What is a 'Kickback'

A kickback is the payment to a recipient as compensation or reward for providing favorable treatment or services to another party. A kickback in the form of money, gifts, credit or anything of value may be viewed as a corrupt practice that interferes with an employee's or official’s ability to make unbiased decisions.

BREAKING DOWN 'Kickback'

Kickbacks can take many forms, but all feature some sort of collusion. For example, someone in charge of the books for a business or government approves an invoice for goods or services that is inflated or pays for substandard goods. The beneficiary would then pay the bookkeeper a part of the difference; both parties benefit from the fraud. Kickback schemes are among the most difficult white-collar crimes for forensics investigators to detect and investigate.

Receiving a kickback does not necessarily mean that there is a quid pro quo arrangement between the kickback receiver and the kickback provider. Payments may be used to induce favor or to induce a positive recommendation of the provider. A government employee responsible for managing contractors on an infrastructure project, such as the building of a bridge, may receive a kickback for choosing one contractor over another. This may result in the most qualified contractor not winning the bid.

Kickbacks are often associated with procurement contracts. In the case of a government contract for office supplies, contractors and sub-contractors interested in winning the business are required to bid against each other. A contractor may reach out to a procurement officer and indicate that, if the contractor were to win, the officer may receive compensation. This could mean anything from cash to tickets to a concert.

Kickback Red Flags

The following kickback warning signs do not necessarily mean that corruption exists, but multiple warning signs simultaneously raises the likelihood:

  • No competitive bidding process (or lower bids ignored)
  • Lack of appropriate supervision during purchasing process
  • Higher-than-average prices for goods or services
  • Recommendation to use a vendor others shun
  • A vendor with frequent legal or regulatory problems
  • Employees are too friendly with vendors
  • Management pressures staff to use a particular vendor
  • Vendors are in an industry where kickbacks are common
  • Employees continue to use vendors who provide poor products or services
  • Delivery dates are repeatedly missed

Kickbacks and other forms of bribery increase the cost of doing business in countries around the world. They form the basis for much of the world's government corruption. Companies looking to supply products or services to countries known for corruption may find that they have to pay numerous employees in order to be considered for a contract. The perception that a kickback scheme will go unpunished, or that punishment will be light, is a primary driver for officials willing to take bribes. In some cases employees are poorly paid and see the potential for additional financial compensation in the form of a kickback as a way to boost a meager salary.

In the United States, the Foreign Corrupt Practices Act makes it illegal for companies listed with the Securities and Exchange Commission (SEC), any company organized in the United States, or any citizen or resident to bribe foreign officials.

Kickback Examples

On Wall Street, brokers sometimes route orders to a particular exchange even though they are required by law to execute trades with the venue that offers the best terms (best execution) for their clients, such as price and likelihood of completing the trade in a timely fashion. The exchanges are then meant to compete to offer the best pricing and timeliness. Instead, some brokers take kickbacks to route trades to a particular exchange, which can lead to slower execution and higher transaction costs for clients. Such "rebates," as the industry calls them, may amount to a fraction of a cent of each share traded, but can add up to huge sums.

In advertising, kickbacks are on the rise in the form of rebates or fraudulent billing for nonexistent services. Clients pay the price with higher costs or a lower level of service than they normally would expect for their money. Shrinking agency fees and a hard-to-understand digital marketplace are providing the motivation and cover for such actions.

RELATED TERMS
  1. Bribe

    An illegal payment from one party to another, usually in return ...
  2. Vendor Financing

    Vendor financing is the lending of money by a vendor to a customer ...
  3. Bid Bond

    A bid bond is a debt secured by a bidder for a construction job, ...
  4. Foreign Corrupt Practices Act

    The Foreign Corrupt Practices Act is a federal law that prohibits ...
  5. Contractors Professional Liability ...

    Contractors professional liability insurance covers contractors ...
  6. Competitive Bid

    A competitive bid is a price submitted by a vendor or service ...
Related Articles
  1. Insights

    Can Novartis Explain 79,236 "Sham" Events? (NVS)

    Novartis AG has been accused by the U.S. government of engaging in a kickback scheme in which the Swiss drug maker wined and dined doctors in order to persuade them to prescribe the company's ...
  2. Small Business

    The Biggest Bribe Cases In Business History

    These cases represent some of the largest bribe accusations and fines in U.S. business history.
  3. Investing

    Banco Brandesco Suffers on Brazil Corruption Probe

    The Brazilian bank saw its stock fall following news that over 100 officials are facing an investigation over alleged corruption.
  4. Investing

    Are Corruption and Growth Conjoined?

    When you line up the corruption index with the fastest growing economies, the top 5 developed economies aren't above 70th place on the corruption index.
  5. Managing Wealth

    How Not To Get Scammed By Contractors

    Home improvement is a $200 billion a year industry. This means a lot of people get into the field that are likely less than qualified.
  6. Investing

    Tips For Dealing With A Renovations Contractor

    It pays to take the time and choose the right contractor for your next big home renovation project.
  7. Tech

    Legal Considerations for Your Cybersecurity Program

    Nearly every financial institution has experienced some sort of cyberattack over the last few years. It pays to create a cyber-secure environment.
  8. Personal Finance

    10 Frustrating Things Standing Between You and Your Mortgage

    If you know about the common challenges ahead of time, you can be prepared for them, and in some cases, even avoid them.
  9. Investing

    Evaluating Executive Compensation

    Learn about the different types of CEO compensation, where you can find this information, and how it can affect your investments.
  10. Retirement

    Petrobras Impact on the Brazilian Economy

    How the Petrobas scandal has shaken the Brazilian economy.
RELATED FAQS
  1. Can mutual fund expense ratios be negative?

    Learn what an expense ratio is, and whether mutual funds, closed-end funds and exchange-traded funds can have negative expense ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center