Procurement Fraud: Kraft, Frito-Lay, Safeway and B&G Employees Plead Guilty To Taking Bribes

A question I've been asking of those involved in P2P compliance and controls, quite a bit recently, is whether or not they've seen a rise of procurement fraud in recent years. Most respond with the simple party line answer: "no". But lurking beneath the surface of many procurement organizations, even more sophisticated ones like Best Buy, are a small percentage of team members who are clearly up to no good. Granted, this percentage will vary between company and industry, but it's likely the recession is causing even more employees without a clear understanding of right and wrong to push the limits of their activities. This behavior is happening inside some of the most respected CPG/food companies, according to a recent, NYT article on the subject, including Kraft, Frito-Lay, Safeway, Nabisco and B&G Foods. In fact, Robert Watson, "a top ingredient buyer for Kraft," apparently took one bribe because "he needed $20,000 to pay his taxes."

I was tipped off to this story from a Spend Matters reader who sent me a link to it yesterday. And I've been engrossed in it every since, in part because of the magnitude of the alleged activities and the fact it involved some of the more advanced procurement organizations out there. Our own benchmarking research suggests Kraft is among the most innovative CPG/consumer foods companies when it comes to embracing sophisticated procurement, supply chain and IT solutions and processes (they've bought solutions from SAP, Ariba and BravoSolution, among others, to automate their direct and indirect materials procurement operations and to improve their sourcing capabilities).

Yet a Kraft employee was very much involved in a "scheme [that touched] more than 55 companies" according to investigators. Moreover, the scandal went beyond bribery and procurement fraud to supplier foisting (with buyer's consents) sub-quality and dangerous ingredients in some of the deals. This would ultimately result in tainted and inferior products ending up on dinner plates, as "in many cases ...the tainted ingredients wound up in food sold to consumers." So much for ERP, P2P, e-sourcing and spend analysis for detecting fraud, I suppose!

In the case of Kraft, the procurement manager at the center of the investigation was already a pro at the procurement fraud game at the time he solicited a $20K bribe to fund his taxes, so he called a broker for a "California tomato processor that for years had been paying him bribes to get its products into Kraft's plants." But little did he know that his call to his supplier was wiretapped by Federal investigators. Then, "Days later, federal agents descended on Kraft's offices near Chicago and confronted Mr. Watson. He admitted his role in a bribery scheme that has laid bare a startling vein of corruption in the food industry. And because the scheme also involved millions of pounds of tomato products with high levels of mold or other defects, the case has raised serious questions about how well food manufacturers safeguard the quality of their ingredients."

In addition to product quality and safety issues, other examples in the case also raise concerns over the premium buyers paid for their own kickbacks. In a different case, a procurement manager at B&G made a supplier price a contract higher to pay for his own "commission" as part of a kickback scheme. In this case, "B&G agreed to buy 13 million pounds of peppers from SK Foods at 22 cents a pound." But the parties on both sides of the contract agreed to add a penny per pound to the price of the agreement, which they would then split.

This investigation suggests that suppliers and buying organizations prone to taking bribes are more likely to compromise on safety to fund their illicit activity. Consider how, according to the story, "SK Foods shipped its customers millions of pounds of bulk tomato paste and puree that fell short of basic quality standards -- with falsified documentation to mask the problems. Often that meant mold counts so high the sale should have been prohibited under federal law; at other times it involved breaching specifications in the sales contracts, such as acidity levels or the age of the product."

As procurement and supply chain professionals, we owe it to ourselves, our colleagues, our customers and those we are hopefully mentoring, to not sweep procurement fraud under the rug. Depending on your perspective, "don't ask, don't tell" may have worked in a twentieth century military, but it most certainly has no place today inside companies and government procurement organizations when it comes to fraud. As this case shows, everyone ends up paying in the end (potentially with their lives in the case of dangerous or inferior parts, ingredients or products). We all must take a proactive stance to sniff out and make examples of those who take part in these scandals. And the Kraft and Best Buy examples we have in front of us both show that even companies buying and implementing the best technology in the market aren't immune to fraud or employing its nefarious perpetrators.

If you have any other examples of procurement fraud or suggestions for combating it, drop a line: jbusch (at) spendmatters (dot) com. I'll keep tips anonymous if people would prefer.

Jason Busch

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