Source-to-Pay Criminals: Getting Away with Procurement Fraud

Over on Spend Matters UK/Europe, Peter Smith has been weighing in quite a bit on procurement fraud (and previously covered on Spend Matters PRO), a universal purchasing and procurement topic. In his multi-part rehash of the PRO material, Peter explores examples of different types of fraud and how to combat them. He's far more expert in the topic than we are at the Spend Matters domestic HQ, but one point that needs further emphasis is the difference between purchasing fraud and procurement fraud.

Simply put, we see purchasing fraud as something that occurs at the frontlines of the enterprise – something anyone in the business could be a part of. It is the act of buying on behalf of a company or entity where there is some type of nefarious behavior and/or personal benefit. In contrast, procurement fraud is something that involves an individual or group within the procurement – or supply management, depending on charter – organization itself. Any type of corporate buying fraud can be sophisticated regardless of where it sits, in the business or in the function. Yet how we mitigate fraud risk is likely to be different depending on where we find it.

Regardless, procurement fraud is on the rise. As Peter observes:

We have been reporting on what seems to be an increasing number of procurement-related fraud cases over the last few months ...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.

Both purchasing and procurement fraud can obviously take many forms! And of course, we must also now take into account in the US what we might term: special interest procurement fraud. Of these types, supplier diversity fraudulent activity (e.g., illegal pass through models) are the most common. But stay tuned for future coverage of this topic in a separate series. Thomas Kase will share a number of ways to get away with supplier diversity fraud and hopefully, by design, will show how to combat these different fraudulent activities with counter measures.

- Jason Busch

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