Dear thebriberyact.com,

I am the MD of a medium-sized contracting company. I have reads lots on thebriberyact.com about the perils of paying bribes to our customers to win contracts…..my problem however is that am concerned about my staff receiving bribes and kickbacks from our suppliers. Can I do anything about this?

We asked David Lawler, forensic accountant and partner of Forensic Risk Alliance, and author of Frequently Asked Questions in Anti-Bribery and Corruption to answer…….
David answers:

If you are the victim of a kickback scheme, then one of your employees will be authorising an additional unauthorised payment to one of your suppliers. The supplier might be bogus, but is usually providing some legitimate business supplies or services . You are not getting good value for money from them though, because the co-operative supplier forwards or ‘kicks-back’ an element of the overbilling, usually in cash, to the complicit employee.

There are several ways in which the overbilling can take place:

• Increased Price – the most common method.
• Reduced Quantity – Deliveries fall short of the amount invoiced
• Reduced Quality – Delivery of sub-standard goods, or supplying inferior goods but charging for best quality.
• Services allegedly performed that weren’t needed in the first place, such as equipment repairs, or services never performed at all
• Extras and penalties charged by the supplier which are subsequently approved
• Tender rigging – only the ‘friendly’ vendors are selected

Kickback arrangements are difficult to detect because there is a totally legitimate order, delivery, and payment, but the bribe is nowhere recorded in the accounts of the purchasing company. (In the case of a company paying bribes, the payment will generally be reflected in its bank statements and payment records.)

While not easy, they certainly can and should be investigated. There are 3 main approaches to it, and a successful resolution will often use an element of all three.

Looking at the financial records of the supplier paying kickbacks

You may have contractual audit rights – if so, use them. The most effective way of investigating suspected kickbacks is an on-site review of your supplier’s financial records by your own forensic team. This will examine if they are selling material that is overpriced or under-specified when compared to what they are supplying to others, and paying kickbacks from the excess profit.

Looking at the circumstances of the individual alleged to be receiving kickbacks

Explore links between the suspect and the vendor company. Company databases and the internet are invariably the first point of call, followed by imaging their laptop/desktop and looking for email and documentary evidence.. Investigators can do more on-the-ground digging, and in particular examine your employee’s wealth and assets: what’s new and can it all be explained by the person’s legitimate salary?

Using data analytics in your own financial records

Data mining and accounting analytics are key to uncovering these schemes, and specialist forensic accountants are expert and obtaining and crunching the financial data that points to evidence of overbilling. Analysis of stock and payment records will highlight accounts whose behaviour does not match underlying trends. So look closely at:

• Cost of goods sold increasing disproportionately compared to sales. This is because most kickback schemes start small and grow over time, as individuals become emboldened and greedier.
• Higher than normal cost of raw materials , or excessive purchases relative to stock , or including excessive write-offs
• Unusually high volume of purchases from one vendor, or unexpected switching between vendors
• Accelerated payment of invoices
• Increases in vendor charges and penalties
• Total billing exceeds budgeted or anticipated amount
• Bypassing normal tendering / contracting procedure, or contracts written to limit competition (for example, sole-source contracts).
• The same vendor always wins contracts by small margins, or the contract always goes to the bid received last.
• When and who authorised the procurement and payments. Is there anything unusual about the way they treated this particular supplier?
• Are there purchase amounts just under review limits or multiple purchases in a short period of time?

Preventing kickback fraud

An effective 3-way match of the key purchase documents can prevent most kickback schemes. These 3 key documents are the

• Purchase Order
• Delivery Note
• Invoice

This means that before paying any invoices, an independent employee must match all 3 documents to ensure that the company has been billed for the right number and quantity of items/services delivered, and which corresponded to the specifications of what was ordered. This simple accounting control cuts out all but the most determined collusive schemes.