How They Do It: Bribery and Corruption Through Travel and Entertainment

Getting involved in a bribery and corruption scandal is a risk for every organisation, regardless geography and industry. Although some industries or geographies are more prone to bribery and corruption risks, it is something that can happen everywhere. Bribery and corruption cause massive harm to societies and economies, undermining the trust that sustains them. In societies, bribery and corruption erode the foundation of justice, perpetuating inequality and hindering social progress. It erodes citizens’ confidence in government. Economically, bribery distorts fundamental market dynamics such as competition and innovation. It exacerbates income inequality, creating an uneven playing field where success is determined not by merit but by illegal activity. Moreover, corruption impacts economic growth and diverts resources away from essential public services into the hands of criminals. Ultimately, the impact of bribery and corruption jeopardises the long-term stability and development of societies, as well as hindering economies to thrive and prosper.

This blog series unravels how bribery and corruption works in practice, hence the name “How They Do It”. Understanding the mechanics is key in preventing and detecting bribery and corruption. The focus of this blog is bribery and corruption through travel and entertainment.

The Foreign Corrupt Practices Act Clearinghouse Database

The Foreign Corrupt Practices Act Clearinghouse database provides detailed information on US Foreign Corrupt Practices Act (FCPA) enforcement actions. A super interesting read if you are curious what bribery and corruption looks like in real life as well as how regulatory enforcement works. Just be mindful that this database solely covers data from FCPA enforcement cases and not other bribery and corruption regulation such as the UK Bribery Act and Sapin II. Anyway, the database shows that by far the large majority of bribes come in the form of cash (94,48% of the cases). Often these cash payments are funnelled through intermediaries and agents. Second and third on the list of most common forms of bribery are travel (23,32% of the cases) and entertainment (15,95% of the cases). Please note that bribery schemes can involve multiple different form of bribery, the percentages therefore exceeds 100%. We covered bribery and corruption through agents and intermediaries in our first How They Do it blog, this blog we will focus on the use of travel and entertainment. Let’s unravel how they do it.

Step 1: Select an appropriate bribery scheme

Bribery concealed as business travel comes in various forms, one of the most common forms is travel for training and education. Training and education can be a perfect smokescreen for bribery, especially if such training and education includes lavish hospitality such as expensive dinners, entertainment events, or luxury hotels. Organisations often have a designated ‘training budget’ for genuine educational purposes. But if used smartly, it can also be used for bribes. Behind the smokescreen of training, hospitality exceeding the boundaries of ethical conduct can be funneled, if done properly, without raising immediate suspicions. With ‘done properly’ we mean not raising any red flags. For instance, luxurious vacations meticulously organised for officials, clients, and their extended circles (e.g., friends and family) may be documented within the organisation’s financial records as ‘client training’.

Another scheme where travel is used as a bribe is to invite officials or clients on lavish trips. This under the disguise of visiting the organisation’s projects, subsidiaries of other company initiatives abroad. Such travel can be perfectly legitimate, but it can also be supplemented by lavish entertainment, expensive hotels and dinners. Also, people in the circle of these officials or clients might join on such trips.

As with travel, entertainment and hospitality can be a perfectly legitimate and valuable business practice. It can help to establish, cultivate, and reinforce relationships that are crucial for an organisation’s business. While fostering connections through entertainment and hospitality is generally acceptable, there exists a fine line that, when crossed, transforms seemingly legitimate practices into illegal activities. Common types of entertainment and hospitality used as bribes include: luxurious dinners and events, VIP sporting events and concerts, exclusive club memberships, expensive cultural experiences and recreational activities.

The critical question in assessing the legitimacy of travel and entertainment is whether it has a legitimate business purpose, is proportionate, is transparently documented, and there is no quid pro quo expectation and reasonable. When travel and entertainment fails to meet these criteria, it becomes a cause for concern. Especially when it takes place in the period before key events such as winning a tender, obtaining a license, or obtaining a concession. Logically, corrupt decision makers want to receive their bribe prior to granting that tender or issuing a license or concession. An increase of, or unusually high travel and entertainment expense in the period of such key events will raise red flags.

Step 2: Organise funding

Bribe payers typically deploy a variety of schemes to create funding for travel and entertainment without detection. Obviously regular budgets for travel and entertainment can be used to invite clients and public officials for lavish hospitality programs. But sometimes this is not enough. Internal controls often restrict the amounts to be spend on travel and entertainment, limiting the possibility to organise something luxurious. One way to overcome this hurdle is to inflate the number of clients or public officials attending, i.e., registering more participants than those who actually attended the travel and entertainment.Such inflation generates a surplus in the funds that can conveniently be diverted. This surplus, free from immediate scrutiny, provides an additional channel for the disbursement of funds for undisclosed purposes.

Alternatively, clients or public officials might want to bring along family or friends to travel and entertainment. This creates a need to falsify attendance records, i.e., to hide the lack of a legitimate business purpose for inviting a broader group of individuals. This manipulation not only aims to conceal the non-business-related aspects of these invitations, but also helps to maintain the appearance of adherence to corporate policies.

A common scheme used in the healthcare industry involves setting up an education fund, which is a percentage of the sales that is allocated for this purpose. The fund is supposedly intended to assist clients in participating in training, workshops and seminars. In reality, the fund is used to send client personnel on trips to holiday destinations, disguised as ‘education’. The fund covers all expenses and it may also include gifts like electronic devices. In exchange, client personnel are incentivised to ensure that their company continues buying goods and services from the organisation, even when there are better alternatives.

Another possibility to secure funding is to engage a third party or intermediary to manage your travel and entertainment. For example use a local travel agent, concealing the lavish expenses as regular corporate travel costs. Even better, hire local consultants and have them organise the luxurious travel and entertainment. To keep the true nature of these expenses out of the books, these consultants should submit inflated invoices. By doing so, your organisation receives invoices from a third party, ideally with vague or general descriptions, that then only need to be processed, recorded and approved. The invoices should be disguised or should look like regular transactions. The process becomes even more straightforward if the person who is initiating the bribe, is a designated authoriser of invoices/payments. This strategy is particularly effective as it allows the travel and entertainment activities to remain discreet and outside the purview of standard controls on travel and entertainment.

The real challenge with such schemes is the number of employees needed to organise and coordinate travel and entertainment. It involves planning trips, arranging tickets, arranging transportation, making reservations, recording invoices, approving invoices/payments, approving expenses, making payments, and recording transactions in the financial administration. This means that sphere of individuals engaged in the scheme as well as the individuals that has knowledge of the activities, tends to be more extensive compared to some other bribery schemes. Consequently, the likelihood of encountering resistance or the risk of concerns being raised increases. This requires bribe payers to get more creative, and especially more manipulative.

Step 3: Cover up the payments

Section 13 of the FCPA details the books and records provision. This provision mandates that organisations must maintain accurate and reasonably detailed records of their transactions. Specifically, organisations covered by the FCPA are required to devise and uphold a system of internal accounting controls to ensure the accuracy and reliability of their financial records. Many organisations that entered into settlement agreements with United States authorities regarding FCPA violations, at their core, allegedly violated the books and records provision rather than the act of bribery and corruption per se. This distinction underscores that the focus of such allegations often resides in the violation of the aforementioned books and records provision, rather than actual bribe payments. It highlights the importance of meticulously documenting transactions, substantiate the rationale behind travel and entertainment, and ensure that the value can be explained. I.e., it has a legitimate business purpose, is proportionate, is transparently documented, and there is no quid pro quo expectation and reasonable. Additionally, the existence of proper and transparent documentation is key.

A bribe scheme through travel and entertainment seems relativity simple and straightforward. However, organisations often have a system of internal controls to prevent misuse of travel and entertainment budgets. This among others include policies, approval procedures, limits on amounts spend, training and communication, budgetary controls, monitoring and management review. However, the more clever fraudsters that apply the schemes set out above should be able to circumvent these controls to a large extent. Another reason why these controls can easily be circumvented is because the line between ‘normal’ entertainment and ‘excessive’ entertainment is thin. Or said differently, it is not a thin line but rather a large grey area.

It is therefore it is important to supplement regular internal controls with detective measures. Such measures include the execution of compliance audits focused on bribery and corruption. Such should not only assess the design, implementation and effectiveness of controls but should also include testing of high risk transactions. Data analytics is another alternative to detect unusual patterns and behaviour. Are there outliers in travel and training spend? Can these outliers be explained? Are there outlier transactions in the period preceding key events such as winning a big tender, obtaining a license or winning a concession. And as always, in addition to these controls organisations should invest in and maintain and ethical culture that helps the organisation’s personnel to do the right thing. By maintaining a clear understanding of the boundaries between acceptable business practices and potentially illicit behaviour, organisations can safeguard their integrity and reputation while promoting ethical conduct within their business relationships.

In conclusion, by explaining how travel and entertainment can be misused for bribes, we shed a light on how involvement of bribery and corruption can be prevented or at least can be detected in an early stage. In subsequent blogs, we shall expand upon, among others, bribery and corruption through joint ventures, gift giving, charities and donations and we will also discuss nepotism.

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