EMERGING TRENDS & ISSUES LYING, CHEATING, … · EMERGING TRENDS & ISSUES LYING, CHEATING, AND...
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©2012
EMERGING TRENDS & ISSUES LYING, CHEATING, AND STEALING: WHITE-COLLAR CRIMES OVERVIEW
White-collar crimes are non-violent, often complex criminal offenses involving lying,
cheating, and stealing. This presentation focuses on the investigation, prosecution, and defense of
white-collar crimes. Topics covered will include fraud, corruption, money laundering,
obstruction of justice, and other crimes commonly litigated in federal courts, along with the latest
laws and legal techniques. This session will also discuss cutting-edge issues specific to white-
collar crime concerning criminal law and evidence.
DOUG SQUIRES
Adjunct Professor of Law
Ohio State University Moritz College of Law
Capital University School of Law
Columbus, OH
Doug Squires is an adjunct professor at the Ohio State University Moritz College of Law and
the Capital University Law School in Columbus, OH. At Moritz, Squires teaches white-collar
crime. At Capital, Squires developed and, for eight years, taught a class in forensic evidence, an
advanced evidence course.
Doug has authored several published materials on white-collar crime and fraud, including a
chapter entitled “Forensic Accounting” in Scientific Evidence in Civil and Criminal Cases, the
leading legal text on scientific and technical evidence.
Since 2000, Doug has worked as a federal prosecutor in Columbus, OH. In 2009, Doug
received the U.S. Department of Justice Distinguished Service Award. Prior to that, Doug
worked for seven years as a state prosecutor in California. Doug received a B.A. from Miami
University, Oxford, OH, his law degree from the University of San Francisco School of Law,
and is licensed to practice law in Ohio and California.
“Association of Certified Fraud Examiners,” “Certified Fraud Examiner,” “CFE,” “ACFE,” and the
ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of
this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without
the prior consent of the author.
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NOTES Goals of the Presentation
DESCRIBE modern white-collar crimes
DEBUNK misconceptions and defenses
DELINEATE courses of action
Disclaimer
The views and opinions of the speaker may not necessarily
be those of the U.S. Department of Justice.
What Is WCC?
1939:
Sociologist Edwin Sutherland
“Occupational crime by persons of high social
status”
Emphasis on social status and greed v. other crimes,
which were the result of poverty
Sutherland criticized the notion that all improper
business dealings are only civil wrongs
(Will discuss civil v. criminal in a moment)
Now:
Lying, cheating, and stealing for gain or advantage
Gain–money, but can also be social status, political
advantage
Why Is There WCC?
“Are you kidding!? I couldn’t make this much money
selling crack in Detroit … Besides, this way, no one
shoots me and I get to wear a suit.”
—Fraudster, Proffer Session
Lyin’, Cheatin’, and Stealin’
There is no list of included offenses; it is constantly
changing
Are federal offenses—focus of this lecture
Fed crimes help us examine WCC
Fed juris based on Commerce Clause
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NOTES Defined by U.S. v. Lopez (SCOTUS 1995)
Regular changes to WCC rules and laws
Laws are added
Agg ID theft with two-year minimum
mandatory prison time
Rules are narrowed
Money laundering (will discuss)
“Like music, lying requires exquisite timing, a consistent
beat, and a melodic quality designed to sooth the most
cynical beast.”
—Robert F. Miller, real estate con-artist; statement to the
U.S. District Court, District of Columbia, 1:05CR00143
Mortgage Fraud
What happened?
The perfect storm
Low interest rates
Red-hot housing market
Mortgage origination boom
New products/markets:
Subprime/Alt-A
New lenders and mortgage brokers
Fee-driven system
Lowered underwriting standards
Securitizations
Trends and opportunities need to be
identified
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NOTES Is It a Crime or a Civil Wrong?
Criminal Fraud What is fraud?
Fraud is a deception for personal gain.
Usually very hard to detect.
Can be civil fraud or criminal fraud.
Elements of fraud are:
Lies
Intent that lie be relied upon
Relied upon by target of lie
Damages to person relying on fact
Why Prosecute Criminal Fraud?
Justice/punishment for harm to people and the
public
Deterrence supporting safe markets
What Factors Determine Criminal Fraud?
Black and white lies, cheating, and stealing
Cover-up
No legitimate business
Public official; public money
Civil Law Criminal Law
Burden of proof: "Preponderance of evidence"
"Beyond a reasonable doubt"
Definition: Disputes between people or businesses
Violations of statutes
Punishment: Money or compelled action
Jail or prison
Examples: Landlord/tenant disputes, divorces, child custody, consumer protection
Theft, assault, robbery, drug trafficking
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NOTES What Indicators Occur in Most Frauds?
Concealing assets/unexplained wealth
Two sets of books
Destroying records
Fake documents
Payments to fake companies and people
How Are Most Criminal Frauds Proven? Proof of lies, cheating, and stealing usually
documents with lies or missing documents
Profits shown through books and records “following
the money”
Insiders who can testify:
Those who profited excessively must be
convicted insiders.
Employees receiving only “normal” salaries do
not get prosecuted.
Work “uphill” to get to the lies by bosses.
Which Frauds Are Most Often Prosecuted?
Monetary Loss
Victim harm
Deterrence
Prosecuting Corporations
Historically, a corporation could not be guilty of a crime,
only tort damages = civil money to be paid.
Why Hold a Corp. Criminally Liable?
Deter really bad conduct
Encourage due diligence laws followed
New York Central (SCOTUS 1909) 212 U.S 481
Cited as historical basis for corporate criminal
liability.
Defendants: cannot hold corp. liable
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NOTES Congress passed unconstitutional Elkins Act
Corp. liability punishes innocent stockholders
No due process to be heard
Deprivation of presumption of innocence
Court: Corp. criminal liability found
No valid reason not to punish a corporation
Public policy requires monitoring of ISC
In this case it prevents favoritism
First case to extend corp. criminal liability beyond acts
of omission or regulatory offenses.
Deterrence
Does holding corp. liable have general and specific
deterrence?
General: deter others from committing crime
Specific: deter the corporation from future crime
Issue: findings of criminal liability are death
sentence
What Individuals Often Get Prosecuted?
Rogue employees
Should there be a “good faith” defense for
corps?
Not for employees that can “bind” corp.
Big heads
How profited and how much?
Beyond “normal” salary
Commissions and backdoor deals
Button pusher or decision maker
Money Laundering Update
Deferred Prosecution Agreements
Non-prosecution agreements with contingencies,
usually the payment of money in exchange for an
admission of wrongdoing and forgoing future
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NOTES conduct = do this/don’t do this and you will not be
prosecuted
The February 2009 UBS Deferred Prosecution
Agreement
The bank admitted to helping U.S. taxpayers hide
accounts from the Internal Revenue Service (IRS), and
agreed to identify customers and pay $780 million.
UBS AG, Switzerland’s largest bank, entered into a
deferred prosecution agreement on charges of
conspiring to defraud the United States by impeding the
IRS and the Justice Department.
As part of the deferred prosecution agreement and in an
unprecedented move, UBS, based on an order by the
Swiss Financial Markets Supervisory Authority
(FINMA), agreed to immediately provide the U.S.
government with the identities of, and account
information for, certain U.S. customers of UBS’ cross-
border business. Under the deferred prosecution
agreement, UBS also agreed to expeditiously exit the
business of providing banking services to U.S clients
with undeclared accounts. Also, UBS agreed to pay
$780 million in fines, penalties, interest, and restitution.
A criminal information was unsealed that charged UBS
with conspiring to defraud the United States by
impeding the IRS. In 2000, after it purchased the
brokerage firm Paine Webber, UBS voluntarily entered
into an agreement with the IRS that required the
reporting of income and other identifying information
for its U.S. clients who held U.S. securities in a UBS
account. Court documents allege that the agreement
also required UBS to withhold income taxes from U. S.
clients who directed investment activities in foreign
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NOTES securities from the United States. The information
further asserts that, in order to evade those new
reporting requirements, employees and managers within
the cross-border business, with the knowledge of
certain UBS executives, helped U.S. taxpayers open
new UBS accounts in the names of nominees and/or
sham entities. According to court documents, the assets
of the individual’s accounts were then transferred to the
newly created accounts, as to which the U.S. taxpayer
would not be identified as a beneficiary.
The information asserts that this device was used by
UBS to justify evading its reporting obligations and
helped U.S. taxpayers to continue to conceal their
identities and assets from the IRS.
The information also alleges that Swiss bankers
routinely traveled to the United States to market Swiss
bank secrecy to U.S. clients interested in attempting to
evade U.S. income taxes. Court documents assert that,
in 2004 alone, Swiss bankers allegedly traveled to the
United States approximately 3,800 times to discuss
their clients’ Swiss bank accounts. The information
further alleges that UBS managers and employees used
encrypted laptops and other counter-surveillance
techniques to help prevent the detection of their
marketing efforts and the identities and offshore assets
of their U.S. clients. According to the information,
clients of the cross-border business in turn filed false
tax returns, which omitted the income earned on their
Swiss bank accounts and failed to disclose the existence
of those accounts to the IRS.
The DPA specified that in light of the bank’s
willingness to acknowledge responsibility for its actions
and omissions, its cooperation and remedial actions to
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NOTES date, and its promised continuing cooperation and
remedial actions, the government will recommend
dismissal of the charge, provided the bank fully carries
out its obligations under the agreement.
At the time, a press release noted, “Today’s agreement
is but one milestone in an ongoing law enforcement
effort to reassure hard-working and law-abiding
taxpayers who pay their fair share of taxes that those
who don’t will pay a heavy price,” said John A.
DiCicco, Acting Assistant Attorney General of the
Justice Department’s Tax Division. “The veil of secrecy
has been pulled aside, and we will continue to
aggressively pursue those who shirk their federal tax
obligations or assist others in doing so.”
“UBS executives knew that UBS’ cross-border business
violated the law,” said R. Alexander Acosta, U.S.
Attorney for the Southern District of Florida. “They
refused to stop this activity, however, and in fact
instructed their bankers to grow the business. The
reason was money—the business was too profitable to
give up. This was not a mere compliance oversight, but
rather a knowing crime motivated by greed and
disrespect of the law.”
UBS Summary
Severely impacted Swiss bank secrecy
UBS Switzerland’s largest bank
Entered into DPA for impeding IRS in
collection of taxes
Agreed to:
Provide identities and account info. For certain
U.S. customers of UBS cross-border businesses
Stop “undeclared accounts”
Pay $780 million in fines, interest, and rest.
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NOTES Arthur Anderson LLP
Destroyed docs after the noticed investigation of
Enron
Charged with obstruction of justice 18 U.S.C.
1512(b)
Turned in CPA license
SCOTUS reversed, but the partnership did not
survive
Led to creation of 18 U.S.C. 1519
Alteration/destruction of docs in federal
investigation or bankruptcy proceeding
FBAR—Foreign Bank Accounts
Must be reported when filing taxes
The Report of Foreign Bank and Financial
Accounts (FBAR) is required when a U.S. citizen
has a financial interest in or signature authority over
one or more foreign financial accounts with an
aggregate value greater than $10,000. If a report is
required, certain records must also be kept.
In April 2003, the IRS was delegated civil
enforcement authority for the FBAR.
Statutory authority for FBAR
U.S.C. § 5314 the United States Code
F.R. Part 103, the Code of Federal Regulations
A financial account includes:
A bank account, such as a savings, demand,
checking, deposit, time deposit, or any other
account maintained with a financial institution
or other person engaged in the business of a
financial institution. A bank account set up to
secure a credit card account is an example of a
financial account. An insurance policy having a
cash surrender value is an example of a financial
account.
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NOTES Securities, securities derivatives, or other
financial instruments accounts qualify.
Other financial accounts generally encompass
any accounts in which the assets are held in a
commingled fund and the account owner holds
an equity interest in the fund. A mutual fund
account is an example of such an account.
Individual bonds, notes, or stock certificates
held by the filer are not financial accounts.
Public Corruption
Lyin’, Cheatin’, and Stealin’ for Personal Gain: Money
or Improved Position
The Hobbs Act (18 U.S.C. § 1951) prohibits actual or
attempted robbery or extortion affecting interstate or
foreign commerce.
“Extortion” obtaining property by actual or
threatened force; or “under color of official right”
McCormick v. U.S. (SCOTUS 1991)
West Virginia legislator alleged to take
payments from foreign docs
State shortage of docs, so legislation considered
to grant foreign medical grads WVA licenses
Some money not on books as campaign
contributions given as cash in envelopes and not
reported as income
SCOTUS focused on “under color of official
right” language and if it includes campaign
contributions
jury instruction said Hobbs Act violation lies
where McCormick induced cash payment by
extortion
Finding: quid pro quo is necessary to prosecute
for accepting a campaign contribution
Benefit or advantage in exchange for money
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NOTES Evans v. U.S. (SCOTUS (1992)
One year after McCormick
Justice Stevens dissented in McCormick
Authors majority opinion here
County commissioner charged with Hobbs Act
and failure to report income on return
Court focuses on term “inducement” and
whether an affirmative act of inducement is an
element of the offense
Undercover FBI gave $8,000, only $1,000
reported as campaign and tax forms
Lower courts split on if affirmative act by a
public official is required
Majority say a “passive acceptive” okay;
SCOTUS agrees
Some require an affirmative act of
inducement by the public official to support
an extortion charge premised upon “under
color of official right”; this is rejected
Gov. must only show: a public official has
obtained a payment to which he was not
entitled, knowing the payment was made in
return for official acts = quid pro quo of
McCormick
Entrapment as a Defense
In Evans, FBI undercover posed as real estate
developer.
Entrapment at issue
Entrapment can be a complete defense to a crime if
two related elements exist:
Gov. inducement of the crime
Defendant’s lack of predisposition to engage in
the criminal conduct
Okay for government agents or decoy to:
Engage in crime
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NOTES Offer crime
But cannot:
Persuade person to do crime
Or otherwise deceive person to commit crime they
had not intended to commit
The Attorney-Client Privilege
The privilege is designed to promote and facilitate an
individual’s ability to seek legal advice, knowing that
all matters can be discussed candidly and completely
with counsel. This is perfected by protecting disclosure
under most circumstances. (Upjohn v. United States,
449 U.S. 383 (1985)
Although the privilege is designed to provide
confidentiality, its purposes are subverted where the
assertion of the privilege is designed to provide a cloak
of secrecy around the illicit business affairs of an
individual or corporation.
Lawyers have an ethical duty to maintain the privilege
that is shared by the agents of either the lawyer or client
who come into possession of such information. The
courts have long recognized that modern legal practice
requires lawyers to rely upon the services of non-
lawyers. This may include secretarial personnel,
interpreters, investigators, law clerks and accountants.
(United States v. Cote, 456 F.2d 142 (8th
Cir. 1982)
The December 2006 “McNulty Memo” drew criticism
for inadequately protecting the attorney-client privilege
in federal prosecutions since the memo specified that
corporate voluntary production of such information
would be considered in a calculation of “cooperation”
to be ultimately considered in charging decisions. Since
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NOTES August 2008, cooperation will no longer be measured
on whether a corporation under criminal investigation
chooses to waive the attorney-client privilege, nor will
attorney-client or work product materials be demanded.
(USDOJ DAG Mark R. Filip, Principals of Federal
Prosecution of Business Organizations, August 28,
2008, the “Filip Memo.”)
The Accountant-Client Privilege
Federal courts have refused to recognize a pure
accountant-client privilege. (United States v. Arthur
Young & Co., 465 U.S. 805, 836 (1984); United States
v. Mihalich, 2006 WL 2946947)
A limited federal privilege exists extending to tax
advice under the Federally Authorized Tax Practitioner
Privilege, which does not apply to criminal matters or
state tax proceedings.
If a crime involves specific-intent, a defense of good
faith reliance on the advice of an accountant is available
if the defendant fully disclosed all facts to the
accountant, and relied on the account advice in good
faith. (United States v. Duncan, 850 F.2d 1104 (6th
Cir.
1988)
The defense can negate a crimes element requiring
specific intent where the defendant shows she relied on
the advice of her attorney, accountant, or state official
in taking certain actions. (United States v. Swafford,
2005 US. Dist. LEXIS 26890 (E.D. Tenn. Nov. 3,
2005). (See Hot Topic.)
For example, Ohio Senate Bill 371(2008) would have
created an accountant-client privilege, which is the
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NOTES trend in about half the states. The measure would have
little impact on federal cases.
Advice of Counsel as a Defense
The advice-of-counsel defense allows a defendant to
show that there was no wrongful intent underlying his
unlawful actions. The defense proposes that the
defendant lacked the intent needed to commit the
offense, or, in the civil context, that the defendant
lacked the specific state of mind required (or
conversely, acted in “good faith”).
The defense is not always an affirmative defense, but
rather negates an element of the offense itself.
A corporate employee may assert the defense to any
criminal charges or civil suit brought against them,
even if there is no direct attorney-client relationship
between themselves and the corporation’s counsel.
A defendant must show that he fully disclosed all
material facts to his attorney before seeking advice, and
actually relied on his counsel’s advice in the good faith
belief that his conduct was legal.
The Hot Topic of Waiver of Privilege
Raising the advice-of-counsel defense means the
defense generally waives the attorney-client privilege
protecting communications between a client and his
counsel because the client is putting the contents of
those communications at issue by asserting the defense.
For executives, the issue of waiver is made difficult
because the lawyers they often rely upon represent the
corporation, not its executives. It is not clear if
executives can raise the defense in each instance if the
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NOTES executive could not force the corporation to waive the
attorney-client privilege. This creates a problem
because corporate directors and employees frequently
rely on the advice of their corporation’s legal counsel in
matters that could expose them to personal liability.
Courts have been inconsistent as to whether and to what
extent an individual asserting an advice-of-counsel
defense may introduce privileged communications
against the wishes of the corporate privilege holder.
In United States v. W.R. Grace, the district court framed
the question this way: “Whether and under what
circumstances the attorney-client privilege must give
way to a criminal defendant’s Sixth so that a balancing
test should be used to determine when the defendant’s
right to present exculpatory evidence may trump the
corporation’s right to maintain attorney-client
privilege.”
In Ross v. City of Memphis, the Sixth Circuit reversed
the Ross court and held that the corporation’s privilege
could not be made to yield for the defendant, no matter
how much she needed the documents for her defense
because “[a]n uncertain privilege, or one which
purports to be certain but results in widely varying
applications by the courts, is little better than no
privilege at all.”
Practice Pointer
Some commentators suggest executive employment
contracts should specify that directors and corporations
should contract that the corporation will waive its
attorney-client privilege if the director, sued in her
individual capacity, needs to raise an advice-of-counsel
defense.
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NOTES Fraud and Intangible Rights
McNally voided use of intangible rights in 1987
Demonstrates how legislation reacts to
SCOTUS decisions
McNally voided mail fraud prosecution
For intangible rights
Immediately after opinion in 1988
Congress enacted 18 U.S.C. 1346
18 U.S.C. Sec 1346
For mail, wire, and bank fraud as “scheme to
defraud” includes a scheme to deprive another
of the “intangible right of honest services.”
Politicians who profit or better their position by
depriving the public of the intangible right of
honest services are engaged in a scheme to
defraud under mail, wire, and bank fraud
statutes.
Skilling v. U.S. (SCOTUS 2010) 130 S.Ct. 2896 (June
24, 2010)
SCOTUS rejected the vagueness challenge, but
interpreted 1346 to criminalize “only the bribe-and-
kickback core of the pre-McNally case law.”
A violation of 1346 requires the defendant to
receive clear bribes or kickbacks from an insider to
the fraud, in addition to the deprivation of honest
services.
1346 attacked as vague, overbroad, and limited.
Some commentators urge, you need a clear shoebox
full of money for illegitimate promises for an 18
U.S.C. 1346 conviction.
What Are “Intangible Rights as Property?”
Items connected to duties owed to the public and
others, like shareholders.
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NOTES One example is the development of insider trading
as a form of securities fraud.
In 1980s, cases developed a misappropriation
theory:
Cases concentrated on the duty owed to
shareholders by an insider and by individuals
receiving info. from the insider.
Most courts found there must be a duty owed for a
finding of insider trading liability.
Some appellate courts found insider trading liability
based on a misappropriation theory:
“A person who has misappropriated nonpublic
information has a duty to refrain from trading on
it.”
A Reversal and Acquittal After Skilling
On November 16, 2011, the Second Circuit reversed
and dismissed the conviction of former New York State
Senate Majority Leader Joseph L. Bruno for theft of
honest services fraud on his failure to disclose alleged
conflicts of interest.
The reversal was based on the Supreme Court decision
in Skilling, which limited 18 U.S.C. 1346, the honest
services statute, to cases involving bribery and
kickbacks.
Even though some circuit courts have upheld honest
services fraud convictions over Skilling challenges, the
reversal here was no surprise to some since, among
other things, the government conceded error.
Bruno argued that if there was insufficient evidence at
trial to justify a conviction under the Skilling bribery
and kickback theory of honest services fraud, the Court
must bar retrial on double jeopardy grounds. The
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NOTES government argued that sufficiency review under a
standard different from that at the time of trial was
inappropriate and unfair. (The defense did not contend
there was insufficient evidence based on the law at the
time of trial.) At oral argument, the government stated
that the evidence at the new trial would be the same as
in the first.
The Court, declining to enact any black letter law, and
relying considerably on the government’s concession
that the evidence would not change at a second trial,
agreed to analyze the sufficiency of evidence based on
the new, narrower Skilling standard. Nonetheless, after
reviewing the facts, the Court held that the evidence
was sufficient under that standard. Bruno, therefore,
won the battle, but lost the war. The government
announced that it will re-indict him under an honest
services fraud theory based on bribery and kickbacks.
Also in November 2011, a Southern District of New
York jury acquitted William Boyland, Jr., a New York
State Assemblyman, of honest services fraud for
allegedly receiving bribes from David Rosen, the chief
executive of a hospital conglomerate, apparently
because of lack of sufficient proof of a quid quo pro.
Other Charges Used in Public Corruption Cases
Bribery
18 U.S.C. Sec 666—theft or bribery concerning
programs receiving federal funds; 10 years
maximum
Congress enacted 18 U.S.C. § 666 to “protect the
integrity of the vast sums of money distributed
through federal programs from theft, fraud, and
undue influence by bribery.”
Elements:
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NOTES If program receives $10,000 or more in year and
$5,000 or more is at issue
Agent solicits, embezzles, or steals
Person corruptly gives with the intent to
corruptly influence
DOJ policy limits prosecutions “to cases in which
the federal assistance is given pursuant to a specific
statutory scheme that authorizes assistance to
promote or achieve policy objectives. The statute
was not intended to reach every federal contract or
every federal disbursement.”
And to lesser extent:
18 U.S.C. 1001—false material statement or
false writing or document to a federal officer
(exec., leg., or judicial branch); 5 years
maximum
“Federal contempt of cop” charge
Kickbacks
Drive up costs and are ethically bent
The Anti-Kickback Act of 1986, 41 U.S.C. §§51-58
Provides criminal (and civil) penalties for
paying or receiving kickbacks in federal
procurements.
10 years maximum for criminal violation.
Civil recovery of twice the bribe and $10,000
fine for each transaction.
Cases supervised in the Federal Procurement
Fraud Unit in the DOJ Fraud Section.
Protects the integrity of all U.S. government
contracts and subcontracts.
Includes contracts and subcontracts for
“supplies, materials, equipment, or services
of any kind.” [41 U.S.C. § 52(4) & (7).]
Prohibits the solicitation, acceptance, payment,
or offer to pay a kickback.
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NOTES Id. § 53(1) & (2). Also prohibits including
the amount of any “kickback” in the contract
price. Id. § 53 (3).
Kickback is defined in § 52(2) 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 subcontract.
This is the commercial equivalent of bribery. A
contractor who is willing to pay a bribe to a
government official to obtain a government contract
might also be willing to accept a kickback from a
subcontractor, perhaps to help defray the cost of the
bribe.
Note civil kickback penalties under:
Medicare Anti-Fraud and Abuse Act 42 U.S.C.
1320a-7b:
No money for referral of Medicare patients
Stark II 42 U.S.C. 1395nn
No physical self-referrals