Procurement Fraud Awareness

Andy Rush – Fraud Team Leader at Norwich City Council

LGSS

What is Procurement Fraud

Procurement fraud is a deliberate deception intended to influence any stage of the procure-to-pay lifecycle in order to make a financial gain or cause a loss. It can be perpetrated by contractors or sub-contractors external to the organisation, as well as staff within the organisation.

Types of procurement fraud

• Bid rigging/bid splitting• Creation of shell companies to facilitate

fraudulent payments• Collusion between suppliers• Purchase order and contract variation

orders• Unjustified single source awards• False invoices for products and services

for suppliers who do not exist

How big is the problem?

• In 2009-10, central and local Government spent £236bn procuring goods and services. At £150bn, central Government expenditure on procurement was almost a quarter of all Government expenditure during the same period

• In January 2011 the National Fraud Authority published an indicative estimate of £2.4 billion of losses to procurement fraud in the public sector. This estimate is made up of losses of £1.5bn to central Government and £855m to local Government

Fraud during the procurement stage

• Collusion between staff and bidders to award contracts and specify favourable terms and conditions

• Collusion between bidders to agree that they will not bid competitively for a particular contract

• Bidders failing to tender in accordance with contract specifications, and then submitting false claims for extra costs under the contract

Fraud once a contract is awarded

• Provide inferior goods and services

• Intentionally override minimum statutory pay and health and safety regulations for financial gain

• Present false invoices; and/or

• Provide inflated performance information to attract greater payments than are due

Our attitudes to procurement fraud

• Self-deluding: it can never happen to us

• Refusing to accept: trying to overlook the problem

• Actively engaged: good control and organised

• Ask yourself: where does Norwich City Council sit with the above?

Procurement fraud – Red Flags

• Unusual/unauthorised vendors• Large gifts and entertainment expenses• Unusual increase in vendor spending • Exact amounts (i.e. £50,000)• Duplicate payments • Sequential invoices paid• Payments just under authorisation level • Employee-vendor address match • Multiple invoices paid on same date • Slight variation of vendor names

The Law

• The Fraud Act 2006 came into force on 15 January 2007. It defines fraud as the attempt to make a gain/cause a loss dishonestly

• Section 2: Fraud by false representation

• Section 3: Fraud by failing to disclose

• Section 4: Fraud by an abuse of a position of trust

Case Study 1

• Head of Energy Procurement at Kent County Council charged with two counts of fraud by abuse of position and one count of money laundering

• The police were called after ‘significant irregularities’ uncovered – £2m+

• Used ‘unauthorised management fees’ to buy himself a Jaguar car, negotiated an ‘unauthorised management fee’ with Centrica of 0.04p per kWh of energy supplied and diverted that commission into his own bank account

Case Study 2

• Havering Council Officer sentenced to 15 months for ‘rigging’ tenders of IT contracts, resulting in the council paying over the odds for PCs, printers and software.

• The (then) Managing Director of Orbital Solutions, Essex, was sentenced to one year for the scam, which took place over a 14 month period

Case Study 3

• In 2009 the Officer of Fair Trading (OFT) imposed fines totalling £129m on 103 construction firms in England.

• These firms were found to have colluded with competitors to agree over-inflated bids for building contracts.

• This is known as ‘Cover Pricing’. Cover pricing is where one or more bidders in a tender process obtain an artificially high price from a competitor

Case Study 4

• A member of the finance team in a government department created invoices for a non-existent supplier, quoting virtual office addresses and fictitious Companies House and VAT registrations.

• The employee created eight invoices for the supplier, five of which were paid.

• The employee was a registered approver of invoices and a senior member of the finance management team.

• The fraud came to light when the bank to which the funds had been diverted, contacted the department to notify them of unusually high funds and subsequent transactions passing through the individuals bank account.

Case Study 4 - continued

• In total, the employee diverted £246,000 to his own bank account

• An investigation was undertaken and found weaknesses in processes within the department relating to supplier set-up. New suppliers were found to be automatically set-up on the payment system simply for submitting an invoice, with no checks being undertaken on the validity of the invoice and company.

• New controls were put in place by the department, whereby new suppliers are only placed on the system when approved by a member of the procurement or finance teams. All new suppliers are now approved by the chief accountant

It’s been around a long time…!

“There is no kind of dishonesty into which otherwise good people

more easily and frequently fall than that of

defrauding the government!”

Benjamin Franklin, Founding Father of the United States and President of Pennsylvania