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.