How to Prove Illicit Payments from the Point of Payment

This approach is preferred if the suspected payer is known, is a relatively small and financially-uncomplicated business and its records are accessible through audit rights, subpoena or otherwise.

Before beginning the tracing process, examine the suspect company’s methods of operation to determine the most likely method of payment, e.g., cash or wire transfer, direct or through an agent, etc.

“On Book” and “Off Book” accounts 

Corrupt payments can be made from on book or off book accounts.

“On book” payments are made from the disclosed accounts of the payer and recorded on its books. They will usually be disguised as some type of legitimate fee or commission, such as a payment to a subcontractor (real or fictitious) or to a ghost employee.  They may be made from an affiliate or subsidiary and go through several intermediaries.

“Off book” payments are made from accounts or funds that are not recorded on the disclosed books of the payer.  They might be drawn from slush funds, undisclosed income from unrecorded sales or from other unrecorded transactions and often are  in cash.

If “on book” payments are suspected, the challenge is to identify the illegal transactions on the books of the payer and trace them to their destination.  This requires the investigator to scrutinize the payer’s expenditures to determine which are the illegal payments.

If “off book” payments are suspected, the challenge is to find the off book accounts or hidden source of funds.  This evidence often comes from the payer’s current or former accountants, bookkeepers or customers. 

Steps to Prove Illicit Payments from the Point of Payment

Use the document collection methods discussed in Step Six, above – the exercise of audit rights, the issuance of a subpoena by a law enforcement agency or a simple request for the documents – to obtain the following records from the company or entity suspected of making the payments:

• Bank account records – e.g., account opening documents, signature cards, monthly account statements, deposits, disbursements, checks, wire transfer records, check registers and other payment records.  If requesting documents from a bank, it is usually best to request the monthly account statements first, from which other items of interest (deposit items, disbursements, withdrawals, etc.) can be identified and requested.
• Company backup documentation – invoices and supporting documents, 1099 US tax forms (which reflect the payment of commissions)
• Company accounting records – cash disbursement journals and ledgers
• Company correspondence and contract files – including memos and other contract documentation, including travel and expense records, if pertinent.

The actual bank account records – cancelled checks, deposit items, wire transfer requests, etc. – are the most important and the place to begin.

Look for:

Payments to middlemen, agents or brokers

Probably the most common way to pay large bribes.  It offers the paying party a certain amount of insulation, as the payer can claim that it didn’t know how the middleman disbursed the funds, and did not authorize – perhaps even forbid, at least on paper – the bribe payments.

Look for larger than customary fees to local agents, agents that lack substantial business backgrounds or permanent offices, or payments for which little or no work product is received.  Be particularly alert for agents that are recommended by the contracting officials.

Questionable “consulting” fees or commissions

This is another common way to pay big bribes.  A purported consulting firm or sales representative might be just a corporate front and bank account for a middleman or the bribe recipient.   Look for such payments without a contract or against a boilerplate agreement, in excessive amounts or payments for which no work product is received.  

Payments to subcontractors and suppliers, real or fictitious

This is yet another common way to hide illegal payments.  The payments can be made to an actual subcontractor or supplier that inflates its invoices to cover the payments and then passes the money on.  The payments also can be made to a fictitious shell company posing as a legitimate subcontractor or supplier.  Local project officials often impose a favored subcontractor on a prime contractor as a method to funnel bribes.  Look for such cases as well as subcontractors that appear to be providing little useful services, are overcharging or that are not listed in telephone or business directories or on the internet.

Also note payments made without a contract or purchase order or the receipt of an invoice or for which no work product was received.

Payments to ghost employees

The payment might go directly to the intended recipient, family member or representative, or be collected by the payer, turned into cash, and distributed.  This method and the ones above have the added benefit of allowing the paying party to claim an (illegal) tax deduction.

Inflated draws by the owners

A small businessman can hide illegal payments by increasing his draw and then making the illegal payments from his personal accounts.  This is expensive, since it will increase the payer’s individual tax liability, but it offers the additional security of using personal accounts that are harder for investigators to obtain.

“Off Book” payments 

As discussed above, in addition to the “On Book” schemes discussed above, a bribe payer that has access to “off book” income, such as cash from unrecorded sales, can use the funds to make illegal payments.  Such payments also can be made through affiliates or subsidiaries, perhaps in different countries, to further hide the trail.  To find a cash slush fund, contact the suspect business’s customers (who might be making payments in cash, or to an off book account they can identify) and former employees of the payer.

Interview the suspect payer

The purpose of the initial interview usually is to get the information listed below, not to accuse the payer of wrongdoing.  A later, more confrontational interview might be necessary, as discussed in Step Eight.

The questions below are most appropriate for closely held, small businesses.  The approach to larger enterprises with more complicated business and accounting systems will be somewhat different, but the basic objectives are the same: to identify potential witnesses, records and methods of payment that can assist the investigation.

Questions for the suspect payer:

1. Cover the business basics:
   • When, where and how was the business organized?  Is it a corporation, partnership, or sole proprietorship? (This is important information to focus public record searches.)
   •  Who are the current and former officers and owners?
   •  Where are its offices, including affiliates and subsidiaries?
   •  What products are services does it provide (how does it make money)?
2. Who were the key personnel involved in the suspect transactions (current and former)?  These include:
   • The sales people who opened and serviced the account.
   • The bookkeepers or accountants on the account.
   • Anyone who was a paid a commission on the transactions, such as outside consultants or sales reps
   • Competitors
3. What is the source of funds for the enterprise?  (Identifying the potential source of funds is a necessary preliminary step to identify “off book” accounts and payments.)
   • Identify its customers.
   • Ask about all sources of funds and revenue for the business – does it have any cash revenue from off book sources, e.g., scrap sales?  If so, how is the cash handled and recorded?
   • Does it receive rebates from suppliers or other non-sales revenue? (This could be a source of off book funds.)
   • Does it have any unrecorded sales?
4. What are the typical expenses associated with the business?  (This will help identify the abnormal and suspect transactions.)
   • Does the business typically pay commissions or fees?  If so, what are the standard percentages or amounts?  What are the industry standard percentages or amounts?
   • Did it pay commissions, fees or subcontractors on the suspect transactions?  How much?  (Compare the amounts paid on the suspect transaction to the standard amounts.)
   • What is the normal pricing and profit margin on the type of transactions involved in the case?
   • What were the prices and margins on the transactions involved in the case?  (Note inflated prices or margins.)
   • Did the business have any extraordinary expenses during the relevant period?  (These might be entries to hide illicit payments.)
   • Does the business have a special or miscellaneous account used to pay expenses?  If so, where is the account and the records?
   • How are travel and miscellaneous expenses reimbursed, and from what account?
   • What is the company’s practice with respect to business gifts?
   • What gifts were given to the suspect recipient, how were they paid for and where are the records?
5. Where are the company’s bank accounts?  Include affiliates and subsidiaries.  If a small business, ask about the location of the owner’s personal accounts.