Mitigate procurement fraud

Mr Stanslus Kabuyaga

What you need to know:

  • “Suppliers must know the requirements and rules before entering the procurement process”

Procurement fraud is the unlawful manipulation of a procurement process to acquire contracts, goods or services or to obtain an unfair advantage during the procurement process. There are many examples of schemes to engage in procurement fraud.

Bid rigging: An honest procurement department will conduct market research before floating any kind of tender. If the competition is far too slim, or there is a monopoly within the supplier list, then it is likely that there is a risk of fraud. Examine every vendor’s bid before deciding on the contract awardee. A suspiciously low bid, or a collectively inflated bid, is not worth ignoring. 

Bribes or kickbacks: Kickbacks are not always the easiest to spot. But a good procurement fraud detection and prevention department will know how to spot one. However, understanding your employees and their background can make it significantly better to monitor. For example; if an employee receives a sudden number of gifts that cannot be explained, it could be a red flag, receiving large monetary gains that help them pay off debts and loans (without a paper trail) could also be a sign that your employee might be engaging in deceptive practices.  

Split purchase orders can aid fraudulent parties in staying below a competitive threshold. Having separate components of the same order contracted or invoiced separately can aid employees in justifying the preference of one vendor over another. Consequently, multiple invoices can also help cover up unexplained cash payments to a vendor since they’re split into higher number of intervals and amounts. 
 Employees collaborating with suppliers: Among the other types, employees collaborating with suppliers is the most common type of procurement fraud. This happens when an employee is assigned to purchase from a related supplier at a much higher price. 

Overcharging the invoice: This happens when there is an inflated invoice from the suppliers. Overcharging the invoice is done with caution by the supplier to conceal it when the audit comes. 
Companies set up by employees to commit fraud: This type of fraud consists of a few employees creating fake companies. This happens when the employees keep issuing payments to their fake companies. 

Conflict of interest: Conflict of interest occurs when an employee will select a vendor for the company related to it. It is not wrong to choose a bidder that you know. Conflict of interest becomes harmful if you choose a particular bidder when conducting the selection process. 
It becomes damaging to the company when self-interest has become a priority rather than the company’s interest. 
There is no definite solution to stop procurement fraud. There are ways to lessen procurement fraud. 

Train employees in the standard procurement process: Training is a must to equip your employees. You should teach your employees your procurement process to make sure that how they choose is aligned with your standard.
Strengthen auditing of purchasing controls: The audit department shall be strengthened to find if there are any anomalies with the purchasing transactions. 
The suppliers must know the requirements and rules before entering the procurement process. Suppliers must have read the conditions regarding the process so acts arising from conflict of interest can be dealt with accordingly. 

The whole procurement process is not controlled by one individual. In minimising procurement fraud in your company, no one should have absolute control regarding the purchasing process. 
Utilising automation to control purchasing processes: In minimising procurement fraud in your company, no one should have absolute control regarding the purchasing process.  

Set up a hotline: Putting together an anti-fraud department with a dedicated hotline is a must to catch procurement fraud in its early stages.  Choose vendors carefully and audit vendor lists frequently. Introducing varied competition is a good way to make sure your vendors are giving fair pricing. 

The writer, Stanslus Kabuyaga (MCIPS) is a procurement manager at BRAC Uganda Bank Limited. [email protected]