Kickback Understanding and Risk Prevention

The term ‘kickback’ is defined by Public Law 99-634 as any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind which is provided directly or indirectly, to any prime contractor, prime contractor employee, subcontractor or subcontractor employee for the purpose of improperly obtaining or rewarding favorable treatment in connection with a prime contract or in connection with a subcontract relating to a prime contract.”

What is explicitly prohibited is for any person or persons to: (1) provide, attempt to provide or offer to provide any kickback; (2) solicit, accept or attempt to accept any kickback; or (3) to include, directly or indirectly, the amount of any kickback in the contract price charged by a subcontractor or a prime contractor or a higher tier subcontractor or in the contract price charged by a prime contractor of the United States.

The Public Law goes on to state that contractors, through contractual terms shall: (1) have in place reasonable procedures (and practices) designed to prevent and detect violations; (2) cooperate fully with any Federal government agency investigating a violation; and (3) report the possible violation in writing to the Inspector General of the contracting agency.

Both criminal and civil penalties can be assessed.  Any person knowingly and willfully engaging in the prohibited conduct shall be imprisoned for not more than ten years or be subject to fines or both.  Civil penalties for any person shall be assessed at twice the amount of the kickback involved and be not more than $10,000 for each occurrence.  A civil penalty may also be assessed on any person whose employees, subcontractors, or subcontractors employees violate the Public Law.

Kickbacks can and do involve all functional areas of a business, not only procurement but those personnel defining procurement specifications, requirement levels, timing and even the need to procure an item or service at all through a make-or-buy decision.  Kickbacks are hard to detect and standard financial audits or contractor purchasing system reviews (CPSRs) are not designed to or likely uncover them.

As a contractor wanting to minimize the risk of non-compliance with Public Law 99-634 you should:

• Develop and implement a strong code of business ethics and conduct addressing a commitment to compliance with the anti-kickback act;
• Document the process for determining the need to procure outside products or services through the thorough make-or-buy decision making and source selection;
• Define required levels of approval authority for all outside procurement and make-of-buy decisions;
• Establish the process for disclosing possible non-compliances in a timely manner and through what channels;
• Provide training to all relevant employees and subcontractors as to the nature and intent of the anti-kickback compliance requirements;
• Modify purchase order boilerplate and subcontract agreements to include an acknowledgment of your anti-kickback requirements and their certification of understanding and commitment to compliance.

To establish a compliance monitoring and detection process, contractors need to identify areas of potential non-compliance with the anti-kickback requirements.  The risk identification process should include:

• Circumvention of the proceduralized source selection process;
• Improper disqualification of bids;
• Insufficient sole-source rationale;
• Lack of the proper level of approval authorization;
• Missing or incomplete cost/price analysis;
• Validation of proper and complete sequential date/time;
• Confirmation of the bidders qualifications;
• Identify alternating courtesy bidding practices by vendors;
• Repetitive procurements with values marginally below established approval levels;
• Consistent and repetitive timing of procurements by the same buyer (person) with specific suppliers;
• Unauthorized change orders revising order value and/or scope;
• Evidence of bid revision (bumps) to assure a specific supplier is the “low bidder”;
• Specifications developed to restrict competitive bidding;
• Proper recognition of supplier qualifications;
• Identify split bidding and procurement; and
• Leaking of bid information.

Awareness of the potential risk of kickbacks and the warning signs that may exist along with established policies and practices designed to detect non-compliance goes a long way toward avoiding these situations.