Kickback Meaning
Kickback is an unethical payment for obtaining preference over some capable person for any discriminatory or special treatment for supplying any goods or service or getting any work done. It can be in cash, credits, goods, preferential allocation, or any other valuable material or service. According to the law, these practices are termed as anti-competitive practices or even bribery.
It 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, a kickback fee is a commission paid for getting something done by a person through unethical means.
Table of contents
- Kickback Meaning
- How does it Work?
- Kickback Examples
- Forms of Kickback
- #1 – Medical Industry
- #2 – Financial Institutions
- #3 – Public Works
- #4 – Securities Market
- #5 – Government Contract
- Threat
- How to Control?
- Recommended Articles
Key Takeaways
- Kickback is a form of bribery where someone gives or receives something of value in exchange for an illicit or corrupt favor or service. This payment can be in cash, credits, goods, preferential allocation, or other valuable materials or services.
- The illegal payment receiver returns a specific amount as a commission to the bribe-taker, who assists the recipient. Thus, it is a commission paid.
- Advertising business and stock broking are examples of kickbacks.
- The medical industry, financial institutions, public works, securities market, and government contracts are forms of kickback.
Kickbacks Explained
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 fee for a high-cost inflated project will provide a better quality of projects to the public.
Thus, kickback starts with the intention of the player or receiver. The payment is normally referred to as commission in some other form.
Some of the well-known 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
- VendorsVendorsA vendor refers to an individual or an entity that sells products and services to businesses or consumers. It receives payments in exchange for making items available to end-users. They constitute an integral part of the supply chain management for providing raw materials to manufacturers and finished goods to customers.read more directly contact the employees outside theThe 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 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
Examples
Let us understand the concept of a kickback scheme with the help of a couple of examples. These practical examples will help us understand that such unethical schemes and practices are prevalent across industries and at different levels.
Example #1
Aaron & Finch Co. a stockbrokerStockbrokerA stockbroker is an individual or company qualified enough to trade securities in the financial markets on behalf of financial institutions, individual and institutional investors, and organizations. They can work either independently as a professional trader or broker-dealer or associate with a brokerage firm.read more, executes all their trades on behalf of their clients through a particular exchange as a kickback arrangement has been made between the two parties.
Other exchanges with better payment systems, interface and user experience are ignored for an exchange with somewhat lesser efficient systems than its competitors only because such an arrangement has been made.
Despite the high charges, Aaron & Finch Co. recover the costs easily by executing smart trades and charging their clients a premium. These arrangements never saw the light of the day as clients were happy to see their investments grow despite the high charges and all parties were left satisfied even though an unethical practice was being carried out on a daily basis.
Example #2
Adobe, the tech giant company was accused and convicted of running a kickback scheme through its solution partner program. They have contractual relationships with government employees through which they were able to have undue influence over federal purchases of software provided by Adobe.
Since such arrangements increase the cost of purchase and thereby, the cost is increased for the taxpayers as well, the Us Department of Justice keeps a close eye on arrangements of this sort.
As a result, Adobe was directed to pay a fine of $3 million towards resolving the false claim act allegations against them.
Forms
As we have understood from the discussion so far, kickback schemes are prevalent across industries and come in different forms. Let us understand the most common forms of such arrangements through the explanation below.
#1 – Medical Industry
Federal healthcare fraud in the US is famous for such kickbacks. Fraudulent referral schemes are announced, which ultimately land up bribing the service recipient. 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 kickbacks are most frequent in case contracts entered into by local governments. The authorized dealers enter into the highly inflated cost for the construction of roads with lower quality &, in effect, get the kickbacks from the contracts for the benefit passed on.
#4 – Securities Market
It 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 kickbacks are common in health care schemes, infrastructure facilities, or defense or educational facilities.
Threat
It is quite obvious that these arrangements are a threat to consumer belief on the system as well as the morale of people working within such organizations. Let us understand the larger picture and how these unethical arrangements are threats to the market and the economy on the whole.
- Discriminatory treatment for a person who can pay for the kickback & strict treatment for a person who cannot pay the kickback or cannot help the authorized dealer.
- The risk of compromise in the quality of goods, machinery, or services may strongly affect the lives of the common person.
- There is no or low assurance of honest completion of the contract by the vendor or contractor.
- Public safety may be at risk.
How to Control?
As government officials, business people, and common citizens of an economy, it is important for us to understand how to control and even better, hoe to completely negate these arrangements. Let us do so through the points below.
- Detection of kickbacks is not as easy as it seems. Such whistle-blowers are normally backed by ethical principles and are free of investigation of any sort. Thus, whistle-blowers have particular importance in derailing kickback schemes.
- The management should periodically review the third-party vendors by selecting random samples. The management can check for the entity 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 related to the employees of the organization. Such relations can be checked through the ownership details of the vendor company.
- In the case of introducing 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.
- Ensure that the prices are checked every time. 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.
Frequently Asked Questions (FAQs)
Yes, kickbacks are unethical practices in real estate. The Real Estate Settlement and Procedures Act (RESPA) prohibits the payment or receipt of kickbacks or referral fees in connection with a real estate transaction that involves a federally related mortgage loan.
Kickback and bribery are similar in that they both involve exchanging something of value for a corrupt one. However, they are not the same. Bribery refers to giving or receiving something of value to influence someone in a position of power to act in a particular way. While both kickbacks and bribery are illegal and unethical, Kickbacks often involve an intermediary who helps facilitate the transaction.
Kickbacks are generally considered taxable income and must be reported on a tax return. Therefore, if a person or company receives kickbacks and fails to report them as income on their tax return, they could face penalties and interest on the unpaid taxes.
Recommended Articles
This has been a guide to What is Kickback & its Meaning. Here we explain its examples, forms, threats, and how to control it in detail. You can learn more about from the following articles –
- Business Ethics
- Ethical Investing
- Accounting Ethics
- Whistleblower Policy
This post first appeared on Free Investment Banking Tutorials |WallStreetMojo, please read the originial post: here
