Kickback Meaning
Kickback is an unethical payment for obtaining preference over some capable person for any biased or special treatment for supply of any goods or provision of service or getting any work done. It can be in the form of cash, credits, goods, preferential allocation, or any other valuable material or service.
Kickback can be referred to as a form of bribery wherein the recipient of illegal gain returns some amount, in the name of the commission, to the bribe-taker, who assisted the recipient in obtaining the assistance. Thus, basically, it is a form of commission paid for getting something done from a person.
How does it Work?
Kickbacks are disguised in the normal operations of an entity and the utmost difficulty to detect such operations. White-collar employees conduct such crimes. For example, a purchaser paying for goods that have inflated cost & such purchaser will receive a kickback from the seller of goods.
The intention behind paying the kickback may be good or bad, but the practice in itself is unethical. For example, a government employee receiving a kickback for a high cost inflated project which will provide a better quality of projects to the public at large.
Thus, kickback starts with the intention of the payer or receiver. The payment is normally referred to as commission in some or other form.
Some of the famous methods include the following:
- Inflating the cost of goodsCost Of GoodsThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more or services
- Vendors directly contacting the employees outside the SOPSOPThe full form of SOP is Standard Operating Procedure & it is a set of guidelines, policies, & procedures that a Company follows to perform its routine tasks following the industry regulations. read more for business.
- No review process for critical processes within the entity
- Highlighting a specific vendor or customer over others
- No quality check for goods or services received
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For eg:
Source: Kickback (wallstreetmojo.com)
Kickback Examples
- Advertising Business – An advertiser may choose to promote only those goods that provide a higher commission to the advertiser through kickbacks. Obviously, the seller of goods will recover the kickback cost by inflating the selling price.
- Stock Broking – The stockbroker, may prefer to execute or route all the trades through a particular exchange only due to a kickback arrangement, even though another exchange provides timely delivery of securities. Again, such cost is easily recovered from clients through higher charge.
Forms of Kickback
#1 – Medical Industry
Federal health care fraud in the US is famous for such kickback. Fraudulent referral schemes are announced, which ultimately lands up bribing the recipient of service. Kickbacks under this category are famous for ambulance service, preferential treatment, medical appliances, a prescription for certain types of drugs only, etc. It normally extracts money for better services, which the hospitals are anyway bound to provide.
#2 – Financial Institutions
This type of kickback exists within the banking and financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more. Frauds may include transactions related to mortgage loans, providing business contracts or loans etc.
#3 – Public Works
These types of kickbacks are most frequent in case contracts entered into by local governments. The authorized dealers enter into the highly inflated cost for construction of roads with lower quality & in effect getting the kickbacks from the contracts for the benefit passed on.
#4 – Securities Market
This may include price manipulation and promotion of stock by the parties involved including the stockbrokers and investment bankers
#5 – Government Contract
This form generally happens in underdeveloped economies. Government-authorized dealers may enter into a disguised contract with the vendors to provide inflated prices. Such forms of kickbacks are common in health care schemes, infrastructure facilities, or defence or educational facilities.
Threat
- Biased treatment for a person who can pay for the kickback & strict treatment for a person who is unable to pay kickback or is unable to help the authorized dealer.
- Risk of compromise in the quality of goods or machinery or services, which may strongly affect the lives of the common man.
- No or low assurance of honest completion of the contract by the vendor or contractor.
- Public safety may be at risk.
How to Control?
- Detection of kickbacks is not as easy as it seems. Thus, whistle-blowers have separate importance in derailing the kickback schemes. Such whistle-blowers are normally backed by ethical principles and are free for investigation of any sort.
- The management should periodically review the third-party vendors by selecting random samples. The management can check for the entity which the vendor owns, his physical address and contact numbers, any reference for the website, authentic information on his website, the price quoted, etc.
- Management can check for whether any vendor is in any way related to the employees of the organization. Such relations can be checked through the ownership details of the vendor company.
- In the case of the introduction of a new vendor in the company books, the entity should have well-placed SOPs to capture every procedure for authentic dealing with the new vendor.
- The vendors should be reviewed periodically to ensure that only a few vendors are not given with most of the contracts, and the contracts are equally spread across the vendors. Also, the supply capacity of each vendor should be checked before providing the contract. Ensure that the prices are checked every time.
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