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Local Government Risk: How can fraud and corruption be avoided

Is education the starting point in building a local government response to fraud and corruption? Loss within local government to fraud and corruption range between 0.5% and 5% that equates to between £275 million and £2.75 billion.

Risk comes from not knowing what you're doing


What is the financial impact of this limited response to risk and does the lack of a counter procurement fraud framework including procurement and anti-fraud expertise or any proactive ability or compliance capability to identify, measure, and respond to procurement fraud and corruption risk make it more likely that the financial losses will be at the higher end of the estimated figures?


In its review of the risks of fraud and corruption within local government procurement, the UK Ministry of Housing, Communities & Local Government highlighted that although there are some good anti-fraud working practices, there is still a long way to go in developing an anti-fraud culture, consistent practices and approach to mitigate procurement fraud and corruption risk across all local government organisations.


The risk of fraud and corruption within procurement is viewed as significant in many areas of local government given the high values of spending involved, low case numbers, low levels of reporting, poor data quality, and the lack of procurement expertise and anti-fraud resources.


Although not specifically stated, from the strong recommendations made within the report there is a clear need to develop a counter procurement fraud framework in their approach to identifying and mitigating procurement fraud and corruption risk.


In the majority of cases, there appears to be no proactive approach to risk identification, only reactive when a risk is identified or reported. The challenge in these local government areas is that they will never appreciate the level of risk that they face or likely identify fraud or corruption when they occur. As highlighted by the Association of Certified Fraud Examiners in their 2020 Report to the Nations, in 7% of cases that were highlighted, fraudulent activity went on for over 5 years before being detected.

KEY RECOMMENDATIONS

The recommendations from the report highlight key areas for organisation development and performance:

  • Improve understanding of risk

  • Building capacity and capability

  • Building an anti-fraud and corruption culture

  • Developing systems and process around due diligence, conflicts of interest and gifts and hospitality

  • Data quality and record keeping

Interestingly, in many respects these recommendations are interlinked and the success in building an anti-fraud culture and identifying and preventing procurement fraud and corruption can only be done, where all actions are implemented.


OBSERVATIONS

There is a clear inability of local government to measure the level of procurement fraud and corruption risk that it faces, that is highlighted in a number of areas that includes the limited number of cases reported, data on procurement fraud and corruption cases aren’t collected, in a large percentage of cases procurement fraud, bribery and corruption isn’t on the corporate risk register and additionally limited spend analysis is conducted, specifically from the respondents:

  • 24% always carrying out spend analysis

  • 54% sometimes conducted spend analysis

  • 22% don’t conduct spend analysis (not commented on within the report)

Additionally, in the use of data analysis, a positive response was received from 41% of respondents that means that 59% don't use data analysis to proactively detect or investigate fraud and corruption.


In highlighted areas, this risk would likely increase where procurement is conducted through procurement cards, use of cash, and instances, where procurement is conducted without a contract or single source procurement, are regularly used without clear and documented justification.


The report highlights the lack of expertise within procurement and anti-fraud prevention, detection, and investigation that leaves the procurement process open to abuse and limited or unlikely ability to detect illicit conduct.


There was a positive response to the question of procurement fraud training, however, it isn't clear if there is inconsistent training including trained procurement professionals or fraud and corruption awareness that includes training on finance and procurement systems and processes. What also isn’t clear is the consistency and quality of procurement fraud and corruption training that is currently being provided, whether it highlights risks within all areas of procurement and projects and how to develop a risk mitigation strategy to protect local government funds.


It is of note that there is limited contract management across all local government organisations that are further highlighted by the fact that "in some circumstances, suppliers are often relied upon to provide progress reports and data to support their delivery of KPIs, sometimes self-certifying that results have been achieved."


MISSED OPPORTUNITY

Recommendations on the development of an anti-fraud culture are limited to publishing policies and procedures and tone from the top. Greater emphasis and coordination need to be made in organisation anti-fraud culture that includes the various formats of internal and external communications, the involvement and engagement of staff, partners, and suppliers in developing the culture.


In addition to the report recommendations local government should consider additional areas of risk and mitigation:

  1. There is a clear need for organisation risk assessment, local government also confirmed that there is a need for risk assessment training. There is no mention of fraud risk assessment within projects that includes the high risk area of construction

  2. Although there was an example of fraud within a case study, there was no mention within the report of asset management and disposal procedures which can be a high risk area of asset misappropriation, corruption, and procurement fraud

  3. Most of the fraud reports appear to have come from individuals raising concern. Greater consideration needs to be given to other detection and reporting opportunities, highlighted within the Association of Certified Fraud Examiners Report to the Nations

  4. A greater emphasis needs to be placed on the identification and mitigation of bid rigging. Construction is seen as one of the biggest risks within local government and although there was a reference to bid rigging and organised crime group infiltration of public procurement, no clear guidance or recommendations were given on risk mitigation. In 2009, The Office of Fair Trading in an information note to procuring authorities confirmed that the OFT uncovered evidence of cover pricing in over 4000 tenders involving over 1000 companies but had to focus its investigation on a limited number of companies and instances where the available evidence was strongest

  5. Due to the amount of procurement that is conducted outside of the procurement function and the lack of trained and qualified procurement staff, significant non-compliance with procurement procedures, lack of value for money and financial loss to fraud and corruption are likely. Greater emphasis needs to be placed on procurement compliance and the training and recruitment of qualified procurement expertise

  6. Although there is an acknowledgment of procurement and process risk assessment, there was a limited comment of corruption risk and areas in which there is an insider threat and where procurement and projects can be influenced or manipulated

  7. The limited use of data analysis of procurement and finance information means that local government doesn’t understand its risk profile, the level of financial loss and drastically reduces its ability to detect and mitigate fraud and corruption risk

  8. Although there is evidence of information sharing, methodologies of identified fraud and corruption cases should be collected and shared between all local government organisations

Within the introduction of the MHCLG report, it confirmed that the loss within local government to fraud and corruption ranges between 0.5% and 5% that equates to between £275 million and £2.75 billion. With the lack of a counter procurement fraud framework including procurement and anti-fraud expertise and any proactive ability and capability to identify, measure and respond to procurement fraud and corruption risk it is likely that the financial losses will be at the higher end of the estimated figures.


In the same way that the NHS Counter Fraud Authority has taken on a holistic anti-fraud approach to the health sector risk, what needs to be put in place to ensure a consistent and successful approach to the MHCLG fraud and corruption in public procurement.


So should we start with the basics of procurement fraud and corruption risk awareness, how local government can be the target of procurement fraud and corruption, and how to design a framework and strategic approach to mitigate or eliminate risk?


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