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Bribery

What is Third Party Fraud?

This is a fraud committed against someone or some business by people other than their employees. They can be committed against individuals, businesses, companies, governments etc. 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 get away. The fraudster may not care if the fraud is eventually discovered as there is no continuing relationship with the victim and they have made their getaway.

What is bribery?

Bribery is 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 are committing a bribery fraud. Bribery advantages both the briber - who gets an unfair advantage over others - and the bribee - who gets the bribe.

Bribery is usually associated with politicians and public officials, but bribery can occur in any private enterprise. Bribery does not have to involve an outside party, it can occur between two employees of the same business. Bribery may be considered an occupational fraud when it involves an 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). This will nearly always cause an indirect detriment or cost to the employer (the primary victim). That detriment will be at least the value of the bribe.

Employees accepting the bribes have been employed in order to act for the benefit of their employer, not to gain personally from giving influence or making inappropriate decisions in favor of other parties. The amount of bribe (the loss) is ultimately met by the employer victim by way of increased costs for, or a decrease in quality in, goods and services supplied by the briber.

Who can be bribed?

Employees that have the authority to make or influence purchasing decisions, that allocate or influence the allocation of contracts for their employer, or are involved in other decision making processes can be bribed. Any employee that can influence a decision, even if they cannot make it themselves, has the potential to be bribed by someone wanting a decision to be made in their favour.

Who is involved in a bribe?

Bribery requires at least three parties, and sometimes four. These are:

1. the perpetrator (the person providing the bribe),
2. the employee (the person accepting the bribe) and
3. the employer.

Another group of victims are the parties over which the briber is seeking the advantage (e.g. 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 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 etc. and many other things can be given as bribes.

What is the difference between marketing and bribery?

Most people recognizes that generally you don't 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 the full benefit given to the employee, and authorizes the receipt of the benefit, there is no bribery.

If the employer is not aware of the benefit given to the employee and has not approved of the receipt of any benefit, there is likely to be a bribe, regardless of whether there is an obvious or immediate commercial cost to the employer or not.

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 third party 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 after the influence is received.

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 third party details of the other tenders received before that party makes their tender, or by attempting to influence the decision maker towards the third party. These are usually done in a tender process for a contract of supply or construction.

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 try to influence a decision in their favor if they do not have a quality product, the cost is not commercial for that quality, and 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 complete on equal grounds.

The briber will want an extra benefit under the contract at least to the value of the bribe. Usually the cost of the goods supplied will be higher or the quality of the goods supplied will be reduced in order to recover that cost. If the cost of the bribe was not covered by a higher profit than would otherwise be obtainable, the bribery scheme would run at a loss, and the bribe would not be offered.

The employer will not receive a commercial product for the cost and may have rectification costs, other cost overruns or quality problems that will cause a cost to the employer.

What are the problems in detecting bribes?

The major problem 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.

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 will use inferior materials and cut corners, giving an inferior product. The indirect cost is borne by ABC by paying for an inferior product and possibly having rectification issues. The company that would 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 a fraud or cause damage to the business. They can do so while appearing to conduct their normal duties and colluding with a third party or accepting unauthorized payments or other benefits. They generally will not grant favors to third parties unless they also personally receive a benefit.

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

3. A bribe is usually received through a payment or other consideration from a third party. The bribe may be received in money, other goods, services, holidays or anything else that the employee values. It may also be paid to an associate (e.g. the employee's spouse).

4. The losses incurred by the employer will usually be either:

(a) an increase in a purchase price or a reduction in a sale price;
(b) the loss of information; or
(c) obtaining supplies or services at a lesser quality than expected.

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: 12.3.2008