Bribery in the Construction Industry: Part I Kickbacks

This is the first of a three-part series of articles that will address bribery schemes in the construction industry. Each article will discuss the different types of transactions involving bribery and methods of prevention and detection. Wendell Walters, a former assistant commissioner at the New York City Department of Housing Preservation and Development, pleaded guilty in March 2012 to accepting $2.5 million in bribes. He was arrested in October 2011 on racketeering charges and accused of taking kickbacks from real estate developers in exchange for directing contracts exceeding $22 million to them. In his statement, Walters admitted to helping developers and contractors get on the approval list for city contracts in exchange for cash payments and other benefits. The Brooklyn U.S. attorney in this case also charged six developers with bribing Walters and demanding kickbacks from contractors. In addition, they have been accused of increasing invoice amounts to absorb the costs of the bribes. Bribery falls in the category of corruption fraud. A survey by the Association of Certified Fraud Examiners found that corruption is one of the most prevalent types of fraud in the construction industry: Of all the construction fraud cases involved in the study, more than 30 percent involved corruption. Commercial bribery can be defined as offering, giving, receiving or soliciting anything of value to influence the outcome of a business transaction. Bribery schemes are different from other types of fraud, such as asset misappropriation. The hallmark of bribery is that it requires collusion from at least two partiesusually the entity paying the bribe and the entity receiving the bribe. There are two general types of bribery schemes: kickbacks and bid-rigging. Kickbacks, as in the case of Wendell Walters, are payments (cash or non-cash) by vendors to employees involved in the purchasing function of a business entity. The purpose of the payment can be to obtain additional business from the purchasing company or to obtain the cooperation of the purchasing companys employee in an over-billing scheme through the facilitation of the payment of inflated or false invoices. For example, a subcontractor having completed 100 hours of work on a project submits an invoice for 150 hours.

The bribe recipient, through his level of influence at his place of employment, then processes the approval of the invoice. In other instances, bribes can be offered and paid to facilitate different types of favorable treatment, such as the acceptance of substandard materials or approval of substandard work. Bid-rigging describes schemes that fraudulently influence the awarding of a contract in a bidding process intended to be competitive. Future articles in this series will discuss different types of bid-rigging schemes and methods to prevent and detect them.