What is Occupational Fraud?
Occupational fraud is fraud committed by an employee on an employer in the course of their employment. They are more common and cause more financial loss to businesses than frauds committed by third parties. As employees will continue to work at the business, they will generally try to hide these frauds permanently, meaning that occupational fraud can be committed over an extended period of time.
What are collusion and bribery schemes?
This is where an employee colludes with another party (whether from outside or inside the business) to use his role as an employee to obtain a personal benefit. Collusion frauds occur off the books of the business. That is, usually no activity needs to be hidden in business records.
The most commonly known collusion fraud is bribery – something given to influence a specific act to happen – whether given after an act has been performed or made to obtain a future benefit or information. Collusion also may be a conflict of interest fraud. Though these frauds do not necessarily involve a distinct third party, they will involve the employee in a role other than as an employee.
Major Headings
Bribery Frauds
1. Bid or Tender Rigging
2. Kick backs or Secret CommissionsConflicts of Interest
Lessons to be Learned
Prevention and Detection
Bribery Frauds
Bribery is used to gain an improper advantage over others through the intervention of a corrupt employee. Bribery is the giving of something of value by another party to a decision maker or decision influencer in exchange for influence in a decision making process. There is a gray area between bribery and innocent commercial marketing. Where does an attempt to market to or to build a professional relationship with someone become a bribe?
The practical answer is the whether the employer has knowledge of and given approval for the person to receive the benefit offered. Without the knowledge and consent of the employer, the chances are that the receipt of a benefit by an employee can be viewed as a bribe. The second part of the answer is whether the benefit is being given to directly influence a specific decision or to maintain a overall relationship.
Why bribe someone?
The intended result is usually to obtain sensitive information, get purchase orders, be awarded contracts, or obtain intellectual property or other insider information. The main result is an advantage gained by the party paying the bribe over other persons or competitors. It is done when that party does not believe that they can compete on equal grounds with other parties.
Bribery gives an advantage over two victims. The first victim is the business that will suffer a loss due to overpricing, quality loss, loss of competitive advantage, or similar. The other victims are the briber’s competitors who are now at a competitive disadvantage. These competitors are the ones passed over by the bribed decision maker.
The cost of bribery to the victim business
The loss from bribery may not be obvious to the business as the employee does not directly steal anything, and the ‘loss’ may take some time to materialize.
The loss to the business will be at least as large as the bribe, or the bribe would not have to have been made. Bribes will not be offered unless the briber will get a greater commercial return than the cost of giving the bribe. The amount of the loss will usually be much greater that the amount of the bribe. The actual loss suffered will generally be through the loss of a competitive advantage, higher costs or lower quality supplies etc that will eventually cause damage to the victim business, both in monetary terms and in reputation.
How is bribery done?
The dishonest employee receives a bribe from the briber. Money is generally used, but anything of value (gifts, entertainment, holidays for the employee or their relatives, payment of bills, sexual favors, etc.) can be given as bribes. The bribee will then use their influence to give an advantage to the briber. There are three major types of bribery frauds:
(a) Over-billing Schemes
Over-billing schemes usually relate to purchase contacts. A bribe is given to the employee to preferring that supplier over others. The goods or services supplied may either be priced higher than they otherwise would have been, or be of lesser quality than expected. The purchase contract may also have other hidden costs, charges or high priced variations. In effect, the business pays too much for the supply, and this over pricing is the profit made from the bribe.
(b) Under-pricing Schemes
Under-pricing schemes are the opposite of over-billing schemes. These usually involve the business selling goods and services to parties at prices that are below or under conditions that are less favorable to the business than would normally have been granted. The benefit to the purchaser is that they get a better deal than they otherwise would have been entitled to get. In this case the business receives too little consideration for its product or service as they are under-priced, and the cost saving is the profit made from the bribe.
(c) Awarding Contracts, Promotions etc
These schemes involve the awarding of contracts on conditions that are not the most favorable to the business. They may be at a higher cost, involve lesser quality materials and / or have conditions that are not the most favorable to the employer. It also involves the granting of promotions to employees within the business – where the briber is promoted above other more qualified people – or the hiring of unsuitable employees.
Hiding the fraud
Bribery does not involve an entry in the records of the business, so nothing needs to be hidden in those records. However, the employee may have to justify why they granted a contract to the briber. If the deal is found to be uncommercial and the business owners look at the circumstances, questions may be asked about how and why the transaction arose.
If the employee is careless they may spend the money obtained from the bribe carelessly, and questions may be asked about how he can afford the new car, the overseas holidays, the school fees etc. Bribery schemes can be uncovered after realizing that employees are living above their means – conspicuous consumption. That consumption will need to be hidden.
Types of bribery
Most bribery frauds fall into one of two major groups – bid or tender rigging, and kickbacks or secret commissions. These are very similar – just different ways of achieving the same result.
1. Bid or Tender Rigging
Bid or Tender-rigging is the process where an employee improperly influences the awarding of a sale or purchase or construction contract. This can be done by:
(a) giving the third party details of the other tenders received (giving them knowledge of the conditions to beat); or
(b) influencing the decision maker towards the briber’s tender, even though it is not the most beneficial to the employer.
Tender rigging is usually done during a tender process for a contract of supply or the sale of a large asset or for construction contracts, or for long term supply contracts. An example is an employee of a real estate agent engaged to sell a property by tender providing details of the other tenders to a party so that they may better structure their own tender.
A commercial decision about a supply contract involves a cost and a benefit. The business will try to contract with the party that gives quality goods or services for the best price. A briber will only try to influence the decision process if they:
(a) do not have a quality product, or
(b) their cost is not competitive, or
(c) both.
If the briber could compete without paying the bribe, they would normally do so.
2. Kickbacks or Secret Commissions
Kickbacks
Kickbacks are payments received by the employee from the third party after the influence has resulted in a gain to the other person. These payments are usually given to obtain a favorable decision, or to obtain influence from the employee in relation to the employer purchasing something from or selling something to the third party. The amounts of these payments are often calculated on the amounts involved in the underlying transaction (e.g. 5% of purchases made from the third party).
The major difference between kickbacks and tender rigging is the timing and calculation of the payment and the success factor. Neither of these factors may make a difference to the intended results of the bribes. Both are paid to get an unfair advantage.
Secret Commissions
Any employee that receives or solicits a commission from another party for an act or influence, where the commission is not authorized by the employer, receives a secret commission. The fact that the employee receives a commission may not in itself be a problem, it is the lack of the employer’s knowledge and approval of the commission that causes the fraud. The employee is often the person seeking an advantage.
The more technical description is given in the Qld Criminal Code:
Any agent (employee) who corruptly receives or solicits from any person for himself or herself or for any other person any valuable consideration:
(a) as an inducement or reward for or otherwise on account of doing or forbearing to do, or having done or forborne to do, any act in relation to his or her principal’s affairs or business; or
(b) the receipt or any expectation of which would in any way tend to influence the agent to show, or to forbear to show, favour or disfavour to any person in relation to his or her principal’s affairs or business;
commits a crime.
The burden of proving that any consideration received or offered to an employee without the agreement of the principal was not a secret commission is on the person giving the consideration.
Conflicts of Interest
A conflict of interest fraud occurs when an employee has an undisclosed personal interest in a transaction. This occurs whether or not it directly causes a loss to the employer at that time or at any time. The main factor is that the interest is undisclosed.
The difference between conflicts of interest and bribes is that the benefit is not usually obtained from a (dishonest) third party. The benefit is derived directly or indirectly by the employee from acting in their self-interest. The concept is that “an employee cannot serve two masters”. Conflicts of interest occur when an employee takes advantage of their employer’s trust, when the employer does not realize that the employee has an ulterior motive for their actions.
How is it done?
A conflict of interest arises when an employee uses their position to make or influence a decision that would benefit themselves in some manner and they do not make the employer aware of that benefit. If the interest is disclosed to the employer and the employer makes an informed decision to enter into the transaction, there is no conflict and no fraud.
It is not uncommon for businesses to enter into transactions with parties related to employees. However, they must be done under normal commercial circumstances, and with full knowledge or all parties, and any benefit that may be obtained must be disclosed. If the transaction is commercial and any benefit to the employee is reasonable, the employee would not need to hide the interest from their employer.
Where is the loss?
The employer may suffer no loss at all from the transaction and may, in fact, also receive a benefit from it. Some people will argue that there is nothing wrong with employees receiving an undisclosed benefit if there is no loss to the employer. This is a matter of judgment and not argued here.
The result of a conflict of interest is that the employer will be steered towards a supplier or customer that they may not have used if they were aware of all the circumstances.
For example – if the business buys widgets and the employee in charge of purchasing them buys them from his wife’s business at the same price as other widgets on the market, where is the loss? But the business will not be buying under competitive circumstances and may not always be obtaining the best price, plus the wife would be receiving a profit from the transaction.
Is there a Conflict of Interest? Yes, if the interest is undisclosed to the employer.
How is the fraud usually done?
Conflicts of interest can occur when an employee buys or sells something on behalf of an employer, or has the power to influence a decision. The potential areas of fraud are wide. In general, the main areas are in the sales or purchase processes, and business or resource diversion.
1. Sales Schemes
A sales scheme occurs when an employee sells the employer’s product to the related party at a discount that would otherwise not have been available or warranted. This creates a loss of revenue to the employer that they would have otherwise received. The same amount of monetary benefit is received by the related party.
2. Purchasing Schemes
The fraud occurs when the employee favors a supplier in which they have a commercial interest, even if the price is comparable to other suppliers. There are two possible causes of loss in these cases. The good or service could be overpriced, or the quality of the supply may be reduced. This may not immediately cause a monetary loss, but may damage efficiency and goodwill in the long term.
3. Business Diversion Schemes
Employees sometimes leave their employment and go into business on their own, and in competition with their old employer. There is nothing illegal about this. However, what the employee takes with him when he leaves, and what does he do prior to leaving may cause a conflict of interest.
While still employed, an employee has a duty not to detriment the employer by his or her actions. If the employee tries to persuade clients to leave the employer to use his own business while still employed, there will be a conflict of interest. It is also possible that the employee will set up a business in competition with their employer but remain employed diverting customers to their own business when possible.
4. Resource Diversion Schemes
Sometimes an employee undertakes some personal activity on the employers time and equipment. Most of this is overlooked as long as it does not impede the employee’s work. There is little real cost to the employer and the goodwill generated by allowing the employees to do this may far outweigh any cost.
But what if the employee was running a business (whether or not in competition with the employer) from your premises on your equipment? His attention would be divided between two causes. The employer would be subsidizing the other business and would likely suffer some from of loss, even if only from the employee’s productivity. There would be a conflict of interest.
Lessons to be Learned
1. Not all losses arise from the theft of resources. Businesses can suffer losses from collusive deals undertaken by a corrupt employee.
2. Collusion frauds do not remove or hide any transaction that should be entered in the records. There is little likelihood of uncovering such a fraud simply by examining accounting records.
3. Collusion schemes can attack any area of the business cycle where an employee deals with outside parties, but may only involve employees within the business and internal transactions.
Prevention and Detection
Some things to look for
(i) Numerous contracts being awarded to the same supplier under terms that were not the most commercial offered.(ii) Common patterns in tenders being received, particularly where the same calculations, components or mistakes appears in multiple tenders.
(iii) The winning tenders consistently being the last to tender or being altered at the last minute, indicating that they were waiting for information to be provided about the other tenders.
(iv) The winning tenders being consistently just less than the next lowest tender, indicating that the tenderer received details of the other tenders to undercut the lowest price.
(v) Low tenderers excessively charging for variations to contracts, resulting in contract payments that are in excess of the other tenders.
(vi) One employee consistently pushing for contracts to be awarded to one or a few tenders even thought they may not appear to be the best tenderer.
(vii) Employees living above their means, or purchasing items that do not naturally match their income level.
(viii) Employees that are very guarded about their purchasing or contract awarding roles and authorities.
Some Basic Controls
(i) Most collusion schemes are discovered by tips from other employees. Therefore a system allowing employees to make anonymous tips should be implemented. Employees should be encouraged to provide such tips with polices to protect them.(ii) Conduct searches on unknown tenderers and the people behind the businesses.
(iii) Request references from people who have dealt with these parties in the past and whether there were cost increases or the work was of sufficient quality.
(iv) Structure the decision making process to provide for the greatest exposure and accountability.
(v) At least two people must either make or review a decision involving competitive bidding. The need for collusion will reduce the chances of bribes being effective and therefore used.