This is the first article in a series during which we will look at the most common types of public sector procurement fraud. And here is a secret. They are not very different from the most common in private sector procurement. There are perhaps some angles that apply particularly when we have a very regulated and structured process, as we often do in public procurement. But the basic principles are similar everywhere goods and services are being purchased and supplied.
Today, we offer a "fraud classification" model, based broadly on when during the overall procurement process the fraud takes place. We will give just a simple and short description of each type of fraud for now, but we will return at greater length here in future articles and look at each in more detail. Note that in many cases, activities mentioned here will not be fraudulent. For example, not every contract extension is part of a fraud. It may well occur for very good reasons!. But equally, it might not.
For simplicity, we will call the supply-side organisation or individual who is organising the fraudulent activity "the fraudster."
1. Eliminating or reducing competition
Even before we get into what we tend to consider the procurement process (tenders, evaluation, supplier selection, negotiation), fraud can focus on simply eliminating or reducing competition and competitive pressure. Assuming an organisation stands to benefit from this, clearly that both increases their chance of winning the business, and may also enable the fraudster to achieve a return that is greater than they could under true open competition. Within this heading, we can define these fraud "species."
Single tender - engineering a situation whereby only one organisation is invited to bid.
Extending contracts - achieving a contract extension instead of a competitive process.
Tailoring the specification - in order to favour a particular bidder who may then be the only supplier (or one of a few) who can meet the specification.
Discouraging other bidders from competing - by bribing those other organisations, offering them other inducements, or indeed through threats.
2. Biased supplier selection
Once we get into the competitive process, there are further routes that the fraudster can take to subvert the fair and open process. They centre around making the supplier selection decision biased in some way towards a particular bidder or bidders. Here are the key areas:
Inside information - enabling the preferred supplier to position their bid successfully by giving them information other bidders do not have.
Design of the evaluation process - introducing an unfair bias or element of the process to favour one firm (the fraudster).
Marking of bids – biased marking and evaluation of the tenders received to favour the fraudster.
3. “Corrupt” contract negotiation and management
This can be a subtle area for corruption. It usually involves collusion, with the buyer and supplier agreeing terms, conditions or payments that are not truly competitive and therefore provide some advantage to the fraudster. This can happen even if the supplier (fraudster) won the competition ‘fair and square,’ but it is more usually associated with fraud earlier in the process (e.g. the supplier selection was biased and then the fraudster is offered generous contract terms). Here are the key examples .
Non competitive Ts and Cs – agreeing contractual arrangements that are not truly competitive or in the contracting authority’s interest; or ignoring contract terms in a manner that favours the fraudster.
Contract change – once supply is under way, agreeing changes to the contract that again are not in the contracting authorities best interests
Contract extension – either in scope, volume or time, again where this is against the best interests of the buyer.
4. Over or false payment
In these cases, basically the fraudster receives payment that does not genuinely reflect the actual goods or services provided. This can happen with the help of someone from within the contracting authority; or can be a ‘solo’ fraud committed by the external fraudster. This category probably we suspect accounts for the greatest number of frauds committed in the public contracting area. Types of fraud include the following:
Over-billing quantity (against what was delivered ) – this includes invoicing for more than the actual amount provided, or for goods or services that were not provided at all.
Over-charging - invoicing at prices higher than agreed in the contract.
Over-buying – collusion between internal staff and fraudster leads to over-buying and invoicing of goods or services that were provided – but were not required.
Fake invoices – invoices submitted from a fraudster that is not a supplier to the contracting authority at all.
Payment diversion – legitimate payment is diverted to a non-legitimate recipient (the fraudster).