The price of vigilance

24 October 2013

This month SM reported the serious damage procurement fraud and corruption is wreaking on Europe’s public coffers. It was revealed in a report by the European Anti-Fraud Office that eight member states in the EU had lost up to a collective €2.2 billion (£1.84 billion) because of corruption and fraud in the supply chain.

The study examines procurement in five areas: road and rail; training; water and waste; urban and utility construction; and R&D. The area most prone to loss through unfair means was training, which lost 44 per cent of budget volume in affected projects. The figures involved are enormous and to an observer outside the industry must seem obscene. In just the eight countries studied, the direct cost of corruption in road and rail was €488-€755 million (£415-£643 million). This figure is large enough but it is dwarfed by the scale of the losses in urban and utility construction which are estimated to be between €830 million-€1.14 billion (£706 million-£971 million). The report notes that bid rigging is the most costly and prevalent of the four types of corrupt practice identified (the others being, in order, kickbacks, conflicts of interest and deliberate mismanagement). The study estimates that bid rigging is found in almost half (48 per cent) of practices and is most present in water and waste and R&D projects. It will be no surprise to anyone working in procurement or the supply chain that the threat of corruption is ever present. Leaks in funds and intellectual property can occur with alarming ease, even with constant vigilance and security measures in place. Without an easy-to-use mechanism for spotting breaches in acceptable spending patterns, schedules, orders or times, those out to harm a company or project can avoid detection easily. The recommendations in the report are aimed at those on the buy-side of public tendering but if you are looking to reduce costs from fraud in a private organisation, there are some solid lessons to be learned here. We recommend reading them. The major alarms we share with the report is a lack of control and competition around the bidding process, and low initial bids followed by excessive revisions in costs. There are a few pointers that go towards helping a business fight corruption that aren’t covered in the report. Our tips are: ● Be careful of too many round value invoices ● Be suspicious if a vendor sends repeated invoices with out of sequence numbers ● Be aware of cash management or payment practices that are unusual for the industry ● Frequently audit your suppliers to ensure there are no ‘phantom vendors’ receiving payments. ☛ Pedro Paulo is CEO at Gatewit
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