Procurement Fraud (part 3) – classifying fraud

So, having set the scene in part 1 (here) and part 2 (here) and looked at some of the motivations of the fraudster, how can we at least minimise the chance of procurement-related fraud in our organisations?

The simplest advice is to follow the money.  Ultimately, procurement related fraud is about getting money from the organisation without proper justification. We’re interested in cases where there is some link with third party supply of goods or services, although as we saw earlier, it does not actually have to involve a third party at all.

It’s worth taking some time to think about how we can classify different types of fraud, which should make it easier to take preventative measures. So we might classify fraud types in terms of what the organisation gets in return for the money it expends -

1. The organisation gets nothing in return – the classic scam that involves invoices from fake suppliers, or diversion of payments.

2. The organisation gets something, but either not as much as it should for the money spend, or of inferior quality, or pays over the market price (the Sainsbury’s potatoes example in part 1).

3. The organisation actually gets acceptable market value – but the process involves fraud.

The last is an interesting case. A trial earlier this year in Northern Ireland, which featured events from 10 years ago, saw a supplier winning contracts with the aid of confidential information provided by MOD staff. But there was in fact no real evidence that the supplier actually charged anything other than reasonable prices, and in some ways they were an exemplary provider. However, they did make payments to MOD staff, which clearly shouldn’t have happened.

But what if the staff had leaked information because they truly believed this supplier was the best, and they wanted them to win the work – but no payment had changed hands? Would that have been fraud? What about the buyer who chooses their favourite supplier in a skewed evaluation process – but for what she believes are genuine reasons (they do a great job), and without any obvious reward? Is that fraud – or bending the rules for good business reasons? But then what if our buyer gets a consulting role from them when she retires?

The point we’re making is that there are some gray areas here, where fraud merges into something we might consider questionable or slightly sharp business practice – but not fraudulent.

Another useful way of looking at matters is the issue of who is involved in the process that drives the fraudulent activity. Again, we  have three options.

External party only

Examples here include external fraudsters submitting false invoices; or diverting genuine payments to a bank account. In those examples, the party does not need to be an actual supplier. But for those fraudsters who are genuine suppliers, the options are wider. The supplier might invoice for work that wasn’t actually done or products that weren’t actually supplied, or over-charge, or submit inferior quality products charged at a higher price.

Internal party only

The classic here is the creation of false invoices that generate payments to a firm controlled by the employee, or that generate improper expense payments direct to the employee. That could even be invoices for goods or services that were actually supplied, but it is more usual to find that they weren’t supplied at all.

Internal / external parties working together

In this category, we have a wide range of options, ranging from the minor (slipping the favoured supplier a bit of inside info in return for a nice dinner) to the multi-million siphoning off funds through invoices for non-existent services. In general, both parties gain; the supplier wins a contract they shouldn’t, or receives more income than they deserve for what they supply; or indeed without supplying anything. The insider receives cash or other benefits in return for their contribution.

We pointed out in part 1 that it tends to be more senior staff who are engaged in fraudulent activities. Looking at this categorisation it’s simple to see why. So many of the different types of fraud depend on someone internally who can make decisions. That may be a decision on awarding a contract to a particular supplier, or a decision in terms of approving a payment; or signing off that goods received were correct and as they should be.

The type of people who can do this tend to be senior. So when we look at how organisations can address the risk areas, bear in mind that steps must apply throughout the organisation; they will be ineffective if the process says, ”.. except for VPs who can approve invoices without counter-signature...”

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Voices (2)

  1. Ian Heptinstall:

    Hi Peter,

    where would you categorise the kind of interenal fraud where genuine goods and services were purchased, but the recipients shouldnt have received them? Examples which spring to mind are dinners/nights out/hotels where one person orders/invoices and their boss is party to the benefit. Also applies to materials/goods delivered to homes.

    I believe procurement has a “policing” role in avoiding fraud. If we want to truly own how organisations use and relate to their supply base, it comes with the turf (as does how well suppliers are paid, and how user-friendly our internal systems are). Do others agree or not?

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