Presented by: Tammy Carruthers BA CPA CGA CFE CICA PMP CLSSB CCA MCITP CISA CPP WSCS Consulting Inc.
AMCTO CONFERENCE JUNE 2019 Summary
1 Introduction – What is Fraud?
2 Contracts & Procurement Methods
3 Fraud Schemes & Municipal Cases
Preventing, Detecting & Investigating 4 Procurement Fraud Schemes
5 Wrap Up & Questions Learning Outcomes • Understand what Fraud Is and how it occurs • Gain knowledge of procurement and contract methods and risks • Learn about procurement fraud schemes and methods and the layout pages. • Determine measures to detect and prevent the different types of fraud schemes that target procurement processes. ACFE: 2018 REPORT TO THE NATIONS
Fraud is defined as:
“any intentional or deliberate act to deprive another of property or money by guile, deception or other unfair means.”
Source: Fraud Examiners Manual, ACFE Greed Defined The inordinate desire to possess wealth, goods, or objects of abstract value with the intention to keep it for one's self, far beyond the dictates of basic survival and comfort.
It is applied to a markedly high desire for and pursuit of wealth, status and power. Why People Commit Fraud What is Procurement? • Procurement” refers to the process of acquiring goods, works and services. • Process from identification of needs through to the end of a services contract or the useful life of an asset. Public Procurement Principles
Fairness Openness and transparency Fiscal responsibility Competition Value for money Accountability Legislative Provisions affecting Municipal Procurement
Municipal Act . Procurement Policy . Integrity Commissioners . Code of Conduct Municipal Conflict of Interest Act Trade Agreements • CFTA • CETA • WTO‐GPA Canadian Criminal Statutes Federal statutes used to combat purchasing fraud include: • Criminal fraud (Criminal Code s. 380) • Frauds on the government (Criminal Code s.121) • Breach of trust by a public officer (Criminal Code s.122) • Commercial bribery (Criminal Code s.426) • Corruption of Foreign Public Officials Act (CFPOA) Civil Remedites • Monetary remedies (damages) • Declaratory remedies • Equitable remedies Administrative Actions • Suspension or Disbarment • Termination for Default • Void of Contract • Suspending Payments Civil Common Law Actions
• Misrepresentation • Breach of Contract • Breach of Warranty • Duty of Loyalty • Duty of Care • Breach of Fiduciary Duty • Conflict of Interest • Conversion • Tortious Interference Methods to Acquire Goods & Services 1. Competitive bidding using sealed bids 2. Contracting by negotiation 3. Sole Source Contracting 4. Simplified acquisition Competitive Procurement Vehicles Competitive Negotiaton
• Proposal Received • May Accept or Negotiate with prospective contractors • Allows prospective contractors to revise their offers before contract award. Sole Source Contracting
• Single Vendor Requested for a Proposal or Quote • May Accept or Negotiate • Does not provide competition Simplified Acquisition
• Charge accounts • Purchase cards • Purchase orders • Petty cash funds Types of Contracts Used in Procurement • Master Contracts • Fixed Price Contracts • Not to Exceed Contracts • Time & Materials • Cost Reimbursement • Incentive Agreements • Escalation Clauses Procurement Process Competitive bidding mechanisms can be reduced to four basic stages & fraud schemes can occur at each:
Post Award & Pre‐Solicitation Solicitation Evaluation & Administration Phase Phase Award Phase Phase Pre-Solicitation Phase Fraud Schemes • Need Recognition
Pre‐Solicitation • Purchases For Personal Use Phase • Bid Tailoring • Unjustified Procurement Methods to Avoid Competition • Bid Splitting Schemes Solicitation Phase Fraud Schemes • Bid manipulation • Bid rotation • Bid pooling • Fictitious contractors Evaluation & Award Phase Fraud Schemes
Evaluation & Award Phase • Bid manipulation Post Award & Administration Phase Fraud Schemes
• Contract modifications • Change orders Bribery & Corruption Bribery & Corruption • Bribery • Kickbacks • Illegal gratuities • Economic extortion • Conflicts of interest Red Flags of Corruption – Procurement Employees
• Unusual amount of interest in a specific contract or contractor • Accepting low quality goods, late delivery • Declining a promotion to a position not involving procurement • Failing to file conflict of interest disclosure forms • Insisting that contractors use specific subcontractors • Failing to take vacations Red Flags of Corruption – Procurement Employees • Accepting gifts • Unexplained increase in wealth or outside income • Outside business • Socializing with vendors • Family ties with contractors • Approving an unusually high volume of purchases Red Flags of Corruption Corrupt Contractors
• Inadequate financial resources • Poor record of performance • Reputation for dishonesty • Involvement in prior complaints or legal actions • History of fraudulent conduct • Undisclosed outside business interests or front companies owned by the contracting employee • Family ties with a procurement employee Red Flags of Corruption Corrupt Contractors
• Making payments of unjustified high prices or price increases for common goods or services • Address, telephone number, or postal code matches an employee’s address, outside business, or relative’s address. • Address is not complete (e.g., it is only a PO Box, it gives no telephone number, or it gives no street address). • Multiple addresses • Reputation for corruption Red Flags of Corruption Internal Controls • Poor internal controls • Insufficient capacity to monitor procurement personnel • Inadequate anti-corruption control plan • Poor separation of duties in purchasing • Lack of enforcement of conflicts of interest or gift acceptance policies • Lack of transparency in expenses and accounting records • Poor documentation supporting award of subcontracts • Inadequate monitoring procedures Red Flags of Corruption Analytical • Repeated selection of vendor and decreasing purchases from other vendors over time • Repeat contract awards made to poorly performing contractors • Unexplained increases in purchase volumes • Repeat contractor only slightly lower in price than the next • Unnecessary or inappropriate purchases of goods or services • Questionable method of selecting a contractor • Frequent change orders awarded to a particular contractor • Unusual and unexplained delays in the procurement process (this might be an attempt to allow secret late bids or extract bribes) Third-Party Fraud in Contract and Procurement The most common forms of collusion between competitors involve: · Complementary Bidding · Bid Rotation · Bid Suppression · Market Division/Allocation Preventing Collusion by Third Parties • Expand the list of bidders. • Educate staff. • Maintain procurement records. • Require a minimum number of bidders. • Do not allow subcontracting. • Impose a reserve price. Red Flags of Collusion • Limited competition. • Winning bid appears too high when compared to cost estimates, published price lists, similar jobs, or industry averages. • Wide gap between the winner and all other bidders. • All contractors submit consistently high bids. Red Flags of Collusion • High price increases. • Large price differences among bidders. • Qualified contractors do not submit bids. • Qualified contractors that did not submit bids become subcontractors. • Low bidder withdraws its bid and becomes a subcontractor. • Token bids by companies unqualified to perform the work • Bid Rotation Red Flags of Collusion • Evidence of collusion in the bids (e.g., identical bids; bidders make the same mathematical or spelling errors; bids are prepared using the same typeface, handwriting etc) • Same competitors always bid against each other. • Losing Bids do not meet specifications. • Unusual patterns when a contract requires a re- bid such as: The new bids result in the same ranking order. The new bids result in the same prices. Some bidders do not re-bid. Collusion Between Employees and Third Parties Procurement fraud schemes involving contractors and employees of the purchasing entity generally include the following: · Need recognition · Bid tailoring · Bid manipulation · Unbalanced bidding · Leaking bid data Preventing Collusion by Third Parties • Segregation of Duties • Centralized Procurement Processes • Regular reviews Red Flags of Need Recognition Schemes • The assessment of needs is not adequately or accurately developed. • Unreasonably high stock levels or inventory levels. • No list of backup suppliers for items, spare parts, and services continually purchased from a single source. • Large numbers of surplus items are written off to scrap. • Needs are defined in a way that can only be met by a certain supplier or contractor. Red Flags of Need Recognition Schemes • Estimates are either not prepared or are prepared after solicitations are requested. • Items, parts, and services are obtained from a single source. • Employee displays sudden wealth, pays down debts, or lives beyond their means. • Employee has an outside business. • Multiple purchases that fall below the threshold limit are present. • Purchases are made without a receiving report produced. Red Flags of Bid Tailoring Schemes • Weak controls over the bidding process • Only one or a few bidders responding to bid requests • Contract that is not re-bid even though fewer than the minimum number of bids are received • Similarity between specifications and winning contractor’s product or services • Unusual or unreasonably narrow or broad specifications for the type of goods or services being procured • Winning contractor was involved in designing the project or drafting the project’s specifications Red Flags of Bid Tailoring Schemes • Complaints from competing contractors • Requests for bid submissions that do not provide clear bid submission information (e.g., time, place, or manner of submitting bids) • Unexplained changes in contract specifications from previous proposals or similar items • High number of competitive awards to one supplier • Socialization or personal contacts among contracting personnel and bidders • High number of change orders for one supplier Red Flags of Bid Manipulation Schemes • Contract is awarded to a non-responsive bidder. • Competing bids are lost. • Bid deadlines are changed. • Despite receiving fewer than the minimum number of bids, the contract is not re-bid. • Solicitations for bids are sent to unqualified contractors. • Solicitations for bids are sent to contractors that previously declined to bid. • During bidding, competing contractors complain about the evaluation process. Red Flags of Unbalanced Bid Schemes • Certain line items in a request for a bid on certain works, goods, or services seem unusually low. • Certain line items in a request for a bid differ from those in the actual contract. • Following the contract award, there are change orders that reduce the requirements for low-bid line items. • Certain line item bids have not been performed or purchased as required under the contract. • Change orders are issued soon after the contract Red Flags of Leaked Bid Data Schemes • Weak controls over its contracting system. • The winning bid is just below the next lowest bid. • The winning bid is unusually close to the procuring entity’s estimates. • The last party to bid wins the contract. • The contract is unnecessarily re-bid. • A contractor submits false documentation to get a late bid accepted. • A procurement employee socializes with contractors. • Contracting personnel provide information or advice about contracts to a contractor on a preferential basis. Sole Source Contracting • Can be appropriate • Where re no competition exists • Where the goods or services are valued at an amount that falls below predetermined monetary thresholds. However, because these methods do not provide for full and open competition, they can invite fraud. Red Flags of Unjustified Sole Source Award Schemes • Complaints by competing contractors • Frequent use of sole-source procurement contracts • High number of sole-source awards to one supplier • Requests for sole-source procurements when there is an available pool of contractors to compete for the contract • Improper contact with procuring entity officials at social or professional events Red Flags of Unjustified Sole Source Award Schemes • No minutes of pre-bid meetings • False statements made to justify sole-source of negotiated procurement • Justifications not signed or approved by employees with authority • Failure to obtain the required review for sole- source justifications • Placing any restrictions in the solicitation documents that tend to reduce competition Red Flags of Personal Use • High volume of purchases suitable for personal use or resale occurred. • Consumer items are purchased but need replacement in a relatively short amount of time. • High number of purchases were completed from vendors selling consumer products. • Items suitable for personal use or resale are missing from inventory or are unaccounted for. • Items that appear to be unnecessary or unrelated to the procuring entity’s needs are purchased. • Purchased items are returned to a vendor without vendor credit or refund. • A suspect employee operates an outside business. Red Flags of Personal Use • High volume of purchases suitable for personal use or resale occurred. • Consumer items are purchased but need replacement in a relatively short amount of time. • Items suitable for personal use or resale are missing from inventory or are unaccounted for. • Items that appear to be unnecessary or unrelated to the procuring entity’s needs are purchased. • Purchased items are returned to a vendor without vendor credit or refund. • Employee operates an outside business. Bid Splitting
• Employees split bids to avoid competitive procurement or management review. • Allows employee to award some or all of the component parts to a contractor with whom they are colluding.
• In some bid splitting schemes, one contractor performs all of the work but submit bills under the names of multiple phony companies. Red Flags of Bid Splitting • Two or more similar or identical procurements from the same supplier in amounts just under upper-level review or competitive bidding limits • Two or more consecutive, related procurements from the same contractor that fall just below the competitive bidding or upper-level review limits • Unjustified split purchases that fall under the competitive bidding or upper-level review limits • Sequential purchases just under the upper-level review or competitive bidding limits • Sequential purchases, which fall under the upper-level review or competitive bidding limits, that are followed by change orders Nonconforming Goods or Services • Nonconforming goods or services schemes may include: • Delivery of inferior/substandard material • Delivery of materials that have not been tested • Falsification of test results • Delivery of used, surplus, or reworked parts • Delivery of counterfeit products • Submission of false certifications • Product substitution Red Flags of Nonconforming Goods/Services
• Tests performed or compliance certificates signed by unqualified personnel • Unavailable or inadequate supporting documentation for proposed standards • Test or inspection records that reflect high rate of failure • High percentage of product returns to vendor for noncompliance with specifications Red Flags of Nonconforming Goods/Services
• Packaging boxes with part of label consistently obliterated • Items with unusual or obliterated serial numbers • Invoice or inventory item numbers or descriptions that do not match purchase order or invoice terms • High number of test or operation failures • High maintenance and repair costs • Complaints or suspicions about a contractor’s quality or performance Change Order Abuse • Collusion between the contractor and personnel • Corrupt contractor submits a low bid to ensure that they win the contract award, but, after the municipality awards the contract, the corrupt contractor increases the price with subsequent change orders. Red Flags of Change Order Abuse
• Vague bid specifications clarified by a change order • Poorly drafted requests for change orders • Repeated pattern of change orders just below threshold limit • High turnover rate among procurement personnel • Period of an existing contract extended by change orders instead of re-bidding Other Purchasing Fraud Schemes Billing Scheme Risks Shell companies Non-accomplice vendor schemes • False Billing – Conversion • Forgery • Voids, Duplicates • Cash Refunds Purchase Schemes Expense Reimbursement Schemes
Fictitious expenses Altered expenses Mischaracterized expenses Duplicate expenses P-Card Schemes
• Making personal purchases (e.g., gas for car, household items, beauty services, groceries, etc.) • Purchasing gift cards for personal use • Avoiding competitive bidding by splitting up purchases to fall under the threshold limit • Purchasing items for resale • Paying kickbacks • Making payments to their own shell company • Procuring multiple p-cards to exceed spending limits Cheque Tampering • Forged Maker • Forged Signature • Intercept Cheques before Delivery • Theft of Returned Cheques • Converting Stolen Cheques • Altered Payee & Tack On • Erasable Ink • Authorized Maker Schemes • Bank Reconciliation completed by fraudster Electronic Funds Transfer Fraud Schemes
• Change Banking Information • Intercept Payments • Change Bank Transmission files Wire Transfer Fraud – Business Email Compromise (BEC)
Other Cases Detection & Prevention Programs Detection & Prevention
• Ethics Program/Codes of Conduct • Undertake Fraud Risk Assessment • Develop Anti Fraud Program • Response Plan Questions? More Information?
Tammy Carruthers BA CPA, CGA CFE CICA PMP CLSSBB CCA MCITP CISA CCP Principal & CEO WSCS Consulting Inc. (tel) 613.267.7521 [email protected] website: www.wscsconsulting.com