Many companies, willingly or unwillingly, will have to deal with corrupt entities. The corrupt entity may be from the government or a private firm. To facilitate a deal, get favorable contracts, or secure the necessary permits, kickbacks will have to be given at some point. Though most jurisdictions outlaw the giving of kickbacks, this practice continues to be a way of life for many businesses. Obviously, the cost of the kickbacks is less than the benefit from the deal, or else, there is no point in handing them out. For these companies that give kickbacks, the money is treated as cost of doing business.
To deter this unsavory practice, tax agencies obviously don’t allow kickbacks to be expensed for tax purposes. The practice of giving kickbacks is also a criminal offense. However, for the financially creative, they’ll find ways to go around the restrictions.
A corruption scandal is currently making headlines. One party (OP) is alleging impropriety in a land deal that involved a high ranking official (HO). According to OP, this was how the kickbacks to HO were disbursed.
The Company (TC) sold shares of its subsidiary firm (SF) to a third party firm (TF) for a very very low price; so low that the shares were almost “given away” to TF, OP claims. TF at that time is a corporation that had no reported income. TC also lent TF a very very large amount.
A few years later, TC bought back the SF shares from TF. This time the shares were bought at their much much higher market rates. TC also wrote off the loans to TF as bad debts. OP claims that the money loaned to TF and the money used to buy back the SF shares from TF were actually kickbacks given to HO. TF, the firm that had no reported income to begin with, was just a dummy, according to OP.
The (not so) funny thing is that OP, who is exposing the alleged anomaly, was actually the signatory to the deal. HO denies everything. There was no trace of HO whatsoever in the documents of the deal, so it’s hard to say who’s actually telling the truth.
If the allegations are true, and nothing has really been proven yet, then what was alleged was actually a very creative way of expensing kickbacks.
I admit that I still have a lot to learn in finance, but there are probably some things that I don’t need to. This type of “creativity” is one of them.
– Finance, M.D.