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COMBATING PROCUREMENT FRAUD
Colin M Cram FCIPS
Tel: +44(0)1457 239894
Mob: +44(0)075251 49611
www.marc1ltd.com
PUBLIC SECTOR POSITIONS
Fraud Investigator: Revenue and Customs
HM Treasury
Cabinet Office
Department of Social Security
North Western Universities Purchasing Consortium
Research Councils’ Procurement Organisation
North West Centre of Excellence
CURRENT POSITIONS
Chief Executive Marc1 Ltd
Chief Executive Open Forum Events Ltd
http://www.openforumevents.co.uk/
Chief Executive Open Forum Enterprise Pte Ltd
http://openforum.com.sg/
Contributing Editor: Guardian Global
Associate Fellow at Manchester Business School
Fellow at University of Bangor
Fellow: Chartered Institute of Purchasing and Supply (CIPS)
Associate Member: Association of Certified Fraud Examiners
Member: Society of Local Authority Chief Executives
Member: Asia Strategic Sourcing Alliance
http://www.theguardian.com/profile/colin-cram
SESSION CONTENT
1. Defining Procurement Fraud, Categories of Procurement
Fraud
2. Consequences of Procurement Fraud
3. Value and Impact of Procurement Fraud
4. Why People Commit Procurement Fraud
5. Who is Most Likely to Commit Fraud?
6. Examples of How to Commit Procurement Fraud
7. Fraud Prevention Controls and their Effectiveness
8. Risks in the Supply Chain
9. First Class Procurement
© C M Cram FCIPS
WHAT IS MEANT BY FRAUD?
WHAT IS MEANT BY FRAUD?
‘Intentional deception made for personal gain’
Wikipedia
‘Wrongful or criminal deception intended to result in
financial or personal gain’
Oxford Dictionary
CATEGORIES OF PROCUREMENT FRAUD?
Corruption
Conflict of Interest
Contractor and Sub-Contractor Fraud
Cyber Theft
Theft
from Warehouses
Cash
Skimming
Fraudulent Records
WHY IS COMBATING PROCUREMENT
FRAUD IMPORTANT?
WHY IS ENGLISH A GLOBAL LANGUAGE?
9
10
11
CONSEQUENCES OF PROCUREMENT FRAUD? © C M Cram FCIPS
CONSEQUENCES OF PROCUREMENT FRAUD © C M Cram FCIPS
Some People Get Rich. Russian Oligarchs?
Lost Wars
Samuel Pepys to the Rescue. Afghanistan?
Deaths
Collapsed Buildings (2016 Italy Earthquake)
2014 Turkey mining disaster. Hundreds killed
Famine
Wrong or Unsuitable Contractors and sub-contractors
High Prices
Charging for work not done or not to specification
Substitute Substandard Materials: Expensive repairs
Infrastructure Projects not delivered or delivered late
Ignoring Health and Safety Standards
Industrial Accidents, Oil Spills
CONSEQUENCES OF PROCUREMENT FRAUD (Cont’d) © C M Cram FCIPS
National Economies Damaged
• Reduced inward investment
• Less likely to do business with
• Outflow of Money: Can Impoverish some countries
Price Increases
Poor Morale of Workforce
Poverty
Jobs Lost
Reduced Pay
Reduced Services to Citizens
Lack of Confidence in Governments: Revolutions/Civil Unrest?
Uncompetitive – Companies and Nations
WHAT IS THE SCALE OF PROCUREMENT
FRAUD IN SCOTLAND?
% of Procurement Spend?
WHAT IS THE AMOUNT AND IMPACT OF PROCUREMENT FRAUD ? (US $billion)
GDP
$Bn
Public/
Commercial
Procurement
Corruption
Rating
TI Score
(out of 100)
Fraudulent
Benefits(?)
: The Take
%
%age by
value of
Contracts
affected by
Significant
Procurement
Fraud (?)
Economic
Impact of
Procurement
Fraud:
% of GDP (?)
New
Zealand
173 173 91 <0.1 <5 <2
Singapore 452 452 84 <0.1 <5 <2
Scotland 233 233 81 0.1+? 5 2?
Hong Kong 397 397 74 <0.5 5-10 <5
India 7400 5500 38 4 20-30 10
China 17617 15000 36 4 20-30 10
Zimbabwe 14 7 21 12 50 50?
GLOBAL 73000 2-3000 20000+ 5-10?
© C M Cram and TA
18
WHY DO PEOPLE COMMIT PROCUREMENT
FRAUD?
Motive/Pressure
Rationalisation
Opportunity, i.e.
• Because they can
• Because it is easy
• They believe they won’t be caught
© C M Cram FCIPS
19
WHY DO PEOPLE COMMIT PROCUREMENT FRAUD? Personal
• Personal Gain
• Gain for Relatives/Friends
• It is Expected
• Pay Debts
• Pay Scheme Inadvertently Incentivises Fraud
• Profit or Targets too Difficult to Hit
Business
• Increase Sales
• Increase Profits
• Compensate for Late Payments
• Compensate for Over-elaborate Contracting – huge expense.
• Compensate for Customer Behaviour not in accordance with Contract
• Compensate for Inaccurate Data Provided by P/S in Contracting
Is the Public Sector sometimes to Blame?
© C M Cram FCIPS
20
PERSONNEL MOTIVATIONS? © C M Cram FCIPS
TO THE EMPLOYEE, MEMBERS OF THE
EMPLOYEE’S FAMILY OR FRIENDS
PERSONAL MOTIVATIONS? © C M Cram FCIPS
FOR EMPLOYEE, MEMBERS OF THE EMPLOYEE’S
FAMILY OR FRIENDS
Cash – now or later
Shares – now or later
Gifts
Personal loans
Payment of credit card bills
Payment of other personal bills
Provision/Transfers of property or cars at less than
fair market value or free of charge
Building works to one’s property
Vacations
Hidden interest in vendor’s business, now or in future
Sex
PERSONAL MOTIVATIONS continued © C M Cram FCIPS
• Dinners?
• Hospitality?
• Excessive Hospitality on product/factory inspection trips
• Use of Facilities, e.g. Yacht
• Supplier/prospective supplier pays a university for an ‘honour’
• Advancement in a society, e.g. Freemasons
• Receiving Personal Discounts
• Honoraria
• Future Job or Job on Retirement (Public sector people particularly liable to this)
• Jobs for relatives
• “Trading in influence”, defined as promising undue advantage to someone who claimed to be able to influence the decision-making
• Career Advancement
COULD THIS BE ATTEMPTED CORRUPTION? © C M Cram FCIPS
Major contract for back office and IT services let
by a government department to supplier A
One year later, the head of IT services at the
department gets a highly paid job with supplier A
WHO COMMITS FRAUD? © C M Cram FCIPS
• Directors, Managers and Employees in one’s own organisation
• In collusion with a supplier and /or sub-contractor
• Acting independently
• Groups of Suppliers/Contractors
• Individual Suppliers/Contractors
• Take advantage of weak procurement and contracts management
• Corporate Fraud – Board Members
• Sales Directors/Personnel
• Middle Managers in suppliers – responsible for managing contracts and hitting
profit targets
• Junior staff, taking advantage of unsatisfactory processes in their companies
• Sub-contractors
• Take advantage of weak procurement and contracts management by main
contractor and one’s own organisation
POSITION OF PERPETRATOR (ACFE)
Position Frequency (%) Average Loss Months to
(US$) Detection
(Global)
Employee 33 143K 13
Manager 40 220K 18
Owner/Executive 20 1000K 24
AGE OF PERPETRATOR (Global) (ACFE)
AGE % Median Loss US$
˂ 26 5 20k
26-30 9 50k
31-35 14 115k
36-40 17 135k
41-45 19 235k
45-50 15 310k
51-55 11 310k
56-60 6 525k
˃ 60 3 750k
TENURE OF PERPETRATOR (ACFE)
Tenure (Years) Frequency (%) Median Loss
(US$)
˂ 1 6 51k
1-5 41 100k
6-10 27 200k
˃10 25 220k
GENDER OF PERPETRATOR (ACFE)
Gender % of Cases Median Loss
US$
Male 87 300K
Female 13 200K
CONTRACTING CYCLE
OPPORTUNITIES TO COMMIT PROCUREMENT
FRAUD
Pre-Contracting
Contracting
Tender Collusion/Bid Rigging/Cartels
Post Contract/Contracts Management: Contractor Fraud
Cost Plus Contracts
Construction
Stock/Warehousing
© C M Cram FCIPS
PROCUREMENT CAN REDUCE SUPPLIERS’ COSTS
PROCUREMENT CYCLE RISKS, FRAUD RISKS AND INDICATORS (1) © C M Cram FCIPS
PRE-TENDERING PHASE: NEEDS ASSESSMENT
0-10
Is there a genuine need for the procurement? 8
Is there clarity of what success looks like 8
Inadequate cost justification 8
Inadequate funding 7
Lack of clarity and realism about objectives 9
Losing track of aim of procurement/project 7
Failure to take a fundamental look at what is needed to deliver project/procurement aim 7
Unrealism about the capability of possible solutions to deliver what is needed 7
Lack of objectivity. People’s careers may be dependent partly on the procurement/project
taking place. (DSS) 7
Over-reliance upon organisation/supplier that has a vested interest 6
Altering the criteria for deciding what success looks like 7
Designing procurement/project to buy what one has bought before 7
Designing procurement project to enable one to use a particular supplier 8
BEWARE: Any part of the organisation that is or claims that it should be exempt from normal
controls. Potential fraud indicator.
WAYS TO COMMIT PROCUREMENT FRAUD (6)
POST CONTRACT/CONTRACTS
MANAGEMENT/CONTRACTOR /SUB-CONTRACTOR
WAYS RISK 0-10
Sub-standard products, materials 9
Product substitution 9
Not delivering the agreed service 9
Not delivering certain elements of the work at all 9
Reducing the service quality 9
Delays in delivering the service, product or work 8
Fiddling the figures – over-stating the volumes of work 9
Reduced quantities
Removing material once delivered
Seeking extra payments for work not done 8
Billing for different work to that provided
Cutting back on Health and Safety © C M Cram
FCIPS 33
FRAUD PREVENTION CONTROLS AND
THEIR EFFECTIVENESS
Types and Effectiveness of Controls
FRAUD DETECTION (%) (ACFE)
Whistle Blower/Tip 43
Internal Audit 14
Management Review 11
By Accident 9
External Audit 6
Account Reconciliation (Finance) 5
Document Examination 4
Surveillance/Monitoring 3
Confession 2
Notified by Police 2
IT Controls 1
IMPACT OF FRAUD CONTROLS (From ACFE data)
With Control %Reduction in Value
Hotline 59
Employee Support Programme 54
Surprise Audits 51
Fraud Training 50
Job Rotation/Mandatory Vacation 47
Code of Conduct 47
Anti-Fraud Policy 40
Management Review 40
External Audit of Internal Controls 35
Internal Audit 31
Independent Audit Committee 30
External Audit of Finance System 25
Rewards for Whistle-blowers 23
PEOPLE controls seem more effective than PROCESS ones.
Contracts management is not properly recognised as an anti-fraud control
INTERNAL CONTROLS MODIFIED IN RESPONSE TO FRAUD (From ACFE data)
Internal Control Percentage Importance Based
of Organisations on Percentage
Reduction with
Control in Place
Management Review 51 40
Surprise Audits 22 52
Fraud Training 15 50
Job Rotation/Mandatory Vacation 14 47
Internal Audit 12 31
Anti-Fraud Policy 12 40
Code of Conduct 9 47
External Audit of Fin Systems 9 25
Hotline 8 59
External Audit of Internal Controls 8 35
Independent Audit Committee 6 30
Rewards for Whistle-blowers 4 23
Employee Support Programmes 2 54
Some of the most effective controls do not find favour
Contracts Management Missing?
THE FUNDAMENTALS OF FIRST CLASS
PROCUREMENT
An agreed set of aims and objectives.
Objectives aligned with those of the organisation served
A comprehensive understanding of procurement spend.
The right organisational structure, with the right terms of reference, the necessary authority, staffed with sufficient staff of the right calibre and the training and accountability for delivering the agreed aims.
© C M Cram FCIPS
Procurement Model/ Key Objectives
For private sector
Devolved Project
Based
Site
Based
National Global
World Class to Support World Class
Highly Respected Source of Commercial Intelligence
Strong Relationships with Internal Customers
Sustainable Relationships with Highly Capable
Suppliers Aligned to our Goals
High Quality Contracting and Contracts Management
Capability
Secure and sustainable supply chains
Products and Services to Support World Class
Business
Specialist Category Expertise
Ahead of Competitors on Price, Value, Quality
Anti-fraud Culture/Fraud Reduction/Prevention
Understand Procurement Spend – Analytics/Common
and complete databases
Consistent High Quality, Leading Edge Processes,
Procedures, Documentation
Independence, Assurance and Accountability
TOTAL © C M Cram FCIPS
Procurement Model/ Public Sector Key
Objectives
Devolved
Team
CLAN Project
Based
Site
Based
National
Long Term World Class
Lower Tax/Leverage//Savings
Delivery of Government Policies and
Programmes
Social Stability
Better Infrastructure
Responsive and Quality Services
Anti-fraud Culture/Fraud
Reduction/Prevention
High Quality Contracts Outcomes
Consistent High Quality, Leading Edge
Processes, Procedures, Documentation
Efficiency
Assurance and Accountability
TOTAL © C M Cram FCIPS
ALPHA PROCUREMENT (1)
Pre-requisites for First Class Procurement
• Authority
• Capability
• Independence
• Reputation and Respect: Within the company and with markets and suppliers
• High Morale – Self Belief, Mutually Supportive, High Expectations
• Performance Management
• Quality, Practical Systems
• Comprehensive Understanding of Procurement Spend
• Market Intelligence
• Involvement in Key Commercial Decisions
© C M Cram FCIPS
ALPHA PROCUREMENT (2): CAPABILITY • Critical Mass
– Sufficiently Resourced
– Sustainable
– Knowledge transfer
– Learning Environment
• Expertise
– Category
– Markets and Competitors
– Contracting
– Contract Management
– Procurement
– Projects and Project Management
– First Class Procurement Techniques:
• Taking Cost out of Supply Chain
• Value Analysis
• Market Management
• E-auctions
• Other up to date techniques e.g. ‘twitter’ © C M Cram FCIPS
Colin M Cram
Marc1 Ltd
Tel: +44 1457 239894
Mobile: +44 75251 49611
www.marc1ltd.com
