Procurement Fraud Awareness

1
Procurement Fraud Awareness

• Andy Rush Fraud Team Leader at Norwich City
  Council
• LGSS

2
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.

3
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

4
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

5
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

6
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

7
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?

8
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

9
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

10
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

11
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

12
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

13
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.

14
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

15
Its 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