Mitigating Risks of Procurement Fraud


IASeminars

 

By Robert W. Walter
IASeminars Instructor

 

backhanders

Procurement fraud is one of the most pervasive types of fraud which occurs in the public sector. This type of fraud may take place in the pre-contract phase – when it often involves corruption, big-rigging, or bid rotation schemes that typically require collusion – or in the post-contract phase. In the latter phase, procurement fraud may be carried out through overpayment or duplicate payment schemes, delivering substandard goods or services, or falsifying deliveries. So-called ghost supplier schemes, which involve the creation of a fictitious supplier by a procurement agent or accounts receivable clerk, may cover both pre- and post-contract phases. These schemes and many other procurement frauds involve self-dealing, bribery, and other forms of corruption. When governments or agencies find procurement fraud, they will often find corruption, and vice versa.

36% of Kenyan CEOs reported they had been asked to pay bribes to win a tender or secure business

In February 2014, PwC published the results of a study in which one in three Kenyan business leaders reported a procurement-related fraud in the past two years, and 36% of Kenyan CEOs reported they had been asked to pay bribes to win a tender or secure business. While asset misappropriation fraud is still the most common financial crime in Kenya, procurement fraud is the fastest growing form of financial crime. And according to PwC’s forensic services leader, more procurement fraud is occurring earlier in the tender process, when those committing the fraud “strategically position themselves... early in the procurement cycle – mostly during the vendor selection process.”

The tender for 1.3 million laptop computers to be furnished to Standard One students in Kenya is a case in point. Olive Telecommunications of India, HP and Haier were shortlisted to receive the contract, and Olive provided the low bid of Sh23.1 billion in its December 2013 final offer. However, when the Ministry of Education awarded the tender, it did so at a price of Sh24.5 billion. HP challenged the award, which was then revoked by the Kenyan Public Procurement Administrative Review Board (PPARB). The price difference was not the basis for the revocation, however, as the PPARB determined that Olive was not an OEM as required by the bid specifications, and did not have the capacity to deliver 1.3 million laptops. In March 2014, Olive filed a court action to seek to reverse the contract revocation by the PPARB.

Whatever the outcome of this tender, the losers may have been the Standard One students, some of whom were supposed to receive laptops as early as last year. Faced with this situation, what could (or should) the Ministry of Education done differently during the tender process to address this situation? 

With a tender of this size, the possibility of tender fraud is high – perhaps very high. Given that risk assessment, the Ministry should have considered a variety of steps, including:

 

  • Using bid specifications to better define original equipment manufacturer (OEM), including minimum annual manufacturing levels or deliveries to be considered a final bidder.
  • Delineating the extent to which subcontracting would be permitted, as Olive claimed it would be doing, in meeting OEM bid specifications.
  • Using bid review and acceptance procedures that would have required senior Ministry officials to notify Kenya’s attorney general and president if a bid tender was accepted at a level above or below a final bid, or – alternatively – if a contract was awarded at a price higher than the final accepted bid, automatically revoking the tender and requiring new bids from all final bidders. 

This also is a situation in which a whistleblower reward program might have provided an incentive for someone within the Ministry of Education to “blow the whistle” on the tender irregularities before the contract was signed. The lack of such a program may discourage an employee from reporting wrongdoing, particularly if the employee fears losing his or her job as a result of “blowing the whistle.” As with any report of wrongdoing, the key question is whether the employee has evidence or merely a generalized suspicion of wrongdoing, which will dictate the nature of the investigation to follow.

Properly designed tender policies and procedures are an extremely important part of mitigating procurement fraud risks. These policies and procedures:

 

  • Should be broad enough to encourage placing of bids by a variety of suppliers, but specific enough to eliminate prospective suppliers who lack required experience and/or production capacity.
  • Should address how invitations to tenders are published or sent, and who is responsible for any pre-qualification screening.
  • Should identify the positions of employees who are responsible for preparing requests for tender, approving bid acceptances, and executing contracts; the duties of employees performing these functions should be appropriately segregated and subject to supervisory oversight.
  • Should provide for review of tender evaluations and supporting notes of employees charged with evaluating the tenders, with a special focus on why a particular supplier was favored over others and the evidence that supports the selection.
  • Should require the archiving of bidding history information from vendors, both for completed tenders and for unsuccessful bids, with a mechanism for scoring past performance and regular updates of this information.
  • Should outline minimum due diligence of tender participants, including date of incorporation or organization, headquarters location and website address; financial statements from public filings or, for private organizations, minimum capitalization criteria; bank references; and the names of all officers and directors, together with a certification of compliance with tender procedures (which prohibit any type of payment or consideration to employees or officers involved in the tender process, or any attempt to improperly influence the tender process).
  • Should call for careful review of a tender in which several bids are identical, several bids are above or below an expected range, or in which late bids are accepted or bid deadlines are extended.
  • Should require comprehensive tender and award documentation to be compiled and matched to each completed tender.
  • Should mandate public tender opening procedures. Lifestyle examinations will sometimes assist governments in identifying procurement agents or officers who are living beyond their salaries, and analysis of bid pattern acceptances can often identify favored suppliers that may merit additional investigation. Sole source award patterns and tenders with a consistently low number of bidders are also worthy of closer scrutiny. Successful bidders with a pattern of securing or submitting material change orders, or which fail to meet tender specifications, should also be carefully evaluated.

In summary, the superior procurement process will be transparent, conducted on a level playing field for all participants, and will follow policies and procedures that are designed to mitigate risks of procurement fraud. Like all policies and procedures, procurement anti-fraud measures must be consistently updated, monitored for effectiveness, and subjected to rigorous management review.

Failure to implement an effective anti-fraud program in procurement often leads to waste of taxpayer funds, corruption and other criminal acts, and governments receiving substandard goods and services – all of which cost far more than the design and implementation of an effective anti-fraud program for procurement.

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