Procurement Fraud threats to companies
Companies, organisations and government agencies can suffer substantial losses when their tendering and procurement process for goods and services is substandard and not managed properly. A poorly structured procurement process is vulnerable to fraud, manipulation and abuse of power by contractors colluding together to raise the agreed price, supply sub-quality goods or services and encourage corruption throughout the organisation.
There are five basic bid rigging schemes which target vulnerable procurement tenders:
- Bid Suppression
This occurs where a group of potential contractors participating in a particular tender agree among themselves not to follow through with the bid, dropping out and leaving one or two favoured contractors to be awarded the contract. The winning contractor will have inflated their budget and pay a portion of this to the contractors which dropped out.
Bid suppression can be conducted voluntarily by a contractor declining from bidding, due to spurious reasons such as being overloaded with other contracts or else not having required skills. Involuntary bid suppression may be achieved by preventing external contractors from bidding by way of legal threats, employment of threats of violence, criminal damage to equipment or theft of materials to deter competition.
- Bid rotation.
This form of procurement fraud is generated where two or more bidding companies collude and share the bidding spoils by taking turns to be the winning bidder. The technique involves one pre agreed contractor being the lowest bidder by way of the other bidders submitting far higher fees, or else by withdrawing from the bidding process at some point. All the participating contractors in this type of scheme covertly share information illegally to control the target price and then share a percentage of the profits. A side-line is that the losing contractors will be included in the project anyway, by way of being hired as a subcontractor with higher than market rates.
- Market Division.
This form of procurement fraud is where contractors agree only to participate in bids along agreed divided market space – often based on product type, customer, service line or geographical areas.
Contractors refrain from competing with each other head-to-head and thus reduce the pressure to push competing prices down for the client. Instead, the colluding contractors make sure that the talent pool is shallow and increases the chance to win the bidding through collusive measures – also allowing for inflated contractor pricing.
- Complementary Bidding
This type of procurement fraud may also be known as protective or courtesy bidding – where a client needs a certain number of contractors to bid for a contract. The other contractors have no desire to win the tender and instead submit spurious bids, merely to give the appearance of a genuine bid but are actually intended to fail. The confederate contractors would submit bids that are too high to be accepted by buyers to ensure the preselected bidder is chosen. In exchange, the winning contractor will share part of the profits, or else submit spurious bids on the behalf of losing contractors in subsequent tenders.
- A phantom bidder.
This procurement fraud involves contractors creating dummy companies and submitting a variety of bids for one contract. The phantom bidders are used to satisfy the requirements for the number of contractors to take part in the tender and so is a way to raise the bidding price. At times, the contract may be awarded to the phantom bidder, but the work is conducted by the sole company that created the series of phantom bids.
Red flags that suggest there is procurement fraud occurring:
• No public and transparent opening of bids
• Deadlines are not enforced or are extended unnecessarily
• Some bids are accepted late after closing date
• The late bidder is also the lowest bidder
• Project is subject to re-bidding with no good reason
• Qualified or winning bidders are disqualified for unclear or questionable reasons
• Some bids are mislaid, “lost” or else not properly recorded
A deterrence to fraud procurement / bid rigging is to set pre-qualifications for each tender and make these widely known and enforced. A further measure is to create a panel of qualified bidders which must undergo prior screening – including requiring these contractors to submit audited financial statements to ensure they are a genuine company and have the capacity to undertake the project.