Key Takeaways

  • Kickbacks are generally illegal when they influence decisions through improper compensation, particularly in government and healthcare sectors.
  • In private business, kickbacks may be illegal under state commercial bribery laws or if they result in harm to shareholders or consumers.
  • The legality depends on the context—who is involved, the nature of the payment, and whether there is a violation of fiduciary duty or antitrust laws.
  • Both federal and state laws prohibit specific types of kickbacks, including those in healthcare and government contracting.
  • Prosecutors often pursue kickbacks under statutes related to fraud, bribery, or anti-competitive practices.
  • Businesses should develop strong internal policies to prevent illegal conduct and avoid reputational and legal consequences.

A kickback definition in law refers to the misappropriation of funds that benefits a person with power or influence. Typically, that person goes on to use their power or influence to make another person or organization even richer.

Kickbacks are often the result of a corrupt bidding scheme. As such, the person in charge may award a contract to a particular company, even though that company did not come in with the lowest bid. Now, that company will profit by being awarded the bid and carrying out the contract.

The official who erroneously awarded the contract will end up receiving part of the profits. That portion is otherwise known as a kickback. Kickbacks fall under the category of anti-competitive practices.

Organized crime has been known to use kickbacks. In a way, they are a form of bribery because those kickbacks are payment for favorable treatment. Kickbacks come in many shapes and sizes. They come as gifts, money, credit, or anything of value. This is a corrupt practice because it interferes with a person's ability to make unbiased decisions.

Federal Statutes

Federal law prohibits kickbacks that involve government officials or funds that come from the government. Kickbacks that are exchanged between a government official and a contractor will be prosecuted under the federal bribery statute.

Kickbacks that are exchanged between contractors who are working on a federal contract are prosecuted under the Anti-Kickback Enforcement Act of 1986. Kickbacks exchanged between employees or foreign government officials will be prosecuted under the Foreign Corrupt Practices Act of 1977. Many states have commercial bribery statutes in place that prohibit kickbacks.

Although kickbacks are punishable under federal and state law, they are not technically illegal. If the kickback does not violate state or federal laws and it is offered to clients in the industry, the kickback may not be considered illegal. In fact, it may even be tax deductible.

Section 162(a) of the Internal Revenue Code allows for ordinary expenses that a business incurs throughout a taxable year to be deductible. This includes kickbacks if they're not illegal and aren't paid to an official, a federal government employee, or an employee of a foreign government. Cases exist where the courts ruled against certain kickbacks because they were not considered usual or customary.

Kickbacks in Private Business and State Laws

While federal statutes clearly prohibit kickbacks involving public officials, federal contracts, or healthcare services, the legality of kickbacks in private business is more nuanced. The key question—are kickbacks illegal in private business—depends on several factors, including applicable state laws, the nature of the transaction, and the relationship between the parties.

Many states have commercial bribery laws that criminalize kickbacks in private settings when they involve a breach of fiduciary duty. For example, if an employee accepts a payment from a supplier in exchange for directing business to them—without disclosing it to their employer—it may be deemed commercial bribery or fraud.

Factors that influence legality in private business include:

  • Breach of Fiduciary Duty: If an employee or agent accepts compensation that affects their impartial decision-making, it may be unlawful.
  • Lack of Disclosure: Secret kickbacks that are not disclosed to relevant stakeholders can be grounds for civil or criminal liability.
  • Intent and Outcome: Prosecutors examine whether the payment was intended to improperly influence business decisions.
  • State Commercial Bribery Statutes: Many states make it a criminal offense for an employee to receive undisclosed compensation from a third party related to their job duties.

While not every gift or incentive qualifies as a kickback, when a payment compromises ethical decision-making or creates an unfair competitive advantage, it may cross legal boundaries—even in the private sector.

Kickbacks in the Healthcare Industry

In the early 1970s, the government began focusing on the healthcare industry. As the cost of healthcare continued to rise, increased efforts were made to deter fraud. In 1995, the Medicare Fraud Statute was implemented. This statute prevents kickback schemes whereby hospitals pay physicians for referrals and drug manufacturers pay physicians to prescribe their medications to patients.

Essentially, this statute makes it illegal for any member of the healthcare industry to receive kickbacks, bribes, or rebates to coerce the recipient to purchase or order any service that Medicaid or Medicare reimburses for.

Experts in the field of healthcare fraud believe the Medicare Fraud Statute is a model for other anti-kickback statutes. in every area of the healthcare industry, not just Medicaid and Medicare.

Kickbacks in Other Industries

Although healthcare is the most heavily regulated area when it comes to kickbacks, other industries are not immune. Construction, defense contracting, finance, and even entertainment have faced high-profile kickback scandals.

Common scenarios include:

  • Real Estate: Agents steering clients toward specific services or properties in exchange for undisclosed compensation.
  • Procurement: Employees accepting payments from vendors to select their products regardless of price or quality.
  • Entertainment: Producers or promoters receiving under-the-table payments to favor certain artists or suppliers.

In industries lacking federal oversight like healthcare, enforcement often falls under state-level fraud statutes, anti-bribery laws, and civil lawsuits. Courts may also impose penalties under unfair competition or breach of duty claims.

Breaking Down Kickbacks

Kickbacks come in many forms, but they all feature some element of collusion. Here's an example:

  • Someone who manages the books for a business or the government might approve an invoice for goods or services at an inflated price or pay for subpar products.
  • The beneficiary of that arrangement would then pay the bookkeeper part of the difference, allowing both parties to benefit from the fraud.

Forensic investigators consider kickback schemes the most difficult white-collar crimes to investigate. That's because a kickback doesn't necessarily indicate quid pro quo harassment. Making a payment happens for many reasons. Some examples include simply to induce favor or a positive recommendation for the provider.

Kickbacks are often seen in procurement contracts. If a government employee responsible for managing the contractors on an infrastructure project receives a kickback for selecting one contractor over another, the most qualified contractor may not win the bid. An example of this would be a contractor reaching out to the procurement officer and offering him concert tickets. That would be perceived as a kickback.

Penalties and Consequences for Kickback Violations

Penalties for illegal kickbacks vary widely based on jurisdiction and the specific laws violated. In general, they may include:

  • Criminal Charges: Fines, probation, or imprisonment under bribery, fraud, or anti-kickback statutes.
  • Civil Penalties: Damages, injunctions, or restitution, especially when harm is caused to consumers, shareholders, or competitors.
  • Professional Sanctions: Loss of licenses or disqualification from federal contracting opportunities.
  • Reputational Harm: Damage to a business’s public image and loss of client trust.

Private businesses found guilty of engaging in kickback schemes may also be subject to breach of contract claims, especially if their actions violate standard procurement terms or internal ethics policies.

Preventing Kickbacks in Your Business

Because kickbacks can occur in many forms and contexts, companies—particularly in procurement-heavy industries—should take proactive steps to mitigate risk.

Best practices include:

  • Developing Clear Ethics Policies: Outline what constitutes a kickback and establish zero-tolerance guidelines.
  • Training Programs: Educate employees on ethical conduct, gift policies, and reporting mechanisms.
  • Whistleblower Protections: Encourage internal reporting by ensuring anonymity and non-retaliation.
  • Vendor Management: Implement transparent bidding processes and audit trails for high-value contracts.

Frequently Asked Questions

  • 1. Are kickbacks illegal in private business?
    Yes, in many cases. While private-sector kickbacks are not regulated under the same federal statutes as government-related ones, they may still be illegal under state commercial bribery or fraud laws.
  • 2. What’s the difference between a kickback and a commission?
    A commission is a legitimate payment disclosed and agreed upon by all parties. A kickback, in contrast, is often secret and given to improperly influence decisions.
  • 3. Can a company be liable if an employee accepts a kickback?
    Yes. If the employee acts within the scope of their duties, the company may face liability for failing to prevent or detect the conduct.
  • 4. Are all gifts considered kickbacks?
    No. Modest gifts or perks may be allowed if they don’t influence business decisions or violate internal policies or laws. Disclosure and intent are key.
  • 5. How can businesses protect themselves from kickback liability?
    Establish clear compliance programs, perform internal audits, train employees on ethical standards, and investigate any suspicious activity promptly.

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