FCPAméricas Blog
“Empresas Fantasmas”: Detecting Phantom Vendors
9.07.2012
Speak to an Argentine about public corruption and he or she will probably invoke the term “empresa fantasma” at some point. Phantom vendors are a common form of facilitating bribery in Argentina, as noted in reports there. In fact, they are common in many parts of the world. Companies focused on FCPA compliance should be particularly alert to the risk.
How does it work? Usually a local employee sets up a bogus consultancy or contractor. The company then pays the entity for some purported good or service. In actuality, the entity provides nothing of value and the money is kept for other purposes, sometimes self-enrichment, other times to pay bribes to officials for a business benefit in return.
When conducting internal investigations or audits, these are ways to detect empresas fantasmas:
Paid and Approved Vendor Lists. A common control that companies use to avoid phantom vendors is an approved vendor list. Third parties added to the list have been vetted and determined to be legitimate and necessary to the company’s business. Companies often allow exceptions for the use of additional vendors not on the list when they are essential and time for adding them is limited. Because of this, approved vendor lists do not always avoid risks completely.
When investigating phantom vendors, one can compare paid vendor lists to approved vendor lists, thereby identifying which paid vendors have not yet been vetted through the normal process. This will yield a universe of potential phantom vendors. It is helpful to pay close attention to the ones that purportedly offer goods and services of the intangible or consumable variety. Schemes are easier to hide in these areas because they usually do not require other company records, like receiving documents or inventory.
Verification of Goods or Services. To detect phantom vendors, one can review invoices, checks to vendors, purchase orders, inventory records, receiving documents, and other books and records for proof that goods or services were actually received. When reviewing documentation submitted by the vendor, visuals matter. Do the invoices appear unprofessional? Is the contact information incomplete? Are invoice numbers in odd sequences? Are numbers in round amounts? Is there supporting documentation? Do cancelled checks show any unusual endorsements? One can then verify the information listed in the sales documentation. Check and see if the new machinery is actually there and in use. See if the broken window in the executive’s office was actually replaced with a new one. Look at the consultant’s strategy report to see if it matches the description on the invoice and speak with the businessperson about how those strategies have been put to use.
Common Red Flags. Look for common features in the relationship that raise concern. Are payments made with no invoices at all? Do addresses include only PO Box numbers, which are generally harder to verify? Have certain contracting personnel shown a special interest in using a specific vendor rather than not using one at all? Are all transactions with that vendor handled by only one person at the company?
Phantoms Setting Up Phantoms. Schemes have been known to include phantom vendors that set up other fake vendors so that a company can receive bids from more than one source for the same work. This makes the scheme appear more legitimate. It can also help participants inflate costs.
Vendor Histories. Sometimes phantoms can be identified by looking at historical patterns in their use. Maybe a company’s purchases from them started small and then grew over time? Maybe the company frequently purchases from the vendor at a level just below that which requires additional authorization? Maybe a company started using the vendor after a particular employee joined and stopped after the employee left?
The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.
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© 2013 Matteson Ellis Law, PLLC
Post authored by Matteson Ellis, FCPAméricas Founder & Editor
Comments
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