his influence on behalf of a third party, in a conflict of interest scheme the perpetrator engages in self-dealing
Identify the two categories of bribery schemes
Kickbacks and bid-rigging schemes
Understand kickback schemes and how they are committed
Involve submission of invoices for goods and services that are either overpriced or completely fictitious
Involve collusion between employees and vendors
Almost always attack the purchasing function of the victim company
Diverting business to vendors
Vendor pays the kickbacks to ensure a steady stream of business from the purchasing company
No incentive to provide quality merchandise or low price
Almost always leads to overpaying for goods or services
Understand bid-rigging schemes and explain how they are categorized
All bidders are expected to be on an even playing field - bidding on the same specifications
The more power a person has over the bidding process, the more influence he or she can exert over the selection of the winning bid
Potential targets include:
Buyers
Contracting officials
Engineers and technical representatives
Quality or produce assurance representatives
Subcontractor liaison employees
Describe the types of abuses that are committed at each stage of the competitive bidding process
Pre-Solicitation Phase
• Need recognition schemes
- Employee of the purchasing company convinces the company that a particular project is necessary
- Has the specifications tailored to the strengths of a particular supplier
• Trends indicating a need recognition scheme is occurring
- Higher requirements for stock and inventory levels
- Writing off large numbers of surplus items to scrap
- Defining a need that can only be met by a certain supplier
- Failure to develop a satisfactory list of backup suppliers
The Solicitation Phase
• Restricting the pool of vendors from which to choose
• Bid pooling (Pg 252)
• Fictitious suppliers (Pg 253)
• Restricting the time for submitting bids
• Soliciting bids in obscure publications
• Publicizing the bid during holiday periods
The Submission Phase
• Fraud in the sealed bid process
- Last bid submitted is the one that is awarded the contract
- Winning bidder finds out what the other competitors are bidding
- Winning bidder may see the other competitors’ bids before submitting his bid
• Gets help on preparing the bid
Be familiar with the controls and techniques that can be used to prevent and detect bribery
Detecting Kickbacks
• Normal controls may not detect kickback schemes
• Look for price inflation
• Monitor trends in cost of goods sold and services purchased
- Often start small but increase over time
• Look for excessive quantities purchased
• Investigate inventory shortages
• Look for inferior goods purchased
• Compare actual amounts to budgeted amounts
Preventing Kickbacks
• Assign an employee independent of the purchasing department to routinely review buying patterns
• Make sure that all contracts have a “right to audit” clause
• Establish written policies prohibiting employees from soliciting or accepting any gift or favor from a customer or supplier
• Expressly forbid any employee from engaging in any transaction, on behalf of the company, in which he or she has an undisclosed personal interest
• Implement an ethics policy that clearly explains what improper behavior is and provides grounds for termination if an employee accepts a bribe or kickback
Detecting Bid-Rigging Schemes
• Look for:
- Unusual bidding patterns
- Low bids followed by change orders
- A very large unexplained price difference among bidders
- Contractors who bid last and repeatedly receive the contract
- A predictable rotation of bidders
- Losing bidders who become subcontractors
- Vendors with the same address and phone number
- Fewer bidders than expected for the project
- Projects that have been split into smaller ones
Define conflicts of interest
- Employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the company
- Victim organization is unaware of the employee’s divided loyalties
- Distinguished from bribery-in conflicts of interest, the fraudster approves the invoice because of his own hidden interest in the vendor
- Purchasing schemes
- Sales schemes
Differentiate conflicts of interest from bribery schemes and billing schemes
- In the bribery case, the fraudster approves the invoice in return for a kickback, whereas in a conflict of interest case he approves the invoice because of his own hidden interest in the vendor.
- Look at the nature of the fraud. Why does the fraudster overbill her employer? If she engages in the scheme only for the cash, the scheme is a fraudulent disbursement billing scheme. If, on the other hand, she seeks to better the financial condition of her business at the expense of her employer, this is a conflict of interest
List and understand the two major categories of conflicts of interest
Purchasing Schemes
• Overbilling schemes (Pg 257)
- Bill originates from a real company in which the fraudster has an undisclosed economic or personal interest
- Fraudster uses influence to ensure the victim company does business with this particular vendor
- Does not negotiate in good faith or attempt to get the best price for the employer
• Turnaround sales
- The employee knows that the company is seeking to purchase a particular asset and purchases it himself
- Turns around and sells it to the company at an inflated price
Sales Schemes
• Under-billings
- Goods are sold below fair market value to a customer in which the perpetrator has a hidden interest
• Writing off sales
- Purchases are made from the victim company and credit memos are later issued
Be familiar with proactive audit tests that can be used to detect corruption schemes
- Implement, communicate, and enforce an ethics policy that addresses conflicts of interest offenses
- Require employees to complete an annual disclosure statement
- Establish an anonymous reporting mechanism to receive tips and complaints
- Compare vendor address and telephone files to employee address and telephone files for matches
CASE STUDY
General Services Administration (GSA); Art Metal U.S.A.; Art Metal management was paying off GSA inspectors
Black’s Law Dictionary defines corrupt as
“spoiled; tainted; vitiated; depraved; debased; morally degenerate. as a verb, to change one’s morals and principles from good to bad.”;
“an act done with an intent to give some advantage inconsistent with official duty and the rights of others. The act of an official or fiduciary person who unlawfully and wrongfully uses his station or character to procure some benefit for himself or for another person, contrary to duty and the rights of others.”;
an act in which a person uses his position to gain some personal advantage at the expense of the organization he represents
four distinct categories
bribery, conflicts of interest, economic extortion, and illegal gratuities
Bribery may be defined as
the offering, giving, receiving, or soliciting anything of value to influence an official act
The term official act
means that traditional bribery statutes proscribe only payments made to influence the decisions of government agents or employees
commercial bribery
something of value is offered to influence a business decision rather than an official act of government
commercial bribery scheme
payment is received by an employee without his employer’s consent
offering a payment
can constitute a bribe, even if the illicit payment is never actually made
commercial bribery cases
acceptance of under-the-table payments in return for the exercise of influence over a business transaction
Illegal gratuities are similar to bribery schemes
except that something of value is given to an employee to reward a decision rather than influence it
party who benefited from the decision
rewards the person who made the decision
company ethics policies
forbid employees from accepting unreported gifts from vendors
economic extortion schemes
“pay up or else”; one person demands payment from another
Refusal to pay
results in some harm
Bribery, illegal gratuities, and economic extortion cases
involve an illicit payment from one party to another, either to influence a decision or as a reward for a decision already made
conflict of interest
employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the organization
in bribery schemes a fraudster is paid to exercise his influence on behalf of a third party
in a conflict of interest scheme the perpetrator engages in self-dealing
a bribe is a business transaction
an illegal or unethical one
Bribery schemes generally fall into two broad categories
kickbacks and bid-rigging schemes
Kickbacks
undisclosed payments made by vendors to employees of purchasing companies; usually to enlist the corrupt employee in an overbilling scheme
Bid-rigging schemes
employee fraudulently assists a vendor in winning a contract through the competitive bidding process
Kickback schemes
involve the submission of invoices for goods and services that are either overpriced or completely fictitious; involve collusion between employees and vendors; often undertaken by employees who have purchasing responsibilities
purchasing company
overpaying for goods or services or getting less than it paid for
vendor
raise prices to cover the cost of the kickback; overbilling schemes; bribery schemes
kickback schemes
vendor submits inflated invoices; overbilling schemes; either overstate the cost of actual goods and services or reflect fictitious sales
existence of purchasing authority
success of kickback schemes
Corrupt employees
filing of a false purchase requisition; prepare false vouchers to make it appear that fraudulent invoices are legitimate
slush fund
noncompany account from which bribes can be made
fraudulent disbursement of company funds
writing company checks to a fictitious entity or submitting false invoices in the name of the false entity; coded as “fees” for consulting or other services
key component to most kickback schemes
price inflation; vendor fraudulently increases the price of goods or services to cover cost of _______
“right-to-audit” clause
requires the supplier to retain and make available to the purchaser support for all invoices issued under the contract
specifications of a contract
list of the elements, materials, dimensions, and other relevant requirements for completion of the project
“prequalification” procedures
known to eliminate certain competitors
bid-splitting
broke the project up so that each smaller project was below the mandatory bidding level
Bid-pooling
several bidders conspire to split up contracts and ensure that each gets a certain amount of work
collusive bidding
losing bidders frequently appear as subcontractors on the project
illegal gratuities
similar to bribery schemes, except there is not necessarily intent to influence a particular business decision
economic extortion
employee demands a payment from a vendor in order to make a decision in that vendor’s favor.
conflict of interest occurs when
employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the company
question of motive
reason that some schemes are classified as briberies but others are classified as conflicts of interest
employee approves payment on a fraudulent invoice submitted by a vendor in return for a kickback
bribery
employee approves payment on invoices submitted by her own company (and if the ownership is undisclosed)
conflict of interest
most conflicts of interest arise when
victim company unwittingly buys something at a high price from a company in which one of its employees has a hidden interest, or unwittingly sells something at a low price to a company in which one of its employees has a hidden interest
turnaround sale, or flip
employee knows his employer is seeking to purchase a certain asset and takes advantage of the situation by purchasing the asset himself; fraudster then turns around and resells the item to his employer at an inflated price
Conflict of interest schemes
violations of the rule that a fiduciary, agent, or employee must act in good faith, with full disclosure, in the best interest of the principal or employer
Foreign Corrupt Practices Act (FCPA)
primary anti-corruption legislation in the United States; illegal for U.S. companies or individuals acting anywhere in the world to, directly or indirectly, offer or pay anything of value to foreign officials for the purpose of obtaining or retaining business
five elements to an FCPA bribery violation
A regulated party; Makes a payment or offer; To a foreign official; With a corrupt intent to influence a decision; With a business purpose
Regulated persons include
A domestic concern; An issuer; The agents; A foreign national or business
Under the FCPA, payments can include
money, gifts, charitable contributions or donation of benefit to foreign official, in-kind service, scholarship to foreign official’s relative, overpayments for shares, and loans at favorable interest rates
The SEC can seek civil penalties
of up to $500,000 for covered entities and $100,000 for individuals
United Kingdom (UK) Bribery Act
British citizens • Individuals who normally reside in the UK • An entity incorporated under the law of any part of the UK
strict liability offense
no criminal intent is required
Serious Fraud Office (SFO)
enforcement of the act
Bid-pooling is
A process by which several bidders conspire to split contracts, thereby ensuring that each gets a certain amount of work
Bid-rigging
A process by which an employee assists a vendor to fraudulently win a contract through the competitive bidding process
Bid-splitting is
A fraudulent scheme in which a large project is split into several component projects so that each sectional contract falls below the mandatory bidding level, thereby avoiding the competitive bidding process
Bribery
The offering, giving, receiving, or soliciting of some- thing of value for the purpose of influencing an official act
Business diversions
A scheme that typically involves a favor done for a friendly client; can include situations in which an employee starts his own company and, while still employed by the victim, steers existing or potential clients away from the victim and toward his own new company
Collusion
A secret agreement between two or more people for a fraudulent, illegal, or deceitful purpose, such as overcoming the internal controls of their employer
Commercial bribery is
The offering, giving, receiving, or soliciting of something of value for the purpose of influencing a business decision without the knowledge or consent of the principal
Conflict of interest is
A situation in which an employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the company as a result
Illegal gratuities
The offering, giving, receiving, or soliciting of something of value for, or because of, an official act
Economic extortion
The obtaining of property from another when the other party’s “consent” has been induced by wrongful use of actual or threatened force or fear
Kickbacks are
Schemes in which a vendor pays back a portion of the purchase price to an employee of the buyer in order to influence the buyer’s decision
Need recognition scheme
A pre-solicitation-phase bid-rigging conspiracy between the buyer and contractor whereby an employee of the buyer receives something of value to convince his company that it has a “need” for a particular product or service
Official act
The decisions or actions of government agents or employees. Traditionally, bribery statutes proscribed only payments made to influence public officials
Purchasing scheme
A conflict of interest scheme in which a victim company unwittingly buys something at a high price from a company in which one of its employees has a hidden interest
Resource diversions
The diversion of assets from the victim company
Sales scheme
A conflict of interest scheme in which a victim company unwittingly sells something at a low price to a company in which one of its employees has a hidden interest
Slush fund
A noncompany account into which company money has been fraudulently diverted and from which bribes can be paid
Specifications scheme
A pre-solicitation bid-rigging conspiracy between the buyer and vendor wherein an employee of the buyer receives something of value to set the specifications of the contract to accommodate that vendor’s capabilities
Turnaround sales
A purchasing scheme wherein an employee knows that his company plans to purchase a certain asset, takes advantage of the situation by purchasing the asset himself, and then sells the asset to his employer at an inflated price
Under-billing
A sales scheme that occurs when an employee under-bills a vendor in which she has a hidden interest. As a result, the company ends up selling its goods or services at less than fair market value, which creates a diminished profit margin or loss on the sale
What are the two principal schemes involving bribery?
Kickbacks and Bid-rigging
