A Washington Post investigation exposed fraud at the General Services Administration (GSA), where Art Metal U.S.A. supplied $200 million in defective furniture over a decade, despite complaints from agencies like the IRS and CIA.
A Senate investigation, led by Peter Roman, uncovered $1.3 million in cash generated through suspicious checks (e.g., to "Spiegel Trucking" and "Auction Expenses") used to bribe GSA inspectors. Testimonies and bank records confirmed the bribery, leading to Art Metal’s bankruptcy and convictions of its plant manager and general counsel.
The case highlights how bribery and lax oversight enabled long-term fraud, with defective products accepted due to corrupt payments.
Detection relied on cash flow analysis, pattern recognition, and witness testimony, underscoring the importance of thorough financial investigations.
Corruption is defined as using one’s position for personal gain, violating official duties. The chapter examines four corruption types: bribery, illegal gratuities, economic extortion, and conflicts of interest, per the ACFE Fraud Tree.
It emphasizes the human factor, exploring fraudsters’ motivations, rationalizations, and psychological drivers.
The chapter is divided into five modules, each with specific learning objectives:
Module 1: Introduction to corruption schemes
Module 2: Bribery (kickbacks and bid-rigging)
Module 3: Foreign Corrupt Practices Act (FCPA) and international bribery
Module 4: Illegal gratuities, economic extortion, and conflicts of interest
Module 5: The human factor in fraud
Corruption schemes include bribery (offering value to influence decisions), illegal gratuities (rewards post-decision), economic extortion (demanding payment to avoid harm), and conflicts of interest (undisclosed self-dealing).
Bribery and gratuities involve external collusion, while extortion is coercive. Conflicts of interest focus on internal self-interest without external payments.
Bribery influences official or business decisions, often through commercial bribery without employer consent. Gratuities reward past decisions, potentially evolving into bribery.
Extortion uses threats to extract payments, while conflicts of interest harm the employer through undisclosed personal interests.
The module aims to enable readers to describe the four corruption forms, distinguishing their mechanics and implications.
Bribery involves paying for influence, categorized as kickbacks (collusive overbilling) and bid-rigging (manipulating competitive bidding). A case study cites Adidas executives bribing college basketball recruits.
Kickbacks: Employees with purchasing authority approve inflated or fictitious vendor invoices, receiving payments. Non-approvers forge documents or exploit lax oversight.
Bid-Rigging: Occurs in presolicitation (need recognition, specification schemes), solicitation (bid pooling, fictitious suppliers), or submission phases (abusing sealed bids). Fraudsters tailor specifications, limit competition, or access competitors’ bids.
Kickbacks conceal overbilling through matching documentation, while bid-rigging hides collusion via falsified bids or sole-source contracts. Slush funds finance bribes, coded as vague expenses (e.g., “consulting fees”).
Harm includes inflated prices, poor quality, or unnecessary purchases, as vendors face no competitive pressure.
Monitoring price trends, comparing vendor prices to market rates, and tracking purchase volumes detect overbilling. Right-to-audit clauses and vendor reputation checks prevent fraud.
Bid-rigging detection involves analyzing bidding patterns (e.g., high prices, predictable winners, or low bidder withdrawals). Ethics policies prohibiting gifts and requiring disclosure deter corruption.
The FCPA (1977) and UK Bribery Act (2010) address international bribery, prohibiting payments to foreign officials for business advantages. A Wal-Mart case illustrates a $300 million settlement for bribery in Mexico.
The module focuses on applying antibribery measures in high-risk developing countries.
Bribery schemes target foreign officials to secure contracts or permits, often concealed through intermediaries or slush funds.
Challenges include cultural differences, weak local enforcement, and complex global operations, necessitating robust compliance programs.
Compliance programs with training, due diligence on third parties, and internal audits prevent FCPA violations. Monitoring payments to consultants or agents in high-risk regions detects red flags.
Data analytics, such as flagging unusual payments or vendor relationships, enhance detection in international contexts.
Gratuities reward past decisions without prior agreements, e.g., a vendor gifting a car after contract award. They risk evolving into bribery and violate ethics policies.
Detection relies on monitoring gifts and comparing vendor relationships to contract awards.
Extortion involves demands for payment to avoid economic harm, e.g., an employee withholding contracts until suppliers pay. It is coercive and overt.
Prevention includes strong vendor vetting and anonymous reporting channels to expose demands.
Conflicts arise from undisclosed interests in transactions, e.g., approving invoices from a personally owned vendor. They include purchasing schemes (overbilling, bid-rigging) and sales schemes (underbilling, writing off receivables).
Turnaround sales involve buying assets cheap and reselling them to the employer at inflated prices. Detection compares vendor-employee data and monitors purchase/sale patterns.
Ethics policies, annual financial disclosures, and anonymous hotlines prevent conflicts. Comparing vendor and employee addresses or tracking excessive returns detects schemes.
Data analytics, such as identifying round-dollar payments or sole-source contracts, flag potential corruption.
Adapted from Sam Antar’s blog, the module explores fraudsters’ use of persuasion, deceit, and “spinning” (e.g., rationalizing actions, shifting blame). Fraudsters exploit hope, build credibility, and attack critics.
Human failings, not just greed, drive fraud. Perceived injustices (e.g., Bob Walker’s demotion) or unreasonable employer expectations (e.g., expecting perfect honesty) contribute.
Perception of Detection: Employees deterred by perceived risk of being caught are less likely to commit fraud. Strategies include employee education, proactive fraud policies, analytical reviews, surprise audits, and hotlines.
Wages in Kind: Fair treatment, proper hiring, and reasonable expectations reduce perceived justifications for fraud. Ethical leadership sets the tone.
Fraud vs. Lying: Deterrence focuses on fraud, not eliminating all lies, acknowledging human tendencies.
Education fosters a fraud-aware workforce, while hotlines amplify tips, the most common detection method. Analytical reviews and surprise audits uncover anomalies.
Ethical policies alone are insufficient without leadership modeling integrity, especially in small businesses vulnerable to fraud.