Mr. Goldmann

Security & Safety

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 pgoldmann@wccfighter.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:

MARCH: Hotel Human Resources 2015: Recruiting and Retaining the Best Employees

Steve Curtin

Business as usual produces the usual results: average quality delivered by uninspired employees. There are far too many companies known for providing ordinary customer service - or worse. And there are far too many employees who are content to simply execute the mandatory job functions for which they are paid, unaware of the myriad opportunities missed to delight customers. But for those companies that refuse to accept an unremarkable reputation by default and, instead, take steps to define and communicate their purpose and foster a corporate culture that inspires employees to deliver their best work, READ MORE

Shayne  Paddock

It's engagement season! How is your hotel or brand driving customer loyalty and striving for that long-lasting relationship? If you want travelers to opt-in and engage with your digital marketing effort, they need to be wooed. Wooing, however, takes time and it takes finesse. More importantly, it takes precision in knowing just the right thing to say and when to say it. In "Engaging with Customers Beyond their Stays," Shayne Paddock, CIO of ZDirect, details the importance of using Hotel Marketing Automation to build customer trust and a desire for two-way communication. READ MORE

Joe Stanton

It is estimated that only 48% of travelers write and post travel reviews online. But since a hotel’s online review scores contribute to everything from occupancy to RevPAR (revenue per available room) to profits, encouraging the remaining 52% of casual visitors to become social advocates for the brand is of critical importance. Luring these guests to action requires changes to both a hotel’s operations and its marketing campaigns. While the specific recommendations made in this article may seem time-consuming, the results gained from improved social review scores make the investment well worth it for motivated hotel operators. READ MORE

Tom O'Rourke

This article discusses how hotel mobile apps can help create guest loyalty and retention by creating unique experiences and providing great utility that makes the property stand out from the competition. Ultimately, the idea is that a hotel app can be used as a competitive advantage and convince the guest to book at that property the next time they need accommodations. READ MORE

Coming Up In The May Online Hotel Business Review


Feature Focus
Hotel Sustainable Development: Responsible Decision-Making for the Near and Long-term
The subject of sustainability has gained considerable momentum in recent years. There has been an increasing awareness among hotel owners and investors regarding the environmental impacts of hotel development and operations, such that sustainability issues have now permeated nearly every aspect of the industry. Despite the lack of clear metrics which makes the issue difficult to quantify, there is a growing consensus about the definition of what sustainability is, and its essential importance in the everyday, decision-making process. Simply put, sustainability seeks to balance financial, social and environmental factors to facilitate responsible business decision-making over the near and long term. How those factors are balanced may differ from company to company, but there are several fundamental issues about which there is little dispute. First, sustainability has become an important factor when customers make a hotel selection. According to a recent TripAdvisor survey, 71% of travelers reported that they planned to choose hotels based on sustainability over the next year. Thus, hotels that are managed and operating sustainably have a considerable advantage over their competitors. Secondly, sustainability can be a profit center. The main emission sources of carbon footprint in the hotel industry are energy, heating and water. Thus, the reduction in consumption of those elements means that both the size of their carbon footprint and their costs go down, so it is a true win-win for both businesses and the environment. These are just some of the issues that will be examined in the May issue of the Hotel Business Review, which will report on how some hotels are integrating sustainability practices into their operations, and how their businesses are benefiting from them.