Category Archives for "Corruption"

Gift a bribe
Oct 30

When is a Gift a Bribe?

By Charles Hall | Auditing , Corruption

When is a gift a bribe?

Vendors often give sporting event tickets to clients. Or maybe they take them out for a nice dinner. Others might pay for a trip to Vegas.

So, at what point does a gift become a bribe? A friend of mine recently asked me this question. He said, "I give football tickets to clients. Is that a bribe?" I responded, "Maybe not, but if you give them season-long tickets, probably yes." (Such tickets cost several thousand dollars.) My friend followed with, "What if I go to every game with them?" My answer was, "That makes no difference." And doing so could be worse.

Cozy Vendor Relationships

20% of the 2022 fraud cases in the ACFE's recent study revealed "unusually close association with a vendor" as a red flag.

I've lost count of the fraud cases involving close vendor-client relationships. For example, the vendor and client might take annual family vacations together (think Aspen ski trip), with the former footing the bill.

I once spoke at a conference with vendors in the audience. One of them asked, "What can vendors give?" I responded, "I can't give you a list, but I would never give cash." He wanted a list of acceptable gifts. So, here's one: planes, trains, and automobiles. Yes, I'm trying to be funny, though I know of one vacation home gifted to a CEO. Why? So, a construction company could win a bid.

Some presents (like a vacation home) are obviously a bribe, but lower-cost ones are more difficult to define.

Gray Gift Decisions

You may wonder, "How can I know when a gift is okay?" There's no easy answer to this question. But consider these scenarios. A vendor offers one of the following to you:

-A sleeve of golf balls
-Takes you to play golf
-Pays for you to attend a PGA tournament at Pebble Beach and all expenses for a week-long trip (including your spouse and children)
-Pays your annual dues at your local country club (cost is $25,000 annually)

I'll take the sleeve of balls and play golf, but I'm uncomfortable with the other two.

Front Page Litmus Test

When there is a gray ethical decision, I always say, "Put it on the front page of the paper and see how you feel." If you're comfortable with it, you're probably okay. If not, then don't do it. Another step you might take is to ask an honest friend what they think, someone who has no vested interest. (If you're unwilling to ask your friend the question, your conscience is probably telling you, "This is not okay.")

Most vendors want to give gifts without crossing the line (they want to avoid going to jail). But the line is not usually defined, and naming particulars can be futile. After all, how many things could be on such a list? So, creating a list of proper (or improper) gifts may not work.

So, how do we know if a gift is a bribe?

Quid Pro Quo

In the context of bribery, the concept of "quid pro quo" plays a significant role. This Latin phrase means a direct exchange, where something is given with the expectation of receiving something in return. To determine if a gift can be considered a bribe, one key question is: Was the gift given with the expectation of receiving something in return?

It's easier to argue that a gift is not a bribe if it's small or of low value. In such cases, it may appear more like a token of appreciation than an inducement for a particular action. However, when a vendor gives an expensive gift, it becomes much more challenging to assert that there's no expectation of something in return. Expensive gifts raise red flags and make it more likely that the present is, in fact, a bribe.

So, your company should create a gift policy, defining what is acceptable and unacceptable.

Gift Policies

Gift policies should limit amounts to a specific dollar amount, such as $100 annually. As I said earlier, cash (at least, in my mind) is never an acceptable gift.

The gift policy might provide examples of proper activity with a vendor, such as playing golf together once or twice a year. It might also provide examples of improper actions, such as going on vacations with vendors.

You could list unacceptable gifts, but this is challenging. I would instead define inappropriate gifts in terms of dollars. Doing so is a blanket covering all types of activity.

Moreover, consider including actions the company might take if the employee violates the policy. You may want to say that violations could lead to the loss of their job. But, consult with your legal advisors about the written policy.

And remember to communicate the policy.

Communicate the Gift Policy

Give your written gift policy to new employees, and discuss the importance of transparency regarding vendor gifts. Additionally, remind existing employees of the policy. You might do so in annual training classes.

So, should companies require written disclosure of gifts received?

Gift Disclosure Forms

Companies might also require a signed disclosure form once a year where employees provide details of what they receive from vendors. (Here’s a sample disclosure form.) Additionally, provide such disclosures to your compliance department if you have one. If not, consider giving these to the company owner.

And who might you require to complete such a disclosure form? Anyone with the power to purchase, whether a person issuing a purchase order, a department head authorizing payments, or someone signing checks--anyone able to pay a vendor (or cause a vendor to be paid).

Again, consult with your legal advisors about your disclosure form and processes.

So, is bribery a significant threat to most businesses?

Bribery is Real

ACFE fraud surveys continue to reveal that bribery is one of the leading causes of fraud. 50% of the ACFE's 2022 fraud cases involved corruption (bribery is a form of corruption). Why is this so?

Because it's easy for employees to receive illegal payments (or gifts) without anyone's knowledge, but make no mistake: This activity adversely affects the employer. How? The vendors usually pass the bribe cost to the company through inflated prices or substandard goods. Strangely enough, the vendor often sees a bribe as a cost of doing business, albeit an illegal one.

Bid rigging case
Jan 23

Nonprofit Bid-Rigging and Kickbacks

By Charles Hall | Corruption , Fraud

In this article, we look at a nonprofit bid rigging case. (Some people refer to this as bid rig.) We sometimes think of nonprofit fraud as nonexistent. After all, these are the good guys. But today we see that nonprofit theft does occur–and to the detriment of those most in need.

Nonprofit Bid Rigging Case

Some nonprofit leaders prey on not-for-profit entities, harming the very people the organization is designed to help.

One such nonprofit leader was charged with bid-rigging, receiving kickbacks, and making fraudulent payments to vendors.

Bid rigging case
The Department of Justice charged a “former director of operations at…a Manhattan substance abuse treatment center, with bid rigging, conspiracy to defraud, and income tax evasion, in connection with a conspiracy to embezzle approximately $2.34 million from the organization over an eight-year period.”

The Department of Justice stated the charges stemmed from the director “conspiring with several outside vendors to rig bids and allocate contracts awarded by”  the nonprofit “for the supply of food, meat, health and beauty supplies, baby supplies, office supplies, printed materials, janitorial supplies, and medical supplies from 1990 until at least April 1998.” According to the charge, the director “steered nearly $10 million in contracts to those vendors.” No small bid rigging case.

The director was charged with taking kickbacks totaling at least $364,000 in cash or goods and services from vendors to ensure receipt of contracts. 

The Department of Justice went on to say, the director and seven vendors embezzled at least $2 million from  the nonprofit “by issuing false and fraudulent purchase orders to each of the seven vendors, who in turn issued corresponding invoices for goods and services that were never delivered or provided.”

Later, the director pleaded guilty to bid rigging, fraud, and tax charges.

What was the harm to the nonprofit’s 600 substance abuse patients? Well, money that should have aided the needy went into the pockets of fraudsters.

Bid Rigging Control Weaknesses

The first weakness was having a leader who was concerned more about his wealth than the people he served. Auditors often refer to this as the tone at the top–it’s the ethical makeup of those in charge. COSO calls it the control environment. Without a positive, honest culture, fraud is more likely to occur.

The second weakness was the bidding process never happened. There’s a reason for bidding: It keeps everyone honest, and it ensures the lowest price for the organization.

The third weakness was a lack of accounts payable controls (or the circumvention of such policies, if they existed). Collusion between an organization’s leaders and vendors can wreak havoc. In such cases, the vendors send invoices, but no service or product is provided. Since someone in the nonprofit is approving the invoice (with knowledge the invoice is fictitious), there is no gatekeeper, no one to prevent the theft. The person approving the invoices is aiding in the fraud.

What are the fixes for a bid rigging case such as this one?

Bid Rigging Fixes

First, fire unethical leaders. Nonprofits can’t afford the reputational damage—or the monetary losses.

Second, solicit (real) bids. Sealed bids should be received and opened in a public meeting.

Third, ask board members to review and vet the nonprofit’s vendor list, especially those vendors receiving payments over a certain threshold (e.g., $50,000). Alternatively, ask your external or internal auditors to verify the work of key outside vendors.

Bribery in business
Nov 16

Bribery in Businesses: How to Lessen

By Charles Hall | Corruption

The World Bank estimates that over $1 trillion in bribes are offered each year. Bribery in business is costly. Today we look at how bribery works and how you can prevent it.

A Bribery Story

The FBI performed a sting operation involving two mid-Georgia city council members. The Bureau’s court complaint alleged that two city council members contacted a city vendor requesting a bribe. The vendor, according to the complaint, had previously provided services to the city. But when the contract came up for renewal, the city officials sought monetary encouragement (also known as cash) to continue the arrangement.

Bribery in business
The vendor’s president, once aware of the proposed bribe, contacted the FBI, which in turn conducted the sting.
On the arranged date, the company CFO delivered $20,000 in cash to the city council members. The conversation was recorded as the payment was made. The arrests followed soon thereafter.

The bribe was unsuccessful in this case, but, all too often, the bad guys receive the cash, and the organization suffers. How?

Vendors usually don’t absorb the cost of the bribe. They pass the expense along to the organization in the form of increased invoice billings, or the vendor will, in some cases, provide substandard products or services. Either way, the organization suffers, and the villain walks away with cash or a free vacation or a free car or…well, you get the picture.

Bribery Control Weaknesses

Bribery in business increases as dishonest people lead. Organizations should vet each key employee before hiring, making sure the person has historically acted in an upright manner. (In the case above, the citizens must vote for ethical leaders.)

The city had no fraud hotline. The Association of Certified Fraud Examiners biennial survey has repeatedly shown that corruption is often unearthed by tips–often through a fraud hotline. What is a fraud hotline? It is any means that an organization provides its employees to report a potential theft. (See below.) Bribery can occur even when organizations have the best of controls, but hotlines are a key defense.

Entity’s-level controls such as a code of ethics are just as important as activity-level controls.

Bribery in Business: How to Lessen

Organizations can increase communications about potential theft by:

  • Providing a 24/7 phone number–it can be a 1-800 number (employees call and report any information anonymously)
  • Provide employees with an email address where they can report suspected fraud
  • Ask employees to report red flags (signs of fraud) to a designated person in your organization

To mitigate corruption, implement these controls (there are others, but these will help):

  • Require sealed bids that are opened in the presence of multiple people (mainly for larger purchases)
  • Implement a whistleblower program (include vendors)
  • Require announced periodic vendor audits
  • Implement a conflict of interest policy
  • Implement a bribery prevention policy (include gifts)
  • For significant construction contracts, monitor all phases of the project, including solicitation of bids, awarding of the bid, development of the contract, on-site construction, and related billing, and contract change orders (don’t trust the builder to do this for you).
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