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:

APRIL: Cultivating Guest Satisfaction and Retention

Simon Hudson

According to the Oxford Dictionary an apostle is a “vigorous and pioneering advocate or supporter of a particular policy, idea, or cause”. For hotels, creating apostles should be a priority. They are the most loyal customers and they are so satisfied that they want to convert others to share their experiences. But how do hotels create apostles? This article looks at how some hotels around the world are delivering not only superior products and services, but through customization and personalization are creating guests who would not dream of staying anywhere else. READ MORE

Edward Reagoso

In the hustle and bustle of being accountable for so many facets of the hotel business, a hotel general manager needs to do one thing to truly secure his or her future in our industry, that being “insuring your team members truly care about your guests stay.” Sounds simple enough, right? This is not rocket science and I mean no disrespect to anyone struggling with operations or sales issues that can often seem surmountable. We all have these problems at one time or another. There are resolutions to every issue we have. The resolution to any problem is really just a matter of applying a specific strategy that will minimize the issue or frankly, make it go away completely. How many times have you walked into a situation with a guest that was surprised and upset that a tiny issue was never dealt with by a front desk agent, housekeeper, waiter, maintenance person, or even a manager that worked for you? I have too, the important thing is that we learn from this and move forward. One must insure everyone on our team grasps the importance of caring and the application of certain techniques can solidify a culture. Getting everyone on your team to care about your guests really is the key. READ MORE

Rick Garlick Ph.D.

A primary objective of hotel operators is to keep their properties full of ‘heads in beds’ to capacity. While this goal is understandable, there is a risk hotels may market themselves indiscriminately and draw guests that are not a good match to their particular value proposition. While this meets a short term goal of wasting as little inventory as possible, there is a longer term risk that these guests may provide negative feedback about their stays, even though the hotel was being true to its own identity and branding. Indeed, the guest experience cannot be fairly evaluated apart from the expectations and preferences a person brings to the hotel from the time he or she books a room. Using a comparative restaurant example, a top steakhouse could never deliver a satisfying experience to a committed vegetarian, even if it provided the best cut of meat and the most attentive service. You have to like steak to positively evaluate the experience. READ MORE

Aaron  Housman

Things will go wrong. It’s inevitable in life and in business. And the sooner one gets to that conclusion the sooner he can get on with what comes next: preparing for the inevitable. In the hotel business that means following up with guests when the experience is substandard for any number of reasons, from guest service to property maintenance to the type of sheets on the bed. But there is a difference between just preparing for the inevitable and being well-prepared. Following up effectively with upset guests doesn’t happen accidentally. It is planned, trained tracked and executed every day. It is a way of life for best-in-class operations. READ MORE

Coming Up In The May Online Hotel Business Review


Feature Focus
Hotel Sustainable Development: Integrating Practices for the Environment and the Bottom Line
The term “sustainable development” was first coined in 1987. In a report entitled, “Our Common Future,” the Brundtland Commission defined sustainable development as follows: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” This definition immediately caught on. In the business world, it is sometimes referred to as a triple bottom line – capturing the concept that investments are profitable, good for people and protective of the environment. Within the hotel industry, companies have taken an active role in committing themselves to addressing climate change and sustainability. Hotel operations have realized that environmentally sound practices not only help the environment, but can lead to cost reductions, business expansion, and profit growth as consumers increasingly seek environmentally sustainable products and services. In a recent survey by Deloitte, it was noted that 95% of respondents believe that the hotel industry should be undertaking “green” initiatives. Additionally, 38% of respondents said they made efforts to identify “green” hotels before traveling, and 40% said they would be willing to pay a premium for the privilege. These results suggest that consumers want and expect sustainability in their travel plans. In response to these trends, many hotel companies and on-line travel agencies have even begun offering their consumers an opportunity to purchase carbon offsets to reduce the environmental impact of their trips. The May issue of the Hotel Business Review will document how some leading hotels are integrating sustainability practices into their hotels and how their operations, consumers and the environment are profiting from them.