Procurement fraud schemes
In the broadest terms procurement fraud can be defined as fraud against the procurement lifecycle, that includes its manipulation from the identification of needs through to the end of life of an asset including its disposal.
Scope of procurement fraud
The scope of procurement fraud can be categorised into five elements, specifically, a completely insider fraud and associated financial crime, fraud and corruption where an insider colludes with a supplier to influence or manipulate the procurement or associated processes, collusion between companies such as bid rigging, a single company committing fraud against an organisation such as false invoicing and an organised criminal enterprise where an organisations procurement and/or payment system is targeted by criminals e.g. illicit change of bank account details to divert payments to accounts set up to launder the diverted funds.
The theft of procured assets can include by the manipulation of an organisations control measures and/or falsification of documentation or movement or disposal of materials. This can be by personnel or collusion between internal and external individuals.
An insider can manipulate the bidding process in many ways to benefit a favoured contractor or supplier, eliminating the competition within the bidding process. Examples can include accepting late bids, leaking information and rebidding for the agreed vendor to enhance their bid. Additionally, inviting poor or inadequate suppliers to submit bids will allow a favoured supplier to win a contract.
Bid rigging involves the collusion between companies to influence a competitive bidding process and secure a predetermined contract award and price.
In this scheme, bidding companies collude to submit bids but take turns at being the lowest bidder. Competitors who are part of this procurement fraud scheme can take turns at winning the tender or being the agreed subcontractor.
As part of a bid rigging scheme, one or more competitors who would have been expected to bid agree to refrain from bidding or to withdraw a previously submitted bid so that an agreed colluding competitor’s bid is accepted.
Bribery and corruption
Bribery involves an offer, promise or payment of a bribe, and corruption includes the request, receipt or agreeing to receive a pecuniary advantage to influence the procurement process—including the award of a contract—allowing illicit overcharging, false invoicing, product substitution or acceptance of substandard goods, materials, works or services within the contract. The payment or pecuniary advantage can be anything of value.
A cartel is a collection of companies that act together to influence price and the market for certain goods, works and services by controlling production and marketing.
This bid rigging method is used when competitors agree to submit either high bids or a bid with additional terms and conditions that they know will not be accepted. These activities give the appearance of competition and are the most common forms of bid rigging schemes.
Counterfeit, inferior or substituted products
All aspects of the fraudulent product and package are fully replicated, and the product or raw materials can be substandard, unregistered or unlicensed, or falsely represent their identity, composition or source. A contractor or vendor substitutes products with material of lesser quality than specified or uses counterfeit, defective, substandard, falsified, or used parts or products.
In addition to areas such as email compromise, there exists online procurement fraud threat from fake or copied websites, where goods purchased will either not be provided or are inferior, substituted or counterfeit.
The deliberate use of inaccurate cost or pricing information to inflate costs and the total value of a contract.
Diversion of payments
During an ongoing contract term or project, an insider requests or changes a supplier’s bank account details to divert payments to a personal or other bank account, or illicitly changes a supplier’s bank account details by creating a false letter of request from the supplier to change payment information to divert current or future payments to a new account controlled by the insider.
Information that can be provided during pre-and post-contract award stages that enables fraud to occur (e.g. the provision of false, out-of-date or inflated pricing information within the negotiation process, which allows higher invoicing within the contract).
The submission of invoices for works, services or goods that were not or were only partially provided. There are many examples of false invoicing, including duplicate billing, claims made for additional workers who were not present (ghost workers) or abuse of time cards. The costs have not occurred, are not reasonable or cannot be directly or indirectly allocated to the contract.
Fictitious vendors are placed on the supplier list and false invoices are created and used to either divert illicit payments to others or facilitate the theft of monies from the organisation. This generally happens where there are inadequate dual control measures in the vendor onboarding process.
Ghost/shell companies can be set up and used to bid for tenders and, where contracts are won, monies can be asked for upfront before any goods, works or services are provided. The goods, works or services will either not be provided or will be only partially supplied. A company' business name may be the same as or similar to a well-known brand or create a website to support the appearance of legitimacy.
Inflated claims or mischarging
The submission of false invoices that involve billing for higher costs for goods, works or services provided, including through the increase in the quantity of materials used or services provided, or increasing the number of staff or hourly/daily rate.
Once a bid rigging scheme is in place, fixing the contract price by increasing the value of the lowest bid, thereby creating greater profit to share between colluding companies. It can additionally be linked to market sharing, where companies that control the market decide to fix prices at an agreed rate.
Rigged design or specification
An insider or consulting company unduly manipulates the design or specification of an organisation’s requirement to influence the award of a contract or allow a favoured contractor to qualify for a bidding process. A rigged design or specification may also be used to create contract variations later on in a project, where design flaws or additional works are identified.
Procurement is deliberately split into two or more purchases so that each purchase is below the financial threshold that would otherwise have required additional financial scrutiny or a competitive tender process.
Unjustified single source
This involves an insider deliberately writing a non-supportable single source justification or using this procurement route to avoid a competitive tender selection, and illicitly or improperly awarding a contract to a predetermined vendor.