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

Cathy  Fyock

The workforce is aging, and many organizations remain unprepared for the changes necessitated by increasing numbers of retirements. What are the old assumptions about retirement, about productivity of older adults, and about what employers can and should do to effectively manage through these changes? This article outlines how the workplace will likely change, and suggest new assumptions and new strategies for maximizing the benefits of an aging workforce. READ MORE

Roberta Matuson

The U.S. labor market in October reached its longest stretch of job creation since at least World War II. U.S. employers, which added 214,000 jobs to payrolls last month, are on track to post the best yearly gain in employment since 1999. The steady job growth has pushed the nation’s unemployment rate down to 5.8%, which is great news for job seekers and not so great news for anyone in search of talent. READ MORE

Cindy Novotny, CHSE

After spending 13 years with the Ritz-Carlton Learning Institute and the last 15 years working with the best hotel companies in the industry, I have learned the best lesson in business today. Inspect what you expect and don’t hire the first warm body that comes through the door, even if they ‘look’ the part and talk a good game. Recruiting great talent takes a lot of time, will try your patience and bust your HR budget on professional recruiters, if you don’t have a plan. The best hiring practice is to ‘select’ NOT ‘hire.’ READ MORE

Bernadette Scott

The intense competition to secure the best talent continues, with organizations engaging evermore creative recruitment strategies to ensure they get the best from international graduate pools. Fueled by new technologies, market globalization and frequent changes to business models, the demand for organizational talent grows. Talent supply, however, is another issue with the World Economic Forum and the Boston Consulting Group (2011) indicating shortage across 25 countries by 2030. A ready-supply of engaged talent is needed to enhance service quality and to achieve this, graduate talent skills sets must become culturally embedded investments across international hospitality industry organizations. READ MORE

Coming Up In The April Online Hotel Business Review


Feature Focus
Guest Service: Customer Service is a Key Business Differentiator
In today's hyper-competitive, hyper-connected global marketplace, customer experience has assumed a major role as a key business differentiator. There is a growing understanding that competition based on products or price alone is no longer a viable strategy. Since feature or function advantages can be quickly duplicated and/or enhanced, product innovation is no longer the differentiator it once was. And competition based on price impairs profitability. On the other hand, research indicates that 86 percent of consumers said they would be willing to pay more for a better customer experience. To protect both market share and margins, hotel companies must provide customers with consistent, compelling experiences - before, during, and after their purchases - across all major channels. There are many things organizations can do to deliver a superior customer experience. Management must align everything a company does with the customer service experience in mind. They must assign high value to anticipation of customers' real needs and desires, and they must incentivize and reward personal initiative in the pursuit of customer satisfaction. They must respond quickly to customer requests. They must ensure that customer interactions are highly personalized, and they must deliver the right information to the right place at the right time. And perhaps most importantly, upper management must create a culture where customer service is valued and esteemed, taught and rewarded. Customer experience leaders who can drive this kind of cultural change will radically affect their companies? competitive position and business performance. The April issue of the Hotel Business Review will document what some leading hotels are doing to cultivate and manage guest satisfaction in their operations.