What is related-party transaction fraud?

• A. Transactions with related parties at arm's-length terms used to ensure fair pricing.
• B. Related-party transactions are always legitimate and require no disclosure.
• C. Transactions with unrelated parties at non-arm's-length terms.
• D. Related-party transaction terms used to conceal losses or siphon funds.

Answer: (D)

Related-party transaction fraud happens when a deal between entities that have a close relationship is used to manipulate financial results, typically to conceal losses or siphon funds. The key is that the terms are not at arm's length—they don’t reflect fair market conditions and are arranged to benefit the related party rather than the company or its shareholders. Related parties can include family members, affiliated companies, or executives with influence over the entity. When terms are non-arm’s-length and there’s insufficient independent oversight, it opens the door to hiding losses or diverting assets, which is the essence of the fraud described. The other descriptions describe legitimate, arm’s-length pricing, or transactions with unrelated parties, which do not fit the idea of related-party fraud.