Like most businesses – large and small – you probably need to buy in goods and services.
Regardless of whether you rely on a handful of local traders or a long international supply chain, you could be at risk of fraud.
Catching fraud early is vital. You will prevent losses, protect your reputation and you might even save the business from collapse.
Fraud in the buying of goods, works and services is commonly called ‘procurement fraud’. It can happen at any stage – from the initial decision-making through to final delivery.
How your business tackles the risk of procurement fraud will partly depend on the size of the business and the resources available.
A set-building subcontractor, who submitted fake invoices worth £33,000 to a TV studio, was jailed for 18 months after pleading guilty. His fraud went on for eight months even though he’d been employed for just a week. The fraud was spotted only when the work available declined sharply but the fake invoices kept arriving.
Any of these should sound the alarm.
If your contract management procedures are not up to scratch, fraud can easily go undetected.
One of your employees may try to ensure that a certain supplier wins a particular contract. You can end up paying for things you don’t need, or which are overpriced or otherwise unsuitable.
A group of suppliers can prevent competition by colluding. They might take turns to bid for contracts, agree to divide up the market, deliberately bid too high or not at all, or agree to fix prices. One of your employees could be involved, perhaps by selling or leaking information.
After bids have been received, one of your employees might try to influence the evaluation and selection process to make sure a certain supplier wins.
Suppliers might deliberately overcharge. Delays and overruns can be faked to justify extra charges. An employee might intentionally over-order for their own use or resale. Or they can collude with the supplier to pay for goods or services that are never delivered.
Corrupt employees and third parties might have created fake companies solely for the purpose of siphoning off your procurement budget.
An employee receives cash or gifts (such as sports tickets or an expensive holiday) in return for making sure that the supplier wins the work.
This might involve sharing technical or financial information, or tailoring the contract or specification to suit.
Overcharging for real deliveries or charging for extras never delivered.
Poor-quality, second-hand or counterfeit goods or services are delivered but charged for at full price.
Staff steal items bought for the business, including deliberately over-ordering for their own personal use or resale.
Two ‘rival’ suppliers of furniture parts to well-known brands were fined £2.8m for colluding to carve-up the market and inflate the prices their customers paid. The fraud was uncovered by a tip-off. Investigators found evidence of meetings at which executives shared normally confidential pricing information and promised not to approach each other’s customers.
Some simple steps can make your business safer.
Make sure that suppliers, consultants and contractors really do exist. Check their VAT registrations (where appropriate), references from previous clients, and bank and registered office details. Review publicly available information online, including Companies House. And it is always a good idea to cross-check supplier details (addresses, bank accounts and so on) against those you hold for employees.
Segregate responsibilities for ordering/commissioning and the making of payments wherever possible. Ideally no one person should be solely responsible for procurement decisions.
Create formal policies and procedures that apply to everyone. Keep a record of all conflicts of interest, gifts and hospitality (given and received), especially where they concern suppliers, subcontractors and intermediaries. Review and update these regularly.
Review spending – both with suppliers and by employees (on credit cards and using petty cash). Investigate anomalies as soon as possible. Monitor deliveries of goods or services against the original specifications. Match payments to purchase orders.
Make sure you have a clear process for making amendments to contracts and orders after work has begun.
To be sure you are receiving exactly what you have paid for, always check delivery notes and the products delivered. Keep inventory and asset registers up to date and monitor their usage regularly. To prevent deliveries going astray think about providing suppliers with a list of approved delivery addresses.
Ask staff to record all decisions and actions relating to the award, implementation and management of each individual contract.
A manager at a drinks company took bribes of cash and football tickets worth £1.5m over almost a decade. In exchange, his favoured suppliers won real and bogus contracts at inflated prices, and received confidential commercial information. Bribes were paid via a network of shell companies. The scheme came to light when one of the bribers accidentally included a rival’s confidential price information in an expense claim.
This practical guide highlights the many risks of procurement fraud. But business fraud comes in many other guises. It makes good business sense to find out more. Go to lovebusiness-hatefraud.org.uk or follow the campaign on Twitter and LinkedIn.
Thanks to Laura Hough from BDO LLP for kindly writing this guide.
Published June 2022. © Fraud Advisory Panel and Barclays 2022.
Fraud Advisory Panel and Barclays will not be liable for any reliance you place on the information in this material. You should seek independent advice.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence.