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6 types of procurement fraud and how to spot them

How to spot procurement fraudVigilance against procurement fraud is crucial for ensuring your organisation gets the right results from its procurement. It’s also essential to preserving stakeholder trust, company reputation and preventing unnecessary overspend.

Procurement fraud can be difficult detect as well as complex to investigate. We’ve compiled a list of six common types of procurement fraud and their warning signs.

1. Kickbacks and corrupt payments

A type of bribe, a kickback is paid by the contractor after they’ve received payment for the winning project. They often vary between 5% and 20% of the overall contract value.

A corrupt payment is promised to influence the recipient for a successful bid. It can be monetary, but can also take the form of goods or services in kind such as expensive gifts, credit cards, sexual favours and overpaying for reciprocal purchases.

Warning signs:

  • There may be a broker or middleman involved in transactions, where it isn’t needed. The selection of the contractor appears unjustified or there is approval of high prices and low quality goods
  • A member of the procurement team receives gifts or seems to enjoy a sudden and unexplained increase in wealth

2. Corrupt influence

Corrupt influence includes paying over market rates, buying more items than are needed, qualifying an untested or unqualified supplier and excluding qualified bidders. The perpetrator might also tailor or narrow specifications to such a degree that only their chosen bidder can win.

Warning signs: This is harder to prove than a kickback, but some of the same signs of that category apply here, as well as:

  • Knowingly accepting low quality goods/services
  • Awarding contracts without robust and transparent justification

3. Collusion and manipulation by bidders

Collusion (bid-rigging) often accompanies kickbacks and involves groups agreeing to submit complementary bids to win contracts, sometimes on a rotation basis. This system may be used to divide regions between select parties and to monopolise the field.

Manipulation occurs when a bid, or circumstances surrounding it, are managed to benefit a preferred bidder. Examples are leaking information from fellow bidders, accepting late bids and re-bidding of the tender.

Warning signs:

  • No public opening of bids
  • Deadlines are not enforced, extended unnecessarily or bids are accepted late
  • The late bidder is also the lowest bidder
  • Project is subject to re-bidding
  • Qualified or winning bidders are disqualified for unclear or questionable reasons
  • Bids are “lost”

4. Billing fraud

This is the intentional submission of false, duplicate or inflated invoices by a supplier or contractor. This can also happen in collusion with the representatives of the buyer who will profit in some way from the fraud.

Warning signs: There are many in this category, but in essence:

  • Invoiced goods/services can’t be accounted for
  • Records are non-existent or don’t match
  • Invoices share purchase order numbers or are identical in terms of value or service
  • Total payments exceed total purchase order or agreed amounts

5. Conflicts of interest

Non–disclosure falls under this category, wherein a member of the procurement team fails to disclose their interests with a contractor or supplier, liaises with them unofficially, or accepts gifts or payments.

Where an employee purchases items through their company and bills this to a project for private use, this is deemed to be personal interest and is clearly fraudulent.

Warning signs:

  • Accepting of gifts and close fraternisation between bidder and buyer
  • Favouritism
  • Individuals appear to enjoy sudden and unexplained increases in wealth or engage in a side business

6. Delivery fraud

There are three main types of deliver fraud: variation abuse, contract specification abuse and improper claims/imprest funds.

In variation abuse, a contractor submits a successful low bid (in collusion with a procurement executive) and subsequently submits further multiple variations to increase financial gain.

Fraudulent contractors may flaunt contract specifications by delivering sub-par goods or services, aware they fail to meet the quality expected. In order to succeed, the quality of the items or works is concealed or falsely represented.

Sometimes, suppliers exploit operating costs or petty cash funds with false or exaggerated requests for reimbursement of expenses, personal or unauthorised spend, or duplication.

Warning signs:

  • As with billing fraud, records are missing or duplicated
  • Lack of oversight
  • Duplication – refunded from both petty cash and accounts payable
  • Unauthorised or excessive use

One key way to ensure tamper-proof procurement, is to adopt a platform with secure bid process technology. For more information about NexProcure and Nextenders’ patented technology, contact us to arrange a demo.

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