What is Procurement Fraud?
The Fraud Triangle
In procurement fraud cases, criminals believe there is a low chance of getting caught and a high reward if they commit fraudulent activity. The reasoning behind committing fraud can be most easily understood through the fraud triangle of opportunity, pressure and rationalisation. An opportunity can come about from any weakness in a system. The pressure often associated with motivation comes from personal circumstances that require more money, such as greed or wanting to provide for loved ones. Finally, when someone rationalises, they justify their actions.
Most Common Types of Procurement Fraud
Kickbacks, also known as payoffs, are a type of bribery where a purchasing decision-maker is offered benefits in exchange for awarding a bid. Consequently, a decision-maker may award a contract to an unsuitable supplier, engage in non-productive and wasteful spending, or taint the bidding process by excluding favourable suppliers. A common tactic used by employees engaging in corruption is to word item specifications so that only one bidder would qualify.
Conflict of Interest
Another common fraud scenario occurs when a procurement decision-maker has an undisclosed interest in one of the companies bidding for the project. Interests that can influence how a bid is awarded include family connections or investments in the bidding organisation. Since the employee would gain something, they are more likely to be motivated to show favouritism or accidentally share information that would help them win the bid.
Fake invoicing typically affects organisations with lax security measures. The scheme works by forged orders or invoices created by shell companies. The fake invoice is then fulfilled despite services never actually being rendered. Usually, the individual behind the fraud is working alongside an employee who has noticed the organisation’s weak spot.
How to Reduce Procurement Fraud
Preventative protocols to consider:
- Include procurement fraud in your company’s risk register and assign someone to be responsible for managing its prevention.
- Enforce appropriate segregation of duties.
- Ensure management and employees know the company’s ethical conduct, conflict of interest, and gifting/entertainment policies. Furthermore, encourage and train them to report any red flags.
- Do not simply dismiss minor red flags that indicate possible fraud.
- Bid terms and acceptance requirements must be well-defined and mandatory.
- Maintain security and quality by completing due diligence checks on vendors during the approval process.
- Maintain a secure supplier database by monitoring it for inactivity and employee changes.
- Check-in on your suppliers frequently to make sure they are still operational.
- Ensure that your company is adhering to its procurement thresholds and that there is no hint of dividing orders to bypass tender limits.
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