Section J.08.030
All of the following are red flags of corrupt third parties except: A businessperson who routinely provides lavish business entertainment. A businessperson who pays off his mortgage early. A company that provides poor-quality products or services but is continually awarded contracts. A supplier who is consistently awarded work, without any apparent competitive advantage.
A businessperson who pays off his mortgage early. Some common red flags of a corrupt third party include a party who: • Routinely offers inappropriate gifts, provides lavish business entertainment, or otherwise tries to obtain favor with an organization • Consistently receives contracts without any apparent competitive advantage • Provides poor-quality products or services but is continually awarded contracts • Charges unjustified high prices or price increases for common goods or services • Receives or pays fees in cash • Receives or pays fees in a country different from where the underlying business takes place • Offers no apparent value to the organization • Charges high commissions • Claims to have special influence with a specific buyer • Does not relate well to competitors • Has an address or telephone number that matches an employee's address, the address of an employee's outside business, or an employee's relative's address • Provides an incomplete address (e.g., a PO Box, no telephone number, or no street address) • Provides multiple addresses • Has a reputation for corruption or works in an industry or country with a reputation for corruption • Works as an independent sales representative, consultant, or other middleman who does not have the reporting and internal control requirements of his larger, publicly held competitors
Which of the following is not a type of loan that frequently turns up in corruption cases? A legitimate loan made at market rates. A legitimate loan made on favorable terms. An outright payment falsely described as an innocent loan. A legitimate loan in which a third party makes the loan's payments.
A legitimate loan made at market rates. Corrupt payments often take the form of loans. Three types of loans often turn up in fraud cases: • An outright payment that is falsely described as an innocent loan • A legitimate loan in which a third party—the corrupt payer—makes or guarantees the loan's payments • A legitimate loan made on favorable terms (e.g., an interest-free loan) A legitimate loan made at market rates would not typically turn up in a corruption case because the loan recipient would not be receiving anything unusual or special.
Bruce is a purchaser for Acme Widgets. Bruce's brother-in-law is a salesperson for Olson Electronics, one of Acme's largest suppliers. Bruce told his supervisor about the relationship, and she approved his ordering of supplies from his brother-in-law as long as the purchases were reviewed by a senior manager. Bruce did not receive any favors or money from his brother-in-law in return for the sales. A year after Bruce discussed the situation with his supervisor, Acme's management discovers that another supplier offers the same parts as Olson Electronics but at a cheaper price. Acme Widgets is considering suing Bruce for conflict of interest. Which of the following is the most accurate statement about Acme's chances of success? Acme's chances are good because it could have gotten the supplies at a lower price. Acme's chances are poor because Bruce did not actually receive any money from his brother-in-law for sending him business. Acme's chances are good because it is clear that Bruce had a conflict of interest in dealing with his brother-in-law. Acme's chances are poor because the company was aware of the situation and it allowed Bruce to do business with his brother-in-law's company despite the relationship.
Acme's chances are poor because the company was aware of the situation and it allowed Bruce to do business with his brother-in-law's company despite the relationship. A conflict of interest occurs when an employee or agent—someone who is authorized to act on behalf of a principal—has an undisclosed personal or economic interest in a matter that could influence his professional role. But to be classified as a conflict of interest scheme, the employee's interest in the transaction must be undisclosed. The crux of a conflict case is that the fraudster takes advantage of his employer; the victim organization is unaware that its employee has divided loyalties. If an employer knows of the employee's interest in a business deal or negotiation, there can be no conflict of interest, no matter how favorable the arrangement is for the employee.
Which of the following is true regarding the methods typically used for making corrupt payments in bribery and corruption schemes? Payers often make corrupt payments by paying off the recipient's credit card debt. Payers often make corrupt payments by selling property to recipients at prices lower than the property's market value. All of these answers are correct. Payers often make corrupt payments by offering recipients loans on extremely favorable terms.
All of these answers are correct. Corrupt payments often take the form of loans. Three types of loans often turn up in fraud cases: • An outright payment that is falsely described as an innocent loan • A legitimate loan in which a third party—the corrupt payer—makes or guarantees the loan's payments • A legitimate loan made on favorable terms (e.g., an interest-free loan) A corrupt payment can be in the form of credit card use or payments toward a party's credit card debt. The payer might use a credit card to pay a recipient's transportation, vacation, or entertainment expenses, or the payer might pay off a recipient's credit card debt. In some instances, the recipient might carry and use the corrupt payer's credit card. Corrupt payments also might come in the form of promises of favorable treatment. In addition, corrupt payments might occur in the form of transfers for a value other than fair market. In such transfers, the corrupt payer might sell or lease property to the recipient at a price that is less than its market value, or the payer might agree to buy or rent property from the recipient at inflated prices. The recipient might also "sell" an asset to the payer but retain the title or use of the property.
Which of the following is a typical method used to make corrupt payments in bribery and corruption schemes? All of these answers are correct. Checks and other financial instruments. Payment of credit card bills. Gifts, travel, and entertainment.
All of these answers are correct. Often, corruption schemes involve corrupt payments—items of value paid to procure a benefit contrary to the rights of others. There are various ways to make corrupt payments, and many do not involve money. Any tangible benefit given or received with the intent to corruptly influence the recipient can be an illegal payment, and traditional methods of making corrupt payments include: • Gifts, travel, and entertainment • Cash payments • Checks and other financial instruments • Hidden interests • Loans • Credit cards • Transfers not at fair market value • Promises of favorable treatment
Which of the following is a basic method used to prove corrupt payments in bribery and corruption schemes? Secretly infiltrating ongoing transactions. All of these answers are correct. Identifying and tracing payments through audit steps. Turning an inside witness.
All of these answers are correct. There are three basic ways to prove corrupt payments: • Turn an inside witness. • Secretly infiltrate or record ongoing transactions. • Identify and trace the corrupt payments through audit steps.
Which of the following scenarios is an example of a conflict of interest? An employee has an undisclosed personal relationship with a company that does business with his employer. An employee for a pharmaceutical company has an economic interest in a company that does business with his employer and discloses it to his employer. An employee for a phone installation company works as a fishing guide on weekends, but he does not tell the phone company about his or her job. An employee is related to a party that works for one of his company's vendors and informs his employer of the relationship.
An employee has an undisclosed personal relationship with a company that does business with his employer. A conflict of interest occurs when an employee or agent—someone who is authorized to act on behalf of a principal—has an undisclosed personal or economic interest in a matter that could influence his professional role. Thus, an employee with an undisclosed personal relationship with a company that does business with his employer is engaged in a conflict of interest. An employee who has an undisclosed side job would not be engaged in a conflict of interest provided that the job is in a different industry, does not create a time conflict, and does not create any personal or economic interest that could influence his ability to act in his primary employer's best interest. Most conflicts of interest occur because the fraudster has an undisclosed economic interest in a transaction, but a conflict can exist when the fraudster's hidden interest is not economic. In some scenarios, an employee acts in a manner detrimental to his company to provide a benefit to a friend or relative, even though the fraudster receives no financial benefit. Conflicts of interest do not necessarily constitute legal violations, as long as they are properly disclosed. Thus, to be classified as a conflict of interest scheme, the employee's interest in the transaction must be undisclosed. The crux of a conflict case is that the fraudster takes advantage of his employer; the victim organization is unaware that its employee has divided loyalties. If an employer knows of the employee's interest in a business deal or negotiation, there can be no conflict of interest, no matter how favorable the arrangement is for the employee.
Which of the following scenarios is an example of a kickback scheme? A politician threatens to shut down a business if it does not pay a bribe. A government official demands money in exchange for making a business decision. A vendor inflates the amount of an invoice submitted to the company for payment. An employee receives a payment for directing excess business to a vendor.
An employee receives a payment for directing excess business to a vendor. Kickbacks are improper, undisclosed payments made to obtain favorable treatment. Thus, an employee who receives a payment for directing excess business to a vendor is an example of a kickback scheme. In such cases, there might not be any overbilling involved; the vendor simply pays the kickbacks to ensure a steady stream of business from the purchasing company. Extortion is defined as the obtaining of property from another, with the other party's consent induced by wrongful use of actual or threatened force or fear. Economic extortion is present when an employee or official, through the wrongful use of actual or threatened force or fear, demands money or some other consideration to make a particular business decision. Thus, if a government official demands money in exchange for making a business decision, this is an example of an economic extortion scheme. Similarly, if a politician threatens to shut down a business if it does not pay a bribe, this is also an example of an economic extortion scheme.
Which of the following is not a red flag of a corrupt employee? An employee who makes decisions in areas for which the employee is not responsible. An employee who refuses to insert himself into areas in which he is not involved. An employee who makes excuses for deficiencies in a third party's services. An employee who often ignores standard operating procedures to benefit a vendor.
An employee who refuses to insert himself into areas in which he is not involved. Some common red flags of a corrupt employee include: • A high success rate in markets where competitors are known to bribe • Reputation for regularly accepting inappropriate gifts • Extravagant lifestyle • Reputation for taking action without being instructed to do so or directing subordinates to bend, break, or ignore standard operating procedures or rules to benefit the payer • Tendency of employee to insert himself into areas in which he is normally not involved • Propensity to assert authority or make decisions in areas for which the employee is not responsible • Inclination to make excuses for deficiencies in a third party's products or services, such as poor quality, late deliveries, or high prices • Circumstances that generate extreme personal pressures, such as ill family members or drug addiction • History of not filing conflict of interest forms • Frequent hospitality and travel expenses for foreign public officials • Friendly social relationship with a third-party contractor
When an employee or official uses force or fear to demand money in exchange for making a particular business decision, that individual is engaging in: Economic extortion. An illegal gratuity scheme. Bribery. A kickback scheme.
Economic extortion. Extortion is defined as the obtaining of property from another, with the other party's consent induced by wrongful use of actual or threatened force or fear. Economic extortion is present when an employee or official, through the wrongful use of actual or threatened force or fear, demands money or some other consideration to make a particular business decision. Thus, if an employee or government official demands money in exchange for making a business decision, this is an example of an economic extortion scheme. Similarly, if a politician threatens to shut down a business if it does not pay a bribe, this is also an example of an economic extortion scheme.
All of the following are common methods that fraud examiners can use to uncover an employee who has an undisclosed financial interest with an outside vendor except: Review tips and complaints from employees or vendors. Review exit interviews. Compare vendor addresses with employee addresses. Compare customer account balances to billing files.
Compare customer account balances to billing files. Conflicts of interest are probably one of the most difficult schemes to uncover. Therefore, there are no fast and easy detection methods for this type of fraud. Some of the more common methods by which conflicts are identified include tips and complaints, comparisons of vendor addresses with employee addresses, review of vendor ownership files, review of exit interviews, comparisons of vendor addresses to addresses of subsequent employers, policies requiring certain employees to provide the names and employers of immediate family members, and interviews with purchasing personnel regarding favorable treatment of one or more vendors.
Daniel, a plant manager for a utility company, has his own commercial cleaning business on the side. Daniel threatened to withhold business from any vendors of the utility company that did not hire his cleaning business for their office cleaning needs. Which of the following best describes the type of corruption scheme in which Daniel engaged? Kickback scheme. Collusion scheme. Economic extortion scheme. Illegal gratuity scheme.
Economic extortion scheme. Extortion is defined as the obtaining of property from another, with the other party's consent induced by wrongful use of actual or threatened force or fear. Economic extortion is present when an employee or official, through the wrongful use of actual or threatened force or fear, demands money or some other consideration to make a particular business decision. Thus, because Daniel threatened to withhold business from any vendors of the utility company that did not hire his cleaning business for their office cleaning needs, he engaged in an extortion scheme.
James is a purchaser for a large government entity. ABC Inc. tells James that if he will award ABC at least $5 million in contracts over the next two years, ABC will hire James at the end of the two years at twice his current salary. Because no actual money changes hands, this could not be considered a bribery or corruption scheme. True. False.
False. Bribes do not necessarily involve direct payments of cash or goods. Bribery may be defined as the offering, giving, receiving, or soliciting of corrupt payments—items of value paid to procure a benefit contrary to the rights of others—to influence an official act or business decision. Promises of favorable treatment can constitute corrupt payments. Such promises commonly take the following forms: • A payer might promise a government official lucrative employment when the recipient leaves government service. • An executive leaving a private company for a related government position might be given favorable or inflated retirement and separation benefits. • The spouse or other relative of the intended recipient might also be employed by the payer company at an inflated salary or with little actual responsibility.
Although bribery schemes are more common than most other forms of occupational fraud, they tend to be much less costly. True. False.
False. Though bribery schemes are not nearly as common as other forms of occupational fraud, such as asset misappropriations, they tend to be much more costly.
Ed Smith, a city commissioner, negotiated a land development deal with a group of private investors. After the deal was approved, the investors rewarded Smith with an all-expenses-paid trip, even though giving such rewards to government officials is prohibited by law. Which of the following is the most appropriate term to describe what has taken place? Collusion. Need recognition. Illegal gratuity. Economic extortion.
Illegal gratuity. Illegal gratuities are items of value given to reward a decision, often after the recipient has made the decision. Illegal gratuities are similar to bribery schemes except that, unlike bribery schemes, illegal gratuity schemes do not necessarily involve an intent to influence a particular decision before the fact. That is, an illegal gratuity occurs when an item of value is given for, or because of, some act. Often, an illegal gratuity is merely something that a party who has benefited from a decision offers as a "thank you" to the person who made the beneficial decision.
Which of the following statements about the methods used to make corrupt payments in bribery and corruption schemes is incorrect? Payers often make corrupt payments by using their credit cards to pay recipients' transportation, vacation, and entertainment expenses. Payers often make corrupt payments by selling property to recipients at prices higher than the property's market value. Payers often make corrupt payments by making outright payments falsely described as innocent loans. Payers often make corrupt payments by buying assets from recipients and allowing the recipients to retain title or use of the items.
Payers often make corrupt payments by selling property to recipients at prices higher than the property's market value. Corrupt payments often take the form of loans. Three types of loans often turn up in fraud cases: • An outright payment that is falsely described as an innocent loan • A legitimate loan in which a third party—the corrupt payer—makes or guarantees the loan's payments • A legitimate loan made on favorable terms (e.g., an interest-free loan) A corrupt payment can be in the form of credit card use or payments toward a party's credit card debt. The payer might use a credit card to pay a recipient's transportation, vacation, or entertainment expenses, or the payer might pay off a recipient's credit card debt. In some instances, the recipient might carry and use the corrupt payer's credit card. Corrupt payments also might come in the form of promises of favorable treatment. In addition, corrupt payments might occur in the form of transfers for a value other than fair market. In such transfers, the corrupt payer might sell or lease property to the recipient at a price that is less than its market value, or the payer might agree to buy or rent property from the recipient at inflated prices. The recipient might also "sell" an asset to the payer but retain the title or use of the property.
Payers can make corrupt payments by giving recipients hidden interests in profit-making enterprises. False. True.
True. A payer might make a corrupt payment by giving the recipient a hidden interest in a joint venture or other profit-making enterprise.
Corruption is the wrongful use of influence to procure a benefit for the actor or another person, contrary to the duty or the rights of others. True. False.
True. Corruption is the wrongful use of influence to procure a benefit for the actor or another person, contrary to the duty or the rights of others.
Kickbacks are improper, undisclosed payments made to obtain favorable treatment. True. False.
True. Kickbacks are improper, undisclosed payments made to obtain favorable treatment. For example, in a kickback scheme, an employee might receive compensation in exchange for directing excess business to a vendor. Such compensation could involve monetary payments, entertainment, travel, or other favorable perks.
