Procurement Fraud (part 1) – is it on the increase ?

- November 29, 2012 4:31 AM
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(A version of this series was first published on Spend Matters PRO, our subscription service – see here for full details).

We have been reporting on what seems to be an increasing number of procurement-related fraud cases over the last few months. They’re a source of endless fascination, and while the specific are always different they certainly share some common characteristics.

In this series, we’ll take a look at three issues;

  1. Why might fraud be on the increase, and is the problem likely to get worse?
  2. How is fraud being executed?
  3. Finally, what should procurement executives be doing to counter the threat?

I’d stress that this is not going to be an exhaustive guide. The subject is too extensive for that, so look out for more on the topic in the future.

As we say, there has been a plethora of recent examples of procurement related fraud. We tend to think of the archetypal procurement fraud as involving somebody inside the organisation and someone outside – a supplier or a pseudo-supplier. But it’s interesting that the recent UK cases have shown the variety of fraud, and have demonstrated that you don’t need two parties.

One recent case, a classic of its genre, saw the head potato buyer of Sainsbury’s (the UK’s 2nd / 3rd largest supermarket chain), colluding with senior staff at a potato supplier. The buyer paid over the odds for the potatoes, the extra income went into a slush fund managed by the supplier, which was used to pay the buyer via both pure cash and through trips to expensive hotels and similar.

That involved two parties; the buyer and the suppler. But then there’s the recent Lloyds Bank example which was a purely internal fraud, where an employee authorised fake invoices from dummy companies she had set up herself. It is possible in such cases that no third parties are involved at all.

And as a final example for now, the UK’s Olympic Delivery Authority and the construction firm Skanska were the victim of a fraud that had – as far as we can tell – no internal participants. The fraudsters communicated with ODA in the guise of Skanska, and told ODA that the money owed to Skanska (a genuine supplier) should be paid into a different bank account to their usual. ODA believed the message, and paid the money into what was, as you’ve guessed, an account set up by the fraudsters.

Frauds can therefore include participants from both buyer and sales side working together. They might also involve purely internal staff, or indeed purely external. They can be committed by a single person, or they can rely on collusion and multiple players.

So, with this huge variety of types and examples, what common themes and lessons can we draw?

Let’s start with motivation – why does fraud take place? While I’m not a huge fan of the modern detective culture, between the ages of 14 and 16 I read everything Agatha Christie and Raymond Chandler ever wrote.  And if I remember one thing about crime, it’s this –

MOTIVE  +  OPPORTUNITY = BAD THINGS HAPPEN

Fraud is a crime, and the same equation works for a manager falsifying invoices to a dummy company, just as it does for the jealous wife with an unfaithful husband, a life assurance policy on his head, and a penchant for admiring the view over the hotel balcony…

So, everyone who commits fraud has a motive and an understanding of motivation might help organisations spot where risk may be greater, and take pre-emptive action to reduce risk. We’ll look at that motivation issue in part 2.

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