United Nations (UN): Definition, Purpose, Structure, and Members

What Is a Kickback?

A kickback is an illegal payment intended as compensation for preferential treatment or any other type of improper service received. The kickback may be money, a gift, credit, or anything of value. Paying or receiving kickbacks is a corrupt practice that interferes with an employee's or a public official’s ability to make unbiased decisions. Kickbacks are often referred to as a type of bribery.

How a Kickback Works

Kickbacks can take many forms but they all feature some sort of collusion between two parties. The bookkeeper for a business or government office might approve an invoice for goods knowing that the bill is inflated. The seller of the goods might then pay the bookkeeper part of the difference or some other kind of reward.

Kickbacks can also be used to buy a positive recommendation for the kickback provider. A government employee who's responsible for managing contractors on an infrastructure project such as the building of a bridge might receive a kickback for choosing one contractor over another. This may result in a better-qualified contractor not winning the bid.

Procurement contracts can be fertile ground for kickback schemes. Contractors who are interested in winning the business are typically required to bid against each other in the granting of a government contract such as for office equipment. Rather than playing fair, a contractor might reach out to a procurement officer and indicate that the officer would be rewarded if the contractor were to win. The reward might be cash, concert tickets, or anything else of desired value.

Kickback Warning Signs

These are some common kickback warning signs. They don't necessarily mean that anything nefarious is going on but the more of them there are, the greater the likelihood of a kickback scheme.

• No competitive bidding process or lower bids are ignored
• Lack of appropriate supervision during the purchasing process
• Higher-than-average prices for goods or services
• Recommendation to use a vendor that others shun
• A vendor with frequent legal or regulatory problems
• Employees are too friendly with vendors
• Management pressures staff to use a particular vendor
• Vendors are in an industry where kickbacks are common
• Employees continue to use vendors that provide poor products or services
• Delivery dates are repeatedly missed

Kickbacks increase the cost of doing business in countries around the world. They also form the basis for much of the world's government corruption. Companies that are looking to supply products or services to countries known for corruption may find that they have to pay numerous officials to be considered for a contract.

The perception that a kickback scheme will go unpunished or that punishment will be light is a primary driver for officials who are willing to take bribes. They may be poorly paid and see kickbacks as a way to supplement a meager salary in some cases.

The U.S. Foreign Corrupt Practices Act makes bribing foreign officials illegal for all companies listed with the Securities and Exchange Commission (SEC), any company organized in the United States, or any citizen or resident, even if it's the local custom.

Examples of a Kickback

Wall Street brokers sometimes route all orders to a particular exchange even though they're required by law to execute trades with the exchange that offers the best terms or best execution for their clients. The broker may take a kickback in exchange for routing all of their trades to a particular exchange rather than choosing one that offers the most competitive price and has the highest likelihood of completing the trade promptly.

This can ultimately lead to slower execution and higher transaction costs for clients. The industry refers to the practice as "rebates." These rebates may amount to only a fraction of a cent of each share traded but considerable sums can be accrued over time.

Kickbacks can take the form of rebates or fraudulent billing for nonexistent services in the advertising business. Clients pay the price with higher costs or a lower level of service than they normally would expect for their money. Shrinking agency fees and a hard-to-understand digital marketplace provide the motivation and cover for such actions.

The Bottom Line

It’s illegal to pay or receive a kickback in the U.S. and this rule prevails over a wide range of industries and professions. A kickback is a bid to receive preferential treatment and it doesn’t necessarily have to be transmitted in the form of money. It can be anything of value, such as concert tickets that are impossible to buy on the legal market.

Always ask questions if you spot any warning signs as a consumer or, at the very least, switch to another service provider of your own choosing.