Procurement Fraud Mike Neumann ITS Training (UK) Ltd.

Fraud is… Saying or writing or doing something that is not true ; or Leaving out something important (by not saying writing or doing something you should) ; and Knowing that ‘ordinary people’ would think this was dishonest ; and either Intending to get something for yourself or someone else ; or Intending that anyone loses out or might lose out.

Procurement is… Buying good and services Tendering for contracts Negotiating contracts with suppliers Procurement administration Management and audit of contracts Buying a pen Arranging a train ticket …

Procurement Spend and Fraud Local government spends tens of billions on procurement Total government procurement expenditure amounted to hundreds of billions The current published figures for procurement fraud assume a 1% rate of fraud The normal rate of fraud within any lightly controlled system is roughly 5%

Procurement Fraud Any deliberate action taken to interfere with, influence or manipulate any stage of the procurement process Committed by  Contractors  Sub-Contractors  Staff Any Anti-Competitive Practice is illegal We should also consider ‘accidental errors’…

Procurement Cycle Determine requirement Procurement strategy Contract close and evaluation Bid evaluation Contract management Contract award Procurement Process Starts

Pre-Contract Award Fraud Unnecessary purchases / over-spec Bid rigging Cover pricing Price fixing Market sharing Sub-contact fraud Bribery Failure to declare an interest

Case Study Cover-pricing fraud Millions in fines have been handed to construction firms in the UK that had colluded to keep prices artificially high for contracts, by supplying cover prices to each other. These bids were submitted knowing that they would not win. These bids gave a misleading impression of competition in the process. Despite the fines, the practice continues as it’s worth it!

Pre-Contract Award Fraud Problems in preventing and detecting this kind of fraud :  Fraudulent activity is external  Often no obvious signs of fraud  Extremely easy to commit  Lack of fraud awareness within procuring organisations  Lack of procurement fraud strategy

Post-Contract Award Fraud Duplicate invoicing Ghost suppliers Contract deviation Over-stocking Staff collusion Payment deviation

Case Study Internal buying fraud Two department managers from a local authority were found to have defrauded their employer to the tune of £500k over a period of three years. They had taken advantage of the LA’s use of catalogue reference numbers when paying invoices. Payments were made based on a goods reference number allowing the pair to purchase high value luxury goods for personal use. This was done with the connivance of the supplier who wilfully turned a blind eye to their activities.

Post Contract Award Fraud Problems in preventing and detecting this kind of fraud : Individuals with too much control Lack of procedures to prevent and identify fraud Failure to properly manage contracts Failure to carry out effective checks before payment

Criminal Offences Enterprise Act 2000 – s.188 – cartel offence Bribery Act 2010 – ss.1 and 2 – bribery and being bribed Fraud Act 2006 ss.2, 3 and 4 – false representations, failure to disclose information and abuse of position Theft Act 1968 ss.1 and 17 – theft and false accounting

EU Processes Open procedure. All interested parties are asked to return tenders by a set date. Restricted procedure. Following a pre-selection stage, certain selected suppliers are invited to Tender. Competitive dialogue procedure. Following the OJEU Contract Notice and a selection process, the authority negotiates with companies to develop suitable solutions to be tendered on. Negotiated procedure. The public body may (in very limited circumstances) enter into contract negotiations with one or more suppliers before, or after, issuing an OJEU notice.

Local Processes Contracts below the EU thresholds do not have to be advertised in the OJEU but may be, at the discretion of your authority. If the OJEU thresholds are not met and you do not submit an OJEU notice, your authority will have different rules for procurement that it sets itself. The thresholds set by LAs vary considerably!

Following the Rules EU limits are set in stone – failing to follow these may lead to an application for judicial review. A Local Authorities is obliged by law (and this is reinforced by case law) to follow its own published policies. If you don’t do what your policies say you will do, you may be liable for damages or required to re-run a procurement exercise. ‘East Coast’ ring a bell?

Enterprise Act 2000 s.188 Cartel Offence Dishonestly agrees with one or more persons to make or implement, or to cause to be made or implemented, arrangements of the following kind relating to at least two undertakings which are intended to : Directly or indirectly fix a price for the supply of a product or service. Limit or prevent supply of a product or service. Limit or prevent production of a product. Divide between A and B the supply of a product or service. Divide between A and B customers for the supply of a product or service. Be bid-rigging arrangements.

Bid-Rigging & Bribes “Bid-rigging” is making arrangements in response to a request for bids for the production or supply of a product or service in the UK where A & B agree that : A but not B may make a bid ; or A and B may each make a bid but, in one case or both, only a bid arrived at in accordance with the arrangements. Bribes are offering, expecting or accepting any : improper payments ; or corrupt gifts.

In Order for Crime to Occur… Motive – There must be a reason for someone to commit crime. Possibility – There must be the means of committing an offence and the control systems must leave an opportunity. Justification – The person must be able to justify to themselves why they are doing what they are doing.

Remove the Motive Why do you think people commit financial crime? It’s not all about being hard up – perceived injustice can play a large part. What can you do to remove or reduce the common motives?

Limit the Possibilities Restrict the means of committing an offence, so far as is possible without breaking the system. Reduce opportunities, again ensuring that this doesn’t break the system. Make it obvious who has done what – it doesn’t count as ‘possible’ if you are obviously guilty! Punish offenders. Get the money back!

Remove Justification Everyone does it… It’s a victimless crime… It’s only a pencil… If I didn’t do it, someone else would…

Make Sure They All Know… What the rules are. Where to go for advice. What constitutes fraud. What enquires count as ‘due diligence’. Where the line lies between due diligence and criminal investigation.

Questions?

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