Kickbacks return a portion of the money exchanged in a business transaction as compensation for favorable treatment. They’re illegal in the United States and many other countries. But because kickbacks are often disguised as gifts, travel and entertainment, they can be hard to identify.
Intention of the gift-giver
Gifts, gratuities or courtesies of modest value associated with ordinary business practices are usually acceptable. The key consideration is the intention of the giver. Your employees shouldn’t accept any gift offered with the intent to improperly influence business decisions — or that would give the impression of compromising the employee’s ability to act in the best interests of the company.
The same integrity test should be applied in deciding whether to offer a gift to a customer or any other third party. You must take care to avoid not only an actual impropriety, but also the appearance of impropriety.
But defining what is proper or improper with a specific dollar amount can be difficult. Common sense often determines when a gift becomes extravagant or excessive. Professional organizations may provide their members with gift standards, and your employee handbook should set guidelines and spell out your policy.
Kickback schemes in progress often are uncovered when an employee or vendor reports it. So make sure your company operates a confidential fraud hotline. Without an eyewitness, you might look for a pattern of lavish business entertainment or irregular purchasing behavior. Watch for repeated instances of ordering materials at a time other than the optimal reorder point and consistently placing orders with the same vendor.
Failure to follow general bidding policies also signals the need for a closer look. And if costs of materials seem out of line, the cause may be kickbacks in general purchasing.
Kickbacks sometimes sneak into the bidding process when employees accept money in return for advance information about bids. Irregularities in the bid solicitation and submission process — for example, tailoring requirements in solicitation documents to fit the products or capabilities of a single contractor — may be signs of a kickback scheme.
Other signals of possible trouble include prequalification procedures restricting competition and bypassing necessary review procedures. A foreshortened bid submission schedule might allow only those with advance information time to prepare proposals.
Spell out your policy
The line between an acceptable gift offered with integrity and a kickback given as an illegal inducement for favorable treatment can be thin. Contact Ashley Sparks, CPA, CFE at email@example.com for assistance in detecting and preventing kickback or other business risk management issues.