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Procurement Fraud
Information on Procurement Fraud.
What is Procurement Fraud?
Procurement fraud is any unlawful activity at any stage of the procurement cycle, from the decision to procure, to the conclusion of the contract. It includes the purchase and commissioning of goods, works and services by the council. It can be perpetrated by those inside or outside the organisation.
Impact of Fraud on Procurement
It is estimated that Councils in England spend £55 billion in goods, services and works and that between 0.5% and 5% (£275 million to £2.75 billion) is lost through fraud and or error.
Nature of ‘fraud’ is that it is hidden – known identified fraud may only be the tip of the iceberg.
Public procurement can be attractive to organised criminals and, given the services councils provide, this carries significant risk for both councils & communities.
Growing areas (Commercialisation) are:
- Collusion / Fixed pricing
- Friends and family
- Corruption (including gifts and hospitality)
- Overcharging / Fictitious Invoices
- Overstating Performance
The areas of Adult Social Care provision and construction are examples highlighted as areas of particular concern, given the high level of spend and complexity of the supply chains involved.
How can we identify Procurement Fraud?
When discussing the issue of fraud the most obvious question is how difficult is it to spot?
Chances are you have witnessed potential signs of procurement fraud in everyday working life, so look out for those potential ‘red flags’.
It should be noted a red flag is an ‘indicator' there may be issues or concern, but doesn’t necessarily mean there is fraud
Procurement fraud can happen at any stage of procurement cycle, not just at award.
There are times when we are aware of a feeling that something is not quite right. This is our professional scepticism at work! We can’t rely on our feelings alone, there are often ‘red flags’ – where things appear a bit out of the ordinary or not as we’d expect, which point us in the direction of needing to do some further work to allay our concerns, or indeed, to highlight where something is wrong.
This summary aims to set out some red flags to identify circumstances, which may indicate the need for further investigation. While red flags do not always mean there is an issue, they are intended to help you reflect, consider what the issue may be and, potentially raise your concern in the first instance with your manager. A list of controls to help mitigate the risk of fraud and error is provided, and controls may be relevant to more than one risk area. Examples of Red flags take a number of forms, where things have or could go wrong are also included:
- Behaviour that is ethically or morally wrong
- A member of staff has a meeting with a supplier and they insist they go alone. Why? If these are regular meetings with a supplier off-site with no expense forms completed, who is paying?
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A staff member is talking about new job prospects with a supplier.
Another common procurement fraud risk in both the public and private sectors globally is work that is sole-sourced, often without proper justification. Possible red flags are:
- The work was awarded to a supplier when it could have been awarded to a number of other contractors, as this service is commonly available.
- The product or service has been bought previously, but was not previously sole-sourced.
- A supplier has been awarded multiple sole-source packages in the past without justification.
Another opportunity for procurement fraud to occur is through contract variations or ad hoc works. Here the possible red flags are:
- The variations have a high value compared to the original contract. Why have the costs varied so much?
- A last-minute (unscheduled) contractor is brought in to carry out change order or variation works.
- The contract specification is poorly written, so changes are required.
- The variations are already covered under the existing contract.
- There are a high number of variations awarded to a particular supplier.
Red Flag – 1 Procurement Sidelined
|
Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
| Pre-procurement (planning stage) | Contract awarded not subject to competitive tender/compliant framework |
Lack of technical & commercial oversight
VFM not achieved Objectives for Cumberland are not met |
Procurement checklist and all documents to plan a procurement are available in the Intranet Procurement Library.
All Contracts (over £100K) subject to competitive tendering process. |
Red Flag 2- Done Deal
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Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
|
Award Stage
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Behaviours of Officer or member advocating one supplier
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Criminal conviction Reputational damage/ lack of integrity Impact on communities if objectives from procurement not met
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Ensure no one person is responsible for procurement award decisions by always having a Moderation Panel (procurement can help)
Anyone involved in the procurement and specifically the evaluation of bids does not have a conflict of interest and has signed to say so.
Cumberland Council and all Officers are responsible for maintaining and actively monitoring the Register of Interests and the Register of Gifts & Hospitality.
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Red Flag 3 - No Formal Contract in place
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Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
|
Tender Process
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No formal Contract in place
Analysis of spend identifies lots of small ‘spend’ regularly for same items
Excess ordering
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Duplication/waste/fraud
No opportunity to add value
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Regular analysis of spend (Bins)
Random checks by procurement, audit
Procurement templates and guidance Procurement Code outlines each step, whether straight rebuy, modified rebuy or new buy
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Red Flag 4 – Contract Creep/Bid Rigging
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Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
|
Contract management
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Contract award based on an unrealistically low bid, which is then made up for, by contract variations, duplicate invoices, sub-standard delivery etc. Therefore fraudulent variation of a contract
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Potential ‘Bid rigging’
VFM not achieved.
Cost escalates and leaves Cumberland Council at risk of not being able to complete works.
Genuine bidders miss out on Council Contracts
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Ensuring Specification at start of procurement adequately describes what is required and is deliverable (Undertaken premarket engagement to ensure realistic and deliverable)
Contract and supplier management plan at start of procurement to set our roles, responsibilities, change process, approvals and escalations
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Further Red Flag Examples:
|
Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
| Collusion among Contractors |
Evidence or suggestion of a close relationship between the bidding organisations. Limited competition in the sector. The same contractors bid for each job. All the bids appear expensive/are above the tender amount. Certain contractors do not bid whom you would expect to. Submission of suspicious bids. Winning bidder sub-contracts some work to the losing bidder or a non-bidder. There is a pattern to winning bidders or losing bidders, due to an agreement with bidders to manipulate their bids/not bid. Only one bid covers all requirements and the others are poor. Not declaring a connection with another bidder.
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Increases the chance that suppliers can manipulate the contract value. May indicate price fixing.
May indicate price fixing. May be the result of a pre-agreement between contractors. Bids from fake companies to give appearance of competition. May have agreed this arrangement prior to bidding. Could indicate bid manipulation. Could indicate bid manipulation.
Could indicate bid manipulation.
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Joined-up working across the organisation Availability of Documents/Training on awareness of procurement process and procurement fraud Centralised contract register which is regularly reviewed and analysed Conducting due diligence to establish legitimacy of suppliers Strong controls around sub-contracting processes
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|
Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
|
Collusion between procurer and bidder |
The person overseeing the award of a contractor has a relationship with the successful contractor, eg the public official holds a post with/owns shares/has a close family or friendly relationship with someone in the winning company. The contractor provides inappropriate gifts or rewards to a public official who accepts them. The procurer requests gifts, a loan, fee or reward in return for competitive advantage. Contract specification changes after preferred bidder is appointed. One officer specifically deals with a particular supplier. Supplier wins multiple bids. Contract awarded to the unknown or ‘surprising’ contractor, such as one with previously reported underperformance (eg contracts terminated or exited). Losing bidder(s) has publicly expressed concerns regarding the process/decision to award. Presence of a ‘middle-man’ whose existence cannot be easily explained or justified. Favouring getting procurement done quickly over following proper process with appropriate evidence/documents. |
A conflict of interests.
Bribery.
Corruption. Could represent malpractice against losing bidders.
Could be corruption.
Could be ‘insider information’ or ‘hand holding’ through the process. Could indicate bid manipulation. Could be the result of a poorly defined process, creating risks to VFM.
Could indicate a bribe or ‘kickback’ to an intermediary.
Could indicate bid manipulation.
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Maintaining and actively monitoring the Register of Interests and the Register of Gifts & Hospitality Improving the culture of compliance with standing orders and OJEU requirements Availability of Documents/Training on awareness of procurement process and procurement fraud Segregation of duties Due diligence on suppliers Investigation of complaints Rotation of employees
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|
Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
|
Pre-tender
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There is a lack of evidence that a needs assessment has been carried out as well as a lack of evidence around the decision to go ahead with the procurement. The need for or timing of a contract is altered. Weak justification for the use of single-sourcing. Multiple procurements for the same goods/services.
Tenders appear narrow or vague. Abuse of waivers to extend or modify existing contracts. Contract splitting to circumvent approval thresholds. A lack of due diligence on potential suppliers.
|
Could be collusion with a supplier.
Could be used to benefit a specific supplier. Could be used to favour a supplier. Could circumvent approval and tender thresholds.
Could be to favour a supplier.
Could be used to circumvent approval limits. Could result in significant financial and/or reputational risks. |
Availability of Documents/Training on awareness of procurement process and procurement fraud Internal audit activity Spend analysis to identify a large spend to a supplier which, when aggregated, breaches approval thresholds Tender evaluation framework agreed at procurement planning stage
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|
Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
|
Bid manipulation
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Placing bid adverts in obscure places, or during holidays possibly including poorly articulated rules/unclear documentation.
Altering bids or timetables.
Accepting late bids.
A limited number of bids or certain contractors do not bid.
Fictitious companies submit bids. Sharing information between bidders.
Manipulation of tender scoring process and disqualifying bids for unjustified reasons.
Contractor falsifies documents to secure a contract. Bids are high priced and/or similar bid documentation received. Same suppliers bid for every contract and/or a pattern emerges over time of which contractors submit bids. Prices unusually close to procuring organisation’s estimates. |
Could imply the procurer has a bidder in mind before placing the advert, a desire to restrict the number of bidders or wants to circumvent procurement rules. Could imply the procurer has a bidder already in mind or has a desire to restrict the number of bidders.
May indicate favouritism towards a bidder as well as breaking procurement regulations.
Bidders may have agreed this arrangement prior to bidding.
May indicate bid manipulation. May result in different bidders receiving different information, providing unfair advantage. May indicate favouritism towards a bidder as well as breaking procurement regulations.
Could indicate fraud.
May indicate bid manipulation.
May indicate bid manipulation.
May indicate collusion and bid manipulation.
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Availability of Documents/Training on awareness of procurement process and procurement fraud Internal audit on the security around bids and sensitive tender documentation
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|
Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
| Where there is a single tender award |
Overuse of single tender applications.
One supplier often favoured.
No records of why supplier was appointed.
Surprising supplier appointed.
|
May indicate favouring certain suppliers (conflict of interest/bribery/corruption).
May indicate favouring certain suppliers (conflict of interest/bribery/corruption).
May indicate procurement team has a related party interest in the supplier (conflict of interest/bribery/corruption).
May indicate an abuse of power/conflict of interest/bribery/corruption). |
Internal audit review, eg of suppliers and spend analysis
Availability of Documents/Training on awareness of procurement process and procurement fraud
Clear procurement procedures
Effective categorisation of spend in the ledger, eg all vehicle costs should be in the same codes
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|
Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
|
Contracts
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A contractor invoices for work but there are no/inadequate checks that the work has been done to required standards before paying the invoice. Costs/margins look unreasonable or are not clear in the context of risk/nature of contract and contractor performance. Design of contract leaves it vulnerable to manipulation. Internal audit or the audit committee has raised concerns about a contract, eg its award or how it is managed. Evidence of underperformance through published data, user feedback or whistle-blowing, client concerns, internal audit, audit committee or the media. A contractor is performing below expectations, but no penalties have been imposed. Client or contractor reluctant to meet or talk about contract. Contract is awarded on the basis of an unrealistically low bid which is then made up for by contract variations, duplicate invoices, sub‑standard delivery etc. Unspecified items on invoices and invoice prices/amounts do not match contract. |
Inadequate validation of deliverables.
Excessive profits or lack of transparency around the margins made.
Elements of payment by result or targets can create risks for data manipulation.
Underperformance not acted upon.
Poor relationships exist.
Fraudulent variation of contract.
Fraudulent charging. |
Effective contract management and monitoring Internal audit review of contracts including checking goods/services have been received Proactive monitoring, eg spend analysis Setting of appropriate authorisation limits Segregation of duties Effective budget monitoring Contract variations agreed at an appropriate level in the organisation
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|
Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
| Payments |
The same person has responsibility for both signing off and paying invoices, or the same person who approves expenses also counter-signs them. Irregular payments or gifts given to staff. Increasing amounts paid in expenses or large payment(s) paid to an individual. Transactions carried out at an odd time, odd frequency, unusual amount or to unexpected recipients. Internal controls which are not enforced are compromised through intervention by more senior colleagues. Discrepancies in accounting records and unexplained items on reconciliations. Bank reconciliations are not up-to-date. VAT charged on invoices but no VAT reg number. Poor budget monitoring. Missing documents/only photocopied documents available. Excessive/spurious voids or credits. Common names or addresses of payees or customers. Unusual discrepancies between the client’s records and confirmation replies. Missing inventory or physical assets which cannot be adequately explained. Evidence of alterations on documents, eg backdating signatures. Duplicate or inflated invoices. Employees unwilling to share duties, take leave or may have a lifestyle above their apparent means. Unusually high payments in a certain cost centre. A large number of small payments to one supplier. Receiving and paying for poor quality goods/services. |
Conflict of interest within the process.
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Whistle-blowing policy and open culture Strong segregation of duties and duplicate payment controls Active management of conflicts of interests and Gift & Hospitality Registers Internal review of controls A ‘zero tolerance of fraud’ message from the top of the organisation
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Procurement lifecycle stage |
Red Flag |
Consequences | Control Measures |
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Processes
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One employee has control of a process from start to finish with no segregation of duties. Little or no supervision. Risk of collusion among employees. Deliberate manipulation of financial statements, accounting records and/or missing files. Lack of validation checks within the process, eg verification of qualifications on application forms. Some areas of public sector business attract a higher risk of investment by Serious Organised Crime (SOC) groups. |
Conflict of interest within process and risk of fraud.
Risk of fraud.
Risk of fraud.
Risk of money laundering and fraud. |
Effective internal audit service Effective reconciliation processes Segregation of duties (eg a technical specification written by two officers and the tender submission checked by a separate two officers) Due diligence carried out by the procurement team. It is essential that managers within these SOC risk business areas are aware of these threats and effectively manage their staff. Specialist training should be considered
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Reporting Fraud
Report suspected procurement and contract fraud or bribery and corruption:
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Process for reporting
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Safeguards whistle-blower
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Allows for confidentiality
Who to report your suspicions to
Should any have any question of doubt, your first line of reporting should always follow as shown:
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Line Manager
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Departmental Manager
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Senior Managers / Internal Audit
In exceptional or accelerated circumstances, there are other routes noted below, although it is hoped that the lines of report previously listed could address anything:
External Auditor / Trade Union / Citizen’s Advice / Professional Bodies / Police / National Audit Office
Confidential Reporting
Your referral will be taken in complete confidence and any personal information provided will be treated as strictly confidential.
Please provide us with as much detail as possible so that the matter can investigated effectively.
- All concerns will be reviewed.
- Untrue allegation made in good faith is better than an allegation not being reviewed.
- As much information as possible.
- Timely reporting.
- Do not be the detective.