Fraud: Department of Justice (DOJ) Announces Procurement Collusion Strike Force

Background

It has been highlighted by some studies that Procurement fraud is the second most frequently reported form of economic crime behind asset misappropriation.

Procurement fraud is the act of gaining a dishonest advantage by abusing a position of decisive power in the procurement process; either by the individual responsible for this position in his or her own action, or by those seeking to win the opinion of that individual, resulting in a decision of benefit to themselves.  Procurement fraud may be committed by procurement officers, vendors, or subcontractors, but always involves the act of collusion in order to obtain the unmerited advantage.  Fraudsters use the procurement process as part of their scheme to further their own interests in lieu of serving the interests of the procuring company.

Consider the internal risk of this type of fraud: ill-gotten financial gains come in the form of kickbacks to the Fraudster who in this example is the buyer, for selecting the suppliers’ bid which is often not in the best interest of the company.  Procurement fraud is also an external risk.  Vendors may work together to create the illusion of competition, thus fooling the procurement officers into accepting a bid above fair market value.  The scope of procurement fraud is widespread, global and not limited to certain categories, companies, or geographies.

Deeper Dive

Some report that approximately 30% of organizations have experienced procurement fraud, and that it was most common during the solicitation phase.  During this time, vendors may collude with each other or with procurement officers in various ways that compromise the fairness of the bidding process and potentially result in improperly awarded contracts and/or higher contract costs.  Those “holding all the cards” during the solicitation phase, make the process extremely susceptible to unethical behavior.

It is important to remember that even after the contract has been awarded, the potential for fraud is ever-present. For example, a vendor could:

  • Charge more than the contractually agreed price and hope the overcharge goes unnoticed.
  • Submit duplicate invoices in the hopes that both invoices are processed.
  • Deliver non-conforming goods or services of lower value, quantity or quality than specified in the contract.
  • Exploit the change order process to perform services not specified in the contract or to artificially inflate the contract value over time.
  • Work in collusion with an insider to submit bogus invoices for goods not delivered or services not provided by the vendor.

According to a Global Economic Crime survey, the sectors reporting the most procurement fraud were state-owned enterprises (SOE’s), followed by the energy, utilities and mining; engineering and construction; and transport and logistics industries.

More likely than not, factors driving the increase in procurement fraud schemes include an increase in public tender processes, companies changing and expanding their global supply chains, and a rise in outsourcing.

On November 5th, the Department of Justice announced the formation of the new Procurement Collusion Strike Force (PCSF) “focusing on deterring, detecting, investigating and prosecuting antitrust crimes, such as bid-rigging conspiracies and related fraudulent schemes, which undermine competition in government procurement, grant and program funding”.

The Strike Force is an inter-agency partnership comprised of prosecutors from the Antitrust Division, and prosecutors from thirteen (13) U.S. Attorneys’ Offices.  Aiding in the prosecutors’ efforts are investigation partners such as the Offices of Inspector Generals from the Department of Justice, Department of Defense, U.S. Postal Service, and General Services Administration Office.  The Department of Justice’s announcement proclaimed that investigating and prosecuting those who “cheat, collude and seek to undermine the integrity of government procurement” will have more to concern themselves with when executing their crimes.  Prosecutors and investigators alike expressed enthusiasm to be working as a part of this new team.

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Bribery and Antitrust

An effective method to detect bribery schemes is to analyze contract awards for unusual patterns or anomalies. For example: correlating contract awards to financial transactions may identify instances where fraudsters attempt to conceal their behavior.  You may not see a check cut from the organization directly to the person they’re bribing, but a closer look may uncover patterns like excessive meetings, gifts, meals, and entertainment during the time period of awards.  Data analytics can also be used to detect instances of price-fixing, bid-rigging, and/or market division or allocation fraud schemes.

In simple terms, bid rigging is a fraud scheme which involves intentional manipulation of the bidding process. It often involves an agreement among competitors as to who will be awarded the contract.  The bidders may agree in advance who will submit the winning bid. The purchaser is then provided with a bid amount higher than what the competitive market generally produces, which results in an overpayment for goods or services. There are four basic schemes involved in most bid-rigging conspiracies:

  • Bid Suppression:  In this type of scheme, one or more competitors agree not to bid, or withdraw a previously submitted bid, so that a designated bidder will win. In return, the non-bidder may receive a subcontract or payoff.
  • Complementary Bidding: In this scheme, co-conspirators submit token bids which are intentionally high or which intentionally fail to meet all of the bid requirements in order to lose a contract. “Comp bids” are designed to give the appearance of competition.
  • Bid Rotation: In bid rotation, all co-conspirators submit bids, but by agreement, take turns being the low bidder on a series of contracts.
  • Customer or Market Allocation: In this scheme, co-conspirators agree to divide up customers or geographic areas. The result is that the co-conspirators will not bid or will submit only complementary bids when a solicitation for bids is made by a customer or in an area not assigned to them. This scheme is most commonly found in the service sector and may involve quoted prices for services as opposed to bids.

Note: Subcontracting arrangements are often part of a bid-rigging scheme. Competitors who agree not to bid or to submit a losing bid frequently receive subcontracts or supply contracts in exchange from the successful low bidder. In some schemes, a low bidder will agree to withdraw its bid in favor of the next low bidder, in exchange for a lucrative subcontract that divides the illegally obtained higher profits between them. 

Almost all forms of bid-rigging schemes have one thing in common: an agreement among some or all of the bidders which predetermines the winning bidder and limits or eliminates competition among the conspiring vendors.  Indicators of collusive bid-rigging schemes include:

  • Be aware of bids for goods or services for which the pool of qualified prospective bidders is small but maintains a large control of the market share.  These bids are at higher risk for vendor collusion.
  • Also be mindful of bids for standardized goods or services.  If there are no differentiating factors among the various proposals aside from price, there is a much greater risk of collusion.
  • When vendors collude with one another, similarities may exist in the bids submitted to the procuring company.  For example, pay attention to similarities in the mailing addresses, email address domains, or courier account numbers.  Take a look at the properties of an electronic document to see if similar authors appear.
  • Observe the behavior of vendors when undergoing the procurement process.  The communication or action of the bidding vendors can be very telling.  Remember social engineering is a tool available to both sides!

Price Fixing schemes often impact the procurement process when business is conducted through purchase orders or direct purchases. Price fixing occurs when competitors agree to raise or fix their prices for their goods or services, set a minimum price that they will not sell below, or reduce or eliminate discounts.  Indicators of these types of schemes include:

  • Look for situations where competitors always announce their price increases at the same time for the same amount, or staggered price increases with an established pattern or frequency, often times creating the appearance of who is going to be first to increases prices.
  • Look for competitors reducing or eliminating discounts at about the same time.
  • Generally, be alert to situations in which all prices seem to be uniform and all suppliers refuse to negotiate those prices.

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Methods to Deter & Detect Procurement Fraud

An effective way to deter and detect fraud is to develop a thorough understanding of the business environment, the risks impacting the achievement of the business’ strategic goals, and the implementation of a holistic fraud risk management program.  Once the risks are identified, I would also strongly encourage the use data analytics, combined with proper training, internal audits, and compliance reviews to support and supplement the fraud risk management program.

Other practices that could help detect fraud include, but are not limited to:

  • Ensuring transparency from everyone and apply the right amount of skepticism, always!
  • Maintaining, restricting access to, and auditing a valid master vendor list.
  • Performing proper due diligence during supplier onboarding.
  • Referring to debarment sources of blacklisted suppliers.
  • Performing peer grouping to determine if a supplier fits an appropriate profile for a contract.

At Baker Tilly we can assist any organization with your fraud risk management and anti-fraud programs and controls.  This includes services to detect, deter, respond, and remediate instances of fraud. Our team of experts is well positioned to investigate and remediate suspected instances of procurement fraud, which includes the ability to conduct a root cause analysis to determine the cause of the misconduct.  The DOJ has deemed a company’s efforts to properly remediate and identify root cause as a best practice and often provides credit to those companies who engage in such activities in the event of a criminal prosecution resulting from procurement fraud.  The DOJ also looks highly upon companies with robust third party risk management programs, which can also be used to mitigate the risk of procurement fraud.

Our team of highly-skilled professionals use advanced analytics, such as predictive modeling, to help identify attributes or patterns that are highly correlated with known fraud, even complex and emerging patterns of fraud. Moreover, we use text mining as an effective tool to identify red flags of procurement fraud or antitrust violations.

I often say, “Analytics can answer questions that manual or ad hoc methods would generally miss – it’s the ‘silent whistleblower!’”

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Closing

Many organizations miss the mark when it comes to managing the procurement process. Some are quite good!

It’s starts with a well-written code of conduct, and includes strong policies, proper internal controls (note: segregation of duties is a pervasive issue), robust third party risk management program, training, and monitoring.

I’m not surprised by the DOJ’s initiative and commend them in the fight against public procurement crimes.  We recommend organizations review their compliance program, supply chain, and procurement process for risks and opportunities for enhancements.

We welcome your thoughts and comments.

Now, for tomorrow!

Best,

Jonathan T. Marks

Paul Zikmund

Melissa Dardini

Members of Baker Tilly’s Global Fraud and Forensic Investigations, Compliance, & Security Services

Our team focuses on the intersection of where strategy meets execution, so that we can  enhance and protect our clients’ value.”

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