In a highly publicized case of government corruption, former U.S. Congressman Randy "Duke" Cunningham pleaded guilty to receiving approximately $2.4 million in bribes from defense contractors. While conducting the investigation, authorities discovered a handwritten "bribe menu" that Cunningham prepared on his House of Representatives notepaper. The menu detailed how much the contractors needed to pay Cunningham in order for him to direct government contracts their way. For example, one column offered $16 million in contracts in exchange for a boat worth $140,000.
Corruption is defined as when fraudsters wrongfully use their influence in a business transaction in order to procure some benefit for themselves or another person, contrary to their duty to their employers. (Common examples include accepting kickbacks, and engaging in conflicts of interest.)
- Association of Certified Fraud Examiners
In one case involving a large manufacturing company, the Chief Financial Officer (CFO) and the General Counsel entered into a verbal agreement that paid the General Counsel a "commission" for accounts receivable balances that were collected by staff in the legal department. As part of the scheme, the company's accounts receivable department was required by the CFO to assign highly collectable accounts to the law department. Further, in order to hide the commission payments, the General Counsel asked that a fake vendor account be created so that he could receive them once they were "earned."
There was a reason why the CFO felt compelled to create the illicit arrangement. Previously, the General Counsel investigated and dismissed a claim of sexual harassment against the CFO by another staff member. In exchange for the dismissal, the General Counsel wanted a kickback in the form of the accounts receivable agreement.
Not surprisingly, the agreement was not disclosed to the CEO or the holding company that ultimately fired the CEO, CFO and General Counsel.
Within the corporate world, commercial bribery can result in significant economic loss, as well as legal risks and damage to a company's reputation. Many corporate investigations don't uncover evidence as compelling as the bribe menu scribbled by Cunningham, who was sentenced in March 2006 to eight years and four months in federal prison. However, corporate bribes do create a document trail that can be readily identified by a skilled accountant.
For example, in one case, a hospital employee was charged with conspiracy and mail fraud for approving significantly inflated invoices associated with the construction of a new hospital wing. Kickbacks were accepted from the building contractor in the form of cash, cars, exotic vacations and construction on the employee's home.
As this example illustrates, kickback schemes are almost exclusively focused on the purchasing function at a company including selecting vendors and approving purchases. Once that function has been compromised, the company that paid the bribe no longer has an economic incentive to provide a quality product at a competitive price. Even worse, the victimized company often ends up paying for the kickbacks in the form of higher prices that the purchasing manager must now accept.
In other cases, bribes and kickbacks are disguised as management or consultant fees, payment for service on advisory boards, or participation in consultation programs. Some of that participation includes travel to luxurious resorts or other locations.
In one high-profile case, pharmaceutical firm Bristol-Myers Squibb and its wholly owned subsidiary Apothecon, agreed in 2007 to pay more than $515 million to settle charges over a variety of civil allegations involving their drug marketing and pricing practices. The government alleged that the companies paid illegal remuneration to physicians and other health care providers as an inducement to purchase Bristol-Myers Squibb drugs. In addition, Apothecon paid illegal remuneration in the form of price protection payments, prebates, market share payments, stocking allowances, and free goods to induce customers (retail pharmacies and wholesale distributors) to purchase its products.
"Patients are entitled to unbiased decision-making from their physicians and should not have to worry that financial inducements or lavish entertainment have influenced their physicians' prescribing choices," said United States Attorney Michael J. Sullivan in announcing the settlement, which resulted from six actions filed in Massachusetts and southern Florida.
"Kickbacks are especially nefarious when they are used as part of a marketing effort to convince physicians to prescribe drugs for uses that the Food and Drug Administration has not determined to be safe and effective," Sullivan added.
However, as other cases illustrate, the line between marketing and kickbacks is confusing. In 2004, a federal jury acquitted eight current and former employees of TAP Pharmaceutical Products of paying bribes and kickbacks to doctors and hospitals.
The government argued that TAP sales people offered medical professionals expensive meals, trips, tickets and other inducements in order to get them to prescribe the company's drugs. Defense lawyers successfully argued the company's sales people were trying to comply with unclear laws and didn't believe they were engaging in illegal practices.
How can you determine if illegal kickbacks are being paid to your company's employees? And how can you detect and prevent conflicts of interest? There are no easy answers. After all, this type of fraud is by its very nature difficult to detect. Fortunately, an accountant can assist you by:
- Supplying your company with a detailed overview of the types of behavior you should watch for in employees and suppliers.
- Providing a number of effective data mining techniques that can determine if fraudulent accounts payable activity is taking place.
- Drafting policies that define what constitutes conflicts of interest. A multi-pronged approach is your best defense in combating bribes, corruption and conflicts of interest.