How To Identify & Prevent Procurement Fraud
Private and public organisations undertake procurement to achieve outcomes and deliver infrastructure across Europe and the UK. Fraud in procurement can result in financial losses, reputational damage, legal repercussions and operational disruption that may lead to delays in project delivery.
According to the UK government, procurement fraud accounts for losses of￡2.4 billion annually. While fraud and corruption are constantly changing, preventing fraud through robust procurement compliance processes is the most cost-effective way to address procurement fraud.
What is procurement fraud?
Procurement fraud is any fraud that relates to an organisation in the public or private sector purchasing goods or services from a third party.
Procurement may include large infrastructure, like a construction project, or ongoing software and related services — there are many types of procurement where fraud could occur.
The consequences of procurement fraud can be far-reaching. Procurement fraud redirects resources that would otherwise be available for further social and economic development and compromises trust in government or private leadership.
Can suppliers commit procurement fraud?
Yes, suppliers might commit pre-contract procurement fraud through price fixing, defective pricing or misrepresenting costs during contract negotiations. Collusion between suppliers can rig the tender process or false invoices may be raised post-contract.
Organisations can minimise supplier procurement fraud by implementing robust policies and systems that enable fraudulent activity to be identified early.
Indicators of procurement fraud
Procurement fraud may occur before or after the contract is awarded. It may even occur during a procurement audit or performance evaluation.
Bid rigging or price fixing
Price fixing occurs when contractors agree to raise prices or eliminate discounts. Bid rigging occurs when:
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The winning contractor subcontracts to higher bids
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There is collusion to offer identical bids
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Lower-than-realistic pricing is submitted to win contracts
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There is collusion not to bid below government estimates
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Bidders agree to maintain or raise costs charged above real costs
During the bidding process, fraud may be at play if one bidder withdraws and becomes a subcontractor to a higher bidder.
Tailored needs determination or statement of work
An organisation may engage in fraud by tailoring a statement of work or needs determination to target a preferred contractor. This may involve liaising with the contractor during tender preparation.
Preferential evaluation criteria
During evaluation, the procuring organisation may set out evaluation criteria that favour a particular bidder.
Bribes or kickbacks
Bribery or kickbacks to procurement team members, contractors, subcontractors, vendors, purchasers or government employees can take the form of cash, personal discounts or even prizes.
Split purchase orders or unauthorised purchases
Proper traceability and documentation of purchases in procurement is key to preventing fraud. Where workflows do not align with clear authorisation and supporting documents like supplier agreements, fraudulent activity may be present.
Phantom vendors
A phantom vendor is a fake company included in the vendors list to submit fraudulent invoices or receive payment for goods and services that were never delivered.
Shell companies like this may be involved in money laundering or other fraudulent transactions, and small amounts are often used in transactions to reduce the chance of them being noticed.
This type of fraud can be prevented by ensuring every transaction is matched to a purchase order. Digital procurement platforms have a huge advantage over manual systems in streamlining transaction audits.
False claims
False claims often occur as an invoice that reflects a higher price than the contract agreement, does not match the goods or services delivered, or split purchase orders and unauthorised purchases that can’t be traced back through the workflow documentation.
The best way to prevent false claims is to ensure tender workflows with inbuilt approvals that enable accurate matching of invoices, purchase orders and contracts.
False emergency contract
A no-competition contract may be awarded in an emergency. If this emergency is falsified then the contract is fraudulent.
Pricing and costs fraud
Defective pricing is where a supplier fails to update lower costs for goods or services in the pricing data. Pricing fraud can also occur during contract negotiation, where a contractor misrepresents costs during negotiations. An unrealistically low price may be updated with a change order after the contract award.
Substitution, tampering or certification fraud
Product substitution fraud is the wilful substitution of inferior or counterfeit goods or services that do not meet the contract specifications. This can include substandard goods or services, used materials, or supplies that are improperly tested or that fail to meet specifications. This type of fraud puts the project at risk of failure and may result in costs and delays as items are replaced and work is redone.
Procurement fraud examples
Procurement fraud may be confirmed by an external audit or in a court of law. These two examples of infrastructure procurement show that by using robust processes and tools, fraud can be identified and prevented.
Tender for network facility
The European Court of Justice in January 2016 found in Agriconsulting Europe SA v European Commission that the European Commission properly rejected the bid as abnormally low. The bidder priced ‘additional tasks’ in the tender abnormally low and the Commission requested information about the prices of these tasks.
The information revealed that the bidder intended to overlap staff across the main tasks and additional tasks, which was against the tender specifications.
Fraud in the construction of a multi-purpose sporting facility in Slovakia
Between April 2008 and December 2009, funds from the European Economic Area and Norway Grants were used to procure the construction of a sporting facility that included a football playground, three tennis courts, promotion and management of the project.
An audit confirmed that there were indicators of procurement fraud, from missing documents in public procurement files to discrepancies between the works delivered in the technical specifications outlined in the tender and contract documents.
Bidding irregularities including bidders submitting identical offers. The audit also identified inflated prices for materials and equipment, cash payments and missing audit trails for cash withdrawals and payments.
Detecting and preventing procurement fraud
Procurement fraud may be difficult to detect in a single transaction — it may take vigilance across a number of tenders to identify patterns in vendor or contractor behaviour that amount to fraud.
Establish and regularly revise procurement procedures
Procurement processes evolve rapidly, with cloud-based digital tools and AI support increasingly taking over from email chains and spreadsheets. Keeping up with change and continuing to be vigilant for potential fraud requires regular revision of policies and processes.
New technologies present more effective options for identifying and preventing fraud but they can also create new opportunities that fraudulent actors may exploit. Regularly reviewing the risks and updating policy, procedure and technology implemented for procurement will keep organisations at the forefront of fraud detection and prevention.
Identify abnormally low bids and proposals
If a tender is too good to be true, it probably is. A very low bid indicates that there may be collusion, product substitution or other fraud at play. A late, low bid is also a red flag, this may indicate the vendor has inside information on the tender.
Having a large supplier list and introducing varied competition can make it harder for bid rigging to occur. Due diligence and effective Q&A processes also reduce the chances of fraud at this stage of the procurement process.
Audit every procurement project
Auditing each project and conducting a quarterly or regular review of risks can help identify any irregularities that occur over time. While a fraudulent activity in a single project may go unnoticed, when it occurs repeatedly the pattern can be identified and remediated through updated processes.
Transparent, centralised collaboration
Removing silos within procurement teams and aspects of the procurement process allows clear visibility of end-to-end procurement stages. Using a central, accessible tool with easy-to-use access rights prevents information that may expose fraud from slipping under the radar.
Leverage data analytics
Visualising the relationships between employees and vendors who may not disclose a connection can help surface fraud in procurement. Mapping connections between entities, for example, employees acting on the account, vendors, invoices and business information can identify anomalies and cross-over, surfacing undisclosed conflict of interest.
AI tools and digital procurement platform analytics can help to spot where invoices have been issued on the same date, whether there are anomalies in invoice amounts, if employees share an address with a vendor, and small, frequent invoices where payments are typically large and infrequent.
Identify and prevent procurement fraud with Procure, a streamlined digital procurement tool
Worldwide, 55% of executives express concern about procurement fraud but few are using available tools to combat it. This challenge arises across industries and geographies, but there are tools that can help to reduce the risks.
Procure provides full visibility and clarity over the procurement process, including who has viewed which document, who has contributed and how progress is tracking. There are no plug-ins and with 24/7 support there’s a low barrier to use. Workflows and automated project management make oversight of procurement easier than ever?
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Questions about procurement fraud
What is an example of procurement fraud?
Emergency or accelerated procurement may have a higher risk for fraud. For example, in 2020 the UK government handled bids to acquire personal protective equipment. Transparency UK found that 20% of these contracts between February and November of 2020 raised red flags for fraud relating to political connection, award without competition or award where the supplier had no track record of providing goods or services.
What are red flags of procurement fraud
Non-competitive selection of a contractor, favoritism through tender terms or evaluation criteria, excessive purchases or approval of high prices, continually accepting low-quality goods or services.
How to deal with fraud in procurement?
Robust risk management processes that include regular review of procurement processing, audits of procurement, training for staff to identify red flags, an internal whistleblower policy and a competitive vendor pool can help to reduce fraud in procurement.