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:

NOVEMBER: Hotel Sales & Marketing: The Heart of the Matter

Andrew Freeman

The old saying that “everyone’s money is green here” might seem like true hospitality in action, but for a marketer with limited resources, it’s a recipe for failure. Clearly defining target markets means identifying who we believe will respond first and most often to our concept. However, it also means consciously acknowledging that we can’t be everything to everyone for every occasion. Demographics alone are no longer sufficient and marketers must deeply know their guests. Initially, this process can seem time consuming, but it can ultimately lead to stronger brand loyalty and the generation of greater revenue at a lesser cost. READ MORE

Bonnie Knutson

There is no question that we will see a tremendous explosion in the use of strategic content marketing in the relatively near future. With the proliferation of mobile devices, and the growth in all things Internet, people will be connecting anywhere, any time. So your brand message had better be ready and able to inform interestingly, entertainingly and with relevance 24/7. This takes what I am dubbing the 5 Cs of Kontent is King. In this article, you’ll see how your these 5 Cs can help your hotel develop an effective content marketing strategy for guests and prospective guests alike. READ MORE

Mark Johnson

Generating customer loyalty in hospitality is a surefire way to drive sales and revenue, as guests tend to remain dedicated to certain hotels based on positive experiences. However, what it means to have a positive customer experience at a hotel has been transforming as of late, and marketing and sales must keep up with new customer expectations to stay competitive. Mark Johnson, CEO of Loyalty360, an unbiased, voice of the customer loyalty marketer’s association, explores the new landscape of loyalty in his piece “The Loyalty Renaissance: Navigating New Expectations to Deliver an Exceptional Experience in Hospitality.” With expert insight and examples from hotels doing it right, Johnson delivers a must-read piece for anyone implementing a loyalty program in the hospitality industry. READ MORE

Stevi  McCoy

How much is a good customer experience worth? Some might argue that it is priceless. Most will agree that the holistic brand experience can make or break effective customer engagement. But will consumers pay more for an amazing experience? Recent data on this subject indicates that consumers do indeed make decisions based on factors other than price. According to a CEI Survey, 86% of buyers will pay more for a better customer experience. But only 1% of customers feel that vendors consistently meet their expectations. READ MORE

Coming Up In The December Online Hotel Business Review


Feature Focus
Hotel Law: The Biggest Challenges
Given the size and scope of the international hotel industry, the subject of hotel law is equally varied and vast. From development deals to management agreements; from food and beverage liability to labor and employment; from claims management to anti-trust matters; to legal concerns surrounding the issues of risk, safety and security, the practice of hotel law relies upon the expertise of many different kinds of legal specialists and practitioners. Though the subject matter is broad, there are several pending legal issues which will loom large in 2014 and beyond. The Affordable Care Act will be fully implemented in 2014 and its impact on hotel companies and their hiring practices is still to be determined. Other significant labor issues to be addressed include lawsuits pertaining to tip credit and tip pooling; wage-hour audits conducted by the Department of Labor: ongoing negotiations with unions involving living wage issues and the right of workers to organize; and increased pressure on hotel operations to be fully compliant with the Americans with Disabilities Act. On the business side of the industry, it is expected that there will be a wave of new hotel development that will engender all the related legal issues – land acquisition, entitlements, joint ventures and other financing, selection of hotel operators and brands, along with Hotel Management and Franchise Agreements. In addition, it is projected that there will be a substantial increase in foreign investment – particularly from the Chinese. Chinese investment will involve all the normal legal issues of an investment from due diligence, acquisition and financing, but will add layers of complexity to deal with tax and other international issues involving direct foreign investment in the U.S. These critical issues and others pertaining to Hotel Law will be explored in the December issue of Hotel Business Review.