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Corruption (Kick-Back)
Corruption (Kick-Back)
Source:https://www.investopedia.com/terms/k/kickback.asp
Kickbacks can also be used to buy a positive recommendation for the kickback provider. For
example, a government employee responsible for managing contractors on an infrastructure
project–such as the building of a bridge–might receive a kickback for choosing one
contractor over another. This may result in a better-qualified contractor not winning the bid.
ontracts can be fertile ground for kickback schemes. For example, in the granting of a
government contract for office equipment, contractors interested in winning the business are
typically required to bid against each other. Rather than playing fair, a contractor might reach
out to a procurement officer and indicate that, if the contractor were to win, the officer would
be rewarded. The reward might be cash, concert tickets, etc.
These are some common kickback warning signs. They don't necessarily mean that
anything nefarious is going on, but the more of them there are, the greater the likelihood of a
kickback scheme.
Kickbacks increase the cost of doing business in countries around the world; they also 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 officials 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, they may be poorly paid and see kickbacks as a way to
supplement a meager salary.
Even if it is the local custom, the U.S. Foreign Corrupt Practices Act makes bribing foreign
officials illegal for all companies listed with the Securities and Exchange Commission (SEC),
any company organized in the United States, or any citizen or resident.1
Example of a Kickback
On Wall Street, brokers sometimes route all orders to a particular exchange (even though
they are required by law to execute trades with the one that offers the best terms, or
best-execution, for their clients). Rather than choosing the exchange that offers the most
competitive price and has the highest likelihood of completing the trade in a timely manner,
the broker may take a kickback in exchange for routing all of their trades to that particular
exchange. This can ultimately lead to slower execution and higher transaction costs for
clients. The industry refers to the practice as "rebates." While rebates may amount to only a
fraction of a cent of each share traded, over time, considerable sums can be accrued.
In the advertising business, kickbacks can take 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.