Procurement Fraud and How to Identify It


In a previous post, we discussed accounting fraud and how it affects businesses. Now we discuss another deviant process called procurement fraud. In general, an act that is aimed at acquiring goods and services, particularly for business reasons is known as procurement. The actual process involves preparing the approval of payment for the commodities obtained. There are several procedures that are involved during this process, such as planning the purchase, selecting a supplier, negotiating price and controlling inventory.

Procurement represents a decisive part of a company’s business strategy since the ability to purchase certain materials goes a long way in determining the profitability of the firm. However, as is so often the case when financial transactions are involved, scammers find a loophole that they can exploit. When it comes to procurement, there are a number of tricks they use to deceive others.

What is Procurement Fraud?

We’ve already established what procurement entails. Now we can delve into what procurement fraud is. Any act that involves dishonestly acquiring an advantage, failing to pay, redirecting funds in a transaction or avoiding an obligation is known as procurement fraud.

Naturally, procurement scams can affect any industry and the methods employed can vary in terms of sophistication in planning. Businesses require purchases, which results in ample opportunities that scammers can exploit. This is also tantamount to extraordinary losses for companies.

Types of Procurement Fraud

Now that we have defined procurement fraud, we will look into the various types that are commonly used by scammers.

Embezzlement

A form of employee theft, embezzlement is the act of wrongfully appropriating funds that have been entrusted to an individual although they are owned by another party. Embezzlers generally gain access to money or property legally, since it is placed in their care to begin with. However, they acquire it fraudulently, without the consent or knowledge of the original owners.

Employee fraud may be the most common type of procurement fraud but there are other ways to embezzle. For instance, accounting embezzlement is the manipulation of financial statements to conceal the theft of resources. Moreover, it represents a white-collar crime that can be prosecuted as both a criminal and/or civil fraud.

Kickbacks and Corrupt Payments

man in suit holding reaching to take 50 euro banknotes - royalty free, without copyright, public domain photo image

Kickbacks are a kind of bribe paid by a contractor once they have received payment for a project. The sum of payment can vary from 5% to 20%, depending on the overall value of the contract. The recipient is paid as compensation for the provision of favorable treatment. This can be in the form of gifts or money. Regardless, at its core, it is a corrupt practice that infringes an employee’s capability for unbiased decision making.

Kickbacks bring us to the concept of corrupt payments. The former is just one way to execute a corrupt payment. Generally, it is promised to influence the receiver if a bid is successful. Corrupt payments are not simply limited to cash injections. Alternatives include gifts such as travel or entertainment; loans; credit cards; overpayment for reciprocal purchases and; sexual favors as well.

Naturally, where illegitimate activity is taking place, there is the manifestation of red flags. For instance, if there is a broker or intermediary involved in transactions, especially when they are not performing a specific objective, is a potential warning sign. Their presence will seem unjustified and unwarranted. Likewise, if a member of the procurement team suddenly comes into excess wealth and begins to enjoy gifts and an influx of resources, then that may be an indication that they are receiving corrupt payments.

Corrupt Influence

This can entail measures like paying well above market rates, purchasing more items than required and giving license to an untested supplier. Additionally, tenders of participating bidders being leaked and the exclusion of credible bidders are more cases of corrupt influence being exercised. There are cases where the perpetrators may use their influence to such an extent that only their bidder of choice is selected.

While corrupt payments leave behind a trace that can be followed, there is no tangible way to corroborate that unscrupulous influence has been exacted. This makes the latter is considerably difficult to prove. There are still signs that something may be wrong. Low-quality goods and services are purposely accepted or if contracts are awarded without any logical justification are just two instances of potential influence being used in procurement.

Bidding

We alluded to it when discussing the concept of corrupt payments and now we can define how bidding is used as procurement fraud. The idea of collusion is used frequently for personal gain. Bidders may work in consonance and submit complementary bids that enable both parties to win contracts on a regular basis.

Furthermore, they may use this method to divide regions or territories which would prohibit other vendors from being chosen. This phenomenon is also known as bid rigging. This measure may also be used in combination with kickbacks for maximum gain. Lastly, there is also the option of manipulating bids. Executives who handle procurement deals can engineer the entire bidding process so that it works in the favor of their preferred contractor or supplier.

Delivery Fraud

All in all, there are three central types of delivery frauds that scammers can put into motion, namely variation abuse, contract specification abuse and improper claims. Variation abuse involves a contractor submitting a low bid, which is done in partnership with a procurement executive. Gradually, the bids are upped to increase their financial gain.

Contract specification abuse means contractors may deliver poor quality goods and services deliberately in the hopes that they do not meet the quality expected. However, they intentionally conceal the quality of items delivered for personal gain.

Suppliers may be inclined to exploit costs by making exaggerated claims so that they will be reimbursed accordingly, despite not performing those tasks. In terms of potential admonitions, records may go missing if individuals are involved in billing fraud. Duplication may be more apparent than usual and may be refunded from multiple accounts.


Posted On September 19, 2018