14 Corruption
CHAPTER 14 WHEN MOST PEOPLE THINK OF CORRUPTION, bribery usually comes to mind. While bribery is the most common of corruption schemes, corruption also includes extortion, illegal gratuities, and conflict of interest. Corruption is where someone using the role of an employee colludes with a third party where the employee obtains a benefit. The major difference between corruption and other fraud schemes from a data analytical perspective is that the benefit is not recorded in the business system records. It is completely off the books of the organization that the employee works for. The most common corruption scheme is bribery. It is given to influence a decision or act to occur. It may be given ahead or after the act has occurred. The technical definition of bribery is restricted to that of influencing public officials. We will use the term bribery to include situations where employees of commercial enterprises influence business decisions. Bribes are given to the employees to obtain an advantage over others. Therefore not only will the organization suffer losses that may include excessive pricing and lower quality products, but competitors of the briber also suffer from their loss of business opportunities. Losses for the employee’s organization are usually not immediate. There is no theft of assets or anything tangible from the organization so there is no apparent loss. Eventually there must be a cost to the organization. A bribe is given based on a business decision for business purposes. There must be a benefit to the briber of at least the value of the bribe, but usually significantly higher. A commercial return is expected for the bribe or else the bribe would not have been given in the first place. Bribes can take the form of cash, gifts, trips, and promises of future employment or contracts. These under-the-table payments do not directly have to benefit the corrupt employee as they can be directed to accomplices or relatives to conceal the gain. Overbilling schemes are associated with purchase contracts. A bribe is given to the employee of the organization in order for the vendor to be selected over others. Benefits to the vendor include providing the goods or services at higher prices than competitors or providing lower-valued or poor-quality goods. Alternatively, or in addition, there could be unfavorable costs included in the contract, such as excessively high costs for additions or any other variations over the basic contract. The bottom line is that the organization eventually pays far more for the goods or services than they otherwise would have. In order for the bribe to be of value, it must be given to someone with the ability to authorize or to arrange authorization of purchases. If the corrupt employee cannot authorize the purchase, then he or she must use techniques, such as forging the purchasing documents, to convince an authorizing officer that there is a need for the product, or include the fraudulent purchasing documents among legitimate ones for signature. The vendor has an employee working on the inside of the organization to vouch for any false documents or information provided by the vendor. The false documentation may include fraudulent invoices submitted to the organization and the corrupt employee ensures that they are paid. In underbilling schemes, the organization sells their goods at less than regular amounts charged to other customers. The purchaser that paid a bribe obtains a better deal than otherwise entitled to. The selling organization receives a less than favorable price. The cost savings to the purchaser would normally exceed the amount of the bribe. Tender schemes are also known as bid rigging. Here, the bribe is given to influence the awarding of a contract, whether it is for sales, purchasing, or construction contracts. The reason for the bribe may be because the bidder’s cost is not competitive, the bidder does not have a quality product, or a combination of both. The bribe may be offered just to be able to get an edge over the competition to obtain the business. Having an insider provides a significant advantage over competitors. One such method is to pay a bribe to be able to see the specifications of the tender requirements earlier than when they are officially made available. This allows a longer lead time for the bidder to prepare their tender documents. Tender schemes can be invoked at any stage of the bidding process. Prior to offering to accept bids, the procurement requirements can be written to favor a specific supplier. It could also be decided that the organization would have no choice other than to proceed with the sole-source supplier route given that only one supplier can meet the organization’s requirements. Alternatively, the job can be split so that each component falls below the threshold amount of requiring tenders. The sole-source jobs can then be allocated to preferred suppliers. When the tender is advertised, techniques to restrict the pool of qualified vendors may be utilized. For example, a minimal amount of time can be allowed for the submission of bids, making it difficult for those vendors without prior knowledge to submit their complete tender documents on time. Vendors may also bribe employees for information on how to best prepare their tender documents. As an aside, no bribes need to be paid if the vendors are in collusion. The vendors may agree among themselves to designate the successful bidder on a rotational basis. This way, the vendors can consistently maintain high prices with the successful bidder having prices below the other vendors yet still above the market rates. If there are a number of jobs available for tender, another collusion method would be bid pooling. This is where the vendors split up the contract so each gets a piece of the work. There is a designated winner for each of the jobs so everyone’s successful bid is at the prices they wanted. When the tenders have been submitted, certain bid documents can be lost or deemed incomplete to reduce competition. The person with access to the sealed bids can open them to extract the bid information and provide the details to the preferred vendor. With the information, the vendor who paid the bribe for the information can just underbid the lowest amount. If the bid is at market rates, the successful vendor may still be able to make an additional profit when the organization requires modifications above the basic contract.
Corruption
BRIBERY
Overbilling Schemes
Underbilling Schemes
TENDER SCHEMES
KICKBACKS, ILLEGAL GRATUITIES, AND EXTORTION