Question

Fraud case - A USA public company doing business in Freedonia (a made up name from another Marx Brothers movie!) is compelled to bribe local officials in order to be the first to receive a business license for a certain type of industry there. The competition is fierce, but local government officials have unabashedly spread the word that under the table bribery payments to them from the USA company can seal the deal and that's why the USA company is feeling the pressure to participate in the bribe. This would be a violation of the FCPA.

The USA company participates in the fraud, bribing the government officials sufficiently to get the license first, before their competition. The payments are on the books, but hidden, so to speak, in order to get the tax deduction. The payments are cleverly disguised in the expense accounts to appear as normal expenditures. Foreign Corrupt Practices Act (FCPA), we saw that a key to reducing the penalty is through keeping books and records that are clean and transparent

You are the USA government investigator searching for the fraud after the US government has been tipped off that the fraud happened in Freedonia.

1. What income statement expense accounts would you research for evidence of bribery payments being made even though not so indicated as bribery payments?
2. What type of evidence would you be looking to gather to prove the case?

Answer 1

Corruption is a major economic and legal risk for business organizations that do business in the nation and around the world. While it may be found to affect the developed countries, it is even more detrimental to the interests of the transitioning and developing nation. The Security and Exchange Commission (SEC) and the United States Department of Justice have undertaken several measures for reducing corruption through prosecutions for the violation of FCPA (Foreign Corrupt Practices Act- a US Federal law enacted in the year 1977) and through investigations and settlements. The FCPA has both accounting requirements as well as anti-bribery provisions. The FCPA prohibits all kinds of payment with a corrupt motive, and its provisions apply worldwide.

1. The two types of accounts found in the General Ledger Accounts include the "Income Statements Accounts" and the "Balance Sheet Accounts".

Income statement accounts are used for storing and sorting transactions that may involve operating revenues and expenses. and nonoperating revenues, gains, expenses, and losses. The companies use the income statement accounts for reporting revenues as well as expenses, for the departmental, product, division other divisions, and budgeting. The expenditures may be denoted as salaries, expenses, cost of goods sold, fringe benefits expense, wages expense, utility expense, rent expense, automobile expense, advertising expense, interest expense, and depreciation expense, among others. These expenses are the cost that a business has to incur for generating revenues. They can be the operating expenses, or the non-operating expenses (for instance expenses made in the secondary activities including income tax payment).

Corrupt payments such as bribery can be made from both "on-book" or the "off-book" accounts. The on-book illicit payments are made from the disclosed accounts of a business and the payment is recorded in the books in certain guises to impart it the requisite legitimacy. The payments may be disguised as expenses in the form of legitimate fee, commission, payment to a ghost employee, payment to a subcontractor, or may be made from an affiliate/subsidiary and subsequently go through the many different intermediaries so that the tracing becomes difficult. Many different expenses accounts can be used for hiding the bribery payments where tracing is not easy.
Therefore all kinds of expenses accounts need to be carefully scrutinized. Payments should be investigated and confirmed through tangible and evidence including invoices and payment slips, salary slips, etc that may be reported digitally or in ledgers. The recipients should also be questioned to know whether the payments were made or not. For instance, a sub-contractor may be questioned for the payment he or she received. Other aspects may also be check, for instance in the case of ghost-employee payment there would be no entity present that would have received the payment.

An off-book payment is not recorded in the accounting books and is also made from funds are accounts that may provide for it. The undisclosed income from the unrecorded sales, slush funds, and other unrecorded transactions may be used for an off-book payment and these are often made in cash. The investigator will have to scrutinize the expenditures to know the illegal payments. He/she will have to find out the hidden sources of funds and the off-book accounts that may be used for bribing purposes. Evidence may be gathered from the former and current accountants, customers, and bookkeepers.

2. Demonstrative, documentary, real, and testomonial evidences can be gathered for proving the case. For instance, interviews with the concerned recipient of payments can be recorded, which would help the court know whether the concerned party (for instance a subcontractor) received the payment or not. Evidences may also take the form of salary or payment slips and invoices among others that were issued/received/recorded but the funds were never actually transferred or were issued to a party that never existed.

Hence evidence can be agthered through:

a. Interviews or testimonies.
b. Interrogations, by questioning the accountants and other relevant parties and stakeholders.
c. Inquiries made with the concerned parties.
d. Searches, by searching the cloud, digital, and physical accounting books, premises, etc.
e. Document examination, as in the case of examination of the accounting books.
f. Forensic expertise and evidence.

Wiretapping and communication interceptions, surveillance, eavesdropping, sting operations, and other measures can also be used for gathering evidence.