Procurement

Fraud
Leslie Ann D. Banaag
MSCJ
 Procurement Fraud
“An ancient scam that flourishes
in emerging markets and costs
corporations billions”
Procurement fraud is possibly one of the oldest frauds
businesses have to confront. That fraud has flourished
in emerging markets in recent years. Whether in a
public or private setting, procurement fraud is often
'quid pro quo,' in exchange for something a favor or
advantage is given. In a typical scenario of
procurement fraud, the seller is awarded the contract,
typically well above the market prices; the
procurement manager receives cash, material goods or
other advantages in exchange for the contract award.
Procurement fraud is considered one of the most
common frauds perpetrated by managers operating
in emerging markets, and businesses and their
shareholders are the big losers of this fraud.
Businesses lose billions of dollars annually because
businesses do not pay the fair market value for the
vendors' services and products. Consider a
company's increased profits if it paid 20 to 50
percent less for the goods and services supplied by
the vendors.
Since procurement fraud schemes are difficult
to detect, multinational businesses continue to
fail to deter, recognize and overcome
significant kickbacks on growth markets for
procurement managers. Uncovering these
schemes can be a challenge for a variety of
reasons,
Procurement fraud is not only an old scam but
one of emerging markets' fastest-growing
frauds. Global companies operating in
emerging markets have lost and are likely to
continue to lose billions of dollars from these
frauds unless they take the necessary
preventive measures. These losses can be
significantly curtailed if the correct due
diligence protocols are established.
MOST
PREVALENT
CASE OF
PROCUREME
NT FRAUD
 1. Bribes and Kickbacks  9. Imprest Fund Abuse
 2. Collusive Bidding by  10. Leaking of Bid
Contractors Information
 3. Change Order Abuse  11. Manipulation of Bids
 4. Conflict of Interest  12. Fictitious Vendor
 5. Excluding Qualified  13. Product Substitution
Bidders  14. Purchases for Personal
 6. Failure to meet Contract Use or Resale
Specifications  15. Rigged Specifications
 7. False, Inflated or  16. Split Purchases
Duplicated Invoices
 8. False Statements and
Claims
REPORT OF
PROCUREMENT
FRAUD IN THE
PHILIPPINES
 Philippine figures new economic survey,
authority pegs the growth rate of GDP in the
Philippines in 2019. Year-on-year 5.9 percent,
though this is the slowest rate of growth. Such
growth continues to be one in the Philippines
since 2011 the highest region in Southeast
Asia, and Overall.
In the global study, fraud against consumers is having
witnessed top field of economic crime. External attacks like
client's Fraud and cybercrime are a little bit of unpredictable,
and still evolving. Instead, misappropriation of properties
globally accidents have shrunk. Fraudsters have already turned
around emphasis on misappropriation of properties as global
undertakings equipped with valuable technologies to
themselves. Why we are still consider this kind of fraud as the
most common? Did the Philippines suffer fraud? It's maybe
our programs and the controls It may not have developed to
combat this as Much like more mature companies Lands.
Territories.
Malacañang reacted to PwC’s 2020 Global Economic
Crime and Fraud Survey–The Philippine Report that
cites the rise in bribery and corruption. The presidential
spokesperson said it’s the fault of the private sector. I
wish to make a few rejoinders to this reaction:
1. That is partially true. It is also true that between the
government and the private sector, it’s the former that
has the power.
2. Whenever a bribery transaction happens, it’s not the
government personnel that’s the hapless victim.
The PwC report discloses that 42 percent of
respondents were victimized by financial
crimes about two to six times during the year,
ranging from P500,000 to P5 million per hit.
One of the reasons why financial crime is on
the rise is that while corporates are willing to
invest in technology and digital upskilling, they
are not that keen on putting up the equivalent
investment in IT security. Thus, the tools we
sought to help us are easily used by fraudsters
to perpetrate the crime.
HOW
PROCUREMENT
FRAUD IS DONE
Bribes and Kickbacks

A bribe is usually defined as giving or receiving a "thing of

value" to corruptly affect another's actions, most commonly
affecting a contract award or the execution of a contract. A
"kickback" is a bribe that the contractor pays after it gets
paid. A bribe is usually defined as giving or receiving a
"thing of value" to corruptly affect the actions of another,
most commonly affecting awarding a contract or executing a
contract. A "kickback" is a bribe payable by the contractor
after it is paid.
Collusive Bidding by Contractors
Groups of bidders may secretly agree to submit additional
high bids to enable pre-selected contractors to win rotating
contracts, divide contracts by territory, or take other steps to
break the competitive process and divide work. Collusive
bidding, also known as "offer rigging," will drive up prices
in the industries concerned. It is most common in high start-
up and entry costs industries and relatively few bidders, such
as road construction, paving, and waste disposal. Some form
of bid rigging often goes hand in hand with kickback
schemes to ensure the corrupt firm is selected.
Change Order Abuse
A contractor can submit a low bid to insure the
winning of a contract in collusion with the
procurement official, and then increase its price and
profits by submitting requests for changes in order
after the contract is awarded. A dishonest contractor,
acting alone or in collusion with contract staff, may
submit unjustified or inflated requests for a change
order to increase profits, or use the change order
process as a result of corruption to extend a contract
that should be re-bidden.
Conflict of Interest
Conflicts of interest may arise if procurement staff has
undisclosed interests in a supplier or contractor, accept
inappropriate gifts, favors or kickbacks from vendors, or
engage in unsanctioned job discussions with current or
prospective contractors or suppliers. Both kickbacks and
bribery can be prosecuted as a conflict of interest. A conflict
of interest case could be easier, as the prosecution needs only
to show that the kickbacks, which can be in the form of gifts
and favours, were not revealed, rather than having to prove
corrupt intent.
Excluding Qualified Bidders
A dishonest procurement employee, likely in
collusion with a corrupt bidder, can use a variety of
tactics to exclude other qualified bidders, including
arranging narrow or unduly burdensome pre-
qualification criteria, setting unreasonable bid
specifications, splitting purchases to avoid
competitive bidding, making unjustified sole source
awards, and so on.
False, Inflated or Duplicated Invoices

Suppliers or contractors may deliberately

submit false (that means no services have been
provided), duplicate or inflate invoices. The
scheme may involve a contractor acting alone
or in collusion with a victim organization's
employee who shares the profits.
False Statements and Claims
Contractors or suppliers may submit false
information about their employee credentials and
experience, invoice for goods and services not
delivered, charge for items of higher quality than
provided, submit false or defective bonds, or make a
variety of other erroneous statements and claims.
Imprest Fund Abuse
Replenished "imprint funds" (also known as
"operating accounts" or "small cash funds") may be
misappropriated or misused by employees of
contractors. Employees may submit false or inflated
requests for expense reimbursement, use the fund for
personal or unauthorized expenditure, or "double-
dip" by submitting reimbursement to both the fund
and payable accounts.
Leaking of Bid Information

Procurement personnel may leak

information from other bidders, or
confidential pre-bid information, to a
favored bidder in order to give it an unfair
advantage in the bid process. These schemes
are usually the product of corruption.
Manipulation of Bids
A procurement employee may exploit the bidding
process in a variety of ways to help a preferred
contractor or supplier, usually as a result of
corruption. These include leaking bid information,
accepting late bids, changing bids, re-bidding work,
etc. A contractor can also submit a "low" bid with the
understanding that subsequent contract amendments
and price increases will be approved by the corrupt
procurement official.
Fictitious Vendor
An employee with procurement obligations, or in
accounts payable, or an outsider, may send bills from
a non-existent vendor in a slightly regulated
environment. Normally fictitious vendors claim to
have services or consumables, rather than verifiable
products or works. Dishonest bidders can also apply
"offers" as part of bid bribery schemes from fake
bidders.
Product Substitution
A supplier or contractor may replace products or
materials of lesser quality than the contract
stipulates, or may use counterfeit, defective or used
parts to increase profits or comply with contract
schedules. The dishonest supplier could give
inspectors gifts or favours, or pay kickbacks to
contracting officials to facilitate the scheme, and
submit false documentation to cover it up.
Purchases for Personal Use or Resale
An employee may buy products that are
intended for personal use through his or her
employer or company, such as equipment,
personal computers, or automotive parts, or
that the employee intends to resell as part of a
side business, such as computer parts or
inventory.
Rigged Specifications
An employee with procurement obligations, usually in
collaboration with a supplier or contractor, drafts an
application for bids or proposals comprising either too
limited or too vague specifications. Unduly narrow
requirements require only a preferred contractor to compete,
and unreasonably broad specs may be used to compete a
contractor otherwise unqualified to bid. Broad specs may
also be used to facilitate a corruption scheme in connection
with subsequent contract amendments and changes of orders.
Split Purchases
To avoid review or competitive selection, a
single procurement may be split into two or
more purchase orders or contracts, each below
the upper-level review or competitive bid
thresholds. Repetition of this scheme, which
favors the same parties, may be a powerful
indicator of corruption.
SAMPLE,
INVESTIGATION
AND LAWS FOR
PROCUREMENT
FRAUD
Procurement of goods and services is an area
most vulnerable to corruption and fraud,
often involving huge loss of government
revenue. In order to effectively investigate
the related crime, one needs to understand
the “modus operadi” of the corrupt offenders
in the process so as to focus on areas where
evidence can be discovered.
Procurement related corruption usually takes
the form of the suppliers offering money,
entertainment and other advantages to public
officials in return for assistance or favour in the
various stages of the procurement process.
Advantages offered include provision of lavish
entertainment, sexual services; invitation to
gambling, offering gifts and extending loans
and other favours.
As the corrupt offenders are invariably smart
criminals. It is not possible to list out all the
clandestine methods they could have employed.
Some common corruption opportunities that can
be identified in the procurement process are:
• Requisition Stage
• Inviting Quotation / Tender Stage
• Evaluating & Awarding Stage
• Receipt of Goods & Services
In some cases, corruption takes the form of nepotism where
the public officials show special favour in awarding
procurement tenders to suppliers owned by his close
relatives or personal friends
In cases of fraud, where public officials may not be involved,
it often takes the form of submitting quotation/tenders with
false particulars and certificates, so as to score higher marks
in the assessment. There are also cases where the approved
suppliers conspire together to submit pre-determined prices
so as to avoid competitions amongst themselves.
EFFECTICE INVETIGATION OF PROCUREMENT
FRAUD

Independent — procurement related corruption can

involve very senior public officials and hence the
investigation can be politically sensitive and embarrassing to
the Government. The investigation can only be effective if it
is truly independent and free from undue interference. This
depends very much on whether there is a top political will to
fight corruption in the country, and whether the head of the
anti-corruption agency has the moral courage to stand
against any interference.
Adequate investigative power — because such
corruption is so difficult to investigate, you
need adequate investigative power. The HK
ICAC enjoys wide investigative power.
Confidentiality — it is crucial that all
corruption investigation should be conducted
covertly and confidentially, at least before
arrest action is ready, so as to reduce the
opportunities for compromise or interference.
International mutual assistance — many
corruption cases are now cross jurisdictional
and it is important that you can obtain
international assistance in the areas such as
locating witnesses and suspects; money trails,
surveillance, exchange of intelligence, arrest,
search and extradition, and even joint
investigation and operation.
The investigators must be persons of high
integrity. They must adhere strictly to the rule
of confidentiality, act fairly and just in the
discharge of their duties, respect the rights of
others, including the suspects and should never
abuse their power.
An effective complaint system — No anti-
corruption agency is in a position to discover
all corrupt dealings in the society by itself.
They rely heavily on an effective complaint
system. The system must be able to
encourage quality complaints from members
of the public or institutions, and at the same
time, deter frivolous or malicious complaints.
THE PROCUREMENT ACT
The drive behind the enactment of the Procurement
Act is the general policy of good governance in all
branches of the Philippine government. The
Procurement Act covers the procurement of
infrastructure projects, goods and consulting services
by all branches and instrumentalities of the
Philippine government, including all its departments,
offices and agencies, even government-owned and/or
controlled corporations and local government units.
GENERAL RULE
The general rule under the Procurement Act is that procurement shall be
conducted through competitive bidding. Under competitive bidding, any
interested party is allowed to participate in bidding for government
procurement contracts. However, interested parties are required to follow
the mandatory stages of competitive bidding under the Procurement Act,
which include:
 Advertisement;
 Pre-bid conference;
 Eligibility screening of prospective bidders;
 Receipt and opening of bids;
 Evaluation of bids;
 Post-qualification; and
 Award of contract.
SPECIAL CIRCUMSTANCES
 Under special circumstances the act allows
the following methods:
 Limited source bidding;
 Direct contracting;
 Repeat order;
 Shopping; and
 Negotiated procurement.
NEW PROVISIONS
One highlight of the 2016 Revised IRR provides
clarity in determining what activities are not
considered procurement activities under the
Procurement Act. Effective 29 October, 2016, the
following have been expressly declared as
procurement activities outside of the scope of the
Procurement Act and the 2016 Revised IRR
CONCLUSION
Keeping in mind the fundamental basis of the enactment of the
Procurement Act, the GPPB and various stakeholders are
consistently moving to improve and enhance the IRR of the
Procurement Act. The 2016 Revised IRR are long overdue
given the rapid economic, social, legal and technological
changes in society. The amendments and improvements
provided in the 2016 Revised IRR provide hope that, moving
forward, the procurement activities of the Philippine
government will be improved, more transparent, and faithful to
the aspirations and core values of the Procurement Act. (RA
9184)