Investigation of Corruption Schemes

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In this chapter:

  • Bribes
  • Kickbacks
  • Extortion and Conflict of Interest
  • Related-Party Transactions
  • Money Laundering
  • Foreign Corrupt Practices Act (FCPA)
  • Prevention and Detection

One very common corruption scheme is a kickback. This requires someone on the inside of the company to participate in the fraud along with vendor. From the book:

 A kickback occurs when a company overpays for goods and services, and a vendor gives part or all of that overpayment to the perpetrator. It is often not difficult for a purchasing employee within a company to engage in a kickback scheme, which is why it is so important for a company to put good controls in place. Anyone who has the authority to award contracts or purchase products or services on behalf of the company is at risk for engaging in a kickback scheme. Other employees involved in the process of approving a contract, such as production managers, engineers, or quality control supervisors, are also at risk for receiving kickbacks.

One of the best ways to detect a potential kickback scheme is through data analysis. Software can hunt down irregularities in pricing or quantities, and can analyze the frequency of purchasing from vendors. A higher than normal cost of raw materials from one or more vendors or an unusually high volume of purchases from one vendor can signal a problem.

The quality of raw materials or merchandise should be monitored closely. It is not uncommon for a supplier to substitute inferior goods in order to make a greater profit from the transactions. The supplier has a lower cost for the inferior goods, but is charging the price of the higher-quality goods to the customer. There is an instant profit, and this is one type of fraud involved in kickback schemes. If quality issues are discovered, look into the potential for a corruption scheme.

It is important to analyze trends in spending and look for explanations for increases and decreases. Look for irregularities in inventory accounts, including excessive write-offs, which may be used to cover up for overpayments.

Contracts with vendors should include a right to audit clause, because their records could be an important part of an investigation of bribery or kickbacks. Under such a clause, the company would have a right to look at the accounting records of the vendor to determine whether there was a fraud or misrepresentation.