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Bribery Frauds

What is Third Party Fraud?

This is a fraud committed by people outside an employee employer relationship. They can be committed against individuals, businesses, companies, the government or any other entity. Third party frauds are not as common as occupational frauds, but on average each fraud is for a larger amount.

Some third party frauds are not meant to remain hidden forever. Some only remain hidden long enough for the fraudster to make their get-away. The fraudster may not care if the fraud is eventually discovered as they do not have a continuing relationship with the victim and they cannot be found.

What is bribery?

Bribery is a fraud of collusion, involving the offering, giving or receiving of something of value in exchange for giving or gaining undue influence in a decision making process. Both the giver and the receiver of the bribe are committing a fraud as bribery advantages both the briber - who gets an unfair advantage over others - and the bribee - who gets value offered as the bribe.

When can bribery occur?

Bribery is most commonly known as associated with politicians and public officials and brown paper bags full of money. But bribery can occur in any commercial enterprise of any size - either private or public or government. Bribery does not have to involve a party outside the enterprise, it can occur between two employees of the same business (for example: when one bribes a person to obtain a promotion).

Bribery may be considered an occupational fraud when it involves an employee using his position of employment (most bribery frauds will involve at least one employee) and the business is the ultimate victim.

Why is bribery wrong?

Bribery is used by a party (the briber) to gain an improper advantage over others by paying a bribe (an unauthorized consideration) to someone who is not entitled to receive that consideration (the bribee). This will nearly always cause an indirect detriment or cost to someone - usually the employer of the bribee. The amount of that detriment will be at least the value of the bribe given - or it would not be commercial to pay the bribe.

If the other party could compete commercially, it would not consider paying a bribe to achieve what it wanted.

Employees are employed in order to act in the best interests of their employer, which does not include gaining personally from giving influence or making inappropriate decisions in favor of other parties. The loss is ultimately met by the employer victim, possibly by way of increased costs for, or a decrease in quality in, goods and services supplied by the briber, but may also be because an inappropriate person was selected for a position.

What is the cost to the employer?

Any commercial decision involves a cost and a benefit. A business would expect to pay a commercial price to purchase quality goods and services, and will contract with the party that gives the highest quality good or service for the most commercial price.

A briber will want to influence a decision in their favor if they do not have a quality product, the cost of their product is not commercial for that quality, or they do not believe they will win the contract on merit. If they could compete without paying a bribe, they would normally do so. The fact that the briber pays a bribe indicates that they cannot compete on equal grounds and their product is either inferior or expensive.

Therefore the employer victim will not receive a quality product for a commercial cost. This may lead to rectification costs, increased costs or quality problems in the future. All of these will cause a loss or cost to the employer that may have otherwise been avoided.

Who can be bribed?

Any employee who has the authority to make or influence purchasing decisions, who allocates or influences the allocation of contracts for their employer, or who is involved in other decision making processes can be bribed. Any employee that can influence a decision, even if they cannot make that decision themselves, has the potential to be bribed by someone wanting a decision to be made in their favour and wants that extra influence.

Who is involved in a bribe?

Bribery requires at least three parties, and sometimes four. Bribery is a collusive fraud, meaning that it is done by the collusion between multiple parties. It takes more than one person to commit a bribery fraud. The parties to a bribery fraud are:

1. the perpetrator (the person paying the bribe),
2. the employee (the person accepting the bribe) and
3. the employer (the primary victim).

A second group of victims are the parties over who the briber is seeking the advantage (e.g. the other parties quoting for contracts etc.) and who lose the contract to the briber.

How is bribery committed?

Something of value is offered to a person so that they will make or influence a decision. There is an exchange of something of value for that improper influence.

Is money always given for a bribe?

No. Money is usually recognized as the product of a bribe - cash in a brown paper bag - but anything of value or enjoyment can be given. Entertainment, gifts to the employee or associates of the employee, holidays, sex, the payment of accounts or anything else that the employee sees as valuable may be given as bribes.

What is the difference between marketing and bribery?

Most people recognize that you rarely get something for nothing. But where does an attempt to innocently market a person and build a relationship become a bribe? The major difference is the knowledge of the employer.

If the employer is aware of the marketing effort and authorizes the receipt of any benefit by a particular employee, there is no bribery. If the employer is not aware of and has not approved the receipt of any benefit by the employee, it may be a bribe - particularly if it influences the employee's decision.

What are the two common types of bribery?

Bribery is sometimes called Kickbacks and Bid-Rigging.

What are Kickbacks?

Kickbacks are payments to the employee from the briber outside his terms of their employment that are usually made for obtaining a favorable decision or influence for a purchase order. It can be summarized as "You give me this contract and I will give you money". This is what most people will think of as bribery. Kick-backs are commonly thought of as payments to gain that influence and may be based on a percentage of orders received, or some other basis.

What is Bid-Rigging?

Bid-Rigging is an employee improperly influencing the awarding of a contract through the normal tender process. This can be done by giving the briber details of the other tenders received before that party makes their tender, or by attempting to influence the decision maker towards the briber. These are usually done in a tender process for a contract of supply or construction.

What are the issues in detecting bribes?

The major problem with detecting bribes is that no assets are stolen and no entries are made in the records of the business. These transactions are outside the record keeping system of the victim.

Detection of these frauds usually starts with suspicions increasing when the prices of supplies increase above what is expected, or quality issues become more frequent. Investigators will trace the source of these problems back to a supplier or a contract.

FOR EXAMPLE

Example One

ABC Company wants to obtain competitive quotes for a construction contract. An employee at ABC is approached by one of the tenderers, XYZ builder, and is paid a bribe to provide copies of the other tenders to XYZ. XYZ then uses this information to design a lower quote. To make a profit on the contract, XYZ uses inferior materials and cut corners, giving an inferior product. The indirect cost is borne by ABC by paying for an inferior product and having rectification issues. The builder that should have been awarded the contract also loses.

Example Two

ABC Manufacturer makes furniture and buys industrial adhesive to use in the manufacturing process. The purchasing officer at ABC accepts a bribe to buy glue from XYZ at the same price as other suppliers. The employee gets a kickback on the amount of any orders received by XYZ. XYZ sells a lesser quality of glue to ABC for the same price to profit from the sales. ABC starts incurring rectification costs due to the poor quality of the glue and losses the advantage of a competitive purchasing process.

LESSONS TO BE LEARNED

1. Employees do not need to remove or steal cash or other assets from a business to commit fraud. They can do so while appearing to conduct their normal duties and colluding with a third party or accepting unauthorized payments or other benefits.

2. Losses will usually occur when employees favor third party interests over the interests of the employer. The loss may not be immediately evident, but will generally be in the form of higher prices or inferior quality.

3. A bribe may be paid in money, other goods, services, holidays or anything else that the employee values. It may also be paid to an associate or relative to further distance the briber from the employee.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

Acknowledgment
The material in this Fact Sheet was sourced from various publications including those listed in the Reading List on the Fraud Awareness page on this website.

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Last Updated: 30.3.2010