Detection of Procurement

Fraud and Misconduct

 Procurement Fraud
 Procurement internal controls
 Fraud investigation techniques
 Procurement Fraud Schemes

DR INNOCENT SENYO KWASI ACQUAH

MEANING OF PROCUREMENT FRAUD

Fraud is generally defined in law as a material existing fact made by one person
to another and for the purpose of inducing the other person to act, and upon
which the other person relies with resulting injury or damage.
Fraud is also defined as deliberate deception to secure unfair or unlawful gain.
Fraud may also be made by an omission or purposeful failure which
nondisclosure makes other statements misleading.
The UK’s Fraud Act 2006 states that a person is guilty of fraud if he is in breach
of any of the following: fraud by false representation, fraud by failing to disclose
information, fraud by abuse of position.

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The National Fraud Authority of the UK defines Procurement fraud as a
deliberate deception intended to influence any stage of the procure-to-pay
lifecycle in order to make a financial gain or cause a loss. It can be perpetrated
by contractors or sub-contractors external to the organisation, as well as staff
within the organisation
The UN Practitioners book defines Procurement fraud as any fraud relating to an
organisation purchasing goods, services or commissioning construction projects
from third parties. A simple definition by the Chartered Institute of Procurement
and Supply of procurement fraud is fraud within the procurement lifecycle of a
product or service, not forgetting long-term maintenance contracts. It can be
perpetrated by those inside and outside an organization.

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Four common fraud scenarios in procurement

A person with responsibility for buying defrauds for his or her employer.

Suppliers defraud their customers.

Suppliers and buyers work together to defraud the buyer’s employer.

Buyers make personal gain at the expense of the supplier.

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Why Procurement fraud thrives

Procurement fraud thrives where systems override or controls fail, where

procurement fraud is not taken as a big risk, where there is no procurement
fraud strategy in place, where duties are not segregated, procurement
processes are often by-passed and where orders are often divided to avoid
tender. It is therefore important to check these areas to prevent
procurement fraud from thriving.

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The fraud triangle
The fraud triangle is model, or framework used mostly in auditing to explain the
motivation behind a person’s decision to commit fraud. It outlines three factors
that motivate a person to commit fraud. The three factors or components are
opportunity, incentive, and rationalization.

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Components of the fraud triangle
Opportunity
Opportunity to commit fraud arises as a result of non-existing or weak internal
controls. For example, if there is no segregation of duties allowing one single
individual to carry out several processes in procurement with little or no
supervision, the person may cease the opportunity to commit fraud. People
who engage in fraud believe they will not be caught
Incentive
The incentive to commit fraud is also referred to as pressure and explains the
individual’s mindset to commit fraud. An employee in a supplier’s business
whose performance is measured by the target he is able to achieve and is paid
bonuses in line with the target is more likely to commit fraud in an attempt to
achieve the set target. An employee may also be incentivized personally. For
example, the need to get more money, amass worth and even to cater for
emergencies such as medical bills.
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Rationalisation
Rationalisation refers to a person’s justification for committing fraud. They may
use justifications such as a belief that everyone else is doing it or management is
also doing the same, so it is okay for an employee to also do. It may also come
from the fact that the individual thinks that he has not been treated well. That
is, he has not been promoted as expected or he is not been paid as much to
commensurate the kind of services he renders for the organization. In such
instances, the individual perceives that the only solution is to commit fraud to
compensate for the non-recognition.

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 TYPES OF PROCUREMENT FRAUD
Procurement fraud can be classified under two categories. These are fraud at the pre-
contract award stage and fraud at the post-contract award stage. We shall take a look
at both categories below.
Fraud at the Pre-contract award stage
The pre-contract award stage involves procurement activities that are carried out
before the contract is entered. These activities include identifying the need,
preparation of specifications, tendering, evaluation, selection of successful tenderer
Fraud at the pre-contract award stage indicates fraud which are related to the
procurement process from the need identification to the point of awarding the
contract.
Fraud at the pre-contract award stage is very difficult to detect and it can occur with
the assistance of officers within the organisation or by external parties alone such as
suppliers.

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 Types of procurement fraud carried out at the
pre-contract award stage.
Bid rigging
Bid rigging refers to an illegal procurement practice in which two or more suppliers agree
to not compete genuinely with each other so that one supplier may have an automatic
chance of being selected for the contract. Such suppliers may take turns to win the
contract at different times by deciding in advance how to submit the quotations or
tenders. It makes the tendering process uncompetitive leading to the organisation not
realising value for money. Bid rigging may take several forms, some of which are
discussed below.
Cover bid
Cover bid occurs where the competitors to a contract decide on a winner amongst
themselves so that all other suppliers, except the winner they have chosen, intentionally
quotes an amount which is higher to artificially make the winner’s quotation
competitive.
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Bid suppression
In bid suppression, some competitors who ordinarily would submit a successful tender or
quotation intentionally agree not to tender so that the one they have agreed on already,
wins the contract.
Non-conforming bids
This occurs where suppliers intentionally decide to submit a tender or quotation with
unfavourable terms and conditions so that their tender will be rejected. The rejection of
their tenders pave way for the preferred supplier or tenderer.
Bid withdrawal
A supplier or tenderer intentionally withdraws its successful and winning tender to
facilitate the winning of the contract by another competitor.
Bid rotation
Bid rotation occurs when competitors agree amongst themselves to win contract in turns
and make sure that all of them get their share as far as selling to the organisation is
concerned.
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Collusion
Collusion can be in two forms. That is between an employee of the organisation and an
external supplier or a collusion between suppliers outside the organisation. Collusion refers
to a scheme or arrangement between two or more suppliers, or between a supplier and a
buyer, designed to establish prices at artificial, non-competitive levels. Such suppliers
ensure that a specific contractor wins the bid or tender, usually at an inflated price. The
winner may then award subcontracts to the losers or provide them with a kickback for their
services. Collusion can take several forms. Some are discussed below.
Excessive requisition
The officer in charge convinces the organisation to procure excessive or unnecessary goods
and services so that they can profit from the purchase. In excessive requisition, the
fraudster is just interested in buying whether what is bought is needed or not.
Bid Tailoring
In bid tailoring, the officer in charge prepares a specification in such a way that it gives
advantage to a supplier. That supplier is able to meet the specifications whereas other
competitors are not able to meet the specifications.
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Information leakage
This occurs when a contracting officer provides confidential information about
tendering and other related information to a supplier to enhance their chances of
winning. It can also be in the form of the officer providing a supplier with
information about another supplier’s tender.
Tender splitting
Tender splitting refers to dividing a large requirement into several smaller lots with
the intention of avoiding a mandatory competitive tender requirement. For
example, a building maintenance work costing GH₵300,000.00 which requires
advertisement is divided into two phases to use price quotation and avoid the need
for advertisement.
Unjustified single source awards
An officer can also collude with a supplier to award contracts to them through
single source procurement method. This is especially so if it is unjustified and
unapproved.
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Conflict of interest
Conflict of interest occurs when the interest of an officer clashes with the
interest of the organisation he or she represents. It can be the officer awarding
contracts to companies owned by friends and family or by himself.
Examples of conflict of interest includes staff of an organisation using his/her
official position to influence a contract or facilitate favourable terms for a
company in which he/she, or a relative or friend, has a financial interest or
obtaining financial or non-financial benefits for him/herself or for a relative or
friend in return for providing advantage, or potential advantage to a third party.

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Unfair exclusion of tenderers
In tendering, a dishonest employee of the organisation may usually in arrangement
with a corrupt tenderer, use unfair tactics to make sure a qualified tenderer is excluded
or does not have interest in participating in a tender. The unfair tactics may include:
a difficult prequalification criterion.
drawing biased or unreasonable specifications which is difficult to be met by
tenderers except very few or only one.
very short tender submission period.
very short delivery period. For example, requiring a winner to deliver 1000 computers
within 3 days. In such a case it is possible a preferred supplier is already having the
computers in stock whereas all others will have to import making them unable to
compete favourably.
publishing a tender in such a way that it is hidden from many prospective tenderers.
Can you imagine placing a procurement tender advertisement under classified in the
Daily Graphic? How many people will read that?
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Manipulation of Tenders
The tender process can be manipulated in several ways by a corrupt employee in
procurement in order to favour a chosen supplier or tenderer. Now, let us look at some
of the ways of possible manipulation.
Leakage of information concerning the tender of competitors to the preferred
tenderer.
Accepting tenders which are submitted late. For example, a deadline for submission
and receipt of tenders is set at 10.00am on a date. A tenderer walks in at 10.30am on
the said date and yet the tender is accepted.
Changing tenders. The employee allows a tenderer to submit a modified tender after
the deadline for submission.
Re-bidding. This occurs where the corrupt officer calls for re-tender after he detects
that their preferred tenderer is not winning or does not have chance to win.
Introducing new criteria for evaluation after bid submission
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 Fraud at the Post award stage
This refers to fraud which occurs in relation to procurement activities which are
undertaken after the contract has been awarded or the contract has been signed by the
two parties. These include false invoicing, product or service substitution, repeated
change orders, duplicate payments, phantom vendors, bribery, kickbacks etc.

Invoicing
Fraud in relation to invoicing include false invoicing, duplicate invoicing, inflated invoicing.
False invoicing occurs where a supplier or contractor intentionally submits an invoice for
payment for no work done or no goods supplied.
Duplicate invoicing refers to paying for goods delivered or services rendered for which
payment has already been effected without records of a second delivery.
Inflated invoicing occurs where the invoice amount submitted for payment is more than
the amount agreed in a contract or as contained in a purchase order.

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Phantom Vendor
Phantom vendor refers to an employee setting up a fictitious or unauthorized vendor account
and submitting invoices or processing payments for non-existent or fraudulent goods and
services. In some cases, payment may be made to a fictitious vendor without any invoice to
support the payment. For example, an invoice shows an address which is linked to an employee
of the organisation.
 Product or service substitution
This kind of fraud occurs when, after the contract has been awarded, a supplier or contractor
delivers goods or services which are significantly different from what is stated in the order or
contract.
The change is mostly substituting products or services with lesser quality or substandard
products or use counterfeit, defective or used parts, to increase profits or comply with contract
time schedules.
The substandard goods or services are accepted by persons responsible for receipt and
inspection so that the supplier or contractor will give them a share of the payments, or some
offers in kind.

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Repeated change orders
Another fraud scheme is when a contractor submits relatively low quotation in
order to secure a contract, then rely on several change orders to get more
payments above what is due him.
It can also occur by expanding the contract scope to accommodate work not
performed or simply to increase profits to contractor or supplier.
The contractor does this with the support of an official who agrees to issue out
unnecessary change orders just to get the contractor to be paid more variations
with the motivation of getting kickbacks from such payments.
This can also be facilitated if the contract allows for fluctuation payments.

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Bribery and kickbacks
Transparency International defines bribery as the offering, promising, giving,
accepting or soliciting of an advantage as an inducement for an action which is illegal,
unethical or a breach of trust. Inducements can take the form of gifts, loans, fees,
rewards, or other advantages (taxes, services, donations, favours etc).
Bribery can take place at both the pre-contract award and post-contract award
phases.
Kickbacks are given to corrupt officials after they have facilitated a fraudulent
transaction or helped a tenderer to win a contract or get a false payment through.
It is perceived that in Ghana most contractors pay 5% or 10% of contract amounts as
kickbacks to officials who help them to secure contracts unfairly.
Offers to corrupt officials can take the form of gifts such as travel, accommodation,
entertainment, loans, money, commissions, and future employments.

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Causes of Procurement fraud

Motivation

Opportunity

Rationalization

Capacity

Absence of procurement fraud strategy

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Consequences of procurement fraud

Loss of revenue

Debarment of supplier or contractor

Reputational damages

Prosecution

Loss of job, income and assets

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 Red Flags

Procurement fraud red flag refers to

a direct or indirect indication of
corruption, collusion or fraud. We
shall discuss the red flags to look out
for in procurement fraud.

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Possible collusion with suppliers or contractors

Red flags to detect collusion include

limited competition
The price at which a supplier or contractor wins the contract is higher
than expected
the same set of suppliers participate in tender or request for quotation
Qualified tenderers do not submit tenders
Tender winners are rotated. For example, A wins today, B wins tomorrow,
C wins another time, then it comes back to A again.

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Loosing tenderers consistently submit tenders which do not meet
requirements.
Consistently, the last supplier to submit tender wins the contract.
When a new supplier enters the market, prices fall drastically.
Different quotations have similar fonts, colours, mistakes. Sometimes they
even have the same address and telephone numbers.
Contractors who win contracts consistently sublet to subcontractors (other
contractors who participated in the tender)

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Possible collusion with procurement officials

Several contracts awarded which are all below competitive threshold with
the intention of avoiding competitive tenders.
Supplier or contractor is involved in drafting specifications for the contract.
In such instance the supplier writes it in such a way that it favours his firm.
The supplier quotes the same tender price as the independent in house
estimate.
Accepting late tenders or changing the deadline for tender submission and
opening to allow a preferred tenderer to submit a tender.
Negotiating with only one tenderer and leaving out the other suppliers

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Continues use and abuse of sole or single sourcing procurement method
which does not give other suppliers the opportunity to also tender for the
contract.
incomplete procurement files making it difficult to trace the sequence of
transactions.
Unqualified suppliers or contractors winning contracts.
Continuously disqualifying otherwise qualified tenderers without
justifiable or valid reasons.
An official of the purchasing organisation or a procurement staff has a
meeting with a supplier and they insist they go alone.

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Possible post contract award fraud
Duplicate payments for the same transaction
Request for payment without any supporting documents are honoured.
Restricted access to production or storage facility or records.
Continuously accepting substandard performance or delivery which is certified
by a responsible officer as okay.
Continuously accepting prices higher than the agreed prices with no justifiable
reasons.
Unwarranted or continues change orders without valid reasons or justifiable
explanations.
Overcharging for goods and services or charging for unallowable costs
Numerous voucher or invoice errors and poor documentation of costs.

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Possible Single or sole source fraud
Contract for goods or services which are readily available in the market is
awarded to a supplier through single sourcing without justifiable reasons.
The same goods or services was bought previously but not through single
or sole source indicating suppliers are available to supply.
A particular supplier is awarded multiple single or sole source contracts
without valid reasons.
Awarding single or sole source contracts without seeking approval from
the appropriate Authority. For example, without approval from the Public
Procurement Authority, in the case of public sector procurement in Ghana.
Engaging in single sourcing without undertaking due diligence before.

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Possible variation frauds
The variations have higher values compared to the values in the original
contract.
The original specifications for the contract is poorly written so that it will
somehow justify change orders which are given later during contract
execution.
Variations given out are already covered by the original contract. So why
the need for such variations, if not to defraud the organization?
One supplier is awarded so many variations
There are weak controls and unregulated change order procedures. This
allows the corrupt officer to issue unwarranted change orders.
There is a trend of supplier submitting and winning contracts with very low
tenders which is followed by variations which increase cost considerably.
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 Red flags associated with invoicing
Weak controls in the process of receipt of goods and services. In some cases, the
purchasing organisation may have very good control system in place but responsible
officers do not enforce the controls.
Supporting documents for payments are not original or are altered or sometimes no
documents are provided to support the payment.
No stores receipt vouchers or inspection reports are available and yet payment is
effected to a supplier.
Prices on invoices, amounts, description of items or terms submitted by the supplier
or contractor exceed or do not match the one stated by the contract.
Supposedly received goods for which an invoice is processed for payment, cannot
be located or accounted for.
No purchase order or contract follows invoiced goods or services.

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Possible specification fraud
Only a few tenderers or in some cases only one tenderer responds to
invitation for tender by submitting a tender. Others may express interest
but upon inspecting the tender documents, the specifications put them off.
Specifications of the goods sold by the winning firm is similar to those
required by the purchaser. When this is consistent them it should raise a
red flag.
The specifications contain brand names so that those not dealing in those
brands are automatically disqualified from the onset.
Specifications are significantly broader or narrower than similar previous
request for tenders or quotations.

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Behaviour red flags

Employee living beyond his or her means. He spends more than he is paid
by the organization with no additional income source.

Employee has close association with a contractor or supplier.

Employee has excessive power and control.

Employee is always defending a particular supplier’s actions against the

position of his employers.

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How to deal with procurement fraud

Prevention
Education and Training
Whistle blowing
Surprise Audits
Screening of prospective employees
Create effective work culture
Internal control mechanisms
Code of Conduct

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Fraud investigation

Counselling
Disciplinary action
Suspension
Dismissal

Prosecution

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Management’s responsibility in dealing with Fraud

It is the responsibility of management of the organization to ensure that

fraud in the procurement system is eliminated or prevented.
Management must set the rules and regulations for employees to follow.
They must also exhibit the highest standard of integrity.
Again, it is their responsibility to put in place the necessary controls and give
punishment to offenders when necessary.
It is important to punish so that it will serve as a deterrent for others.
Another responsibility of management is to organise training for the staff
and counselling sessions when the need arises.

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Controls in Procurement
As part of preventing fraud management must put in place strong controls in
the procurement system. Some of these are stated below
Thresholds must be established clearly
Approval authorities must also be in place
A designated authority must have the responsibility for signing purchase
orders or contract letters so that the person who processes is different from
the one signing the order.
All other duties must clearly be segregated so that one person does not do
everything.
Similarly, those responsible for payment must not be the same as those
processing the order

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Employee’s responsibility in dealing with Fraud

Do you think it must be only management’s responsibility to exhibit standards

of integrity and honesty?
Employees must also have a high sense of integrity and honesty
They must be of good behavior and take it upon themselves to report any
suspicious behavior they see in others
Dealing with fraud must therefore be a collective effort of all. Employees must
make sure they don’t go against the standards set in the code of conduct
They must also seek interpretation from their superiors on any issue that they
are not sure about

DR INNOCENT SENYO KWASI ACQUAH

THANK YOU

DR INNOCENT SENYO KWASI ACQUAH