How to Tackle Procurement Fraud in Your Organisation

Procurement fraud comes in many forms and can increase the cost of procurement by as much as 10%.

This is a staggering amount, which can cause a project to run over budget and have huge financial implications for your company. With threats from inside and outside of your organisation, you must understand these fully to neutralise them.

PwC reported that 23% of fraud reported related to procurement, up from 18% in the previous year. Bribery and corruption also accounted for 23% of reported fraud, with a staggering increase of 17% on the previous year.

What is Procurement Fraud?

Procurement fraud is an overarching term for any dishonesty within the procurement chain, which serves to give a party an advantage, allows them to avoid an obligation or causes a loss. This is a broad definition, as fraud comes in many different shapes and sizes.

Types of Procurement Fraud and How to Spot Them

Throughout the procurement process, there are many areas in which it’s possible to exploit any weaknesses. Larger companies with more steps in the chain and bigger budgets are often more open to this kind of fraud, but smaller organisations should also be on their toes.

The following types of procurement fraud are the most common, however you should also be aware that other means exist to exploit this process.

Corrupt Payments and Bribery

Gaining an advantage through kickbacks and bribery is hugely disruptive to the supply chain. Bribery can target the decision maker in the procurement chain or a middle man that collects tender bids on behalf of your organisation.

A kickback is a type of bribe, which gives the corrupt person a percentage of the contract cost for a successful bid. This can mean that a decision maker is influenced to award the contract to a more expensive bid, accept shoddier quality service, or lesser known organisation.

To tackle this, increase transparency within supplier relations. Use committees and groups to make decisions, as this will cut down on the risk of a single corrupt colleague accepting a bribe. Documenting the reasons for selecting a bid and multiple points of contact within your organisation will reduce the likelihood of fraud.

It’s also advisable to work with your colleagues in HR to devise a strict anti-bribery policy. This should outline riles on gifts and donations, which places the onus on the employee to refuse even indirect bribes from suppliers.

How to Spot:

• Unnecessary middle men within the process.
• A colleague receiving gifts or financial rewards from bidders.
• Unexplained increases in wealth among colleagues.

Mischarge Schemes

Knowingly creating mischarged transactions to gain more revenue can also influence the cost of procurement. The supplier may create conflated invoices and subvert the accepted payment process to increase the amount they are paid.

This can be undertaken solely by the supplier, or there may also be a colluding member of staff within your organisation. This could be a colleague in finance or the person that signs and accepts a delivery. If they knowingly accept less than the invoice, they may be incentivised by a bribe or portion of the profits.

In complex procurement chains with a large volume of orders this can go undetected. The best way to tackle mischarging is to create a robust, transparent system of financial reviews. This effectively cuts down on the risk of an employee being involved in this, as they would have to work outside of this system to do so.

Creating a system of reviewing invoices and acceptance forms will highlight any disparities. Regularly audit both new and older invoices to highlight changes over time. You can also require that shipments are signed off by two recipients, so both can account for the volume delivered.

If a single supplier continues to erroneously submit invoices, consider giving them a strict warning before considering switching to another supplier. If you have links to other organisations in your industry, you should also make other organisations aware of the supplier’s actions where appropriate.

How to Spot:

• Escalating costs of procurement.
• Records of billing are missing or duplicated.
• Mismatch of invoices and amounts received.

Bidder Collusion and Manipulation

Bid-rigging will generally happen out with your organisation, as suppliers come together to co-ordinate their bids. They may share the profits of an awarded contract, as they co-ordinate their bids to ensure that one organisation is successful.

In a group of suppliers, all but one will place a high bid, and this will ensure the low bid receives the contract. While the low bid may be lesser than other suppliers, this may be over the market rate for the product or service. By skewing the bids, even an expensive bid may seem reasonable in comparison.

The most effective way to tackle collusion is strong supplier relations, in which the supplier values your relationship over any collusive practices. They may also make you aware of information about these schemes, which you may not be privy to.

Widening the net on the suppliers that you use can also give you fresh perspective on their bids, as they may not be part of the collusion ring. Similarly, you can ask others in your industry the rate they would expect for these products or services.

How to Spot:

• Several similar bids with one drastically different bid.
• Leaked information to other bidders.
• The late bidder may be the lowest bidder.
• Many similarities between bids.

Undisclosed Interest

A conflict of interest can impact the selection of bids, as a decision maker can have a vested interest in one of the suppliers. They may have family connections, investments or other interests in a supplier organisation that influences how the bid is awarded.

This may come in the form of an outright preference towards a supplier, or leaking information to suppliers before they submit a bid. This highly unethical practice can go unnoticed, as it’s not immediately obvious that these undisclosed connections exist.

To combat this, employees should be required to disclose any investments or personal connections that they have within the industry. Due diligence should also be taken to rule out any potential conflicts, for example checking an employee’s connections with a supplier they have worked for in the past.

By emphasising the consequences for undisclosed interests and the importance of disclosure, you can educate your colleagues.

How to Spot:

• Preferential treatment for suppliers.
• Signs of close relationships between bidder and buyer, such as contact outside of work or connections on social media.

Investigating Procurement Fraud

Should an incident of procurement fraud come to your attention, you’ve got to handle an investigation carefully. Remember, this isn’t just a matter for your company, it’s also a legal matter.

If these red flags begin to show, or an employee commands attention by whistleblowing, it’s time to take on an investigation. This is another area in which you should team up with the HR department, as they can keep your investigation compliant.

Depending on the type of procurement fraud you suspect, your method of investigation will differ.  For some, this may mean undertaking forensic financial analysis, whereas others may better suit an interview with the parties involved.

If this goes beyond your area of expertise, you can also enlist the help of an outside consultant or investigator.

These are the steps that you should take to cover all bases of your investigation:

Step 1 – Initiating the Case

This is where a complaint or a hunch goes turns into an investigation. You may have noticed red flags or rumblings within colleagues for a while, but now it’s time to put these thoughts to paper.

At this point, you want to gather additional information about the claim. For example, if a complaint has been made then you’ll want to work with the complainant confidentially to get the full scope of the issue. Probe the accuracy and specificity of the allegation, to understand their origins.

At this stage, you may find that a complaint has been lodged due to personal issues or that a simple misunderstanding is at play. Conversely, you may realise the full scope of the fraud is bigger than you considered, requiring legal action or further intervention.

Step 2 – Review the Internal Results

Most procurement investigations will contain internal and external investigations. Dealing with third parties is a given, and often an investigation will require information from these parties too.

Ensuring that you’ve done your due diligence up to this point ensures that you won’t be bothering your third-party suppliers every time an employee cries wolf or you have a hunch.

This is the point at which you decide whether the claim requires further investigation, or whether you’re satisfied that the issue has been fully resolved.

Step 3 – Initiate the External Investigation

The next step is to assess whether third parties can corroborate your suspicions. If you’re in a situation in which you believe a third party is complicit in the fraud, then this may be slightly more difficult.

Gather paper trails and evidence, before discussing the potential for fraud with the third party. This has to be handled sensitively, as you don’t want to destroy the supplier relationship by making accusations.

Simply gather as much evidence as you can, as sensitively as you can. You don’t have to tell third parties that you’re investigating fraud, you can request new copies of invoices and purchase orders without going into specifics.   

Step 4 – Compile the Evidence

With all of the evidence that you’ve compiled so far, you want to create a clear narrative supported by the facts.

This will either prove or disprove the initial claim; if you’re not sure whether your evidence is sufficient, you can work with another employee to ascertain their feelings on the evidence. They should be a trusted employee that will keep the contents of the investigation confidential.

Each step of the investigation should be carefully documented, especially if a legal case will likely be brought as a result.

Step 5 – Prepare the Report

Bring all the information and investigation that you have compiled into a report to conclude the investigation.

Summarise the evidence collected and the likely outcomes that this points to. Suggest a timeline for the fraud, from the first instance to detection. 

Your report should also include further steps for the investigation, such as legal action to recover lost revenue.

If the fraud involves an internal employee, then you should work with HR to work out a reasonable response. While fraud constitutes gross misconduct, this doesn’t mean that you can fire or demote an employee on the spot without due cause.

For many organisations, lost revenue in the procurement process is a given - but this doesn't have to be the case. Being aware of and acting on procurement fraud will protect your organisation. 

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