Wk 5 Discussion (Corruption in a Global Economy) - Post 1
mvazquez21
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schemes often start with relatively small 5 percent or 10 percent overcharges, but as these
frauds progress, the supplier and corrupt employee may begin to bill for several times the
legitimate purchase price.
In order to help detect overcharges, price thresholds should be established for materials
purchases. Deviations from these thresholds should be noted and the reasons for the
deviations verified in advance of payment. In addition, organizations should maintain an
up-to-date vendor list, and purchases should be made only from suppliers who have been
approved. As part of the approval process, organizations should take into account the
honesty, integrity, and business reputation of prospective vendors.
Kickback schemes not only frequently result in overcharges, but they may also result in the
purchase of excessive quantities of goods or services from a corrupt supplier. Organizations
should track purchase levels by vendor and routinely monitor these trends for excessive
purchases from a certain supplier or deviations from a standard vendor rotation, if one
exists. Unusually high-volume purchases from a vendor that do not appear to be justified by
business need are frequently a sign of fraud.
It is important to monitor not only the number of transactions per vendor, but also the
amount of materials being ordered in any given transaction. Purchases should be routinely
reviewed to make sure materials are being ordered at the optimal reorder point. If
inventory is overstocked with materials provided by a particular vendor, this may indicate a
kickback scheme.
On the other hand, some kickback schemes progress to the point at which a corrupt
employee will pay invoices without any goods or services actually being delivered by the
vendor. In these cases, inventory shortages—purchases that cannot be traced to inventory—
can also signal fraud.
Another potential sign of fraud is the purchase of inferior-quality inventory or
merchandise. This may result from kickback schemes in which a corrupt employee initiates
a purchase of premium-quality merchandise from a vendor but the vendor delivers lower-
quality (less expensive) merchandise. The difference in price between the materials that
were contracted for and those that were actually delivered is kicked back to the corrupt
purchasing agent or split between the purchasing agent and the vendor.
As with any form of billing fraud, kickback schemes have the potential to create budget
overruns, either because of overcharges or excessive quantities purchased, or both. Actual
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expenditures should be compared to budgeted amounts and to prior years, with follow-up
for significant deviations.
As a preventative measure, organizations should assign an employee who is independent of
the purchasing function to routinely review the organization’s buying patterns for signs of
fraud such as those discussed above. In order to provide an appropriate audit trail for this
type of review, organizations should require that all purchase decisions be adequately
documented, showing who initiated the purchase, who approved it, who received the
materials, and so on.
Because any investigation of a kickback scheme will likely necessitate a review of the
corrupt vendor’s books, all contracts with suppliers should contain a “right-to-audit” clause,
a standard provision in many purchasing contracts that requires the supplier to retain and
make available to the purchaser support for all invoices issued under the contract. In short,
a right-to-audit clause gives an organization the right to review the supplier’s internal
records to determine whether fraud occurred.
Finally, organizations should establish written policies prohibiting employees from
soliciting or accepting any gift or favor from a customer or supplier. These policies should
also expressly forbid employees from engaging in any transaction on behalf of the
organization when they have an undisclosed personal interest in the transaction. This
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should be a standard part of any organizational ethics policy, and it serves two purposes: (1)
it clearly explains to employees what types of conduct are considered to be improper, and
(2) it provides grounds for termination if an employee accepts a bribe or kickback while
preventing the employee from claiming that she did not know that such conduct was
prohibited.
Bid-Rigging Schemes
As we have said, when one person pays a bribe to another, he does so to gain the benefit of
the recipient’s influence. The competitive bidding process, in which several suppliers or
contractors are vying for contracts in what can be a very cutthroat environment, can be
tailor-made for bribery. Any advantage one vendor can gain over his competitors in this
arena is extremely valuable. The benefit of “inside influence” can ensure that a vendor will
win a sought-after contract. Many vendors are willing to pay for this influence.
In the competitive bidding process, all bidders are legally supposed to be placed on the same
plane of equality, bidding on the same terms and conditions. Each bidder competes for a
contract based on the specifications set forth by the purchasing company. Vendors submit
confidential bids stating the price at which they will complete a project in accordance with
the purchaser’s specifications.
The way competitive bidding is rigged depends largely on the level of influence of the
corrupt employee. The more power a person has over the bidding process, the more likely
the person is to be able to influence the selection of a supplier. Therefore, employees
involved in bid-rigging schemes, like those in kickback schemes, tend to have a good
measure of influence or access to the competitive bidding process. Potential targets for
accepting bribes include buyers, contracting officials, engineers and technical
representatives, quality or product assurance representatives, subcontractor liaison
employees, and anyone else with authority over the awarding of contracts.
Bid-rigging schemes can be categorized based on the stage of bidding at which the fraudster
exerts his influence. Bid-rigging schemes usually occur in the presolicitation phase, the
solicitation phase, or the submission phase of the bidding process (see Exhibit 10-6).
The Presolicitation Phase
In the presolicitation phase of the competitive bidding process—before bids are officially
sought for a project—bribery schemes can be broken down into two distinct types. The first
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is the need recognition scheme, whereby an employee of a purchasing company is paid to
convince his company that a particular project is necessary. The second reason to bribe
someone in the presolicitation phase is to have the specifications of the contract tailored to
the strengths of a particular supplier.
Need Recognition Schemes
The typical fraud in the need recognition phase of the contract negotiation is a conspiracy
between the buyer and contractor whereby an employee of the buyer receives something of
value and in return recognizes a “need” for a particular product or service. The result of
such a scheme is that the victim company purchases unnecessary goods or services from a
supplier at the direction of the corrupt employee.
There are several trends that may indicate a need recognition fraud. Unusually high
requirements for stock and inventory levels may reveal a situation in which a corrupt
employee is seeking to justify unnecessary purchase activity from a certain supplier. An
employee might also justify unnecessary purchases of inventory by writing off large
numbers of surplus items to scrap. As these items leave the inventory, they open up
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spaces to justify additional purchases. Another indicator of a need recognition scheme is the
defining of a “need” that can be met only by a certain supplier or contractor. In addition, the
failure to develop a satisfactory list of backup suppliers may reveal an unusually strong
attachment to a primary supplier—an attachment that is explainable by the acceptance of
bribes from that supplier.
EXHIBIT 10-6: Bid-Rigging (Bribery)
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Specifications Schemes
The other type of presolicitation fraud is a specifications scheme. The specifications of a
contract are a list of the elements, materials,
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dimensions, and other relevant requirements for completion of the project. Specifications
are prepared to assist vendors in the bidding process, telling them what they are required to
do and providing a firm basis for making and accepting bids.
One corruption scheme that occurs in this process is the fraudulent tailoring of
specifications to a particular vendor. In these cases, the vendor pays off an employee of the
buyer who is involved in the preparation of specifications for the contract. In return, the
employee sets the specifications of the contract to accommodate that vendor’s capabilities.
In Case 1063, for instance, a supplier paid an employee of a public utility to write contract
specifications that were so proprietary that they effectively eliminated all competition for
the project. For four years this supplier won the contract, which was the largest awarded by
the utility company. The fraud cost the utility company in excess of $2 million.
The methods used to restrict competition in the bidding process may include the use of
“prequalification” procedures that are known to eliminate certain competitors. For
instance, the bid may require potential contractors to have a certain percentage of female or
minority ownership. There is nothing illegal with such a requirement, but if it is placed in
the specifications as a result of a bribe rather than as the result of other factors, then the
employee has sold his influence to benefit a dishonest vendor—a clear case of corruption.
Sole-source or noncompetitive procurement justifications may also be used to eliminate
competition and steer contracts to a particular vendor. In Case 2015, a requisitioner
distorted the requirements of a contract up for bid, claiming the specifications called for a
sole-source provider. Based on the requisitioner’s information, competitive bidding was
disregarded and the contract was awarded to a particular supplier. A review of other bids
received at a later date showed that certain materials were available for up to $70,000 less
than what the company paid in the sole-source arrangement. The employee had helped
divert the job to the contractor in return for a promise of future employment. Competitive
bidding was also disregarded in Case 1075, wherein management staff of a state entity took
bribes from vendors to authorize purchases of approximately $200,000 in fixed assets.
Another type of specifications scheme is the deliberate writing of vague specifications. In
this type of scheme, a supplier pays an employee of the purchasing company to write
specifications that will require amendments at a later date. This will allow the supplier to
raise the price of the contract when the amendments are made. As the buyer’s needs
become more specific or more detailed, the vendor can claim that, had he known what the
buyer actually wanted, his bid on the project would have been higher. In order to complete
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the project as defined by the amended specifications, the supplier will have to charge a
higher price.
Another form of specifications fraud is bid-splitting. In Case 1797, a manager of a federal
employer split a large repair job into several component contracts in order to divert the jobs
to his brother-in-law. Federal law required competitive bidding on projects over a certain
dollar value. The manager broke the project up so that each smaller project was below the
mandatory bidding level. Once the contract was split, the manager hired his brother-in-law
to handle each of the component projects. Thus, the brother-in-law got the entire contract
while avoiding competitive bidding.
A less egregious, but still unfair, form of bid-rigging occurs when a vendor pays an
employee of the buyer for the right to see the specifications earlier than her competitors are
able to. The employee does not alter the specifications to suit the vendor, but rather simply
gives her a head start on planning her bid and preparing for the job. The extra planning
time gives the vendor an advantage over her competitors in preparing a bid for the job.
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The Solicitation Phase
In the solicitation phase of the competitive bidding process, fraudsters attempt to influence
the selection of a contractor by restricting the pool of competitors from whom bids are
sought. In other words, a corrupt vendor pays an employee of the purchasing company to
assure that one or more of the vendor’s competitors do not get to bid on the contract. In this
manner, the corrupt vendor is able to improve his chances of winning the job.
One type of scheme involves the sales representative who deals on behalf of a number of
potential bidders. The sales representative bribes a contracting official to rig the solicitation,
ensuring that only those companies represented by him get to submit bids. It is not
uncommon in some sectors for buyers to “require” bidders to be represented by certain
sales or manufacturing representatives. These representatives pay a kickback to the buyer
to protect their clients’ interests. The result of this transaction is that the purchasing
company is deprived of the ability to get the best price on its contract. Typically, the group of
“protected” vendors will not actually compete against each other for the purchaser’s
contracts, but instead engage in “bid-pooling.”
Bid-Pooling
Bid-pooling is a process by which several bidders conspire to split up contracts and ensure
that each gets a certain amount of work. Instead of submitting confidential bids, the
vendors decide in advance what their bids will be so that they can guarantee that each
vendor will win a share of the purchasing company’s business. For example, if vendors A, B,
and C are up for three separate jobs, they may agree that A’s bid will be the lowest on the
first contract, that B’s bid will be the lowest on the second contract, and that C’s bid will be
the lowest on the third contract. None of the vendors gets all three jobs, but each is at least
guaranteed to get one. Furthermore, since they plan their bids ahead of time, the vendors
can conspire to raise their prices; the purchasing company suffers as a result of the scheme.
Fictitious Suppliers
Another way to eliminate competition in the solicitation phase of the selection process is to
solicit bids from fictitious suppliers. In Case 1797 discussed above (the bid-splitting case),
the brother-in-law submitted quotes in the names of several different companies and
performed work under these various names. Although confidential bidding was avoided in
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this case, the perpetrator used quotes from several of the brother-in-law’s fictitious
companies to demonstrate price reasonableness on the final contracts. In other words, the
brother-in-law’s fictitious price quotes were used to validate his actual prices.
Other Methods
In some cases, competition for a contract can be limited by severely restricting the time for
submitting bids. Certain suppliers are given advance notice of contracts before bids are
solicited. These suppliers are therefore able to begin preparing their bids ahead of time.
With the short time frame for developing bid proposals, the supplier with advance
knowledge of the contract will have a decided advantage over his competition.
Bribed purchasing officials can also restrict competition for their co-conspirators by
soliciting bids in obscure publications where they are unlikely to be seen by other vendors.
Again, this is done to eliminate potential rivals and create an advantage for the corrupt
suppliers. Some schemes have also involved the publication of bid solicitations during
holiday periods when those suppliers not “in the know” are unlikely to be looking for
potential contracts. In more blatant cases, the bids of outsiders are accepted but are “lost” or
improperly disqualified by the corrupt employee of the purchaser.
Typically, when a vendor bribes an employee of the purchasing company to assist him in
any kind of solicitation scheme, the cost of the bribe is included in the corrupt
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vendor’s bid. Therefore, the purchasing company ends up bearing the cost of the illicit
payment, in the form of a higher contract price.
The Submission Phase
In the actual submission phase of the process, wherein bids are proffered to the buyer,
several schemes may be used to win a contract for a particular supplier. The principal
offense tends to be abuse of the sealed-bid process. Competitive bids are confidential; they
are, of course, supposed to remain sealed until a specified date when all bids are opened
and reviewed by the purchasing company. The person or persons who have access to sealed
bids are often the targets of unethical vendors who are seeking an advantage in the process.
In Case 1170, for example, gifts and cash payments were given to a majority owner of a
company in exchange for preferential treatment during the bidding process. The supplier
who paid the bribes was allowed to submit his bids last, knowing what prices his
competitors had quoted, or, alternatively, was allowed to actually see his competitors’ bids,
and adjust his own accordingly.
Vendors also bribe employees of the purchaser for information on how to prepare their bid.
In Case 613, the general manager for a purchasing company provided confidential pricing
information to a supplier that enabled the supplier to outbid his competitors and win a
long-term contract. In return, both the general manager and his daughter received
payments from the supplier. Other reasons to bribe employees of the purchaser include to
ensure receipt of a late bid or to falsify the bid log, to extend the bid opening date, and to
control bid openings.
Preventing and Detecting Bid-Rigging Schemes
Bid-rigging is a form of bribery similar to kickback schemes, which were already discussed,
and in many instances this type of fraud involves the payment of kickbacks to corrupt
employees of the purchasing organization. Therefore, many of the antifraud measures
discussed earlier under the heading “Preventing and Detecting Kickback Schemes” will also
be effective in dealing with bid-rigging frauds. In addition, a number of prevention and
detection methods are specifically applicable to the competitive bidding process.
Bid-rigging schemes are often uncovered because of unusual bidding patterns that emerge
during the process. Perhaps the most common indicator of collusive bidding practices is an
unusually high contract price. For example, if two or more contractors conspire with an
employee in the bidding process, or if an employee incorporates bids from fictitious vendors
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to artificially inflate the contract price, the winning bid (or in some cases all bids submitted)
will be excessively high compared to expected prices, previous contracts, budgeted
amounts, and so forth. Organizations should monitor price trends for such instances.
Another red flag sometimes arises in bid-rigging cases when low-bid awards are frequently
followed by change orders or amendments that significantly increase payments to the
contractor. This may indicate that the contractor has conspired with somebody in the
purchasing organization who has the authority to amend the contract. The contractor
submits a very low bid to ensure that its bid will win the contract, knowing that the final
price will be inflated after the award.
Very large, unexplained price differences among bidders can also indicate fraud. As noted
in the preceding paragraph, this condition may arise when one supplier submits a very low
bid with the understanding that the final contract price will later be inflated. Significant
cost differences among bidders can also occur when an honest bidder submits a proposal in
a competitive bidding process that was previously dominated by a group of suppliers who
were conspiring, by means of a bid-pooling scheme, to keep prices artificially high.
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Red flags might also appear from certain patterns within the bidding process. For example,
if the last contractor to submit a bid repeatedly wins the contract, this would tend to
indicate that an employee of the purchasing organization is allowing vendors to see their
competitors’ bids. The corrupt supplier would wait until all other bids have been submitted,
then would use its inside knowledge to narrowly undercut the competition with a last-
minute proposal. This narrow margin of victory can itself be a sign of fraud. If the winning
bidder repeatedly wins contracts by a very slim margin, this could also indicate that the
bidder has an accomplice working within the purchasing organization.
In bid-pooling schemes, as discussed above, several vendors conspire to fix their bids so that
each one wins a certain number of contracts, thereby removing the competitive element of
the bidding prices and enabling the corrupt suppliers to collectively inflate their prices.
These schemes may result in a predictable rotation of bid winners, something that would
not be expected in a truly competitive bidding process. Any sort of predictable pattern of
contract award that is based on a factor other than price or quality should be investigated.
Another red flag consistent with collusive bidding occurs when losing bidders frequently
appear as subcontractors on the project. This tends to indicate that the suppliers conspired
to divide the proceeds of the contract, agreeing that one would win the award while others
would receive a certain portion of the project through subcontracting arrangements. In
some cases, the low bidder will withdraw and subsequently become a subcontractor after
the job has been awarded to another supplier.
A corrupt employee or vendor will sometimes submit bids from fictitious suppliers to create
the illusion of competition where none really exists. In some cases, these frauds have been
detected because the same calculations or errors occurred on two or more bids, or because
two or more vendors had the same address, phone number, officer, and so forth.
Fraud may be indicated by a situation in which qualified bidders fail to submit contract
proposals, or in which significantly fewer bidders than expected respond to a request for
proposals. This type of red flag is consistent with schemes in which a corrupt employee
purposely fails to advertise the contract up for bid. This eliminates competition and helps
ensure that a certain supplier will be awarded the contract. Similarly, the number of bids
might be reduced because a corrupt employee has destroyed or fraudulently disqualified
the bids of contractors who submitted more favorable proposals than the employee’s co-
conspirator.
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Finally, bid-rigging may be indicated by the avoidance of competitive bidding altogether,
such as occurs when an employee splits a large project into several smaller jobs that fall
beneath a bidding threshold, then makes sole-source awards to favored suppliers.
Something of Value
Bribery was defined at the beginning of this chapter as “offering, giving, receiving, or
soliciting any thing of value to influence an official act.” A corrupt employee helps the
briber obtain something of value, and in return the employee gives something of value.
There are several ways for a vendor to “pay” an employee to surreptitiously aid the vendor’s
cause. The most common, of course, is money. In the most basic bribery scheme, the vendor
simply gives the employee currency. This is what we think of in the classic bribery scenario
—an envelope stuffed with currency being slipped under a table, a roll of bills hastily
stuffed into a pocket. These payments are preferably made with currency rather than
checks, because the payment is harder to trace. But currency
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may not be practical when large sums are involved. When this is the case, slush funds are
usually set up to finance the illegal payments. In other cases, checks may be drawn directly
from company accounts. These disbursements are usually coded as “consulting fees,”
“referral commissions,” or the like.
Instead of cash payments, some employees accept promises of future employment as bribes.
In Case 1590, for instance, a government employee gave a contractor inside information in
order to win a bid on a multimillion-dollar contract in return for the promise of a high-
paying job. As with money, the promise of employment might be intended to benefit a third
party rather than the corrupt employee. In Case 1584, a consultant who worked for a
particular university hired the daughter of one of the university’s employees.
In Case 1987, we also discussed how a corrupt individual diverted a major purchase
commitment to a supplier in return for a percent of ownership in the supplier’s business.
This is similar to a bribe effected by the promise of employment, but also contains elements
of a conflict of interest scheme. The promise of part ownership in the supplier amounts to
an undisclosed financial interest in the transaction for the corrupt employee.
Gifts of all kinds may also be used to corrupt an employee. The types of gifts used to sway an
employee’s influence can include free liquor and meals, free travel and accommodations,
cars, other merchandise, and even sexual favors.
Other inducements include the paying off of a corrupt employee’s loans or credit card bills,
the offering of loans on very favorable terms, and transfers of property at substantially
below market value. The list of things that can be given to an employee in return for the
exercise of his influence is almost endless. Anything that the employee values is fair game,
and may be used to sway his loyalty.
ILLEGAL GRATUITIES
As stated, illegal gratuities are similar to bribery schemes, except there is not necessarily
intent to influence a particular business decision. An example of an illegal gratuity was
found in Case 2294, in which a city commissioner negotiated a land development deal with a
group of private investors. After the deal was approved, the commissioner and his wife
were rewarded with a free international vacation, all expenses paid. While the promise of
this trip may have influenced the commissioner’s negotiations, this would be difficult to
prove. However, merely accepting such a gift amounts to an illegal gratuity, an act that is
prohibited by most government and private company codes of ethics.
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ECONOMIC EXTORTION
As stated earlier, economic extortion is basically the flip side of a bribery scheme. Instead of
a vendor offering a payment to an employee to influence a decision, the employee demands
a payment from a vendor in order to make a decision in that vendor’s favor. In any
situation in which an employee might accept bribes to favor a particular company or
person, the situation could be reversed so that the employee extorts money from a potential
purchaser or supplier. In Case 802, for example, a plant manager for a utility company
started his own business on the side. Vendors who wanted to do work for the utility
company were forced by the manager to divert some of their business to his own company.
Those who did not “play ball” lost their business with the utility.
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CONFLICTS OF INTEREST
As we stated earlier in this chapter, a conflict of interest occurs when an employee,
manager, or executive has an undisclosed economic or personal interest in a transaction
that adversely affects the company. The key word in this definition is undisclosed. The crux
of a conflict case is that the fraudster takes advantage of his employer; the victim
organization is unaware that its employee has divided loyalties. If an employer knows of the
employee’s interest in a business deal or negotiation, there can be no conflict of interest, no
matter how favorable the arrangement is for the employee.
Most conflict cases occur because the fraudster has an undisclosed economic interest in a
transaction. But the fraudster’s hidden interest is not necessarily economic. In some
scenarios an employee acts in a manner detrimental to his employer in order to provide a
benefit to a friend or relative, even though the fraudster receives no financial benefit from
the transaction himself. In Case 1797, for instance, a manager split a large repair project
into several smaller projects to avoid bidding requirements. This allowed the manager to
award the contracts to his brother-in-law. Though there was no indication that the manager
received any financial gain from this scheme, his actions nevertheless amounted to a
conflict of interest.
Any bribery scheme could potentially be considered a conflict of interest—after all, an
employee who accepts a bribe clearly has an undisclosed economic interest in the
transaction (in the form of the bribe that he is paid), and he is clearly not working with his
employer’s best interests at heart. The reason that some schemes are classified as briberies
but others are classified as conflicts of interest is a question of motive.
If an employee approves payment on a fraudulent invoice submitted by a vendor in return
for a kickback, this is bribery. But if an employee approves payment on invoices submitted
by her own company (and if the ownership is undisclosed), this is a conflict of interest. This
was the situation in Case 1132, in which an office service employee recommended his own
company to do repairs and maintenance on office equipment for his employer. The
fraudster approved invoices for approximately $30,000 in excessive charges.
The distinction between the two schemes is obvious. In the bribery case, the fraudster
approves the invoice in return for a kickback, whereas in a conflict of interest case he
approves the invoice because of his own hidden interest in the vendor. Aside from the
employee’s motive for committing the crime, the mechanics of the two transactions are
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practically identical. The same duality can be found in bid-rigging cases, wherein an
employee influences the selection of a company in which he has a hidden interest, rather
than influencing the selection of a vendor who has bribed him.
However, conflict schemes do not always simply mirror bribery schemes. There are vast
numbers of ways in which an employee can use his influence to benefit a company in which
he has a hidden interest. The majority of conflict schemes fit into one of two categories:
• Purchasing schemes
• Sales schemes
In other words, most conflicts of interest arise when a victim company unwittingly buys
something at a high price from a company in which one of its employees has a hidden
interest, or unwittingly sells something at a low price to a company in which one of its
employees has a hidden interest. Most of the other conflict cases the ACFE researchers
reviewed involved employees who stole clients or diverted funds from their employer.
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CASE STUDY: WORKING DOUBLE DUTY
After grabbing a quick bite to eat at the mall, Troy Biederman spent the rest of his lunch
hour shopping for clothes. He liked to present a professional appearance as a sales
manager at ElectroCity, an electronics and appliance chain. While waiting on a charge
approval at a small menswear store, Biederman spotted its promotion for a free La-Z-Boy
and tossed his business card into the drawing fishbowl on the counter. Suddenly his eye
caught a familiar name on top of the pile—Rita Mae King, the full-time purchasing agent at
ElectroCity. The card, however, read: Rita Mae King, account executive at Spicewood Travel.
“He put two and two together and it smelled fishy,” explained Bill Reed, the vice president
of loss prevention at ElectroCity. Biederman knew Spicewood Travel was the agency his
company used to book incentive trips for its sales force, of which he was a member. He also
knew King enjoyed close ties with Spicewood—now he wondered how close. Biederman
snatched King’s card from the pile and discreetly turned it in to his boss that afternoon.
Within two weeks the business card had made its way up to the executive vice president of
ElectroCity, a company that rings up annual sales of $450 million. Not wanting to jump to
any conclusions, yet also suspecting that his purchasing agent might be in cahoots with a
travel vendor, the EVP handed the card over to Bill Reed “to investigate the extent of the
relationship.”
Reed immediately requisitioned the accounts payable department for all corporate travel
billings for the past three years. Early entries showed that the company had been using
Executive Travel for most of its travel needs. In her first year as purchasing agent, however,
King had introduced Spicewood and had placed it at the top of the travel vendor list. Reed
said that although ElectroCity had never designated any one agency as its sole vendor,
under the direction of the corporation’s purchaser, Spicewood had squeezed out Executive
Travel for the store’s business—which now exceeded $200,000.
Corporate fraud examiners then phoned numerous other travel agencies, asking for quotes
on similar services for the same period in an effort to compare prices. They found that
many of the bills were inflated between 10 and 30 percent over the other agencies’ package
trips to destinations such as Trump Castle in Atlantic City and Bally’s in Las Vegas. Calls to
other branches of Spicewood Travel further confirmed significant overcharging by the local
office, which King used exclusively.
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Six days into his investigation, Reed took a statement from the corporate merchandising
buyer at ElectroCity, who had experienced difficulties with King on several occasions about
competitively priced trips. He said King was insistent on using Spicewood. In his written
account of a recent episode, the merchandising buyer told of personally shopping for a
better price on an incentive vacation to the Cayman Islands. “With this trip, I went to an
outside agent first and then gave Rita Mae the information to price this trip.
Spicewood came in almost $100 higher per person. Rita Mae did not book the trip through
the lower-priced agent, but went back and had Spicewood requote for what was supposed
to be the same trip. When I asked to have Spicewood’s now lower requote spelled out
exactly, I found that the airfare included an additional stopover, which lowered the
airfare.”
In order to establish King’s relationship with the travel agency, Reed had one of his
investigators call its local office and ask to speak with account executive Rita Mae King.
Without missing a beat, the receptionist transferred him to Janet Levy, manager of
corporate services. The investigator identified himself as an interested traveler who had
King’s business card and wanted her to book a good deal to the Bahamas. Levy assured him
it would not be a problem since she worked closely with King. Levy then asked him to call
King at another phone number. It turned out to be her number at ElectroCity.
“She was essentially running her own travel shop out of her office here,” said Reed.
Although she had no access to an online computer, she jerry-rigged a system for her travel
customers. “Apparently, if King fed business to Spicewood, they would add that to her credit
arrangement.”
King operated out of a beehive of activity littered with paperwork, said Reed. The fifty-one-
year-old married woman often kept two or three conversations going in her workplace at
the same time. “She was a very take-charge, bossy kind of person—very outgoing, but also
caustic in a lot of her interactions with other employees. Also quick to denigrate and
complain.” On the flip side, “She can be very ingratiating and very nice when she wants.”
Through her work, King became well networked in the travel industry, with many friends
and lots of contacts.
After having established an outside business link between King and Spicewood, Reed then
reviewed personnel records for her travel activity. Working on a hunch, he honed in on a
vacation King took the previous December when she and a companion flew to the
Caribbean island of Antigua via American Airlines.
Reed, a former police officer, scrutinized King’s personal credit card statements from that
time. An examination of the statements revealed a MasterCard charge from the Royal
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Antiguan Hotel. Again, Reed had one of his investigators place a call. Posing as “Mr. Lowell
King,” the investigator phoned the hotel claiming to need help with his travel
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