Identifying and Understanding Kickback Schemes

In September of 2020, a high ranking official of the Houston Independent School District was accused of participating in a cash kickback scheme. Allegedly, the official worked with a landscaping contractor to approve and pay for phony proposals from the contractor. The jobs for which the contractor was paid were done, at times, by school district employees instead. The contractor would then, allegedly, provide the official with kickbacks in the form of multiple cash deposits to bank accounts controlled by the school official. During the FBI investigation, a reported total of more than $186,000.00 was seized from the official and the contractor.

Defining Kickback Schemes

The case in the Houston ISD, is a prime example of a kickback scheme. While these schemes can take many forms, they tend to follow some of the same key characteristics. Two parties, usually a vendor and an employee of the victim company, collude to overbill the victim company. The fraudster at the victim company then receives a “kickback” payment (money, gifts, favors, etc.) from the vendor for their role in the scheme.

One of the most common and straightforward kickback schemes involves a vendor submitting a fraudulent invoice to an organization. An employee of the organization then approves and pays the invoice and receives a kickback from the vendor.

A more involved scheme, known as a “Vendor-in-the-Middle” scheme, involves an employee of the victim organization creating a company that buys goods from a foreign vendor and sells them to the victim organization at a markup. The fraudster then pockets the excess monies.

Another common kickback scheme occurs when vendors submit an invoice that overstates costs, quantities, or sales. An employee of the invoiced organization then ensures payment on the invoice and receives a kickback from the vendor. Similarly, vendors can steal by submitting  a falsified invoice that understate costs, quantities, or sales.

Identifying Kickback Schemes

  • Providing an anonymous tip line for employee fraud can ensure employees who suspect or discover kickback schemes have a means of reporting.
  • Performing regular inventory counts can help identify irregularities that could indicate a kickback scheme is occurring.
  • Being aware of employee behavior changes, such as an employee suddenly living beyond their means, can provide indicators of receiving kickbacks.
  • Receiving multiple or conflicting invoices should provoke suspicion.

SDC CPAs has handled many claims related to kickback schemes and advises that they can often be spotted and unraveled with vigilance, good bookkeeping, and professional assistance.

Posted in: