A deep dive into procurement fraud and corruption risk

INTEGRITY of actors in the procurement process may significantly reduce corruption risks. Integrity refers to upholding ethical standards and moral values of honesty, professionalism and righteousness, it is a cornerstone for ensuring fairness, non-discrimination and compliance in the procurement process.

Therefore, safeguarding integrity is at the basis of any effort to curb corruption in procurement. Transparency in procurement serves an important role in levelling the playing field for businesses and allowing small and medium enterprises to participate on a more equal footing. Oversight and control of the procurement cycle generate valuable evidence on the performance and efficiency of the procurement cycle.

The basis for an adequate oversight and control system is a risk analysis of the entity’s process and its environment. In turn, the observations from oversight and control activities may yield insights on new and emerging risks or red flags, allowing updating and refining the oversight and controlling system.

Lloyd Chirindo is the Enterprise Risk Managment Institute of Zimbabwe (ERMIZ) award winner for Risk Manager of the year 2022.

Why does procurement fraud/corruption occur?
Procurement fraud occurs where there is no clear definition of procurement, lack of board importance on procurement, lack of trained staff on procurement fraud, lack of procurement fraud risk mitigation, lack of central point of procurement fraud intelligence, lack of clear definition of procurement fraud and lack of clear guidance on procurement fraud mitigation. Additionally, due to procurement systems overrides, traditional fraud or where the corruption controls do not cover procurement corruption fraud, lack of segregation of duties, lack of proper application of procure-to-pay controls, inconsistent application of 3 –way match approach, undue interference in procurement, frequent bypassing of procurement process and procedures by end-users.

What are the phases in procurement cycle where corruption may occur?
Planning phase where procurement plan, advertisement and bidding documents are initiated. At this stage, a scheme of unnecessary items, unjustified sole sourcing, unusual splitting, restricted circulation of tender and inadequate information can be coopted. Bidding phase shortlisting, pre-bid conference and bid submission where pre-qualification process can be used to exclude competitive bidders. Evaluation, where committee produces a report excluding competitive bidders. Contract management where contract drafting, contract execution and contract variations are done.

What are the types of procurement fraud practices?
Bid manipulation, bid rigging, rigged specifications, bid rotation, bid suppression, bribery, cartels, market sharing, cover bidding, price fixing, product substitution, purchases for resale, split purchasing, unjustified sole sourcing, fictitious vendors and ghost companies. Moreover, abuse of contract variation, manipulation of deliveries, false invoicing, inappropriate bundling, unnecessary line items, restricted bid solicitation circulation, biased evaluation criteria, unbalanced bidding, leakage of insider information, exclusion of qualifying bidders, bid tempering, inappropriate contractual terms, acceptance of late bids and hidden interest in bidding company.

What are the procurement fraud typologies?
Bribery and corruption, concealing conflicts of interests, manipulation specifications, bid rigging, ghost companies, sole sourcing, over charging, false claims and ad hoc emergency works.

What are the red-flags of bribery & corruption?
Involves an offer, promise or payment, including the request or receipt of pecuniary and non- pecuniary advantage for the purpose of influencing procurement process or allowing illicit overcharging, false invoicing, product substitution, or acceptance of sub-standard goods or services during contract execution. Procurement staff, senior managers, non-procurement functionaries attempting to “Force through” as supplier/contractor or purchase order despite objections. Non-procurement staff chasing “expediting” an order consistently. Supplier seems to be ordering services and procurement staff place ex post facto orders. Existence of too cosy, less than “arm’s length” relationship between supplier and critical decision-makers in procurement process. Supplier control of meetings between supplier and procurement functionary. Procurement staff, senior line managers as well as non-procurement functionaries appears to be living beyond means of income. Purchase orders to particular supplier frequently processed outside normal business hours without justifiable reasons. Suppliers in possession of inside and confidential information they should not have, e.g., budget estimates. Correspondingly, supplier chase purchase orders by making consistent inquiries, excessive gifts and hospitality provided by supplier to certain procurement personnel. Seeming reluctance on part of certain procurement staff members to take leave, frequent and deliberate circumvention of procurement process by staff.

What are the red-flags of a ghost company?
Ghost companies are set up to bid for tenders through concealment of true owners and of conflict of interest. Usually, the name is similar to well-known company, organogram not provided and company website created to support appearance of legitimacy. The entity cannot readily provide all legal documentation as well as requesting payments in foreign currency or into offshore banking account into apparent tax haven. Goods either not delivered or provided or partially delivered. Moreover, it only provides website/ e-mailing/postal address and mobile contact numbers. Furthermore, it has no apparent clientele other than procuring organization and has very little to no apparent assets. Company’s financial statements and audit reports appear incomplete.

What is unjustified single sourcing and the red-flags?
Where contract is awarded to particular supplier source where it could have been awarded to any of a number of other suppliers or where the particular supplier has been awarded multiple single source packages in the past. Additionally, no “Sole Source Justification Form” has been completed or authorized and supplier previously provided goods or services, but at a cheaper price. Similarly, absence of justification for price increases without documentary evidence to prove goods or services have been delivered. Finally, there would be evidence of gifts or hospitality received from particular supplier at frequent intervals. By Lloyd Chirindo