Compliance Glossary

Kickbacks

Public or private sector employees who participate in awarding contracts must remain unbiased when choosing vendors and suppliers. In some cases, corrupt contractors may attempt to influence the decision-making process by offering or negotiating a kickback with a corporate officer or public official.

What is a Kickback?

A kickback is a payment from a corrupt contractor to a public or private sector employee as compensation for biased representation or preferential treatment in a decision-making process.

This preferential treatment can include things like:

  • Choosing to award a contract to one supplier or contractor instead of another
  • Agreeing to pay inflated costs for goods and services
  • Agreeing to purchase unneeded or excess goods and services

In some cases, a corrupt contractor might approach an official and offer a kickback payment in exchange for a favor or preferential treatment. In other cases, a corrupt public official or corporate officer might solicit a kickback from a contractor, offering preferential treatment in exchange. Regardless of who initiates the scheme, kickbacks always feature collusion between two parties to corrupt a decision-making process by paying and accepting a bribe.

Kickbacks are often paid in cash, but they can also be paid in merchandise, favors, gifts, or other forms of compensation.

Why is a Kickback Unethical?

When a private sector employee awards a contract to suppliers, their legal duty is to act in the best interests of corporate shareholders. Accepting a payment in the form of a kickback creates a conflict of interest, biasing the decision-making process and preventing the employee from fulfilling their legal duties. Conflicts of interest are not inherently unethical, but it is always unethical to ignore them and advance the decision-making process in bad faith.

Similarly, public sector employees are expected to protect the interests of the public (taxpayers) when awarding government contracts. If a public sector employee agrees to pay an inflated price for goods and services in exchange for a kickback, the result is an inefficient government and a corrupt purchasing process where taxpayers are unfairly robbed of value for their hard-earned dollars.

Are Contractor Kickbacks Illegal?

In the United States, it is illegal for government contractors or subcontractors to participate or attempt to participate in a kickback scheme. This prohibition is created by the Anti-Kickback Enforcement Act of 1986, often cited by its short title, the “Anti-Kickback Act of 1986”. This regulation prohibits anyone from:

  • Providing, attempting to provide, or offering a kickback.
  • Soliciting, accepting, or attempting to accept a kickback.
  • Including a kickback in the contract price charged by a subcontractor to a higher-tier contractor, or by a prime contractor to the United States of America.

The Anti-Kickback Act of 1986 also establishes criminal penalties for engaging in kickbacks, which can include fines and a prison term of up to ten years. Under the Act, contractors are held responsible for detecting and preventing prohibited conduct within their organizations and the United States may engage in a civil action to recover a civil penalty from individuals and business owners who knowingly engage in prohibited conduct related to kickbacks.

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