Bribes and Kickbacks: Things that People Do
By Ricardo J. Zayas, CPA, CFE, CVA, CFF, Partner, Advisory Services
I am routinely engaged by Counsel to assist in matters involving alleged fraudulent conduct and violations of United States criminal statutes. A question which can arise but rarely, if ever, is answered is this; What motivated the perpetrator(s) to engage in the alleged illegal conduct?
Over time, I stopped asking the question and merely accepted that explanations offered by criminal defendants were likely self-serving. Additionally, in most instances, these explanations were irrelevant to whether the perpetrator / client actually engaged in some criminal offense. As a result, I am generally content to leave the task of discerning factors that motivated a defendant / client to embark on a certain course of action to psychologists, sociologists and others trained in such matters.
However, a recent case out of the Southern District of California has piqued my interest and rekindled my interest in understanding the motivations of participants. Dubbed by the press as the “Fat Leonard” case, it may be one of the most wide-spread corruption cases of which few people are aware. Most recently (i.e. November 2018), a former U.S. Navy Captain pleaded guilty to criminal conflict of interest charges and a former U.S. Navy Master Chief was sentenced on corruption charges to 17 months in prison. A November 2018 press release by the U.S. Attorney in San Diego described the guilty plea and sentencing as “… yet another sad chapter in what is the largest fraud and corruption scandal in the history of the U.S. Navy” and noted that “So far, 33 defendants have been charged and 22 have pleaded guilty.”
So, what’s this all about? In short, Leonard Glenn Francis and his Singapore based ship husbanding company, Glenn Defense Marine Asia (GDMA), pleaded guilty to conspiracy to commit bribery, bribery and conspiracy to defraud the United States in violation of 18 U.S.C.§ 371, 18 U.S.C. § 201(b) (1) (A) and (C) and 18 U.S.C.§ 371, respectively. Francis and GDMA also agreed to forfeit $35 million and pay full restitution to the Navy, in an amount to be determined at sentencing.1
The statute in question, Title 18 § 201 of the United States Code (U.S.C.), is entitled “Bribery of public officials and witnesses.” This statute covers two distinct offenses; “bribery” and the acceptance of “gratuities.” The “bribery” offense prohibits the giving or accepting of anything of value to or by a public official, if the thing is given “with intent to influence” an official act, or if it is received by the official “in return for being influenced.” The “gratuity” offense prohibits a public official from accepting the same thing of value. If the person does so “for or because of” any official act, and prohibits anyone from giving any such thing to him for such a reason.
In short, both the payment of a bribe or gratuity and the acceptance of a bribe or gratuity are prohibited under section 201. Many of the statutes dealing with bribes or other illegal payments prohibit both the payment and acceptance of the illegal payment.2
The 35 page “Stipulated Statement of Facts” included with the Francis and GDMA plea agreements outlines a pattern of conduct beginning in 2004 and continuing into September 2013, whereby Francis and GDMA:
- Defrauded the Navy of tens of millions of dollars by routinely overbilling for various goods and services, including fuel, tugboat services and sewage disposal;
- Gave Navy officials millions of dollars in gifts and expenses, including over $500,000 in cash; hundreds of thousands of dollars in prostitution services; travel expenses, including first class airfare, luxurious hotel stays and spa treatments; lavish meals, including Kobe beef, Spanish suckling pigs, top-shelf alcohol and wine; and luxury gifts, including Cuban cigars, designer handbags, watches, fountain pens, designer furniture, electronics, ornamental swords and hand-made ship models;
- Solicited and received classified and confidential U.S. Navy information, including ship schedules;
- Sought and received preferential treatment for GDMA in the contracting process; and
- Bribed a federal criminal investigator to learn more about the federal investigation of his company.
The “Stipulated Statement of Facts” also provided details regarding a former Navy officer who admitted using his influence to benefit Francis and GDMA by hand-delivering Navy ship schedules to GDMA or emailing them directly to Francis on dozens of occasions, each time taking steps to avoid detection by law enforcement or Navy personnel. This same former Navy officer admitted that Francis plied him with lavish meals, alcohol, entertainment, gifts, dozens of nights and incidentals at luxury hotels, and the services of prostitutes. After accepting these gifts, this former Navy officer worked to direct Naval ships to GDMA’s port terminals, including steering an aircraft carrier and its strike group to Port Klang, Malaysia, one of several “fat revenue GDMA ports”.
So, how did so many people sworn to “support and defend the Constitution of the United States” became participants in this criminal scheme? What factors led them to this point? I am reasonably confident, none of these Navy personnel envisioned finding themselves in this situation when they began their careers.
Having seen this movie before (i.e. conducted similar investigations), I suspect Francis was able to identify multiple persons willing to participate in his illegal scheme. As with any good spy novel, the initial contacts were seemingly innocuous. Over time, these contacts morphed into the lavish events described in the plea agreements creating a new norm of acceptable conduct for the perpetrators. At some point in this process requests were made for perceived innocuous information regarding ship movements. These initial requests were additional efforts to lure the perpetrators / participants further into the web until reaching a point where they were subject to coercion, whether real or perceived, by either Francis or their peers.
While the above narrative describes how the perpetrators may have become enmeshed in the conspiracy, it doesn’t address the why. For some insight into why, we can look to Donald Cressey and his “Fraud Triangle.” The “Fraud Triangle” identifies the following three factors that lead a person to engage in fraud.
- Perceived unshareable financial need;
- Perceived opportunity; and
Cressey is only one of many researchers who have delved into the psychological characteristics of individuals who engage in fraudulent activities / behavior.
The “Fat Leonard” case highlights the importance of internal control practices and policies and the apparent consequences of failing to monitor these controls. It also reinforces problems that arise when multiple parties collude to commit some violation.
The accounting and auditing profession continually reminds clients and others of so-called “red flags” or “badges of fraud” (i.e. circumstances that increase the risk of loss to fraud or other misconduct). Some ‘red flags” that appear to have been present in the Francis / GDMA matter include “Environmental” red flags such as:
- Poor Management Philosophy (“Tone at the Top”);
- Confusion about Ethics: and
- Loose Internal Controls3
Also, active maintenance of the following fraud control measures for a purchasing function may have led to earlier detection.
- Maintaining an active vendor compliance / audit policy;
- Obtaining and maintaining proper documentation;
- Securing proper approvals;
- Segregation of duties;
- Maintaining written policies on interaction with vendors;
- Maintaining hotlines;
- Job rotation; and
- Competitive bidding
The definitive story on the “Fat Leonard” matter is still to be written. No doubt the Navy and other governmental authorities are actively performing a post-mortem and will address the various deficiencies that allowed this situation to go on for nine years.
1. Plea agreements between Francis and GDMA and United States.
2. United States attorney Manual (USAM).
3. These three factors were derived from a hypothesis which Cressey referred to as “Other People’s Money”.