Procurement fraud - Deloitte

1 Major infrastructure activity is occurring overmuch of the Middle East with significantconstruction work being undertaken on behalf of government agencies in areas such as airportterminals, hospitals, port facilities and transportnetworks. In addition, multi-billion dollarprojects are being undertaken in the oil and gasindustry. But the incentive to win major contractscan lead individuals and even c ompanies to engagein corrupt and fraudulent behavior. Staff withinthe Procurement or project management divisionsof contracting organizations may be exposed toinappropriate inducements such as bribes andcorrupt offerings. So how does Procurement fraudhappen and who should be concerned? Procurement fraudDeloitte | A Middle East Point of View | Spring 2014| 31 Procurementfraud Should the Middle Eastbe concerned?32| Deloitte | A Middle East Point of View | Spring 2014 The UK National fraud Authority defines procurementfraud as a deliberate deception intended to influenceany stage of the procure-to-pay lifecycle in order tomake a financial gain or cause a loss.

2 It can beperpetrated by contractors or sub-contractors externalto the organization, as well as staff within theorganization. Procurement fraud can be separated into two distinctivesections: The period of time before any contract isawarded, and after a contract has been awarded. Pre-contract stage fraud includes fraud related to thesubmission process such as the premature opening ofbids, altering bids, unjustifiable extension of time limitsand falsifying bid logs and documents bid-riggingschemes, as outlined in the box on the right, andleakage of information where bid information isdirected to a particular bidder to provide it with acompetitive advantage. Pre-contract stage fraud includes fraudrelated to the submission process suchas the premature opening of bids,altering bids, unjustifiable extension of time limits, controlled bid openingand falsifying bid logs and documents bid- rigging schemes and leakage ofinformation, where bid information is directed to a particular bidder toprovide it with a competitive advantageBid- rigging schemesMost bid- rigging fraud schemes involvecollusion between competing companiesduring the bidding suppression schemeOne or more competitors agree with at leastone other competitor to refrain from biddingor agree to withdraw a previously submittedbid so that a decided contractor s bid will beaccepted.

3 Complementary bids/Bid rotation schemes Complementary bidding occurs whencompetitors submit token bids that are toohigh to be accepted. Such bids are notintended to secure the buyer s acceptance,but are merely designed to give theappearance of genuine bids scheme Creating dummy companies to submit avariety of bids on a single contract. That way, they give the appearance of vigorouscompetition while actually bidding tailoring schemes Staff within the awarding company structurethe contract specifications to ensure that theyfavor a particular | A Middle East Point of View | Spring 2014| 33 Post-contract fraud schemes include:Accounting mischarge schemes:These involveknowingly charging unallowable costs to the buyer,concealing or misrepresenting them as allowable costs,or hiding them in accounts where it is thought that theyare unlikely to be detected.

4 Labor mischarge schemes:Where contracts includepayment for labor, contra ctors falsify the numbers ofstaff employed and/or hours worked in order to inflatetheir invoices and payments received. Product substitution schemes:Once a contract forsupplies and products has been awarded, suppliers mayattempt to provide inferior quality supplies or productsin order to save costs. These schemes can be verysophisticated and intended to deceive the buyer intobelieving that the inferior product is actually genuine. Conflict of interest:Including key fraud scenarios,whereby buyers may be silent partners or directors insupplier organizations and purchase on behalf of theawarding company from these organizations; or whererelationships between purchaser and vendor maycompromise the correct and ethical decisions/actions of the purchaser. Single source supplier schemes:Where specific goodsand services are required, companies may enter into asingle source supplier contract.

5 This potentially hasfraudulent ramifications in the event of overpricing bythe supplier and collusion between buyers and thesupplier to source product from a single supplier when it is available through other suppliers at cheaper invoicing schemes:Suppliers either on their ownor by colluding with the project staff inflate invoices,create false invoices or provide duplicate invoices forgoods and/or services. So what enables Procurement fraud and how can it be prevented?Most Procurement functions, by necessity, requirecomplex information management systems. However,this complexity in itself also leads to Procurement fraud risk. Management systems rarely provide seamless end-to-end tra nsparent data. Different parts of the procurementdata such as vendor, customer, payment and receivablesdata may reside on different systems, which may not beeasily reconciled.

6 There needs to be a data miningcapability within all the systems to allow forsophisticated analytics to be undertaken. Data quality issues can also cause problems. Failing toclean vendor data could result in duplicate vendorsbeing listed within the system. This provides an avenueto change addresses, bank accounts and paymentdetails. Lack of controls around vendor creation andmanagement is a major Procurement fraud risk. Most Procurement functions, bynecessity, require complex informationmanagement systems. However, thiscomplexity in itself also leads toprocurement fraud fraud34| Deloitte | A Middle East Point of View | Spring 2014 However, there are several measures that can betaken to prevent Procurement fraud , namely: Thorough control and adequate performancemeasures throughout the whole, complex contractand Procurement processes. Develop fraud risk, business ethics and compliancetraining programs.

7 These greatly assist in supporting a good corporate culture to help in reducingprocurement fraud risk. Establish a fraud risk management group with directreporting lines to an audit or risk managementcommittee. Implement a whistleblowing policy and process for all staff, contractors, suppliers, and customers. Educate contractors and suppliers about theorganization s code of conduct, ethical stance onfraud and corruption, and ensure that they sign anacknowledgement of compliance. Provide incentives for contractors and suppliers tocreate and adopt their own fraud control and ethicalpolicies and procedures. Embark on a proactive data mining detection programof the entire Procurement data. Conduct ongoing fraud risk assessments across theprocurement system. Ensure that all staff members provide a conflict ofinterest declaration. Ensure that a ro bust code of conduct exists whichincludes specific gifts and entertainment protocols.

8 Establish a policy of staff rotation within the identifiedhigh-risk groups such as buyers. Undertake enhanced background checking of newemployees entering the high-risk groups. Develop a fraud control plan. Undertake ongoing internal audit activity into specificareas of the Procurement cycle. Perform background checks on vendors andcontractors. Implement a debarment policy to exclude suppliersand contractors that are known to have participated inany illegal or unethical contractors and suppliersabout the organization s code ofconduct, ethical stance on fraud andcorruption, and ensuring that they signan acknowledgement of compliance isone of the measures that can be takento prevent Procurement fraudDeloitte | A Middle East Point of View | Spring 2014| 35 ConclusionMajor capital and infrastructure project activity withinthe Middle East is set to continue into the foreseeablefuture.

9 Procurement fraud can be one of the mostsignificant types of fraud faced by organizations withinthe region, in terms of financial loss, reputationaldamage, and complexity. A number of high-profileprocurement fra ud instances that have already occuredin the GCC indicate that fraud prevention programs areeither not always in operation or are Procurement fraud requires organizations toundertake a systematic and structured approach thatmust be championed by the executive and seniormanagement. by David Clements, principal director, forensic, DeloitteCorporate Finance Limited (regulated by the DFSA)Major capital and infrastructure projectactivity within the Middle East is setto continue into the foreseeable fraud can be one of themost significant types of fraud faced byorganizations within the region, interms of financial loss, reputationaldamage, and frau