Measures for Identifying and Reducing Fraud and Corruption Risks in Public Procurement OLAF.D.2 – Fraud Prevention, Reporting and Analysis Unit Riga – 25 February 2015

What is OLAF? The European Anti-Fraud Office. 1.To protect the financial interests of the European Union (EU) by investigating fraud, corruption and any other illegal activities; 2.To detect and investigate serious matters relating to the discharge of professional duties by members and staff of the EU institutions and bodies that could result in disciplinary or criminal proceedings; 3.To support the EU institutions, in particular the European Commission, in the development and implementation of anti- fraud legislation and policies. Investigations: fully independent Policy: part of the European Commission Provide financial support through the Hercule III programme to Member States' authorities and NGOs for actions to prevent and fight fraud against the EU Budget. 2

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Costs of corruption Scope of the study: 8 Member States and 5 sectors Public procurement = about 20% GDP in the EU (2010: € 2.4 trillion) Direct cost of corruption value of procurement published in OJ = EUR million and EUR million 4

5 Clean projects Corrupt/grey projects Average loss attributable to corruption: 13% 5% loss18% loss Costs of corruption

6 Direct costs of corruption in public procurement Sector Direct costs of corruption (in million EUR) % of the overall procurement value in the sector in the 8 Member States Road & rail 488 – % to 2.9% Water & waste 27 –381.8% to 2.5% Urban/utility construction % to 6.6% Training 26 –864.7 % to 15.9% Research & Development 99 –2281.7% to 3.9% Table: costs of corruption by sector (Source: PwC) Costs of corruption

Types of corruption Bid rigging Kickbacks Conflict of interest Other – including deliberate mismanagement/ignorance 7

8 Type of corruption by sector SectorBid riggingKickbacks Conflict of interest Deliberate mismanagement Urban/utility construction Road & Rail10841 Water & Waste15630 Training1321 Research & Development12420 Total* Type of corruption by Member State Member StateBid riggingKickbacks Conflict of interest Deliberate mismanagement France6351 Hungary9240 Italy12340 Lithuania11211 Netherlands0010 Poland10621 Romania4841 Spain51111 Total* Table: types of corruption identified (Source: PwC) Types of corruption - analysis

Estonia in the reports Despite progress with e-procurement, corruption risks remain, involving possible hidden agreements between politicians, officials and entrepreneurs, creating competitive advantage through information-sharing, false information in invoices, low tender prices and additional service ordering, and breaking up contracts into smaller parts to reduce reporting obligations In July 2013, a European Commission-funded report coordinated by Transparency International noted corruption risks at the highest and lowest levels of the system distributing EU funds. 9 Annex Estonia to the EU Anti-Corruption Report, p. 8

Estonia in the reports 65% of Estonian respondents consider corruption to be widespread (EU average 76%) 22% say that corruption affects their daily lives (EU: 26%) 19% of companies in Estonia consider corruption a problem when doing business (below the EU average of 43%) 17% think that corruption has prevented them from winning a public tender in the past three years (EU: 32%) 4% of Estonian respondents say they were asked or expected to pay a bribe over the previous 12 months (EU average 4%) 10 Annex Estonia to the EU Anti-Corruption Report, p. 3-4

Latvia in the reports Public works, goods and services accounted for about 20% of Latvia’s GDP in The value of calls for tender published in the Official Journal as a percentage of total expenditure on public works, good and services was 87.2% in 2011 (highest percentage in the EU) Public procurement in the construction sector faces particular challenges. Following a KNAB investigation, municipal- and private-sector managers were convicted of bribery in relation to construction projects. The Procurement Supervision Bureau has noted cases in which procuring agencies failed to make documentation available to bidders, requirements for bidders and subcontractors were missing or unclear, or requirements regarding bidders’ qualifications were disproportionate 11 Annex Latvia to the EU Anti-Corruption Report, p. 3-4, 7

83% of respondents think corruption is widespread in Latvia (EU average: 76%) 67% say that it is acceptable to give a gift to obtain something from the public administration (highest percentage in the EU) Some 20% say that corruption affects their daily lives (EU average: 26%) 20% of companies consider corruption a problem when doing business in Latvia (EU average: 43%) 81% agree that bribery and using connections is often the easiest way to obtain public services (EU average: 73%) 37% think that corruption has prevented them from winning a public tender in the past three years (EU average: 32%) Some 6% of Latvian respondents state that they have been asked or expected to pay a bribe over the past 12 months (EU average: 4%) 12 Latvia in the reports

Public works, goods and services accounted for about 16% of the GDP in Lithuania in In the same year, the value of calls for tender published in the Official Journal as a percentage of total expenditure on public works, good and services was 34.7%. 95% of Lithuanians regard corruption as widespread in their country (EU average 76 %) 29% say that corruption affects their daily lives (EU avg 26%) 36% of companies in Lithuania consider corruption a problem when doing business in Lithuania (EU average 43%) Lithuania has the EU’s highest percentage (29%) of respondents who say they have been asked or expected to pay a bribe for services received over the past 12 months (EU average 4%) 88% agree that bribery and the use of connections is often the easiest way of obtaining certain public services (EU avg 73%) Annex Lithuania to the EU Anti-Corruption Report, p Lithuania in the reports

14 Reactions

Red flags are: Warning signals, hints, indicators of possible fraud The existence of a red flag does not mean that fraud exists but that a certain area of activity needs extra attention to exclude or confirm potential fraud. 15 Fraud prevention tools – Red flags

Rigged specification: only one or abnormally low number of bidders respond to request for bids; similarity between specifications and winning contractor’s product or services; complaints from other bidders; specifications are significantly narrower or broader than similar previous requests for bids; unusual or unreasonable specifications; the buyer defines an item using brand name rather than generic description. 16 Fraud prevention tools – Red flags

Collusive bidding: winning bid is too high compared to cost estimates, published price lists, similar works or services or industry averages and fair market prices; persistent high prices by all bidders; bid prices drop when new bidder enters the competition; rotation of winning bidders by region, job, type of work; losing bidders hired as subcontractors; unusual bid patterns (e.g. the bids are exact percentage apart, winning bid just under threshold of acceptable prices, exactly at budget price, too high, too close, too far apart, round numbers, incomplete, etc); 17 Fraud prevention tools – Red flags

Conflict of interests: unexplained or unusual favouritism of a particular contractor or seller; continued acceptance of high priced, low quality work etc; contracting employee fails to file or complete conflict of interest declaration; contracting employee declines promotion to a non-procurement position; contracting employee appears to conduct side business. close socialisation between a contracting employee and service or product provider; unexplained or sudden increase in wealth by the contracting employee; 18 Fraud prevention tools – Red flags

Manipulation of bids: complaints from bidders; poor controls and inadequate bidding procedures; indications of changes to bids after reception; bids voided for errors; a qualified bidder disqualified for questionable reasons; job not re-bid even though fewer than the minimum number of bids were received. 19 Fraud prevention tools – Red flags

Split purchase: two or more consecutive, related procurements from the same contractor just under competitive bidding or upper level review thresholds; unjustified separation of purchases, e.g. separate contracts for labour and materials, each of which is below bidding thresholds; sequential purchases just under the thresholds 20 Fraud prevention tools – Red flags

21 Reactions

1.Detection of forged Documents in the field of structural actions. A practical guide for managing authorities. 2.Identification of conflict of interests in public procurement procedures in the field of structural actions. 3.Handbook : The role of Member States' auditors in fraud prevention and detection. 4. Guidelines for national anti-fraud strategies for ESI Funds. Access to the practical guidance is restricted to Member States' staff. They can be found on SFC Fraud prevention tools – Practical guides

23 Fraud prevention tools – Transparency Retrieved from on February 6, 2014http://datanest.fair-play.sk

24 Discussion

PwC Study: positive/negative practices

Thank you for your participation! Maria Ntziouni – Deputy Head of Unit OLAF.D.2 – Fraud Prevention, Reporting and Analysis Unit OLAF - European Anti-Fraud Office European Commission Rue Joseph II 30 B–1049 Brussels 26