Corruption and procurement fraud

What is procurement fraud?

Procurement fraud can be defined as illegal conduct by which the offender gains an advantage, avoids an obligation or causes damage to his organization. The offender might be an employee, owner, statutory board member, an official, a public figure or a vendor who was involved in the purchase of services, goods or assets for the affected organization.

Procurement fraud schemes are very common and include corruption, billing schemes and conflict of interest.

Corruption means bribes in the form of gifts or other advantages of various types. Corruption can occur at all stages of goods and services purchase, i.e. in the bidding phase, during the supplier selection, and in the actual goods delivery stage. The best-known forms of corruption include:

• Purchase terms tailored for a selected vendor
• Circumvention of the bidding process (bid rotation, bid suppression, creation of complementary and phantom bids, and/or disqualification of qualified applicants)
• Low-quality goods delivered instead of the originally contracted ones, incomplete contracts or improper billing.

In billing schemes the company purchases and pays for goods and services which do not exist, are overpriced, or which the company does not need at all. Fictitious (phantom or shell) companies, refunds into the offender’s account and misuse of company funds for an employee’s private purposes are oft-used schemes.

Fraud schemes involving conflict of interest include transferring the employer’s customer base to one’s own company, purchase of overpriced goods/services from companies related to an employee of the affected company or favoring of related companies within the bidding process.

Motives

The motives for committing this type of fraud include gaining funds for personal purposes, taking an opportunity upon finding a weakness in the control system, and winning advantages for related parties. Another motive could be blackmail of an employee by a third party, or preferential treatment of a business partner.

Indicators

Procurement fraud indicators include:

• Unsuccessful introduction of control processes in the purchasing department
• Vendors are unknown, recently established companies
• High employee turnover in the purchasing department
• Favoring of certain vendors for no reason
• Preferential relationship between person(s) from the company with person(s) from the vendor (e.g. joint vacation or leisure time activities)
• Vendor without an apparent competitive advantage or with low-quality goods and services regularly winning the bidding process
• Frequently occurring reports and suspicions of misconduct by an employee or an entity
• Frequently missing documentation for important purchases (contracts, bills of delivery, price lists)