GIVEN the prevalent adoption of globalisation strategies, supply chain business models have created blind spots that continue to be exploited by unscrupulous elements in society.
Procurement is one of the most vulnerable areas of business when it comes to fraud and corruption risk. The supply chain process flows serve as the financial gateway in and out of the organisation, making it one of the most vulnerable targets by criminal elements.
Procurement fraud and corruption will always remain complex and multi-faceted, making it very difficult to detect, prove and prosecute.
The supply chain landscape is predominantly susceptible to unethical practices due the prevalence of large budgets, complex supply chains and the involvement of multiple stakeholders, creating huge temptations for misconduct.
Fraudsters are always determined to separate business people from their wealth, padding their wallets while cutting into the organisation’s bottom line.
The reputation of the profession will often sell itself short because of corruption. Complex supply chains and the reliance on multiple tiers of suppliers make oversight very difficult.
At its core, fraudulent procurement occurs in situations where procurement personnel and individuals in other organisations deliberately manipulate the procurement policies and procedures for personal gain, resulting in substantial financial and or serious reputational damage.
Procurement fraud will always be difficult to detect in a single transaction — it often takes vigilance across several procurement transactions to identify fraudulent patterns of behaviour.
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The sheer number of procurement transactions can serve as a major temptation to dirty minds. A chain is only as strong as its weakest link, especially in the global supply chain ecosystem where there are a lot of links — each one being highly vulnerable to fraudulent activities.
There are so many high value payments (digital and physical) flying around the supply chain ecosystem. It is, therefore, not surprising that dirty minds will often attempt to manipulate the procurement systems for personal gain.
The huge amounts of money at play are substantial and will remain a big temptation for those with nefarious intentions. There are so many moving parts, creating a breeding ground for organised crime and making it equally difficult to insulate supply chains from the potential risks.
The ever-present and ominous shadow that has always lurked over the procurement profession is not going away anytime soon.
Procurement fraud also involves the abuse of entrusted power for personal gain, often resulting in unethical business conduct, coupled with skewed decision-making and compromised fairness.
Corruption is inherently antithetical to the rule of law. It is a pervasive problem that always sits in procurement leaders’ mental backstage.
It subverts the principles of competitiveness, fairness, accountability and transparency, central to procurement’s legal framework. It is regarded as an omnipresent challenge that undermines fair competition while at the same time eroding public trust and distorting the smooth functioning of world markets.
The business arena is mired with such scandals that have shaken up the world. Today’s supply chains operate with extensive networks and vast amounts of transactions, creating avenues for potential fraud.
Corruption, bribery, fraudulent billing and theft are prevalent concerns that every organisation must be wary of and be ready to take preventative measures.
In highly-sensitive industries such as healthcare, aerospace food production among others deception can even result in life-threatening situations which may result in huge legal penalties.
The prevailing line of thought is that fraud is an opportunistic crime. It, therefore, means removing the opportunity is key. Understanding the types and spotting the red flags gives procurement leaders a head-start in dealing with corruption.
The identification of red flags early on is key. Recognising these red flags is probably the first step towards building effective safeguards.
Unfortunately, and disappointingly, procurement leaders do not have to look far to read news headlines pertaining to procurement scams. They do not have to look far to find instances of fraud and corruption in the supply chain. It will always remain a threat lurking in all business transactions.
We have seen this play out repeatedly. If a tender is said to be too good to be true, it probably is. Suspiciously low bids may be a red flag that there may be collusion, product substitution or other fraudulent activity at play.
In such situations, participating bidders will agree on a formula to take turns winning tenders by submitting competing bids at artificially inflated prices to give another supplier a free run, demonstrating that a corrupt mind is a devil’s workshop.
Such collusive tendering behaviour will create conflicts of interest, leading to procurement decisions that seek to prioritise personal gain over organisational value.
In some situations, multiple vendors or participating contractors will manipulate the procurement system by withdrawing their bids at the last minute, paving way for a predetermined supplier or contractor to win the tender.
Such collusive bid rigging can even extend to the submission of fake bids or the creation of fictitious organisations just to participate in a particular tender just to increase the numbers.
Whenever competitive bidding is bypassed, it will merit heightened scrutiny of the procurement process flow. Because of the interconnected nature of the global supply chain, fraud and corruption through big rigging can create a domino effect that impacts millions of dollars in trade and commerce worldwide.
Whenever these vices are combined, they can rattle even the best-run organisations.
Phantom vendors involve the establishment of a shell company for the sole purpose of processing fake invoices and approving payments for non-existent product deliveries.
A phantom vendor is, therefore, a fake company that is registered for purposes of submitting fraudulent invoices for goods and services that were never delivered.
Without proper verification procedures, phantom vendor manipulations can go undetected for extended periods of time benefitting unscrupulous characters.
Procurement leaders must, therefore, be on the look-out for a sudden increase in spending with specific suppliers or the prevalence of frequent purchases just below the approval thresholds.
Red flags for procurement fraud may manifest in warehouses consistently being overstocked, deliberately not placing orders when reorder levels reach the acceptable threshold, suspiciously huge amounts of stock write-offs and a tendency to rely on a sole supplier.
Consistent overspending or continuous budget overruns in certain departments could easily be a red flag for systematic fraud related to phantom vendors.
The prevalence of incomplete source documents, missing approvals from the relevant authorities, or the use of vague contract terms and conditions are tell-tale signs of poor oversight or intentional fraud.
Vendors that are reluctant to provide sufficient information when so requested should be treated as red flags. The implementation of projects using the urgent direct procurement method can lead to shortcuts in procurement process flows.
Vendors or procurement personnel, who pressure top management for quick approvals, should be treated as red flags. It must be noted that the bypassing of procurement controls may be conducted innocently with a singular view to expedite legitimate procurement needs.
However, such urgent requirements may give potential fraudsters the opportunity to engage in fraudulent procurement activities citing the ready-made excuse.
There are also situations where product specifications may be designed at short notice and too narrow with a view to eliminate competition. Product specifications can also be manipulated to remain vague for the easy facilitation of contract variations.
Corrupt procurement personnel may also deliberately choose to publish tender adverts in an obscure section of a publication or during public holiday periods when competing suppliers may not be paying attention.
Another red flag is when procurement personnel deliberately extend bid submission periods without justification or accepting bids well after the closing date. Procurement leaders must also be wary of employees, who exhibit indifference when conducting their procurement duties. Of course, this will always remain highly subjective.
But it will always remain a red flag when the person responsible for procurement remain defensive, cagey and overly protective or nonplussed whenever matters of transparency are subjects for discussion.
Another red flag is when only a few vendors decide to participate in the bidding process or in situations where competitors drop out at the last minute. Such forms of procurement fraud can easily seep through the cracks and are predominant in large organisations with high volumes of transactions.
Procurement leaders must also be wary where the same supplier repeatedly win bids uncontested or where there is tender manipulation, which involves the splitting of large purchases into smaller ones to bypass approval limits, leading to financial discrepancies and reduced accountability.
There are also peculiar circumstances where invoices with a pattern of sequential numbers from one vendor are submitted for processing despite intermittent purchases.
It may be another classic indicator of fraudulent billing. Procurement leaders are required to keep an eye out where there are inconsistences in invoicing details or in such instances where there are discrepancies between the purchase order value and the invoice value. Related to that, some of the red flags include immediate withdrawal of money when invoices are settled or a sudden increase of payments to a bank account that had been dormant for some time.
Procurement fraud could also involve product substitution where there is wilful substitution of goods by inferior or counterfeit goods that do not meet the contract requirements as specified in the standard bidding document.
Some of the well-known red flags will include procurement personnel living beyond their means, submission of invoices with very little detail, claiming price variations soon after tender award and unjustifiable sole-source procurement.
Red flags of supplier collusion are also glaring in situations where the same suppliers are always bidding on the same project or in situations where a winning bidder chooses to subcontract part of the project activities to a losing bidder.
Another red flag is where the last bidder to submit a proposal or quotation is always the winner. However, it bears emphasis that red flags must be viewed in their proper context.
One red flag in isolation could easily be a benign error or coincidence. However, multiple red flags or a pattern of anomalies could be a strong indication of elevated fraud risk.
Nyika is a supply chain practitioner based in Harare. For your views and comments, he can be contacted at [email protected]
