Cafeteria Kickbacks

How food-service providers like Sodexo bilk millions from taxpayers.

Lucy Komisar March 3, 2009

Editor’s note: Gen­er­ous sup­port for this arti­cle was pro­vid­ed by the Inves­tiga­tive Fund at the Nation Institute.

Food-service companies buy products from vendors that pay bigger rebates—or kickbacks—rather than those that offer cheaper, locally grown or higher quality food.

At the end of the 2006 school year, children’s nutri­tion advo­cate Dorothy Bray­ley had a dis­turb­ing con­ver­sa­tion with a local dairy rep­re­sen­ta­tive. He had come to her office to dis­cuss par­tic­i­pa­tion in the sum­mer trade show of food providers she runs as direc­tor of Kids First Rhode Island.

At the time, the state’s schools were buy­ing 100,000 con­tain­ers of milk each week. The sales­man for Gare­lick Farms, New England’s largest dairy, told Bray­ley that Sodexo – a food and facil­i­ty man­age­ment cor­po­ra­tion that man­aged most of the state’s school lunch pro­grams – was pay­ing Gare­lick more than com­peti­tors in order to get a big­ger rebate.

State Edu­ca­tion Depart­ment records, which are required to chart milk prices, showed that Sodexo passed on the price hike, billing schools 24 cents to 27 cents a half-pint, while milk was avail­able from Ara­mark, a com­pet­ing com­pa­ny, for 18 cents to 21 cents a half-pint – a loss to schools and fam­i­lies of more than $100,000 a year.

That’s just a taste of the hun­dreds of mil­lions of dol­lars of rebates” – or kick­backs from sup­pli­ers – that Sodexo, a $20 bil­lion-a-year glob­al leader in the food and facil­i­ty man­age­ment indus­try, has tak­en while oper­at­ing cafe­te­rias and oth­er facil­i­ties for schools, hos­pi­tals, uni­ver­si­ties, gov­ern­ment agen­cies, the mil­i­tary and pri­vate com­pa­nies across the coun­try, accord­ing to evi­dence pro­vid­ed by whistle­blow­ers and inter­nal com­pa­ny documents.

In some cas­es, such rebates vio­late the con­tract­ing poli­cies of fed­er­al agen­cies. In oth­ers, undis­closed rebates may con­sti­tute fraud.

Sodexo’s deputy coun­sel Tom Morse declined to reveal the size of Sodexo’s rebate from Gare­lick Farms, and he reject­ed the notion that rebates are abu­sive. Dean Foods, which owns the dairy, declined to comment.

How the rebates work

Sodexo, found­ed in France in the 60s to do mar­itime cater­ing, now has more than 30,500 oper­at­ing sites and 355,000 employ­ees in 80 coun­tries. It report­ed rev­enues last year of $20.4 bil­lion, and prof­its of more than $1 bil­lion. It ranks sec­ond in food ser­vices world­wide, after U.K.-based Com­pass Group.

The rebate sys­tem, endem­ic to the indus­try, works like this: A food man­age­ment com­pa­ny like Sodexo signs con­tracts to run a client’s cafe­te­ria. The com­pa­ny buys sup­plies from ven­dors such as Coke, Kellogg’s or Tyson. Then, cho­sen ven­dors send the man­age­ment com­pa­ny rebates based on a per­cent­age of sales.

Tom Mac­Der­mott, a New Hamp­shire indus­try con­sul­tant who nego­ti­ates for clients with Sodexo and oth­ers, says kick­backs date back half a century.

In the 50s, it was cash in an enve­lope slipped to the chef,” says Mac­Der­mott. As com­pa­nies grew, they were get­ting back 5 per­cent from the pro­duce ven­dor, 2 per­cent from the meat guy, 2 or 3 per­cent from dry goods and dairy.”

In the Unit­ed States, Mac­Der­mott esti­mates that man­age­ment com­pa­nies such as Sodexo, Com­pass and Ara­mark pro­vide meals, cater­ing and vend­ing machines to vir­tu­al­ly every fed­er­al agency, 95 per­cent of cor­po­ra­tions with food ser­vice, 90 per­cent of uni­ver­si­ties, 40 per­cent of health­care facil­i­ties, and 30 per­cent of schools. If you’ve eat­en at a pub­lic cafe­te­ria, you’ve prob­a­bly eat­en food sourced by one of these companies.

As major cor­po­ra­tions and gov­ern­ment insti­tu­tions increas­ing­ly out­sourced pur­chas­ing, kick­backs to mega­cor­po­ra­tions like Sodexo became rife – mak­ing up at least 10 per­cent of sales.

Con­tracts are typ­i­cal­ly cost-plus, mean­ing clients pay the cost set by the sup­pli­er, plus a per­cent­age of that as a fee set by the food-ser­vice firm. There are gen­er­al­ly no cost caps, so rebates – which are not deduct­ed from what the food-ser­vice com­pa­ny charges clients – mean high­er meal prices. They also lim­it food choice and qual­i­ty: food-ser­vice com­pa­nies buy prod­ucts from ven­dors that pay big­ger rebates rather than those that offer cheap­er, local­ly grown, or high­er qual­i­ty food.

Sev­er­al man­agers at small com­pa­nies described the impact of Sodexo’s demand for rebates, but declined to speak for attri­bu­tion out of fear that Sodexo would lock them out of future buys.

A man­ag­er for a small New Eng­land pro­duce sup­pli­er describes the sys­tem this way: Say you’re sell­ing a case of apples at $20 and you have to pay 15 per­cent shel­tered income [or rebate] to Sodexo. So now you have a $23 case that should be going at $20,” he says. The price increase push­es the item off the menu. Now the food-ser­vice direc­tors in the schools will use a frozen item to sub­sti­tute the fresh produce.”

Accord­ing to the man­ag­er, They [Sodexo] squeezed hun­dreds of thou­sands of dol­lars away from us.” But he adds that his com­pa­ny had no choice but to pay Sodexo rebates: They own a lion’s share of the mar­ket place. If we were to give up the busi­ness, some­one would be dying to jump in and take it.”

In anoth­er case, an East Coast ice cream man­u­fac­tur­er says he stopped work­ing with Sodexo because the 10 per­cent kick­backs the com­pa­ny demand­ed cut prof­its so much that it wasn’t worth the business.

The school busi­ness in win­ter keeps us going,” he says. Ini­tial­ly any school in the sys­tem that want­ed ice cream prod­ucts would just call us up, so we could sup­ply them. Then Sodexo comes in. You want to deal with Sodexo facil­i­ties, you have to sign a con­tract. [And Sodexo] off the record says you have to send us a rebate check.

They try to intim­i­date you,” he adds. They have such a grasp on the mar­ket. They force you to work on low mar­gin, 20 per­cent. If you give them a 10 per­cent kick­back, you’re pret­ty much work­ing for noth­ing. We lost about $30-to-$40,000 a year, which is a lot for a small businessman.”

He con­tin­ues, We had been in busi­ness since 1930, so we were entrenched in most of the schools. The PTAs would run it. They used the mon­ey to buy school equip­ment. When Sodexo got involved, there was no mon­ey for the PTAs, the kids, they took it all.”

Major changes’

Recent­ly, a back­lash has emerged against these rebates. A U.S. Depart­ment of Agri­cul­ture (USDA) audit found that, in its sam­ple, the nation­al school lunch pro­gram was pay­ing hun­dreds of thou­sands of dol­lars a year more because food-ser­vice man­age­ment com­pa­nies improp­er­ly retained cash-back discounts.

In Octo­ber 2007, the USDA ruled that food-ser­vice con­trac­tors like Sodexo had to pro­vide schools with invoic­es show­ing the rebates received from food ven­dors – and that fed­er­al reim­burse­ments would not pay those amounts.

The mon­ey involved is mas­sive. Charles C. Kir­by, for­mer USDA region­al direc­tor for child nutri­tion in Atlanta, says he ran a Mis­sis­sip­pi Edu­ca­tion Depart­ment coop­er­a­tive buy­ing pro­gram from 1992 to 2001. He dealt direct­ly with com­pa­nies such as Heinz and Kellogg’s and received rebates rang­ing from 10 per­cent to 50 per­cent. In the last year, his rebates were $15 mil­lion out of $90 mil­lion in purchasing.

You can imag­ine with a large cor­po­ra­tion like Sodexo, the vol­ume they might have on rebates,” says Kirby.

The Pen­ta­gon, too, con­duct­ed audits that found over­charges for its out­sourced food ser­vices. Last May, when the Defense Depart­ment called for bids, it announced a major change.” Con­trac­tors would have to iden­ti­fy rebates that they were pock­et­ing. If they passed on such rebates to oth­er clients, they would have to give the same deal to the Pen­ta­gon, which could require doc­u­men­ta­tion and audit records.

Strong-arm­ing into com­pli­ance’

Jay Carciero, 35, a stocky, intense man, lives with his wife and three chil­dren in a small Amer­i­can-flag-fly­ing blue clap­board home in Woburn, Mass. His soft-spo­ken broth­er John, 37, divorced with one child, lives a few miles away in Read­ing, in a white clap­board A‑frame.

The broth­ers worked for Sodexo for years: Jay as Sodexo’s man­ag­er of food and facil­i­ties for the Lahey Clin­ic hos­pi­tal, Peabody, Mass., and John at Mass­a­chu­setts’ Mel­rose-Wake­field Hos­pi­tal, and then at Low­ell Gen­er­al Hospital.

In 2005, they sound­ed alarms about Sodexo demand­ing kick­backs. Both were even­tu­al­ly fired.

In April 2005, John filed a com­plaint with a busi­ness abuse hot­line Sodexo set up to com­ply with the Sar­banes-Oxley Act. He said the com­pa­ny was using strong-arm tech­niques” to get rebates from vendors.

Sodexo attor­ney Tom Morse claims that John Carciero is a dis­grun­tled employ­ee who filed his com­plaint only after Sodexo began an inves­ti­ga­tion of Jay for expense-account irreg­u­lar­i­ties (about which Morse declined to sup­ply details).

The expla­na­tion lacks cred­i­bil­i­ty because, months lat­er, in Jan­u­ary 2006, Jay was pro­posed by a super­vi­sor for man­ag­er of the year. More impor­tant­ly, the Carcieros sup­plied In These Times with stacks of inter­nal Sodexo doc­u­ments that bol­ster their claims.

Accord­ing to the Sodexo con­tract, the company’s rebate sys­tem at Lahey Clin­ic worked like this: Sodexo got a man­age­ment fee from the clin­ic that amount­ed to 0.9 per­cent of invoic­es from region­al and nation­al sup­pli­ers. The con­tract with Lahey lim­it­ed pur­chas­es to Sodexo-approved ven­dors, which in prac­tice, elim­i­nat­ed most local mer­chants, so Sodexo’s fees were effec­tive­ly cal­cu­lat­ed to include all rebates. The rebates were not report­ed to the hospital.

We weren’t aware of Sodexo get­ting rebates that just went to Sodexo when they should have been com­ing in part to us,” says Phillips Axten, the hospital’s attorney.

Jay Carciero claims that the hos­pi­tal should have been aware; he said he tried to show evi­dence of rebates to Lahey CEO Dr. David Bar­rett, but he did not want to look at doc­u­ments I was giv­ing to him.”

Sodexo, as the hospital’s agent, had a fidu­cia­ry duty to get the best prod­uct at the best price. Instead, Jay Carciero says the com­pa­ny direct­ed man­agers to buy food that sup­plied the high­est rebates. He says he felt betrayed by a com­pa­ny” and felt anger at their rip­ping off the most vul­ner­a­ble cit­i­zens of our soci­ety – chil­dren, the elder­ly, the sick and dying.”

In These Times sent Sodexo coun­sel Morse copies of key inter­nal Sodexo e‑mails and doc­u­ments that back up the Carcieros’ charges, ask­ing Morse if any appeared not gen­uine. He raised no chal­lenge. In the doc­u­ments, Sodexo uses a euphemism for rebates, call­ing them vol­ume dis­count allowances” (VDAs). It asks for bills off invoice,” mean­ing one invoice it can give clients and keep anoth­er for itself – a sys­tem that can dis­guise rebates. Com­pli­ant” refers to ven­dors who sup­ply rebates.

Doc­u­ments show that demand­ing rebates is at the heart of Sodexo’s busi­ness plan. Tony Alib­rio, then Sodexo USA Health­care Ser­vices pres­i­dent, wrote in a July 21, 2000 memo addressed to Health Care Food Ser­vice Accounts” that man­u­fac­tur­er and dis­trib­u­tor rebates sup­port our entire Pur­chas­ing & Pro­cure­ment Depart­ment and network.”

Man­agers were told to avoid cheap­er prod­ucts in favor of those that pro­duced rebates. Direc­tor of Pro­cure­ment Bob Sulick, in a Sodexho’s Bul­letin dat­ed March 22, 2004, wrote, A man­ag­er told me today how he saves mon­ey by buy­ing cans of toma­to prod­ucts from his fruit and pro­duce ven­dor. Please don’t let this hap­pen. Peo­ple should buy the com­pli­ant prod­ucts through their prime ven­dors. That is where the high­est return is.” (Sodexo dropped the h” from its name last year.)

Anoth­er doc­u­ment shows top com­pa­ny lead­er­ship enforc­ing the rule that only ven­dors offer­ing rebates should get Sodexo busi­ness. Accord­ing to the doc­u­ment, Richard Mace­do­nia, then CEO of Sodexo USA, told employ­ees at a Feb. 19, 2004 meet­ing at City of Hope Nation­al Med­ical Cen­ter in Los Ange­les, We want to have a com­pli­ant pro­gram, because it is bet­ter for the com­pa­ny as a whole. So, we intend to make it hard­er to buy out­side of the pro­gram unless our client wants a spe­cif­ic brand.”

In addi­tion to pres­sure from the top, the com­pa­ny set up bureau­crat­ic road­blocks to order­ing from non-pre­ferred ven­dors, accord­ing to Jay Carciero. When you go into a unit, you are giv­en a com­put­er,” he says. When you need to order food or sup­plies, you order it through a por­tal con­trolled by the com­pa­ny. If you want to use the farm down the street sell­ing green beans, you couldn’t do it with­out spe­cial approvals and lots of headaches.”

Accord­ing to anoth­er doc­u­ment, Sodexo USA Pres­i­dent Michel Lan­del was asked at a 2004 man­agers’ meet­ing in Ver­mont, Will units [clients] ever see rebate mon­ey for being prod­uct com­pli­ant?” Lan­del respond­ed instead by say­ing, We have set up goals for both prod­uct and ven­dor com­pli­ance for each of our accounts and our suc­cess relies heav­i­ly on this.”

Sodexo attor­ney Morse argues that work­ing only with com­pli­ant” ven­dors is nec­es­sary to assure health and safe­ty and to guar­an­tee sup­plies in case of shortages.

When we buy from a ven­dor, we make a com­mit­ment to that ven­dor that they will be a pre­ferred ven­dor or we will buy a spe­cif­ic quan­ti­ty from them or will buy over a peri­od of time,” he says. He adds that the first thing we vet our ven­dors for is safe­ty” against food-borne ill­ness­es and the sec­ond con­sid­er­a­tion is if there’s a food short­age, we want to be at top of their list to make sure we get it.”

How­ev­er, Morse could offer no evi­dence that either prob­lem had occurred.

Under con­tract

Sodexo’s U.S. gov­ern­ment pro­cure­ment pro­gram amounts to more than hun­dreds of mil­lions a year. A 2005 Sodexo spread­sheet tracked rebate increas­es from sales to 13 region­al Fed­er­al Reserve banks, the FBI Acad­e­my, the IRS, the Trea­sury Depart­ment, the Library of Con­gress, the Cen­ter for Medicare/​Medicaid Ser­vices, NASA and the Gen­er­al Ser­vices Admin­is­tra­tion (GSA), which han­dles con­tracts for itself and for most oth­er fed­er­al agen­cies. The spread­sheet showed rebate points from sales to CBS, CNN and CNBC.

The GSA declined to detail how its con­tracts address rebates. But lit­tle evi­dence exists that the agency is watch-dog­ging the prob­lem. In May 2008, an inves­ti­ga­tion out­sourced to the Post Office Inspec­tor Gen­er­al con­clud­ed that the GSA’s Fed­er­al Acqui­si­tion Ser­vice was dysfunctional…that GSA lead­er­ship appeared to be sig­nal­ing its employ­ees to favor the com­mer­cial inter­ests of cer­tain large vendors.”

When asked about rebates received from gov­ern­ment agen­cies, Morse says they would be passed on to the fed­er­al gov­ern­ment, but he did not pro­vide evi­dence that this had occurred.

A 1997 direc­tive from the fed­er­al Office of Man­age­ment and Bud­get (OMB), Cir­cu­lar A‑87, requires that rebates to con­trac­tors that reduce costs have to be cred­it­ed to fed­er­al awards. How­ev­er, Wash­ing­ton has been lax in enforc­ing it.

The Bush administration’s OMB Deputy Comp­trol­ler Daniel Wer­fel told In These Times by e‑mail, We are not aware of any oth­er agen­cies who took the step of clar­i­fy­ing their pro­gram rules with respect to rebates, as USDA did.” Nev­er­the­less, he added, At this time, we do not believe it nec­es­sary that all agen­cies ini­ti­ate a rule­mak­ing sim­i­lar to the USDA rule.”

The Defense Depart­ment may have issued new, more demand­ing con­tract­ing guide­lines, but indi­vid­ual ser­vices oper­ate under their own rules, which have allowed rebates, some­times by ignor­ing them. The Marine Corps has a fixed price-per-meal con­tract with Sodexo, so rebates are not at issue. The Air Force says it has no pol­i­cy on rebates, while the Navy says its pol­i­cy is under review. The Army declined to respond to queries.

The USDA 2002 schools audit shows that even when pro­cure­ment doc­u­ments required return of rebates earned through pur­chas­es, food-ser­vice man­age­ment com­pa­nies dis­re­gard­ed the rule and rou­tine­ly kept them.

Morse says rebates were passed on to schools and cit­ed the exam­ple of Rhode Island. How­ev­er, busi­ness man­agers from the New­port and Coven­try school dis­tricts explain that while Sodexo said it used rebates to can­cel out fees the schools might have to pay, account­ing was inadequate.

It’s dif­fi­cult to police,” says Antho­ny Fer­ruc­ci, busi­ness man­ag­er of the Coven­try Dis­trict. We don’t get invoic­es per item.”

East Green­wich School Dis­trict busi­ness man­ag­er Mar­i­anne Craw­ford says she, too, was aware of rebates but nev­er got dol­lar figures. 

A Sodexo rep­re­sen­ta­tive told Karen Works, who man­ages food-ser­vice con­tracts for the Kansas Edu­ca­tion Depart­ment, that account­ing dif­fi­cul­ties made it too hard for the com­pa­ny to return rebates to Kansas schools. 

His exam­ple was if we buy $1 mil­lion worth of chick­en from Tyson, we get $10,000 back, spread out among all the Sodexo con­tracts,” she says. How will they iden­ti­fy it?”

How­ev­er, as the Sodexo spread­sheet shows, and as Morse acknowl­edges, Sodexo has a sophis­ti­cat­ed com­put­er sys­tem for track­ing rebates. It knows exact­ly what per­cent­age of Tyson’s rebate to Sodexo per­tains to each client.

A cor­po­rate rip-off

The rebate sys­tem rais­es issues that could end up in court. For exam­ple, Sodexo serves some 1,800 hos­pi­tals, many of which fill out cost reports for fed­er­al Medicare and Med­ic­aid reimbursements.

Their cost is what Sodexo charges them,” Morse says. So they can fill out their reports based on the amounts Sodexo charges them. It’s dis­closed to the clients that we get allowances. There real­ly isn’t an issue here.”

How­ev­er, Jim Shee­han, New York State’s Med­ic­aid Inspec­tor Gen­er­al, points out that this may vio­late the Medicare-Med­ic­aid Anti-Kick­back Act that man­dates, as Shee­han explains, that no ven­dor can give any­thing of val­ue in whole or part in cash or kind in return for refer­ral of ser­vice paid for by gov­ern­ment.” A com­pa­ny like Sodexo can get a dis­count,” says Shee­han, so long as it’s accu­rate­ly report­ed on the cost report.” But a secret rebate would not meet that standard.”

Robert Vogel, a Wash­ing­ton attor­ney who rep­re­sents whistle­blow­ers, says that if a con­tract calls for reim­burse­ment of actu­al costs and the com­pa­ny is hid­ing a rebate, then that could con­sti­tute fraud.

If the pur­chas­ing agent” – for exam­ple, the Sodexo staffer in a hos­pi­tal or school – is get­ting rebates from the sell­er of the prod­uct and not dis­clos­ing the rebates, it may be affect­ing the pur­chas­ing agent’s deci­sion on what prod­uct to buy,” Vogel says. That would be a kickback.”

Law enforcers, take note.

Lucy Komis­ar is an inves­tiga­tive jour­nal­ist who spe­cial­izes in uncov­er­ing cor­po­rate mis­con­duct. She deals fre­quent­ly with off­shore banks and cor­po­rate secre­cy and their links to cor­po­rate crime; tax eva­sion by the rich and pow­er­ful; empow­er­ment of dic­ta­tors and oli­garchs; bribery and cor­rup­tion; pay-to-play pol­i­tics; drug, arms and peo­ple traf­fick­ing; and ter­ror­ism. Her arti­cles are archived at thekomis​arscoop​.com.
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