Vendor Frauds (Bribes/Kickbacks/Corruption)

 

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The Fraud

The most common vendor fraud is bribery . . . giving kickbacks or gratuities to an employee of a firm to influence the choice of vendor, unbeknownst to the owner or management of the firm. The employee owes loyalty to the employer, not the vendor. Accepting cash or favors to choose the bribing vendor over other competitors is illegal. Travel and entertainment rewards are a common way to incent crooked employees. Once an employee is affiliated with the crooked vendor, the vendor need no longer be concerned with competition and can often raise prices to cover the costs of paying off the employee.

In very large firms, the transgressions will be found in bid-rigging and contract fraud.

Bribery schemes can work backward as well. Rather than a vendor bribing an employee, an employee can demand payment from a vendor to assure selection as a preferred provider. This is called extortion.

The Flaw

Some warning signs of vendor fraud can include:

• Conflicts of interest
• Fraud in the bidding process
• False statements and claims
• False, inflated and duplicate invoices
• Phantom vendors
• Product substitution
• Unnecessary purchases
• Purchases for personal use or resale
• Overcharging

The Fix

Correct hiring, training and supervision of employees in a position of power over purchasing. Management (only) qualifies and approves vendors.

Profile purchasing employees and vendors for living beyond their means, signs of financial difficulties, etc.

Establish and enforce strict receiving procedures. Separate accounts payable duties.