The red flags of procurement fraud

22 April 2013
When the subject of procurement fraud comes up, the most obvious question is how difficult is it to spot? But the chances are you have witnessed potential signs of procurement fraud in everyday working life, so look out for those potential ‘red flags’. It should be noted a red flag is an indicator there may be issues or concern, but doesn’t necessarily mean there is fraud. There are numerous red flags relating to procurement fraud in conflicts of interest, for example:
  • A member of staff has a meeting with a supplier and they insist they go alone. Why? If these are regular meetings with a supplier off-site with no expense forms completed, who is paying?
  • A staff member is talking about new job prospects with a supplier.
Another common procurement fraud risk in both the public and private sectors globally is work that is sole-sourced, often without proper justification. Possible red flags are:
  • The work was awarded to a supplier when it could have been awarded to a number of other contractors as this service is commonly available.
  • The product or service has been bought previously, but was not previously sole-sourced.
  • A supplier has been awarded multiple sole-source packages in the past without justification.
Another opportunity for procurement fraud to occur is through contract variations or ad hoc works. Here the possible red flags are:
  • The variations have a high value compared to the original contract. Why have the costs varied so much?
  • A last-minute (unscheduled) contractor is brought in to carry out change order or variation works.
  • The contract specification is poorly written, so changes are required.
  • The variations are already covered under the existing contract.
  • There are a high number of variations awarded to a particular supplier.
Here is a case study: An investigation was initiated by organisation X concerning senior manager Y, who had an alleged close relationship with supplier Z. Following initial investigation, it was established there was an ongoing tender where the specifications were submitted by Y and Z was on the list of bidders. Z was identified as receiving favourable treatment from Y during the tender scoping. Not all suppliers returned their tenders, despite appearing keen to tender during the PQQ/ITT stages, and it was established that the only supplier to return its tender documents was Z. The other suppliers who declined to tender were contacted and they either failed to return phone calls and emails, or they were vague in their responses. Z had perfect bid paperwork, including insider technical specifications. The total value of previous works carried out by Z was outside the procurement guidelines of company X. The value was too high and it should have been tendered. Y raised the procurement paperwork for Z only after the work had already started - a total in excess of 25 times. Despite all these red flags relating to procurement fraud, without someone coming forward with a casual comment, this fraud would have been missed. ☛ Paul Guile is CIPS global procurement fraud advisor. CIPS is holding a Procurement Fraud MasterClass on 11 June in Newcastle. For full details please click here.
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