Black’s Law Dictionary defines corruption as “an act done with an intent to give some advantage inconsistent with official duty and the rights of others. The act of an official or fiduciary person who unlawfully and wrongfully uses his station or character to procure some benefit for himself or for another person, contrary to duty and the rights of others.”¹ This definition strikes at the heart of what corruption is: an act in which a person uses his or her position to gain some personal advantage at the expense of the organization they represent.

In this chapter, the authors will examine the topic of corruption with an additional look at the human factor. Those modules, along with learning objectives, include the following:

• Module 1 briefly introduces the topic of corruption. The objective of this module is for the reader to be able to describe corruption in its four main forms: bribery, illegal gratuities, economic extortion, and conflicts of interest.
• Module 2 reviews bribery in greater detail. This fraud scheme includes kickbacks and bid-rigging. The goal in this module is for the reader to be able to identify antifraud measures with regard to kickbacks and bid-rigging and apply relevant skills to address case scenarios.
• Module 3 takes a closer look at bribery in an international context through the lens of the Foreign Corrupt Practices Act (FCPA) and the 2010 UK Bribery Act. The objective is for readers to be able to apply antibribery knowledge to organizations operating internationally, especially in high-risk, developing countries.
• Module 4 covers illegal gratuities, economic extortion, and conflicts of interest. Illegal gratuities are similar to bribery except that illegal gratuities are exchanged after the economic or political decision has already been made. The goal here is for the readers to be able to describe the activities and concealment efforts associated with illegal gratuities, economic extortion, and conflicts of interest.
• Module 5 explores the human factor. The psychology of the fraudster was examined in Chapter 2. In this chapter, we reinforce and supplement the material concerning who commits fraud, what pressures the fraudster might face, and common rationalizations. The take-away from Module 4 will be the reader’s ability to adjust their application of antifraud methodology to case issues without inflicting their values on possible suspects. This approach provides a deeper understanding of fraud perpetrators and permits a more objective, evidence-based fraud examination.

Module 1: Corruption Schemes

In the ACFE Fraud Tree, corruption schemes are broken down into four classifications:

1. Bribery
2. Illegal gratuities
3. Economic extortion
4. Conflicts of interest

Before discussing how corruption schemes work, we must understand the similarities and differences that exist among bribery, illegal gratuities, and extortion cases. Bribery may be defined as the offering, giving, receiving, or soliciting anything of value to influence an official act. The term official act means that traditional bribery statutes proscribe only payments made to influence the decisions of government agents or employees.

Many occupational fraud schemes, however, involve commercial bribery, which is similar to the traditional definition of bribery except that something of value is offered to influence a business decision rather than an official act of government. Of course, payments are made every day to influence business decisions, and these payments are perfectly legal. When two parties sign a contract agreeing that one will deliver merchandise in return for a certain sum of money, this is a business decision that has been influenced by the offer of something of value. Obviously, this transaction is not illegal. In a commercial bribery scheme, the payment is received by an employee without her or his employer’s knowledge or consent. In other words, commercial bribery cases deal with the acceptance of personal payments to the employee in return for the exercise of influence over their employer’s business transaction. Notice also that offering a payment can constitute a bribe, even if the illicit payment is never actually made.

Illegal gratuities are similar to bribery schemes, except that something of value is given to an employee to reward a decision rather than influence it. In an illegal gratuity scheme, a decision is made that happens to benefit a certain person or company. This decision is not influenced by any sort of payment. The party who benefited from the decision then rewards the person who made the decision. For example, in one case, an employee of a utility company awarded a multimillion-dollar construction contract to a certain vendor and later received an automobile from that vendor as a reward, a sign of appreciation.

At first glance, it may seem that illegal gratuity schemes are harmless if the business decisions in question are not influenced by the promise of payment. But most company ethics policies forbid employees from accepting unreported gifts from vendors in excess of some minor monetary value (e.g., $25). One reason for concern is that illegal gratuity schemes can (and do) evolve into bribery schemes. Once an employee has been rewarded for an act, such as directing business to a particular supplier, an understanding might be reached that future similar decisions that are beneficial to the supplier will also be rewarded. Additionally, even though an outright promise of payment has not been made, employees may direct business to certain companies in anticipation that they will be rewarded with money or gifts, which can likely influence their future decisions and actions.

Economic extortion cases are the “pay up or else” corruption schemes. Bribery schemes involve an offer of payment intended to influence a business decision, whereas economic extortion schemes are committed when one person demands payment from another. Refusal to pay the extorter results in some economic harm, such as a loss of business. For instance, an employee in another case demanded payment from suppliers and, in return, awarded those suppliers subcontracts on various projects. If the suppliers refused to pay the employee, the subcontracts were awarded to rival suppliers or held back until the fraudster got his money.

Bribery, illegal gratuities, and economic extortion cases all bear a great deal of similarity in that they all involve an illicit exchange of something of value from one party to another, either to influence a decision or as a reward for a decision already made. Conflicts of interest are essentially different in that a conflict of interest occurs when an employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the organization. The key word here is undisclosed. If the company is aware of the personal interest in a transaction that may adversely affect the organization, no conflict exists. As with other corruption cases, conflict schemes involve the exertion of an employee’s influence to the detriment of his employer. In bribery schemes, a fraudster is paid to exercise his influence on behalf of a third party, whereas in a conflict of interest scheme, the perpetrator engages in self-dealing. The distinction between conflicts of interest and other forms of corruption will be discussed in more detail later in this chapter.

Module 2: Bribery

A 2017 Wall Street Journal article reported that Adidas, a sportswear apparel and athletic shoe company, had been named in various bribery schemes involving some of the United States’ top college basketball programs.² In one scheme, a top Adidas executive was alleged to have worked with a sports agent and a financial adviser to funnel tens of thousands of dollars to the families of high school recruits to induce them to sign with major-college programs. In exchange, the recruits were expected to sign with the agent and advisor, and when they turned pro, choose Adidas as their sponsor.

Federal prosecutors filed criminal charges against the Adidas executive, James Gatto. The WSJ suggested that the case also involved alleged bribes paid to assistant coaches at the University of Arizona, Oklahoma State University, the University of Southern California, and the University of South Carolina—all schools with Adidas shoe contracts. Four assistant coaches were arrested and charged in the crackdown by federal prosecutors.

At its heart, a bribe is a business transaction, albeit an illegal or unethical one. As in the GSA and college basketball cases discussed earlier, a person “buys” something of value with the bribes he pays. What he buys is influence over the recipient. Bribery schemes generally fall into two broad categories: kickbacks and bid-rigging schemes.

Kickbacks are undisclosed payments made by vendors to employees of purchasing companies. The purpose of a kickback is usually to enlist the corrupt employee in an overbilling scheme. Sometimes vendors pay kickbacks simply to get extra business from the purchasing company. Bid-rigging schemes occur when an employee fraudulently assists a vendor in winning a contract through the competitive bidding process.

Kickback Schemes

Kickback schemes are similar to the billing schemes described in Chapter 5, in that they involve the submission of invoices for goods or services that are either overpriced or completely fictitious (see Figure 6-1).

Kickbacks are classified as corruption schemes rather than asset misappropriations because they involve collusion between employees (organization insiders) and vendors (organization outsiders); in an asset misappropriation, no outsiders are knowing participants. In a common type of kickback scheme, a vendor submits a fraudulent or inflated invoice to the victim company and an employee of that company helps make sure that a payment is made on the false invoice. For his assistance, the employee/fraudster receives some form of payment from the vendor. This payment is the kickback.

Kickback schemes almost always attack the purchasing function of the victim company, so it stands to reason that these frauds are often undertaken by employees with purchasing responsibilities. Moreover, these schemes are naturally more common when the purchasing decision is ultimately made by one person. That is why the usual kickback suspect is the head of the purchasing department or a key decision-maker in the purchasing process. Purchasing employees often have direct contact with vendors and, therefore, have an opportunity to establish a collusive relationship. In one case, for example, a purchasing agent redirected orders to a company owned by a supplier with whom he was conspiring. In return for the additional business, the supplier paid the purchasing agent more than half the profits from the additional orders. Remember, the funds for the kickback are coming directly from the victim company and not from the entity paying the kickback to the employee.

Bid-Rigging Schemes

As previously discussed, when one person pays a bribe to another, he does so to gain the benefit of the recipient’s influence. The competitive bidding process, during which several suppliers or contractors are vying for contracts (in what can be a very cutthroat environment), can be tailor-made for bribery. Any advantage, one vendor can gain over his competition, may be extremely valuable. The benefit of “inside influence” can ensure that a vendor will win a sought-after contract. Many vendors are willing to pay significantly for this influence.

In the competitive bidding process, all bidders are legally supposed to be placed on a “level playing field,” bidding under the same terms and conditions. Each bidder competes for a contract based on the specifications set forth by the purchasing company. Vendors submit confidential bids stating the price at which they will complete a project in accordance with the purchaser’s specifications.

The way competitive bidding is rigged depends largely on the level of influence of the corrupt employee. The more power a person has over the bidding process, the more likely the person can influence the selection of a supplier. Therefore, employees involved in bid-rigging schemes, like those in kickback schemes, tend to have a good amount of influence or access in the competitive bidding process. Potential targets for accepting bribes include buyers, contracting officials, engineers and technical representatives, quality or product assurance representatives, subcontractor liaison employees, or anyone else with authority over the awarding of contracts.

Bid-rigging schemes can be categorized based on the stage of bidding at which the fraudster exerts his influence. These schemes usually occur in either the presolicitation phase, the solicitation phase, or the submission phase of the bidding process (see Figure 6-2).

The Presolicitation Phase

In the presolicitation phase of the competitive bidding process—before bids are officially sought for a project—bribery schemes can be broken down into two distinct types. The first is the need recognition scheme, in which an employee of a purchasing company is paid to convince his company that a particular project is necessary. The second reason to bribe someone in the presolicitation phase is to have the specifications of the contract tailored to the strengths of a particular supplier.

Need Recognition Schemes

The typical fraud in the need recognition phase of the contract negotiation is a conspiracy between the buyer and contractor in which an employee of the buyer receives something of value and in return recognizes a “need” for a particular product or service. The result of such a scheme is that the victim company purchases unnecessary goods or services from a supplier at the direction of the corrupt employee.

There are several trends that may indicate a need recognition fraud. Unusually high requirements for stock and inventory levels may reveal a situation in which a corrupt employee is seeking to justify unnecessary purchase activity from a certain supplier. An employee might also justify unnecessary purchases of inventory by writing off large numbers of surplus items to scrap. As these items leave the inventory, they open up spaces to justify additional purchases. Another indicator of a need recognition scheme is the defining of a “need” that can be met only by a certain supplier or contractor. In addition, the failure to develop a satisfactory list of backup suppliers may reveal an unusually strong attachment to a primary supplier—an attachment that is explainable by the acceptance of bribes from that supplier.

Specifications Schemes

The other type of presolicitation fraud is a specification scheme. The specifications of a contract are a list of the elements, materials, dimensions, and other relevant requirements for completion of the project. Specifications are prepared to assist vendors in the bidding process, telling them what they are required to do and providing a firm basis for making and accepting bids.

One corruption scheme that occurs in this process is the fraudulent tailoring of specifications to a particular vendor. In these cases, the vendor pays off an employee of the buyer who is involved in the preparation of specifications for the contract. In return, the employee sets the specifications of the contract to accommodate that vendor’s capabilities. In one case, a supplier paid an employee of a public utility company to write contract specifications that were so proprietary that they effectively eliminated all competition for the project. For four years, this supplier won the contract, which was the largest awarded by the utility company. The fraud cost the utility company in excess of $2 million.

The methods used to restrict competition in the bidding process may include the use of “prequalification” procedures that are known to eliminate certain competitors. For instance, the bid may require potential contractors to have a certain percentage of female or minority ownership. There is nothing illegal with such a requirement, but if it is placed in the specifications as a result of a bribe rather than as a result of other factors, then the employee has sold his influence to benefit a dishonest vendor, a clear case of corruption.

Sole-source or noncompetitive procurement justifications may also be used to eliminate competition and steer contracts to a particular vendor. For example, a requisitioner distorted the requirements of a contract up for bid, claiming the specifications called for a sole-source provider. Based on the requisitioner’s information, competitive bidding was disregarded and the contract was awarded to a particular supplier. A review of other bids received at a later date showed that certain materials were available for up to $70,000 less than what the company paid in the sole-source arrangement. The employee had helped divert the job to the contractor in return for a promise of future employment. Competitive bidding was also disregarded in another case, where management staff of a state entity took bribes from vendors to authorize purchases of approximately $200,000 in fixed assets. Sole-source contracts, by their nature, are ripe for corruption, and this fact should be always considered in evaluating these kinds of arrangements.

Another type of specification schemes is the deliberate writing of vague specifications. In this type of scheme, a supplier pays an employee of the purchasing company to write specifications that will require amendments at a later date. This will allow the supplier to raise the price of the contract when the amendments are made. As the buyer’s needs become more specific or more detailed, the vendor can claim that, had he known what the buyer actually wanted, his bid on the project would have been higher. In order to complete the project as defined by the amended specifications, the supplier will have to charge a higher price. These vague specification schemes are particularly problematic for defense and other government contracts.

Another form of specification fraud is bid splitting. In one instance, a manager of a federal employer split a large repair job into several component contracts to divert the jobs to his brother-in-law. Federal law required competitive bidding on projects over a certain dollar value. The manager broke the project up so that each smaller project was below the mandatory bidding level. Once the contract was split, the manager hired his brother-in-law to handle each of the component projects. Thus, the brother-in-law got the entire contract while avoiding competitive bidding.

An egregious and unfair form of bid rigging occurs when a vendor pays an employee of the buyer for the right to see the specifications earlier than other competitors. The employee does not alter the specifications to suit the vendor, but instead simply gives him a head start on planning his bid. The extra planning time gives the vendor an advantage over his competitors in preparing a bid for the job.

The Solicitation Phase

In the solicitation phase of the competitive bidding process, fraudsters attempt to influence the selection of a contractor by restricting the pool of competitors from whom bids are sought. In other words, a corrupt vendor pays an employee of the purchasing company to assure that one or more of the vendor’s competitors do not get to bid on the contract. In this manner, the corrupt vendor is able to improve his chances of winning the job.

One type of scheme involves the sales representative who deals on behalf of a number of potential bidders. The sales representative bribes a contracting official to rig the solicitation, ensuring that only those companies represented by him get to submit bids. It is not uncommon in some sectors for buyers to “require” bidders to be represented by certain sales or manufacturing representatives. These representatives pay a kickback to the buyer to protect their clients’ interests. The result of this transaction is that the purchasing company is deprived of the ability to get the best price on its contract. Typically, the group of “protected” vendors will not actually compete against each other for the purchaser’s contracts, but instead engage in “bid pooling.”

Bid Pooling

Bid pooling is a process by which several bidders conspire to split up contracts and ensure that each gets a certain amount of work. Instead of submitting confidential bids, the vendors decide in advance what their bids will be so they can guarantee that each vendor will win a share of the purchasing company’s business. For example, if vendors A, B, and C are up for three separate jobs, they may agree that A’s bid will be the lowest on the first contract, B’s bid will be the lowest on the second contract, and C’s bid will be the lowest on the third contract. None of the vendors gets all three jobs, but on the other hand, they are all guaranteed to get at least one. Furthermore, since they plan their bids ahead of time, the vendors can conspire to raise their prices. Thus, the purchasing company suffers as a result of the scheme. In one case, it was standard practice for bidders on highway contracts to meet in a hotel the night before bids were announced for projects and decide among themselves who would be the low bidder and high bidder on each deal. That way, the highway construction companies were always sure of getting exactly the jobs they wanted at the prices they wanted to get. This resulted in the state overpaying on highway construction by more than $150 million.

Fictitious Suppliers

Another way to eliminate competition in the solicitation phase of the selection process is to solicit bids from fictitious suppliers. In the bid-splitting case discussed above, the brother-in-law submitted quotes in the names of several different companies and performed work under these various names. Although confidential bidding was avoided in this case, the perpetrator used quotes from several of the brother-in-law’s fictitious companies to demonstrate price reasonableness on the final contracts. In other words, the brother-in-law’s fictitious price quotes were used to validate his actual prices.

Other Methods

In some cases, competition for a contract can be limited by severely restricting the time for submitting bids. Certain suppliers are given advance notice of contracts before bids are solicited. These suppliers are able, therefore, to begin preparing their bids ahead of time. With a short time frame for developing bid proposals, the supplier with advance knowledge of the contract will have a decided advantage over his competition.

Bribed purchasing officials can also restrict competition for their co-conspirators by soliciting bids in obscure publications where other vendors are unlikely to see them. Again, this is done to eliminate potential rivals and create an advantage for the corrupt suppliers. Some schemes have also involved the publication of bid solicitations during holiday periods when those suppliers not “in the know” are unlikely to be looking for potential contracts. In more blatant cases, the bids of outsiders are accepted but are “lost” or improperly disqualified by the corrupt employee of the purchaser.

Typically, when a vendor bribes an employee of the purchasing company to assist him in any kind of solicitation scheme, the cost of the bribe is included in the corrupt vendor’s bid. Therefore, the purchasing company ends up bearing the cost of the illicit payment in the form of a higher contract price.

The Submission Phase

In the actual submission phase of the process, where bids are proffered to the buyer, several schemes may be used to win a contract for a particular supplier. The principal offense tends to be abuse of the sealed-bid process. Competitive bids are confidential; they are, of course, supposed to remain sealed until a specified date at which all bids are opened and reviewed by the purchasing company. The person or persons who have access to sealed bids are often the targets of unethical vendors seeking an advantage in the process. In one case, gifts and cash payments were given to a majority owner of a company in exchange for preferential treatment during the bidding process. The supplier who paid the bribes was allowed to submit his bids last, knowing what prices his competitors had quoted, or in the alternative, he was allowed to actually see his competitors’ bids and adjust his own accordingly.

Vendors also bribe employees of the purchaser for information on how to prepare their bids. In another case, the general manager for a purchasing company provided confidential pricing information to a supplier that enabled the supplier to outbid his competitors and win a long-term contract. In return, both the general manager and his daughter received payments from the supplier. Other reasons to bribe employees of the purchaser include the following: to ensure acceptance of a late bid, to falsify the bid log, to extend the bid opening date, or to control bid openings.

Preventing and Detecting Bid-Rigging Schemes

Since bid rigging is a form of bribery, similar to the kickback schemes already mentioned, many of the antifraud measures used for kickback schemes are also effective with bid-rigging frauds. In addition, there are a number of prevention and detection methods that are specifically applicable to the competitive bidding process.

Bid-rigging schemes are often uncovered because of unusual bidding patterns that emerge during the process. Perhaps the most common indicator of collusive bidding practices is an unusually high contract price. For example, if two or more contractors conspire with an employee in the bidding process, or if an employee incorporates bids from fictitious vendors to artificially inflate the contract price, the result will be an excessively high winning bid (or in some cases all bids submitted) compared to expected prices, previous contracts, or budgeted amounts. Organizations should monitor price trends for these anomalies.

Another red flag sometimes arises in bid-rigging cases when low-bid awards are frequently followed by change orders or amendments that significantly increase payments to the contractor. This may indicate that the contractor has conspired with someone in the purchasing organization who has the authority to amend the contract. The contractor submits a very low bid to ensure winning the contract, knowing that the price ultimately will be inflated after the award is finalized.

Very large, unexplained price differences among bidders may also indicate fraud. As noted in the preceding paragraph, this condition may arise when one supplier submits a very low bid with the understanding that the final contract price will later be inflated. Significant cost differences among bidders can also occur when an honest bidder submits a proposal in a competitive bidding process that was previously dominated by a group of suppliers who were conspiring in a bid-pooling scheme to keep prices artificially high.

Red flags might also appear from certain patterns within the bidding process. For example, if the last contractor to submit a bid repeatedly wins the contract, this might indicate that an employee of the purchasing organization is allowing vendors to see their competitors’ bids. The corrupt supplier would wait until all other bids have been submitted, then use its inside knowledge to narrowly undercut the competition with a last-minute proposal. This narrow margin of victory can itself be a sign of fraud. If the winning bidder repeatedly wins contracts by a very slim margin, this could indicate that the bidder has an accomplice working within the purchasing organization.

In bid-pooling schemes, as discussed above, several vendors conspire to fix their bids so that each one wins a certain number of contracts, thereby removing the competitive element of the bidding process and enabling corrupt suppliers to inflate their prices. These schemes may result in a predictable rotation of bid winners, which would not be expected in a truly competitive bidding process. Any sort of predictable pattern of contract award that is based on a factor other than price or quality should be investigated.

Another red flag consistent with collusive bidding occurs when losing bidders frequently appear as subcontractors on the project. This tends to indicate that the suppliers conspired to divide the proceeds of the contract, agreeing that one would win the award while others would receive a certain portion of the project through subcontracting arrangements. In some cases, the low bidder will withdraw and subsequently become a subcontractor after the job has been awarded to another supplier.

A corrupt employee or vendor will sometimes submit bids from fictitious suppliers to create the illusion of competition where none really exists. In some cases, these frauds have been detected because the same calculations or errors occurred on two or more bids, or because two or more vendors had the same address, phone number, officer, etc.

Fraud may be indicated by a situation in which qualified bidders fail to submit contract proposals or in which significantly fewer bidders than expected respond to a request for proposals. This type of red flag is consistent with schemes in which a corrupt employee purposely fails to advertise the contract up for bid. This eliminates competition and helps ensure that a certain supplier will be awarded the contract. Similarly, the number of bids might be reduced because a corrupt employee has destroyed or fraudulently disqualified the bids of contractors who submitted more favorable proposals than the employee’s co-conspirator.

Finally, bid rigging may be indicated by the avoidance of competitive bidding altogether, such as occurs when an employee splits a large project into several smaller jobs that fall beneath a bidding threshold and then makes sole-source awards to favored suppliers.

Module 3: Foreign Corrupt Practices Act (FCPA)

According to a 2017 Bloomberg News article, Wal-Mart Stores Inc. was preparing to pay roughly $300 million to resolve a long-running U.S. investigation into allegations of bribery by its employees.³ The article further suggests that the proposed Wal-Mart penalty—once considered likely to rank among the largest levied under the 1977 Foreign Corrupt Practices Act, which makes it a crime to bribe foreign officials to gain influence for overseas business—is significantly less than the $1 billion fine sought by the SEC in 2016 to settle the case. The article further indicated:

The case gained national prominence through articles in the New York Times detailing alleged bribery and a potential cover-up by high-level executives in Mexico.

Wal-Mart disclosed possible violations in Mexico to the Justice Department and SEC in November 2011 after a New York Times investigative reporter approached the company with questions.

The government’s investigation centered on whether employees bribed foreign officials to fast-track store openings at a time when the retailer was expanding aggressively overseas. Its first non-U.S. store opened in Mexico in 1991. Now more than half of the company’s nearly 11,700 stores are abroad, though it still makes nearly two-thirds of its overall revenue from Wal-Mart-branded stores in the United States.

After the Bentonville, Arkansas, company conducted its own in-house probe, it overhauled its ethics and compliance programs, appointed chief ethics and compliance officers and anti-corruption directors within each of its markets, and assigned an executive vice president to oversee it all. That unit now employs 2,300 people.

In all, the company has spent roughly $837 million on legal fees, the internal investigation into the alleged payments and the compliance revamp, it has said in filings. It has also replaced its chief executive officer, chief financial officer and the heads of its U.S. and international operations.

Richard Cassin, Editor of the FCPA Blog (November 16, 2017) estimated that Wal-Mart had paid bribes to officials in Mexico totaling about $24 million. By comparison, the fines levied against, and other costs paid by, Wal-Mart to resolve the matter appear to far outstrip the bribery payments to Mexican officials.

According to the Department of Justice website, “the Foreign Corrupt Practices Act of 1977 was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in her or his official capacity, induce the foreign official to do or omit to do an act in violation of her or his lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.” The antibribery provisions of the FCPA apply to all U.S. persons and certain foreign issuers of securities. 1998 amendments expanded the FCPA’s antibribery provisions to foreign firms and persons who cause violations, directly or through agents, when operating within the territory of the United States.

In recent years, FCPA enforcement has been rigorous, using sophisticated investigative techniques such as industry-wide sweeps and undercover sting operations. The act includes not only bribery and bid rigging but also political contributions. Compliance should reduce incidents of American participation in corrupt practices with overseas governments, especially related to economic expansion in developing countries.

Some of the reasons why the United States Government targeted this issue resulted from the business operating environments in many international locations, including the following:

• Lack of transparency and accountability, especially in developing nations
• Poor regulation of political contributions
• Low public sector wages in many foreign countries
• Weak enforcement of laws and regulations by international governments
• Excessive discretionary authority of public officials (in many places, public officials “answer to no one”)

As noted in the Wal-Mart case, penalties for violations of the FCPA can be harsh. Companies may be fined up to $2 million per act or twice the gross gain/loss derived. Individuals also are held accountable under the provisions of the FCPA—fines of up to $250,000 per act, or twice the gross gain/loss derived, and up to five years imprisonment.

Wal-Mart is not the only high-profile company to be targeted for FCPA violations. In 2008, Seimens paid more than a billion in fines. According to a New York Times article, Siemens paid a record $1.6 billion to American and European authorities to settle charges that it routinely used bribes and slush funds to secure huge public works contracts around the world.⁴ The article revealed that beginning in the mid-1990s, Siemens used bribes and kickbacks to foreign officials to secure government contracts for several projects, including a national identity card project in Argentina, mass transit work in Venezuela, a nationwide cellphone network in Bangladesh, and a United Nations oil-for-food program in Iraq under Saddam Hussein.

The Department of Justice website notes that the FCPA also requires companies whose securities are listed in the United States to follow its accounting standards. These accounting provisions, which were designed to operate in tandem with the antibribery provisions of the FCPA, require corporations covered by the provisions to (a) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain an adequate system of internal accounting controls. Penalties associated with violating the accounting aspects of the FCPA include monetary fines of up to $2.5 million per act for companies, and individuals face fines up to $1 million per act and up to ten years’ imprisonment.

The FCPA defines a foreign official as “any officer or employee of a foreign government, or any department, agency or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.” This last category means that an organization may not pay an agent, who then pays the bribe.

The FCPA includes any of the following, improperly paid, as “something of value”:

• Cash
• Checks and/or financial instrument
• Gifts, travel, and entertainment
• Hidden ownership interests
• Loans
• Credit card bills
• Transfers at less than fair market value
• Employment (e.g., no withholding or the employment of spouses or relatives of the foreign official)
• Benefits—health care, college tuition
• Credits and reduced prices
• Charitable support for organizations associated with the official

One complex aspect of the FCPA involves “facilitating payments.” In general, the FCPA does not apply to a payment made to a foreign official, political party, or party official for the purpose of expediting or facilitating the performance of a routine governmental action by a foreign official, political party, or party official. Expenditures paid to expedite the following, generally, are not FCPA violations:

• Obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country (i.e., work visa)
• Processing papers—visas, work orders
• Providing police protection, mail pick up/delivery, inspections

In 2010, the United Kingdom enhanced their anticorruption efforts with the UK Bribery Act. While many aspects of this legislation have parallels to the FCPA, prohibitions associated with the UK Bribery Act apply to bribery of public officials, as well as those in the private sector. The UK Act also provides for jurisdiction over an individual conducting business in the United Kingdom, regardless of where the underlying act occurs. The UK Act also provides no exception for facilitating payments.

Red flags associated with possible FCPA violations may include the following:

• Decentralized management control (in-country)
• Substantial payments to agents, consultants, or others for unspecified services
• Payments to offshore bank accounts, in cash or by wire transfer
• Unduly complex legal or banking structure
• Unusual payments for commissions, loans, temporary employees and directors’ fees
• Payments and wire transfers without chain of command approval
• Payments to agents with unusual addresses
• Payments in round dollar amounts
• Unusually low or high profit margins on projects
• Undocumented business entertainment expenses

Risk assessment and detection approaches include the following:

• Interviewing employees
• Conducting computer forensics
• Searching public records
• Testing transactions with a focus on high-risk accounts—marketing, training, legal, consulting (i.e., accounts where bribes might be disguised as legitimate business expenses)
• Auditing transactions to ensure proper documentation for disbursements
• Reviewing contracts, including compliance with FCPA

The following are antifraud efforts associated with deterring and preventing FCPA violations.

• Implement a code of conduct
• Monitor “tone at the top”
• Establish anticorruption policies and procedures
• Maintain due diligence for agents and other business partners
• Perform FCPA risk assessment
• Conduct annual reviews of FCPA compliance
• Establish senior management oversight and FCPA compliance reporting
• Develop FCPA anticorruption controls
• Institute FCPA training
• Provide on-going legal advice and guidance
• Impose appropriate discipline for violators
• Develop contractual compliance terms and conditions

Module 4: Illegal Gratuities, Economic Extortion, and Conflicts of Interest

Conflicts of Interest

As stated earlier in this chapter, a conflict of interest occurs when an employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects the company. To repeat for emphasis, the key word in this definition is undisclosed. The crux of a conflict case is that the fraudster takes advantage of his employer; the victim organization is unaware that its employee has divided loyalties. If an employer knows of the employee’s interest in a business deal or negotiation, there can be no conflict of interest, no matter how favorable the arrangement is for the employee.

Most conflict cases occur because the fraudster has an undisclosed economic interest in a transaction. But the fraudster’s hidden interest is not necessarily economic. In some scenarios, an employee acts in a manner detrimental to his employer to provide a benefit to a friend or relative, even though the fraudster receives no financial benefit from the transaction himself. As previously illustrated, a manager split a large repair project into several smaller projects to avoid bidding requirements. This allowed the manager to award the contracts to his brother-in-law. Though there was no indication that the manager received any financial gain from this scheme, his actions nevertheless amounted to a conflict of interest.

Any bribery scheme could potentially be considered a conflict of interest—after all, an employee who accepts a bribe clearly has an undisclosed economic interest in the transaction (in the form of the bribe he or she is paid), and this employee is clearly not working with her or his employer’s best interests at heart.

There are, however, subtle differences. If an employee approves payment on a fraudulent invoice submitted by a vendor in return for a kickback, this is bribery. If, on the other hand, an employee approves payment on invoices submitted by his or her own company (and if the ownership is undisclosed), this is a conflict of interest. This was the situation in a case in which an office service employee recommended his own company to do repairs and maintenance on office equipment for his employer. The fraudster approved invoices for approximately $30,000 in excessive charges.

The distinction between the two schemes is obvious. In the bribery case, the fraudster approves the invoice in return for a kickback, whereas in a conflict case he approves the invoice because of his own hidden interest in the vendor. Aside from the employee’s motive for committing the crime, the mechanics of the two transactions are practically identical. The same duality can be found in bid-rigging cases in which an employee influences the selection of a company in which the fraudster has a hidden interest instead of influencing the selection of a vendor who has bribed him.

Conflict schemes do not always simply mirror bribery schemes, though. There are vast numbers of ways in which an employee can use his or her influence to benefit a company in which he or she has a hidden interest. The majority of conflict schemes fit into one of two categories: purchasing schemes and sales schemes.

In other words, most conflicts of interest arise when a victim company unwittingly buys something at a high price from a company in which one of its employees has a hidden interest or unwittingly sells something at a low price to a company in which one of its employees has a hidden interest. Most of the other conflict cases involve employees who stole clients or diverted funds from their employers.

Purchasing Schemes

The majority of conflict schemes are purchasing schemes, and the most common of these is the overbilling scheme. We have already briefly discussed conflict schemes that involve false billings. These frauds are very similar to the billing schemes discussed in Chapter 5, so it will be helpful at this point to discuss the distinction between traditional billing schemes and purchasing schemes that are classified as conflicts of interest.

Although it is true that any time an employee assists in the overbilling of his company there is probably some conflict of interest (the employee causes harm to his employer because of a hidden financial interest in the transaction), this does not necessarily mean that every false billing will be categorized as a conflict scheme. For the scheme to be classified as a conflict of interest, the employee (or a friend or relative of the employee) must have some ownership or employment interest in the vendor that submits the invoice. This distinction is easy to understand if we look at the nature of the fraud. Why does the fraudster overbill the employer? If he engages in the scheme only for the cash, the scheme is a fraudulent disbursement billing scheme. If, on the other hand, he seeks to better the financial condition of his business at the expense of his employer, this is a conflict of interest. In other words, the fraudster’s interests lie with a company other than his employer. When an employee falsifies the invoices of a third-party vendor to whom he has no relation, this is not a conflict of interest scheme because the employee has no interest in that vendor. The sole purpose of the scheme is to generate a fraudulent disbursement.

One might wonder, then, why shell company schemes are classified as fraudulent disbursements rather than conflicts of interest. After all, the fraudster in a shell company scheme owns the fictitious company and therefore must have an interest in it. Remember, though, that shell companies are created for the sole purpose of defrauding the employer. The company is not so much an entity in the mind of the fraudster, as it is a tool. In fact, a shell company is usually little more than a post office box and a bank account. The fraudster has no interest in the shell company that causes a division of loyalty; he simply uses the shell company to bilk his employer. Shell company schemes are therefore classified as false billing schemes.

A short rule of thumb can be used to distinguish between overbilling schemes that are classified as asset misappropriations and those that are conflicts of interest: if the bill originates from a real company in which the fraudster has an economic or personal interest, and if the fraudster’s interest in the company is undisclosed to the victim company, then the scheme is a conflict of interest.

Now that we know what kinds of purchasing schemes are classified as conflicts of interest, the question is: How do these schemes work? After our lengthy discussion about distinguishing between conflicts of interest and fraudulent disbursements, the answer is somewhat anticlimactic. The schemes work the same either way. The distinction between the two kinds of fraud is useful only to distinguish the status and purpose of the fraudster. The mechanics of the billing scheme, whether conflict or fraudulent disbursement, do not change (see Figure 6-3). In one case, a purchasing superintendent defrauded his employer by purchasing items on behalf of his employer at inflated prices from a certain vendor. The vendor in this case was owned by the purchasing superintendent but established in his wife’s name and run by his brother. The perpetrator’s interest in the company was undisclosed. The vendor would buy items on the open market, then inflate the prices and resell the items to the victim company. The purchasing superintendent used his influence to ensure that his employer continued doing business with the vendor and paying the exorbitant prices. A more detailed analysis of overbilling frauds is found in Chapter 5.

Fraudsters also engage in bid rigging on behalf of their own companies. The methods used to rig bids were discussed in detail earlier in this chapter. Briefly stated, an employee of the purchasing company is in a perfect position to rig bids because she has access to the bids of her competitors. Because she can find out what prices other vendors have bid, the fraudster can easily tailor her own company’s bid to win the contract. Bid waivers also are frequently used by fraudsters to avoid competitive bidding outright. In one instance, a manager processed several unsubstantiated bid waivers to direct purchases to a vendor in which one of his employees had an interest. The conflict was undisclosed and the scheme cost the victim company more than $150,000.

In other cases, a fraudster might ignore her employer’s purchasing rotation and direct an inordinate number of purchases or contracts to her own company. Any way in which a fraudster exerts her influence to divert business to a company in which she has a hidden interest is a conflict of interest.

Not all conflict schemes occur in the traditional vendor–buyer relationship. Some cases involve employees negotiating for the purchase of some unique, typically large, asset such as land or a building in which the employee had an undisclosed interest. It is in the process of these negotiations that the fraudster violates her duty of loyalty to her employer. Because she stands to profit from the sale of the asset, the employee does not negotiate in good faith on behalf of her employer; she does not attempt to get the best price possible. The fraudster will reap a greater financial benefit if the purchase price is high.

An example of this was seen in a scheme in which a senior vice president of a utility company was in charge of negotiating and approving mineral leases on behalf of his company. Unbeknownst to his employer, the vice president also owned the property on which the leases were made. The potential harm in this type of relationship is obvious—there was no financial motive for the vice president to negotiate a favorable lease for his employer.

Turnaround Sales

A special kind of purchasing scheme is called the turnaround sale or flip. In this type of scheme, an employee knows his employer is seeking to purchase a certain asset and takes advantage of the situation by purchasing the asset himself (usually in the name of an accomplice or shell company). The fraudster then turns around and resells the item to the employer at an inflated price. We have already seen one example of this kind of scheme in a previous case, discussed above, in which a purchasing supervisor set up a company in his wife’s name to resell merchandise to his employer. Another interesting example of the turnaround method occurred in another case, in which the CEO of a company, conspiring with a former employee, sold an office building to the CEO’s company. What made the transaction suspicious was that the former employee had purchased the building on the same day that it was resold to the victim company, and for $1.2 million less than the price charged to the CEO’s company.

Sales Schemes

Generally, fraudsters perpetrate two principal types of conflict schemes associated with the victim company’s sales. The first and most harmful is the underselling of goods or services. Just as a corrupt employee can cause her employer to overpay for goods or services sold by a company in which she has a hidden interest, so too can she cause the employer to undersell to a company in which she maintains a hidden interest (see Figure 6-3).

Underbillings

In an underbilling scheme, the perpetrator sells goods or services below fair market value to a vendor in which she has a hidden interest. This results in a diminished profit margin or even a loss on the sale, depending on the size of the discount. Using this method, two employees sold their employer’s inventory to their own company at off-spec prices, causing a loss to the employer of approximately $100,000. Another example is a case in which an employee disposed of his employer’s real estate by selling it below fair market value to a company in which he had a hidden interest, causing a loss of approximately $500,000.

Writing-Off Sales

The other type of sales scheme involves tampering with the books of the victim company to decrease or write off the amount owed by an employee’s business. For instance, after an employee’s company purchases goods or services from the victim company, credit memos may be issued against the sale, causing it to be written off to contra accounts such as Discounts and Allowances. A plant manager in one case used this method. This fraudster assisted favored clients by delaying billing on their purchases for up to 60 days. When the receivable on these clients’ accounts became delinquent, the perpetrator issued credit memos against the sales to delete them.

A large number of reversing entries to sales may be a sign that fraud is occurring in an organization. In another case, the fraudster avoided the problem of too many write-offs by issuing new invoices on the sales after the “old” receivables were taken off the books. In this way, the receivables could be carried indefinitely on the books without ever becoming past due.

In other cases, the perpetrator might not write off the receivables, but simply postpone billing. This is sometimes done as a favor to a friendly client and is not an outright avoidance of the bill but rather a delay tactic. The victim company eventually gets paid, but loses the time value on the payment that arrives later than it should.

Other Conflict of Interest Schemes

Business Diversions

In one instance, an employee started his own business that would compete directly with his employer. While still employed by the victim company, this employee began siphoning off clients for his own business. This activity clearly violated the employee’s duty of loyalty to his employer. There is nothing unscrupulous about free competition, but while a person acts as a representative of his employer, it is certainly improper to try to undercut the employer and take his clients. Similarly, the fraudster in another case steered potential clients away from his employer and toward his own business. There is nothing unethical about pursuing an independent venture (in the absence of restrictive employment covenants, such as noncompete agreements), but if the employee fails to act in the best interests of his employer while carrying out his duties, then this employee is violating the standards of business ethics and his fiduciary responsibility to his employer.

Resource Diversions

Finally, some employees divert the funds and other resources of their employers to the development of their own businesses. In one example, a vice president of a company authorized large expenditures to develop a unique type of new equipment used by a certain contractor. Another firm subsequently took over the contractor, as well as the new equipment. Shortly after that, the vice president retired and went to work for the firm that had bought out the contractor. The fraudster had managed to use his employer’s money to fund a company in which he eventually developed an interest. This scheme involves elements of bribery, conflicts of interest, and fraudulent disbursements. In this particular case, if the vice president had financed the equipment in return for the promise of a job, his actions might have been properly classified as a bribery scheme. This case, nevertheless, illustrates a potential conflict problem. The fraudster could just as easily have authorized the fraudulent expenditures for a company in which he secretly held an ownership interest.

Although these schemes are clearly corruption schemes, the funds are diverted through the use of a fraudulent disbursement. The money could be drained from the victim company through a check tampering scheme, a billing scheme, a payroll scheme, or an expense reimbursement scheme. For a discussion of the methods used to generate fraudulent disbursements, refer to Chapter 5.

Financial Disclosures

Management has an obligation to disclose to shareholders, fraud committed by officers, executives, and others in positions of trust. Management does not have the responsibility of disclosing uncharged criminal conduct of its officers and executives. Nevertheless, if and when officers, executives, or other persons in trusted positions become subjects of a criminal indictment, disclosure is required.

The inadequate disclosure of conflicts of interest can be among the most serious of frauds. Inadequate disclosure of related-party transactions is not limited to any specific industry; it transcends all business types and relationships.

Preventing and Detecting Conflicts of Interest

Conflict of interest schemes are violations of the rule that a fiduciary, agent, or employee must act in good faith, with full disclosure, in the best interest of the principal or employer. Most conflict of interest schemes are a violation of the legal maxim that a person cannot serve “two masters.” Some of the more common of these schemes involve an employee’s, manager’s, or executive’s interest in a customer or supplier and receipt of gifts. As in other situations, the employee, manager, or executive is compensated for his or her interest in the form of “consulting fees.”

The prevention of conflicts of interest can be difficult. The primary resource for heading off this complex act is a company ethics policy that specifically addresses the problems and illegalities associated with conflicts of interest and related offenses. The purpose of the policy is to make the position of the company absolutely clear—to define what constitutes a conflict or an improper relationship and to express in no uncertain terms that conflicts are not appropriate and will not be tolerated. The absence of a clear policy leaves an opportunity for a perpetrator to rationalize his or her behavior or to claim ignorance of any wrongdoing.

A policy requiring employees to complete an annual financial disclosure statement is also an excellent proactive approach to preventing conflicts of interest. Comparing the disclosed names and addresses with the vendor list may reveal real and potential conflicts of interest. Communication with employees regarding their other business interests is also advisable. In cases in which public state records reveal the key officers of all corporations, a name search of these records compared to company employees could be revealing.

To detect conflicts of interest, organizations should concentrate on establishing an anonymous reporting mechanism to receive tips and complaints. This is how most conflict of interest cases are detected. Complaints typically come from employees who are aware of a coworker’s self-dealing or from vendors who have knowledge that a competing vendor with ties to an employee of the organization is being favored.

Another detection method that can be helpful is to periodically run reports comparing vendor and employee addresses and phone numbers. Obviously, if a vendor is owned or run by an employee of the organization without that fact having been disclosed, this would constitute a conflict of interest.

Module 5: The Human Factor

We cannot eliminate the problem of fraud in the workforce without eliminating people. The human race is notoriously subject to periodic fits of bad judgment. Anyone in fraud detection or deterrence who is aiming for perfection from the workforce will not only be disappointed but also find that such attitudes invariably increase the problem.

To quote Dr. Steve Albrecht, “If you set standards too high, you may be inadvertently giving an employee two choices in his mind—to fail or to lie.” The challenge in establishing antifraud standards is to make them clear and reasonable.

The diverse case studies in this text have a common element. That is, of course, the human failings that led trusted people to violate that trust. Were these employees, from the mailroom to the boardroom, all simply greedy? Were they all simply liars? Did they always have defective morals that just surfaced when their honesty was tested? Or were they mistreated, underpaid, and only taking what they considered to be rightfully theirs?

The answer, of course, is: “It depends.” Crime is a complex tapestry of motive and opportunity. The Sultan of Brunei, one of the world’s richest men, may have unlimited opportunity to defraud people. But does he have the motive? Contrarily, the minimum wage cashier may be very motivated to steal to keep his lights turned on. But if he is constantly aware that his cash drawer may be counted unexpectedly, he may not perceive the opportunity to do so. In any antifraud effort, we must always keep in mind that no one factor alone will deter occupational fraud; we must attack the problem on several fronts.

CRITICAL THINKING

1. CT-1 How is this possible? A woman had two sons, who were born on the same hour of the same day of the same year, but they were not twins. How could this be?
2. CT-2 Callous, crazy, a killer, or something else? A woman came home with a bag of groceries, got the mail, and walked into the house. On the way to the kitchen, she went through the living room and looked at her husband, who had blown his brains out. She then continued to the kitchen, put away the groceries, and made dinner.

REVIEW QUESTIONS

1. What are the different types of corruption schemes?
2. How do bribery and illegal gratuities differ?
3. What is meant by a conflict of interest?
4. What is defined as “something of value?”
5. How can conflicts of interest be prevented and detected?
6. What is a kickback scheme and how is it committed?
7. What type of abuses may occur at the presolicitation stage of the bidding process?
8. Why is it problematic for an organization to set standards that are too high?
9. How does the “perception of detection” impact fraud deterrence?
10. What is the difference between fraud prevention and fraud deterrence?

MULTIPLE CHOICE QUESTIONS

1. Which of the following is a key attribute of corruption schemes?
   1. Corruption schemes usually involve an elected official.
   2. Corruption schemes usually involve an official operating in an official capacity.
   3. Corruption is a special case of asset misappropriation.
   4. Corruption schemes other than conflicts of interest usually involve at least one person outside (nonemployee) of the organization acting to obtain some advantage inconsistent with their duties, responsibilities, and relationship with the organization.
2. Which of the following is most consistent with illegal gratuities?
   1. An illegal gratuity is not received as a result of an agreement to facilitate an action in advance of that action.
   2. An illegal gratuity occurs when a person agrees to accept an amount for participating in an illegal act.
   3. An illegal gratuity is a conspiracy because it is unexpected.
   4. With an illegal gratuity, the recipient of the benefit expects to receive their reward as a result of a “pay up or else” scheme.
3. Which of the following most accurately indicates why conflicts of interest create concern?
   1. In a conflict of interest, a person accepts illegal payments as a direct result of their actions.
   2. A person who creates a fake company and bills his company for goods and services never received is a conflict of interest because the company didn’t know that the vendor was fictitious.
   3. Decision-makers can be influenced by a person with a conflict of interest without understanding the underlying motivations of the person.
   4. Conflicts of interest are indistinguishable from illegal gratuities and economic extortion.
4. Which of the following generally is not considered “something of value?
   1. Cash, money or checks
   2. Airline miles or hotel credits associated with frequent activity (e.g., frequent flier miles)
   3. An airline ticket received as a prize
   4. An obligation to make up hours derived from accidentally overusing “banked” vacation hours
5. What is the best way to prevent and detect conflicts of interest?
   1. An effective control environment, including an ethical “tone at the top”
   2. Segregation of duties
   3. Bank reconciliations
   4. Transparent and full disclosure
6. Which of the following best describes a key attribute of kickback schemes?
   1. Kickback schemes have no similarities to billing schemes.
   2. Kickback schemes usually involve at least one person inside the organization and one person outside the organization.
   3. Kickback schemes inherently involve economic extortion.
   4. Kickback schemes are a special case of economic extortion.
7. Which of the following is not correct regarding bid-rigging schemes?
   1. Bidding processes create an opportunity for bribery.
   2. Bid-rigging schemes can occur in the presolicitation phase.
   3. Lost bids are always part of a bid-rigging scheme.
   4. Bid-rigging schemes involve something of value.
8. Explain what is meant by the human factor?
   1. The human factor means that all persons suffer from fits of bad judgment, which leads to fraud.
   2. Greed is the defining human factor.
   3. Human failings have led trusted people to violate that trust.
   4. Human failings are derived from unreasonable expectations.
9. Which of the following most accurately identifies the significance of the “perception of detection”?
   1. Fear of getting caught is a critical aspect of effective deterrence.
   2. Proactive fraud policies are more effective than employee education in creating a perception of detection.
   3. Unreasonable expectations are the most costly problem associated with the perception of detection.
   4. The impact of controls is more effective than the perception of detection.
10. Which of the following is most accurate with regard to fraud prevention and deterrence?
    1. Fraud can always be prevented but not deterred.
    2. Fraud deterrence is about creating an environment where fraud is less likely to occur.
    3. Fraud deterrence prevents employees, customers, and vendors from lying.
    4. Fraud prevention is far more important than fraud deterrence.

FRAUD CASEBOOK

Oil-for-Food

Read the following articles or other related articles regarding the Oil-for-Food case and then answer the questions below:

Sources:

Windrem, Bob, “Korean Arrested on Oil-for-Food Scandal Charges,” NBC News and News Services, January 6, 2006.

Lynch, Colum, “Former U.N. Oil-for-Food Chief Indicted,” The Washington Post, January 17, 2007.

Lynch, Colum, “Park Sentenced to 5 Years in U.N. Oil-for-Food Bribery Scandal,” The Washington Post, February 23, 2007.

BRIEF CASES

1. Jackson Enterprises does business in the United States and Venezuela. The Venezuela facility is located in Mariara and the Mayor of the city is Diego Ledezma. Assume that your data analytics examination related to the A/P vendor disbursements resulted in the following summary table for vendors with annual disbursements greater than $400,000:

   Vendor name	Contact	Address	Country	Annual	Expense
   Bear Rock States	James Smith	95 Second Avenue, Dayton, Ohio	USA	$420,000	Travel
   Water Engineering	Carlton Jackson	1093 Park View, Blair, Indiana	USA	$1,000,000	Technology
   Maple Enterprises	Antonius Gustova	Elm Street, Valencia	Venezuela	$500,000	Office rent
   Ledezma Consulting	Domingo Ledezma	Lake Street, Mariara	Venezuela	$1,250,000	Training
   Juaquez Welding Supply	Alejandro Juaquez	Washington Boulevard, Maracaibo	Venezuela	$9,500,000	Inventory
   Buehler Enterprise	Jenna Williamson	221 Cedar Cul-de-sac, Dayton, Ohio	USA	$450,000	Payroll processing
   Tropical Enterprises	Lexus Paul	71035 Oak Avenue, Indianapolis, Indiana	USA	$1,450,000	Office rent
   Valencia Supply House	Eduardo Matau	984 Pine Street, Valencia	Venezuela	$750,000	Office supplies
   Mariara	None	PO Box 10497, Mariara	Venezuela	$950,000	Marketing
   J2 WMD Inc	Wendy Lee	12 Hill Street, Blair, Indiana	USA	$15,750,000	inventory

   Case discussion:

   1. What is the TI Corruption Index for Venezuela?
   2. Given this fact pattern, identify any anomalies that might be consistent with a red flag associated with FCPA, if any, and describe your rationale.
2. Assume that the deadline for the “Project X” bid solicitation is no later than 12 midnight on December 1, 20x5. The following is a data analytics summary of bid details for 20x4 and “Project X”:

   Employee name	# 20x4 Awards	20x4 Rationale: lowest amount	20x4 Rationale: best value	20x5 Project X: time/date	20x5 Project X: bid amount	20x5 Project X: good value?
   James Contractors*	0	No	No	12:01 12/2/20x5	$1,190,000	Yes
   Big Construction	2	Yes	Yes	12:01 12/1/20x5	$1,200,000	Yes
   Giwen Escavation	1	No	Yes	11:59 12/1/20x5	$1,275,000	Yes
   JBL, LLC	10	Yes	Yes	No bid	No bid	No bid
   Delores’ Architects	2	No	Yes	11:59 12/1/20x5	$1,500,000	No
   *Awarded

   Case discussion: Are there any red flags with this fact pattern that might be consistent with a bid-rigging scheme? Describe your rationale.

MAJOR CASE INVESTIGATION

The following is the “inventory” of items received to continue the examination at Johnson Real Estate. In this chapter, the goal is to focus on the missing deposits: who, what, when, where, and how.

Documents subpoenaed from Internal Revenue Service:

• Individual Income Tax Return Form 1040 Year I: William & Joan Rogers
• Individual Income Tax Return Form 1040 Year II: William & Joan Rogers
• W-2 Year 1: William Rogers
• W-2 Year 2: William Rogers
• W-2 Year 1: Joan Rogers
• W-2 Year 2: Joan Rogers
• A worksheet that reconciles the W-2s, tax returns, and JRE employment deposits in Joan Roger’s bank account.

These items will be provided by the course instructor in one Excel file with multiple tabs.

Assignment:

Continuing to focus on evidence associated with the act, concealment, and conversion, use the evidentiary material to continue the investigation. In addition, as the case examiner, you should think of terms of who, what (did the person(s) do), when (during what period?), where (physical place, location in books and records), and how (perpetrated, hidden, and did the perpetrator benefit). Your primary assignment is to examine the information and activity in the family tax returns in terms of what (scheme), how was the act perpetrated, and what benefits did the perpetrator realize, if any. As with any data, consider patterns, breaks in patterns, and anomalies. Your focus is what you can conclude from the evidence, understanding that cases are solved, not with an all-telling piece of evidence—the “smoking gun”—but rather by assembling small pieces of evidence into a coherent picture.

IDEA EXERCISES: ASSIGNMENT 6

Case background: See Chapter 1.

Question: Does Fairmont have any payroll processing on the weekends?

Student task: Students should (a) present a listing of any payroll disbursements processed on a weekend (Saturday or Sunday) and (b) discuss the findings and recommend investigative next steps.

Student Material for step-by-step screenshots for completing the assignment are available from your instructor.

TABLEAU EXERCISES: ASSIGNMENT 6

Case tableau background: See Chapter 1.

The forensic audit revealed that against strict company policy, several payroll disbursements were processed on Saturday.

Question: Can you create a graphic that highlights Saturday payroll processing?

Student task: Students should (a) present a listing of any payroll disbursements processed on a weekend (Saturday or Sunday) and (b) discuss the findings and recommend investigative next steps.

Student Material for step-by-step screenshots for completing the assignment are available from your instructor.