Kickback is a payment that violates the law to serve as compensation for preferential treatment or any other form of inappropriate services. The kickback could be monetary, take the form of a gift or credit, or be anything else of value.
The act of paying or receiving kickbacks is considered a corrupt practice since it impedes the ability of an employee or a public official to make decisions objectively. Bribery is another term that is frequently used to describe kickbacks.
The Mechanism Behind a Kickback
Although there are many different ways that kickbacks can be executed, they invariably include some backroom deal between two parties. For instance, the bookkeeper of a company or government entity might give their stamp of approval to an invoice for items even when they are aware that the amount is significantly inflated.
The price difference may then be paid by the vendor of the items to the accountant or bookkeeper (or some other kind of reward). Kickback schemes are a type of white-collar crime that is notoriously difficult to uncover and pursue.
Employing kickbacks to “purchase” a favorable recommendation for the person providing the kickbacks is also possible. For instance, a government worker who supervises contractors on a public works project, such as the construction of a bridge, can receive a reward for selecting one contractor over another. Because of this, it’s possible that a contractor with greater qualifications won’t get the bid.
Kickback schemes can flourish in the environment provided by procurement contracts. In awarding a government contract for office equipment, for instance, private contractors interested in acquiring the work are often obliged to compete against one another by submitting bids.
Instead of playing by the rules, a contractor can reach out to a procurement officer and suggest that the officer would receive a benefit if the contractor were to emerge victorious in the competition. The incentive could be money, show tickets, or something else.
These are some of the most prevalent warning signals of a kickback. These signs do not necessarily indicate that something illicit is taking place; nonetheless, the greater the number of these signs, the higher the probability that a kickback scheme is being employed.
- No competitive bidding process (or lower bids are ignored)
- Inadequate supervision throughout the entirety of the purchasing process
- Prices for goods and services that are higher than the market average
- Recommendation to work with a provider that most people avoid
- A supplier who consistently runs into legal or regulatory issues
- Employees have an unhealthy level of familiarity with suppliers
- The personnel is subjected to pressure from management to use a specific vendor
- The vendor industry is one in which bribes are a frequent practice
- Employees continue to use suppliers notwithstanding their provision of substandard goods or services
- There is a consistent pattern of missing delivery dates
Kickbacks not only drive up the cost of conducting business in countries all over the world but also create the foundation for a significant portion of the corrupt practices of governments everywhere. Businesses who want to sell their goods or provide services in nations with a bad reputation may discover that they need to bribe many government officials even to be considered for a contract.
One of the key motivating factors for officials willing to accept bribes is the belief that a kickback scheme will not be penalized or that the punishment will be relatively mild. It’s possible that they’re not paid very well, in which case they would view kickbacks as a method to supplement their limited wage.
An Illustration of a Kickback
When doing business on Wall Street, brokers occasionally send all orders to the same exchange (even though they are required by law to execute trades with the one that offers the best terms or execution for their clients). A broker may accept a kickback for routing all of their trades to a particular exchange rather than selecting the market with the most competitive price and the highest likelihood of completing the transaction promptly.
In this scenario, the broker would not select the market that meets both criteria. Ultimately, this may result in slower execution and greater customer transaction costs. The term “rebates” is commonly used to refer to this business practice. Rebates might only amount to a few thousandths of a penny for each share bought or sold, but they can add up to significant sums throughout a trading career.
Rebates and fraudulent billing for services that do not exist are two examples of the types of kickbacks that can occur in the advertising industry. Customers end up footing the bill by bearing higher prices or experiencing a lesser level of service than they would ordinarily anticipate receiving for the amount of money they spend. These kinds of actions are being motivated by shrinking agency fees and a difficult-to-understand digital marketplace, which provide the cover for such actions.