Continuing on from last month’s article on Billing Schemes, we now look at the other common type of occupational fraud, employee corruption.
According to the ACFE, corruption schemes “involve the employee’s use of his or her influence in business transactions in a way that violates his or her duty to the employer for the purpose of obtaining a benefit for him or herself or someone else”.
Corruption occurs when an employee colludes with another party (whether from outside or inside the business) to use his role as an employee to obtain a personal benefit. Collusion frauds occur off the books of the business. That means that the employee usually does not have to hide any of his or her activities in business records. However, the employee may only have to justify their actions to management at some stage.
The most commonly known collusion fraud is bribery – something given to influence a specific act to happen – whether given after an act has been performed or made to obtain a future benefit or information. Collusion also may be a conflict of interest fraud. Though these frauds do not necessarily involve a distinct third party, they will involve the employee in a role other than as an employee. This article does not discuss conflict of interest frauds.
Bribery Frauds
Bribery is used by third parties to gain an improper advantage over others through the intervention of a corrupt employee. Bribery is the giving of something of value by another party to a decision maker or decision influencer in exchange for influence in a decision making process.
There is a gray area between bribery and innocent commercial marketing aimed at an employee. Where does an attempt to market to or to build a professional relationship with someone become a bribe? The practical answer is whether that person’s employer has knowledge of and given approval for the person to receive the benefit offered.
Without the knowledge and consent of the employer, there is a chance that the receipt of a benefit by an employee can be viewed as a bribe. The second part of the gray answer is whether the benefit is being given to directly influence a specific decision or to maintain an overall relationship.
The intended result of a bribe may be to obtain sensitive information, get purchase orders, be awarded contracts, obtain intellectual property or other insider information. The main result sought is an advantage gained by the party paying the bribe over other persons or competitors. Naturally this is done when that party does not believe that they can compete on equal grounds with other parties and needs an ‘improper advantage’.
Bribery affects two victims. The first victim is the employer who will suffer a loss due to loss of profits, overpricing, quality loss, loss of competitive advantage, or similar. The other victim is the briber’s competitor who is now at a competitive disadvantage in getting business from the employer. These competitors are the ones passed over by the bribed decision maker.
In commercial terms, the loss to the employer will have to be at least as large as the bribe that is paid, or the bribe would not have been made. Bribes will not be offered unless the briber will get a greater commercial return than the cost of giving the bribe.
Types of Bribery Schemes
The dishonest employee receives a bribe from the briber. Money may be paid, but anything of value (gifts, entertainment, holidays for the employee or their relatives, payment of bills, sexual favors, etc.) can be given as bribes. The bribee will then use their influence to give an advantage to the briber. There are three major types of bribery frauds:
(a) Over-billing Schemes
Over-billing schemes usually relate to purchase contacts. A bribe is given to the employee to prefer that supplier over others. The goods or services supplied may either be priced higher than they otherwise would have been, or be of lesser quality than expected. The purchase contract may also have other hidden costs, charges or high priced variations. In effect, the business pays too much for the supply received, and this over pricing is the profit made from the bribe.
(b) Under-pricing Schemes
Under-pricing schemes are the opposite of over-billing schemes. These usually involve the business selling goods and services to parties at prices that are below or under conditions that are more favorable than would normally have been granted. The benefit to the purchaser is that they get a better deal than they otherwise would have been entitled to get. In this case the business receives too little consideration for its product or service as they are under-priced, and the cost saving is the profit made from the bribe.
(c) Awarding Contracts, Promotions etc
These schemes involve the awarding of contracts on conditions that are not the most favorable to the business. They may be at a higher cost, involve lesser quality materials and / or have conditions that are not the most favorable to the employer. It also involves the granting of promotions to employees within the business – where the briber is promoted above other more qualified people – or the hiring of unsuitable employees. [Bribery does not need to involve someone outside the business.]
How is bribery done?
Most bribery frauds fall into one of two major groups – bid or tender rigging, and kickbacks or secret commissions. These are very similar and achieve the same result.
1. Bid or Tender Rigging
Bid or Tender-rigging is the process where an employee improperly influences the awarding of a sale or purchase or construction contract. This can be done by:
(a) giving the third party details of the other tenders received (giving them knowledge of the conditions to beat); or
(b) influencing the decision maker towards the briber’s tender, even though it is not the most beneficial to the employer.
Tender rigging is usually done during a tender process for a contract of supply or the sale of a large asset or for construction contracts, or for long term supply contracts. An example is an employee of a real estate agent engaged to sell a property by tender providing details of the other tenders to a party so that they may better structure their own tender.
2. Kickbacks or Secret Commissions
Kickbacks
Kickbacks are payments received by the employee from the third party after the influence has resulted in a gain to the other person. These payments are usually given to obtain a favorable decision, or to obtain influence from the employee in relation to the employer purchasing something from or selling something to the third party. The amounts of these payments are often calculated on the amounts involved in the underlying transaction (e.g. 5% of purchases made from the third party).
The major difference between kickbacks and tender rigging is the timing and calculation of the payment and the success factor. Neither of these factors may make a difference to the intended results of the bribes. Both are paid to get an unfair advantage.
Secret Commissions
Any employee that receives or solicits a commission from another party for an act or influence, where the commission is not authorized by the employer, receives a secret commission. The fact that the employee receives a commission may not in itself be a problem, it is the lack of the employer’s knowledge and approval of the commission that causes the fraud. The employee is often the person seeking an advantage.
The more technical description is given in the Qld Criminal Code:
Any agent (employee) who corruptly receives or solicits from any person for himself or herself or for any other person any valuable consideration:
(a) as an inducement or reward for or otherwise on account of doing or forbearing to
