Quiz 9

ethics policy

(1) it clearly explains to employees what types of conduct are considered to be improper, and (2) it provides grounds for termination if an employee accepts a bribe or kickback while preventing the employee from claiming that she did not know that such conduct was prohibited.

preventing and detected bid rigging schemes

--unusually high contract price -low bid followed by ammendmends -very large price differences among bidders -bidding patterns -losing bidders frequently appear as subcontractors on project -look at address of vendors -low amount of vendors bidding -avoidence of competitive bidding all together

preventing and detecting conflicts of interest

-Implement, communicate, and enforce an ethics policy that addresses conflicts of interest offenses -Require employees to complete an annual disclosure statement -Establish an anonymous reporting mechanism to receive tips and complaints -Compare vendor address and telephone files to employee address and telephone files for matches

4 classifications of corruption schemes

-bribery -illegal gratituties -economic extortion -conflicts of interest

Bribery categories

-kickbacks -bid-rigging schemes

Bid rigging- solicitation phase

-restricts bid solicitations to preferred vendors -solicits bids fictitious vendors -advance notice of bids to preferred vendor -"lose" bids of non preferred vendors -bidpooling( all vendors collaborate so that each gets some of the work)

bid rigging- submission phase

-vendor given acces to competitors bids -employee provides confidential info to contractor -vendor allowed to amend bid -employee accepts late bids

5 Elements of FCPA Violation

1. A regulated party 2. Makes a payment or offer 3. To a foreign official 4. With a corrupt intent to influence a decision 5. With a business purpose.

Why are kickbacks hard to detect?

Bc attacked from 2 sides collaborating

-bid-rigging schemes

Bid-rigging schemes occur when an employee fraudulently assists a vendor in winning a contract through the competitive bidding process

Kickback schemes- Overbilling

Employees with Approval Authority (key) Fraudsters Lacking Approval Authority (filing false purchase requisition, false vouchers, False PO to match vendor false invoice, or slip false invoice into approved pile Other Kickback Schemes (bribe to bypass testing of products, or with customers to get lower prices from the company)

fourth and fifth

Fourth, the person making or authorizing the payment must have a corrupt intent. That is, the payment must be intended to influence the recipient to misuse his position. Finally, the payment must be related to a specific business purpose. Put differently, the payments must be related to obtaining business, retaining business, or directing business. The prohibition also covers payments to gain favorable tax or customs treatment or to obtain permits or licenses.

Kickback schemes: Diverting Business to Vendors

In some instances, an employee-fraudster receives a kickback simply for directing excess business to a vendor.

Kickback Schemes

Kickbacks are undisclosed payments made by vendors to employees of purchasing companies. The purpose of a kickback is usually to enlist the corrupt employee in an overbilling scheme. . In a common type of kickback scheme, a vendor submits a fraudulent or inflated invoice to the victim company, and an employee of that company helps make sure that a payment is made on the false invoice. Kickback schemes almost always attack the purchasing function of the victim company

Bid rigging -presolicitation

The Presolicitation Phase: Need Recognition Schemes whereby an employee of a purchasing company is paid to convince his company that a particular project is necessary. -Unusually high requirements for stock and inventory levels -by writing off large numbers of surplus items to scrap. -specific needs from a specific supplier -False PO or Purchase requisitions specifications schemes: of the contract tailored to the strengths of a particular supplier fraudulent tailoring of specifications to a particular vendor -Bid splitting (split into smaller contracts) -false sole source requirements -unessarilt vague specifications, -false prequalification procedure

Record-Keeping Provision

The failure to record improper transactions • The falsification of records to conceal improper transactions • The creation of records that are quantitatively correct, but fail to specify the qualitative aspects of a transaction that might reveal the true purpose of a particular payment

Foreign Corrupt Practices Act

U.S. law regulating behavior regarding the conduct of international business in the taking of bribes and other unethical actions.

Illegal gratuities

are similar to bribery schemes, except that something of value is given to an employee to reward a decision rather than influence it. In an illegal gratuities scheme, a decision is made that happens to benefit a certain person or company. This decision is not influenced by any sort of payment. One reason is that illegal gratuities schemes can (and do) evolve into bribery schemes. Additionally, even though an outright promise of payment has not been made, employees may direct business to certain companies in the hope that they will be rewarded with money or gifts.

Economic extortion cases

are the "pay up or else" corruption schemes.

Third, the prohibition extends only to

corrupt payments to a foreign official. The term foreign official is very broad and includes: • Members of any foreign department, instrumentality, or agency • Members of any entity substantially owned or controlled by a foreign government • Any official or candidate of a foreign political party • Members of any public international organization • Any person acting in an official capacity on behalf of any of the above enties

Bribery

may be defined as the offering, giving, receiving, or soliciting anything of value to influence an official act. The term official act means that traditional bribery statutes proscribe only payments made to influence the decisions of government agents or employees.

Slush Funds

money used for bribery and other fraudulent purposes usually accomplished by writing company checks to a fictitious entity or submitting false invoices in the name of the false entity. The purchase of goods can be verified by a check of inventory, but there is no inventory for these kinds of services. It is therefore more difficult to prove that the payments are fraudulent

A conflict of interest

occurs when an employee, manager, or executive has an *undisclosed* economic or personal interest in a transaction that adversely affects the organization. motive classifies *if for their own company purchasing (Overbilling) and sales schemes (underbilling) -business diversions -resource diversions -financial disclosures

Second, the FCPA prohibits

paying, offering, promising to pay, or authorizing to pay or offer money or anything of value.

purchasing schemes

turnaround sales `employee knows his employer is seeking to purchase a certain asset and takes advantage of the situation by purchasing the asset himself The fraudster then turns around and resells the item to his employer at an inflated price.

commercial bribery,

which is similar to the traditional definition of bribery except that something of value is offered to influence a business decision rather than an official act of government. . Notice also that offering a payment can constitute a bribe, even if the illicit payment is never actually made.

sales schemes

writing off sales to show the business owes the vendor less *large number of reversing entries *may also just delay filing

Preventing and detecting kickback schemes

—separation of purchasing, authorization, receiving and storing goods, and cash disbursements - maintenance of an updated vendor list -and proper review and matching of all support in disbursement vouchers —^^ may not be as effective bc collusion and off books key factor: price inflation -price trends -often start small and grow -price thresholds established -approve only ethical vendors -look @ purchase levels from a single vendor -inventory shprtages -inferior quality inventory -over budget? -"right to audit" clause in vendor contracts -written ethical policies

regulating persons

• A domestic concern, which is any citizen, national, or resident of the United States, or any business entity that has its principal place of business in the United States or that is organized under the laws of a state, territory, possession, or commonwealth of the United States • An issuer, which is a corporation that has issued securities that have been registered in the United States or an entity that is otherwise required to file periodic reports with the SEC • The agents, subsidiaries, or other representatives of domestic concerns and issuers • A foreign national or business that takes any act in furtherance of a corrupt payment within U.S. territory

Internal Controls Provision

• The role of the board of directors • Communication of corporate procedures and policies • Assignment of authority and responsibility • Competence and integrity of personnel • Accountability for performance and compliance with policies and procedures • Objectivity and effectiveness of the internal audit function