Good Practice
Procurement Fraud — In the News Again

“Procurement fraud is a deliberate deception intended to influence any stage of the procure-to-pay lifecycle in order to make a financial gain or cause a loss. It can be perpetrated by contractors or sub-contractors external to the organisation, as well as staff within the organisation,” so said the, as was, UK National Fraud Authority (which has now closed and its functions transferred to various parts of UK law enforcement, depending on the type of fraud).

It seems everywhere you turn at the moment in the procurement media, you find headlines of fraud, regardless of region or country. What is it about procurement, and particularly public procurement, that makes it so susceptible to fraud? Is it the sheer scale of procurement activity across the public sector, all being carried out independently by each local authority? Is it the high volumes of low-value procurements? Surely procurement is procurement, regardless of sector? Apparently not.

In the UK alone, the National Fraud Intelligence Bureau (NFIB), part of the City of London Police, reported over the past 12 months it had received hundreds of alerts of fraud. Now, bear in mind that many instances of fraud are not reported in the public sector, partly owing to it being difficult to detect, and when they are detected, it can be costly and resource-intensive to follow an investigation and subsequent prosecution. In the words of the then government National Fraud Authority, “it rarely ends in a conviction or the recovery of losses.”

The NFA said in its 2011 report, fraud broadly falls into two categories: pre-contract award and post-contract award. “Fraud in the pre-contract award phase is complex, often enabled by a lack of compliance with policy, but also involving activity such as collusion and corruption which can be difficult to detect. Fraud in the post-contract stage is considerably different. As contracts are already in place, most cases of fraud tend to involve overpayments to contractors, through false or duplicate invoicing, and payments for substandard work or work not completed under contract terms.”

Public sector staff misclaiming hours worked (especially in the NHS), or the dodging of prescription charges (surely they can’t be laid at procurement’s door), all add up to a damning picture, not to mention bribes and ‘perks’. But false invoicing is the particular culprit, costing businesses or local authorities hundreds of thousands of pounds a year, and can be fateful to some. It takes the shape of suppliers submitting multiple invoices for the same work (sometimes unintentional but slipping through the procurement check net), suppliers over-billing for work, non-suppliers invoicing for work that has never been carried out or for goods that have never been delivered, or internal staff creating “dummy firms” and channelling money through them. These are the ones that should be under the scrutinous procurement eye.

Procurement fraud was declared a top priority by David Cameron at the recent anti-corruption summit in May. But, as Public Finance noted “this was overshadowed by the publication of a damning report just two weeks later warning that the scale of fraud across the UK had been woefully underestimated.” The Annual Fraud Indicator 2016, based on research by the University of Portsmouth’s Centre for Counter Fraud Studies, estimated that the annual cost of fraud in the UK to be £193 billion, much higher than previous government estimates of about £50 billion (2013). “The private sector bears the brunt of attacks from fraudsters, losing an estimated £144 billion a year. By far the biggest source of fraud relates to procurement, which represents a staggering 88% of losses. The figure is likely to be similar in the public sector, so it’s a sobering statistic regardless of where you’re sitting.”

The numbers are estimates of course, but Professor Mark Button, director of the centre, admits that “no one really knows the true extent of the problem in the UK – the fact remains that procurement fraud, one of the biggest suspected areas of loss for both central and local government departments, remains a notoriously hard nut to crack.”

Rachael Teiffen, the former deputy director of the now defunct National Fraud Authority, says local authorities need all the help they can get, the article says: “This is particularly so because some council fraud teams have been “decimated” since the the Department for Work & Pensions completed its move to a single fraud and error service for investigations into tax credits, housing benefit and other DWP benefits in March.”

The article continues “A local government procurement report published in February 2014 by the Commons communities and local government committee warns that councils must not “let and forget” contracts but instead actively tackle fraud throughout the lifetime of a contract. That advice continues to ring true. ‘Unless those who are managing contracts are adequately trained, the risk of fraud will increase as more services are put out to tender.'”

“Chris Bovis is professor of business law at Hull University’s Business School and an international public procurement specialist who has acted as a special adviser to the United Nations on public private partnerships and as an academic adviser to the EU on the single market … ‘The UK government thinks the system is quite well behaved. I think it’s in denial. Procurement fraud isn’t a priority … raising the standards of public sector officers and more collaboration and centralisation of data would help enormously … we need less of a box ticking approach to the job. There’s no incentive for them to stick their heads above the parapet to do a more investigative job.’”

There’s more on this in the Public Finance article here, and the report Fighting Fraud and Corruption Locally 2016-2019 is a “good source of practical advice on sharing best practice for council leaders, chief executives, finance directors and all those with governance responsibilities.”