How to Prevent Hotel & Restaurant Kickback Schemes
By Peter Goldmann, President, FraudAware Hospitality
Kickbacks in Perspective
Collusion between employees and outsiders accounts for a growing proportion of corporate frauds.
According to a recent survey by the Big Four accounting firm, KPMG, nearly one-half of companies reported that collusion between employees and third parties had contributed to a fraud in their company.
Topping the list of collusive schemes reported were kickbacks that involved assisting a third party with winning business, increasing business, or with stealing proprietary information from the company.
The Many Faces of Kickback Schemes
Kickback schemes can be an investigator's nightmare. Often, evidence is hard to find and witnesses are even harder to turn. But with the right combination of investigative resources, virtually any kickback perpetrator can be caught, prosecuted and punished to the fullest extent of the law.
Kickbacks in hotels and restaurants can take many forms, but regardless of their unique and often ingenious qualities, nearly all kickback crimes boil down to improper payments being made to a company employee by an outside vendor.
Typical: Payments are made in the form of cash or complimentary goods or services, in exchange for steering business toward the vendor.
Examples of how hotel or restaurant kickback schemes occur:
Red Flags to Watch For
Common signs of possible kickback schemes...
"Phantom" vendors. If an employee is conspiring with an outside vendor to funnel kickback money to a phony vendor, you can usually spot this scheme by finding out if the suspect vendor...
Patterns of unusual or suspicious accounts payable activity. Examples:
Investigating a Kickback Case
To successfully investigate suspicions about an ongoing kickback scheme start with the following steps-possibly with the assistance of an outside investigative firm...
According to Jeffrey M. Klink, president of Klink & Co., Inc., an international risk consulting firm based in New York, it is far too easy for a crooked insider who is running a kickback operation to fabricate, alter, and make changes to inventory records... sales data... commission payment records, etc. Start by finding out...
To do this, your company should secure the legal right to examine records of a vendor to determine if a fraud or a violation of company policy has occurred through a "right-to-audit agreement" or "right-to-audit clause" in the contract. The agreement can be printed on the back of a purchase order or other procurement form. The wording doesn't have to be overly complex. According to Greene, you can keep it simple with language such as:
"Seller shall establish a reasonable accounting system, which enables ready identification of seller's cost of goods and use of funds. Buyer may audit seller's records anytime before three years after final payment to verify buyer's payment obligation and use of buyer's funds. This right to audit shall include subcontractors in which goods or services are subcontracted by seller. Seller shall insure buyer has these rights with subcontractor(s)."
Even if you don't have a right-to-audit provision with a vendor and you suspect kickback activity, you can still request that the vendor submit to an audit by your own financial people. Says Greene, if they have nothing to hide, there should be no problem getting in to review the vendor's books. However, hesitation is a clear red flag that something illegal could be going on.
Fortunately, there are auditing techniques and database analysis technologies that can help in screening for signs of possible kickback activity. Forensic accountants can deploy special software that pinpoints unusual payment patterns like the ones listed above, and many others.
The All-Important Interview
Though modern forensic technology has given new investigative power to fraud investigators, catching internal kickback perpetrators still requires a substantial amount of "hands-on" human interaction. Interviewing strategies for uncovering the facts about a possible kickback operation...
But be prepared: Key witnesses are often reluctant to cooperate unless they feel confident that the investigation will ultimately be successful. No one wants to cooperate in a fraud investigation if at the end of the day all that happened was that the witness was "left hung out to dry."
The solution is to identify the best interviewees by reviewing appropriate documentation, including organizational charts and lists of vendors who might be involved. From those reviews, determine which witnesses will likely possess the most information.
Next, get a commitment from top management, that the company is serious about the investigation. If possible, get a mandate from the Board of the company. Get a commitment from the company that it expects full cooperation from anyone with knowledge about the suspected activity. But-be sure to emphasize that any information provided during an interview will remain strictly confidential.
Identify Your Internal Suspects
Based on the input gathered from your thorough witness interviews and from earlier data analysis, conduct background checks on key employees who have been identified as potentially guilty of kickback activity. Look for.
With this final step, you should have collected sufficient evidence to finger your suspect(s) and to confront them about the kickback scheme.
The bottom line: Effective hotel and restaurant kickback investigations require a special blend of technology-based forensic sleuthing...a degree of "gut instinct" on the part of a skilled investigator...and exemplary interviewing and audit skills.
Peter Goldmann is the Developer of FraudAware/Hospitality, the first on-line fraud awareness training course for hospitality managers, supervisors and line employees. He is is the publisher of the monthly newsletters, White-Collar Crime Fighter and Cyber-Crime Fighter. His company, White-Collar Crime 101 LLC also is the developer of FraudAware/Hospitality, a customizable Web-based fraud awareness training course for managers, supervisors and line employees. He is a member of the Association of Certified Fraud Examiners, and The International Association of Financial Crimes Investigators. Mr. Goldmann can be contacted at 203-431-7657 or [email protected] Extended Bio...
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