Procurement Fraud

Both public and private sector organizations usually find themselves as victims of this fraud. Payment points are high-risk areas as they present criminals with opportunities to ‘legitimately’ withdraw money from an organisation. Fraudulent transactions can be easily concealed especially within large organizations with complex procurement operations. The bidding process is particularly vulnerable to fraud as it tends to give an advantage for dishonesty within the procurement chain and allows for criminals to avoid obligations and cause loss within an organisation.

Reasons for committing procurement fraud can be explained by the fraud triangle: 

Opportunity, pressure and rationalization.

The opportunity presents itself through any weakness in a system—for example, lack of oversight. The pressure relates to motivation, sometimes involving personal situations that create a demand for more money, greed or wanting to benefit family members. Rationalization is justification and usually, in procurement fraud, the criminal concludes that the possible gains from this fraudulent activity are high whereas the possibility for detection is low.

Procurement fraud can take many forms however here are 3 most common:

Kickbacks

A common procurement fraud scams are payoffs or kickbacks. These are a type of bribery where a purchasing decision-maker is offered a benefit of cash payment, favours, influence, or some other form of compensation in exchange for a successful bid. This means that a decision-maker is influenced to award a contract to an unqualified supplier, make fruitless and wasteful expenditure, or corrupt the bidding process by excluding favourable suppliers. Another tactic often used by corrupt employees is to write the item specifications a way that only one bidder can qualify.

Conflict of interest

Another common fraud scenario, when a procurement decision-maker has an undisclosed interest in one of the bidding companies. These interest can be, family connections, investments or other interests in a bidding organisation that influences how the bid is awarded. Since the employee benefits indirectly from the transaction, they would be motivated to have a preference towards this bidding company or could leak advantageous information to bidding company before they submit a bid. Which usually means a bad deal for the organization paying his salary.

Fake companies/orders

Organisations with weak controls are the usual victims of this type of fraud. This fraud is when orders for shell companies or ‘fake invoices’ are created and paid for services that were never rendered. The bidder could either be working alone but usually are colluding with an employee that has identified the weakness.

Plans To Reduce Purchasing Fraud

Minimizing fraud risk is a function of good procurement strategy. The possibility of procurement fraud should form part of an organisations risk assessment. Organisations should enforce preventive controls which can aid in the prevention and detection of procurement.

1. Ensure the risk of procurement fraud is acknowledged on your company risk register, and there is a risk owner who has overall responsibility in the organisation.
2. Appropriate segregation of duties is a recognised procurement fraud barrier but is not always enforced.
3. Ensure that Management and employees are aware of the companies’ policies on the code of ethics, conflict of interest gifting and entertainment, and they should also be trained and encouraged to watch for red flags.
4. Don’t dismiss minor red flags indicating possible fraud such as a perceived close relationship with a supplier that may be closer than you think.
5. Bid terms and acceptance requirements should be clearly defined and enforced.
6. Ensure vendor due diligence is carried out during any vendor approval process. Prospective suppliers should be thoroughly vetted and prequalified by at least two people and kept in a database of preferred suppliers.
7. Have strict controls to the supplier database, including procedures to monitor dormant suppliers and employees to prevent unlawful changes.
8. Conduct regular procedural checks on suppliers to check if they exist.
9. Ensure that your procurement thresholds are being followed and there isn’t evidence of splitting orders to avoid tender thresholds.