Five Types of Kickback Fraud

Every year, our government spends trillions of dollars on our national defense, on our health care safety net, and on public works. Billions more are spent enforcing regulations meant to curtail fraud and general wrongdoing, not only in these areas, but also in the prevention of financial and securities fraud.

All of these areas are ripe for a particular variety of fraud known as a kickback. Because kickbacks can take many forms, potential whistleblowers should be familiar with what kickbacks are and how they operate in different scenarios.

What Are Kickbacks?

Kickbacks are arrangements in which one person agrees to provide money or goods to another on the condition that they receive something they want. Almost 100 percent of the time, kickbacks are illegal.

Here’s one example. A cardiologist might use only one brand of arterial stent—or even insert stents where they are not needed—because the doctor receives some form of remuneration for each stent used. Perhaps after a certain number of stents, the doctor receives a luxury car, an exotic vacation, or cold cash.

One hand washing the other for financial gain: that’s a kickback. Almost anything can be a kickback payment—cars, vacations, expensive meals, unpaid loans, the use of credit cards, sexual favors, and even the promise of a future job.

Bribes are considered very similar to kickbacks. The biggest alerts that bribery or kickbacks might be occurring are:

• Improper selection of a contractor involving various forms of financial favoritism. This situation can be related to bid-rigging, or obtaining a contract at pre-determined prices in exchange for financial consideration.
• “Middlemen” brokering a transaction where none are needed.
• The accepting of gifts, entertainment, and so forth that are of an inappropriate nature and amount.
• A procurement officer’s sudden, unexplained increase in financial resources.

Existing Kickback Laws

The U.S. has several anti-kickback laws. Briefly, they are:

• An early piece of legislation known as the Copeland Anti-Kickback Act, 1934, which supplemented the Davis-Bacon Act of 1931.
• The Anti-Kickback Act of 1986 (AKA) (41 U.S.C. § 51 et seq.). This Act updated and closed loopholes regarding government contractors involved in procurement. Prosecutions under the AKA are not limited to medical billing and establish guidelines for determining what a kickback is.
• The federal Anti-Kickback Statute (AKS). The criminal law 42 U.S.C. § 1320a-7b forbids compensation paid to expedite a transaction. The AKS was included in the Medicare and Medicaid Patient Protection Act of 1987 and was originally enacted in 1972.

Dodd-Frank, a number of SEC statutes, and the Foreign Corrupt Practices Act of 1977 (FCPA) also have anti-kickback provisions.

The Top Five Kickback Fraud Areas

The likely areas in which kickbacks can occur, and could possibly involve situations calling for whistleblower intervention, are listed below. We will take these areas one at a time.

1. Government Contractor/Defense Contractor Kickback Fraud.

Government contract and defense fraud drain billions from the federal budget every year. It is one of the top two areas of false claims activity, the other being government health care programs (Medicare, Medicaid, TRICARE). When it comes to contract fraud, the general area of kickbacks can include such things as outright bribery (giving someone something so they will do what you want) and bid-rigging (colluding on bid prices and related offenses).

Kickback schemes specific to procurement frauds have included the following:

• In 2017, it was reported that a former Navy employee allegedly took kickbacks that ran into the millions from subcontractors, including a well-paying job with one of the subcontractors when the employee retired.
• Three principal officers of Laguna Construction Company were charged in 2012 with receiving kickbacks for subcontractor awards. Laguna was subsequently denied payment by the government for past costs because of the breach of contract involving kickbacks.
• Part of the profits of a shipping and processing company in Ohio were paid in the form of kickbacks connected to receiving contracts. The combined kickbacks amounted to almost a million dollars.

2. Medical Kickback Fraud.

Everyone who reads the news knows that federal health care fraud is an epidemic in the U.S. Kickbacks are certainly part of it, but the types of kickback activity are different than the ones found in government contract or procurement fraud. Generally, the medical kickback activity tends to involve referrals or the use and prescribing of certain drugs or devices, as opposed to inappropriate behaviors concerning contracts.

Medical fraud (Medicare, Medicaid, TRICARE) can range from pharmaceuticals to medical devices to ambulance transport. Some recent cases of medical kickback fraud are:

• A 2017 whistleblower suit in Florida alleges that an ambulance service was embroiled in a kickback scheme that resulted in millions of dollars of false claims submitted to Medicare and Medicaid.
• An arterial stents company settled claims that kickbacks were paid to doctors for recommending the usage of its stents. The 2016 settlement for $11.5 million in this qui tam case is one of the largest cases ever brought where the government did not intervene.
• A major drugstore chain settled a suit for $50 million in 2017; it alleged that kickbacks induced various beneficiaries of federal health care programs to fill prescriptions with the chain.

3. Financial/Mortgage Kickback Fraud.

Mortgage and other financial institutions fraud came to the fore with the crash of 2008. Often, it involves illegal payments in exchange for receiving business or contracts. In that way, mortgage fraud is more like procurement fraud. Several recent cases are:

• Prospect Mortgage was charged with making illegal payments to real estate brokers in exchange for the brokers steering clients to Prospect, said the Consumer Financial Protection Bureau (CFPB). Prospect was fined $3.5 million in 2017.
• In 2016, a former loan officer was sentenced to 18 months in federal prison for taking over $350,000 in kickbacks in exchange for consideration of mortgage applications submitted by local churches.
• During 2013, four mortgage insurance companies were fined $15 million for their involvement in a kickback fraud scheme. It was alleged by the CFPB that the insurance companies colluded with the banks, forcing borrowers to obtain their mortgage insurance policies from specific companies.

4. Securities Kickback Fraud

Securities fraud can involve stock promotion and price manipulation schemes as well as bribery and kickbacks in connection with overseas companies and entities under the Foreign Corrupt Practices Act of 1977 (FCPA). While details can often be hard to come by with SEC cases, here is one case we can tell you about. Two persons were sentenced in 2015 with regard to $11 million in kickbacks and committing securities fraud, as well as concealing money from the IRS, while employed at Systemax, Inc., and its subsidiary Tiger Direct, in Florida. The kickback aspects concerned the consumer electronics the company was selling.

International business transactions can be riddled with corruption and fraud, partly because other countries’ regulations are less stringent than ours, or can even be nonexistent. Under the FCPA in a major 2011 case, Johnson & Johnson was charged by the SEC with bribing doctors in a number of European countries and with paying kickbacks to Iraq in order to garner business. Johnson & Johnson settled the cases for $70 million.

5. Public Works Kickback Fraud

While not as common, public works kickback fraud can be similar in nature to other kinds of government procurement fraud. In one DOJ case from March, 2016, managers of the local union were charged with taking kickbacks that came out of public works employees’ wages. Workers were forced to fork over part of their back pay awards to certain officials in Iron Workers Local 201 of the Washington, D.C. area.

What Can We Conclude?

All kickback fraud can be depressingly similar at its bottom. But that also means that whistleblowers have the opportunity to see patterns of wrongdoing, to collect evidence, and bring a case. While the cases listed above did not always involve whistleblowers, the potential and possibilities are certainly present. If you have seen evidence of improper payments or other kickback schemes, we urge you to consider becoming a whistleblower.