The Basics Of Kickbacks In The Business World
Kickbacks are arrangements in which one party pays or offers to pay to the other part something of value in return for an improper business advantage. They are essentially bribes, i.e., payments made or offered to another party with the intent to induce a favorable action by that party. The favored business action is, of course, the one that the payor wants. For example, consider the case of two private businesses that have long-term contracts under which they have agreed to perform certain services for each other over a period of years . Executives at the two companies may agree that one of them will pay a kickback to the other every time the companies conduct certain types of business with each other that they would not normally conduct through other parties. In this way, the parties can inject their own payments into an otherwise innocuous business arrangement, thus ensuring that they receive the benefit of the services they want on a special basis, and bring about a desired business result.
The Legality Of Kickbacks Within A Private Enterprise
Within the private sector, kickbacks are not illegal per se. However, they can fall afoul of several legal regulations depending on the industry and the parties involved. In many countries and US state laws, there is no exact legal definition of a kickback. Some take the position that any sort of reciprocity between two parties that involves an exchange of money for a service is kickback. Beyond that, it is up to the context in which an alleged "kickback" occurs to determine whether a legal statute was broken.
When it comes to anti-bribery legislation, both the UK Bribery Act 2010 and the Foreign and Corrupt Practices Act (FCPA) are targeted towards public officials and prohibit "anything" of value. Kickbacks to private sector employees or agents do not fall into the scope of those laws, regardless of the value exchanged. By general consensus, private sector transactions fall outside the scope of anti-bribery legislation.
Employment and contract law do provide some context where anti-bribery legislation does not. For example, Section 1(2) of the Bribery Act includes employees in its catchment of foreign public officials and less official agents of foreign public officials. Although a private sector employee is not technically an "official", the line is rather tenuous especially considering that bribery of a public official is prohibited in all countries. So while private sector employees are not necessarily considered officials, an agent bribing such an employee can be accountable for that transaction in the same way they would with a public official.
Beyond that there are a few countries that have made kickbacks illegal. For example, in UAE Article 257 of the UAE Penal Code 1987 provides: "Punished by imprisonment for a period not less than six months and a fine of not more than one hundred thousand dirham: (2)…….Giving any material advantage to another person in order to reach an agreement with the public employee or send him an order, or procure a material advantage to him."
However, even in this case, the bribe is still of material value. With the notable exception of the UAE, in order for kickbacks to not fall within the scope of anti-bribery legislation, there must be a tangible object of value to which a bribe was paid. Payments or gifts exceeding a certain value in the FCPA may be accounted for as promotional expenditures in accordance with legal accounting requirements. Essentially, once the payment or gift exceeds a reasonable point that is higher than "ordinary business courtesy", they may be treated as a bribe.
In addition to anti-bribery and contract law, there are also sector specific regulations that may come into play regarding kickbacks. For example, Section 1128 of the Social Security Act, PBGC, HIPAA, and other laws and regulations include prohibitions on any "kickback, bribe, or rebate" in connection with these industries. Conversely, tax and legal opinion payments are excluded from kickback analysis under these regulations. Similarly, regulations covering government contracts prohibit the receipt of, and attempts to solicit or retain, kickbacks.
Administrative Agencies And Enforcement
Regulatory bodies responsible for investigating unlawful conduct such as bribery, corruption and kick-back schemes are an important component of the legislative framework that affects private businesses in Australia. These regulatory bodies, including agencies such as the ACCC and the AFP, have a role in ensuring compliance with the Act as well as an enforcement role through the investigation and prosecution of breaches of the legislation.
The private sector is susceptible to a variety of risks as it relates to anti-bribery and anti-corruption legislation. Regulators and law enforcement agencies such as the Australian Federal Police (AFP) are at the forefront of policing the anti-bribery and anti-corruption laws discussed in Part 4 of this section. Under these legislative frameworks, relevant agencies have a variety of powers to investigate and prosecute offences. Some of the most notable bodies that are relevant to private businesses include:
The AFP is primarily responsible for enforcement of Commonwealth criminal law. The AFP relies on a range of policies to guide its priorities and responses to various issues. The AFP has a broad investigative role in relation to bribery and corruption offences, including recommendations and referrals for criminal prosecutions to the Commonwealth Director of Public Prosecutions and the Attorney General’s Department. The AFP can refer matters to other law enforcement agencies, including State and Territory police forces, for further investigation.
The ACCC is a Commonwealth Government agency responsible for promoting vigorous competition, fair trading and consumer protection. It is also responsible for enforcing Australian competition, and consumer law. While the ACCC has no specific responsibility in relation to anti-bribery or corruption laws, the ACCC is responsible for enforcing compliance with applicable laws in the private sector. Specifically, the ACCC is responsible for enforcement of the CCA, including Section 76 of the CCA which governs the making of payments or gifts for business other than through agreed contracts for goods and services. The ACCC is responsible for prosecuting serious offences or matters where appropriate.
While the ACCC does not have express powers to investigate criminal offences, it may work in collaboration with other enforcement agencies such as the AFP and State and Territory police. The ACCC may work with the AFP if it suspects a breach of the ICAC Act or the Queensland Crime and Misconduct Act.
The AFP and the ACCC generally investigate and prosecute offences relating to corruption, bribery or dishonestly inducing a public official to exercise their power or influence. In some circumstances where there is evidence of a breach of the ICAC Act, the AFP or the ACCC may refer the matter to the respective ICAC where such a commission exists. For instance, the ICAC will hear public hearings into corrupt conduct in relation to Queensland State political leaders, public service employees, statutory authorities and other public services entities.
Other regulatory bodies have limited enforcement roles when it comes to kick-backs and other common forms of corporate bribery. On occasion, however, these regulatory bodies can impose considerable sanctions on corporations and individual directors, leading to reputational damage and ongoing stringent compliance measures. Examples of these regulatory bodies are set out below.
ASIC regulates the financial services sector and enforces corporate governance laws. ASIC has the power to investigate and prosecute breaches of corporate governance laws, including conduct that could be described as a trade practicable, or the making of financial payments that are an inducement to make a contract or a benefit to a non-employee or non-business relationship.
Consequences Of Engaging In Kickback Schemes
Ensuring legal compliance aside, kickbacks tend to have other more long-term negative consequences for businesses. In the short term, businesses that provide kickbacks face possible legal penalties. Owners or executives may even face prison time for providing kickbacks.
There can be an even greater price to pay. In addition to criminal penalties, offering kickbacks is a surefire way to damage business relationships. Law firms have lost clients because kickbacks were offered. Purchasers of goods and services from kickback-offering companies have gone with their suppliers’ competition once they learned about the kickback practices. The loss of those businesses has caused job losses at the companies that offered the kickbacks.
Companies that practices kickbacks may also suffer financially. While kickbacks are illegal, bold kickback offering companies often advertise openly, even bragging about prices being low and service being great because the receiver of the kickbacks is being paid for sending business their way. People quickly learn that this type of business is not the norm and are not surprised by the actions of authorities when they decide to pursue kickback offenders. Kickback practices invite closer scrutiny from rival businesses, authorities, and private and public watchdog groups.
Ethics And Corporate Integrity
The ethical implications of kickbacks to company employees are immense. When an organization offers an incentive to employees as a condition for securing new business, it is saying that it is willing to sacrifice honesty and integrity for the sake of short-term profits. Most private businesses know this and choose to take a high road approach to winning business.
However, even when a private business thinks it is insulated from the reach of statutes such as the federal Anti-Kickback Statute , it is not. Most state whistleblower statutes include protections and remedies for reporting of such practices in the private business sector, and some federal statutes impose liability on companies who pay kickbacks to a person outside of the company. And the offending private business will have to deal with even greater legal risks and costs if one of its employees decides to report the practice to the government or to a lawyer who can seek a bounty for reporting.
As always, there is also the risk that customers, clients and consumers will find out about the unethical practices and take their business elsewhere.
How To Avoid Kickbacks
Companies can and should implement a comprehensive program to detect and eliminate the risk of kickbacks. Establishing a code of conduct alerting all employees to the risks of potential violation, creating internal controls and a procedure for monitoring their efficacy, and training employees on how to recognize and prevent inappropriate payments to employees, agents, or business partners, are all necessary steps to guard against these arrangements. Whitelisting legitimate payments and banning others, rewarding employees for reporting suspected problems, and even weeding out potentially suspicious personnel by vetting employees against criteria such as criminal history, account balances, and other red flags also may be effective preventative measures.
Such policies and procedures should be implemented at all levels of the company and include the following:
In addition, companies should conduct annual audits of payments and expenses to test the effectiveness of their policies and related controls. Normally, the auditors would determine whether the proper approvals have been obtained and disclosures required by applicable policies have been made. Such audits may reveal the need to revise policies to clarify which payments are permissible and which are prohibited.
Such a proactive program can go a long way towards discouraging inappropriate behavior and encouraging transparency, both of which can help minimize or avoid exposure to costly investigations and fines or penalties.
Case Studies Surrounding Kickbacks In A Private Business
The use of kickbacks is not limited to the public sector. In the private sector, it has become an issue in various industries, especially in the pharmaceutical, construction and industrial supply industries. Such cases are difficult to follow and diligently pursue as a whistleblower attorney due the "secrets" that the kickback payments are designed to protect.
Allegations have involved conduct throughout the country. Such conduct includes local businesses, offices, sales mega-corporations, large multinational operations with subsidiaries that stretch across borders. Here are a few examples of cases involving allegations of kickbacks in private business:
The employees at XTT were taught a step-by-step method to ensure the company obtained large construction contracts, paid out kickbacks to employees of Edwards and Sons, and recorded the kickback payments on XTT’s books and records as legitimate operating expenses, which falsely inflated XTT’s revenues by 100% .
It was determined that Titan paid the fees to a purchasing agent for local knowledge about purchasing "excess" metals and commodities. Titan would know that the commodity value was lower than the artificially inflated invoice. The purchasing agent would then pay Titan a kickback, with the express understanding that the purchasing agent could re-purchase the inventory Titan sold back to them for less than the amount Titan had previously charged.
An Illinois Department of Human Services employee allegedly solicited money, gifts of personal property and employment for a relative from five drug manufacturers in exchange for agreeing to facilitate the sale of anti-psychotic drugs under the Medicaid program. His case resulted in a conviction of conspiracy to commit mail fraud.