Automated Tests for Procurement Frauds and the Data Required to Conduct Them

Automated Tests for Procurement and Payment Frauds

The sample indicators in the sections below are prioritized and color coded as follows for application in ex ante detection systems:

RED: Real-time BLOCKS or ALERTS of apparent improper transactions, e.g., a bid submitted by a debarred company or different bids from the same IP address

BROWN: Pre-programmed REPORTS for other common procurement fraud schemes, waste, or abuse

ORANGE: Other less common reports that can be listed in a HANDBOOK or ONLINE GUIDE for auditors, investigators, or other users

BLUE: Links to online public records, including telephone and address information

Both the “primary data sources” and “other useful data sources” listed for each scheme should be readily available from any e-Procurement system. The primary data requirements refer to the information needed to identify the most significant indicators. Other potential data sources refer to the information needed to identify useful but less critical indicators.

 

Collusive Bidding

Secret agreements by bidders or suppliers to divide work and artificially inflate prices, often with the complicity of government officials.

Indicators include:

• Different bids from the same IP address
• Bidders with the same contact information
• Unusual bid patterns, e.g., bids an exact percentage apart
• Sequential bid securities
• Same bidder’s rebid in the same order in later rounds
• High price bids, e.g., bids that exceed the confidential owner’s estimate by > 30 percent
• Pattern of rotation of winning bidders
• Same bidders always bid, win, and lose
• Losing bidders become subcontractors
• Unusual bid patterns, e.g., “6-9-17 bid pattern”
• Bids not in conformity with prior legitimate bid patterns
• Distant bidders that are cheaper than local bidders
• Losing bidders that cannot be located in corporate registries or directories or on the internet

Data requirements:

Primary data sources:

• Bidder’s address, telephone, fax, email, IP address
• Winning and losing bids
• Bid securities
• Owner’s cost estimates

Other useful data sources:

• Line item prices
• Subcontracts
• Previous bids

Bid Rigging

Bid rigging is the improper manipulation of the bidding or vendor selection process to favor certain bidders to the exclusion of others.

Indicators include:

• Procurement official’s contact information is same as bidder’s contact information
• Shorter notice to submit bids than rules require
• Sole source awards greater than sole source limits
• Split purchases
• Multiple purchases just below procurement threshold
• Award to only one evaluated bidder
• Award to other than the low bidder
• Unusually high line item bid, followed by change order increasing quantities
• Unusually low line item bid, followed by change order removing or reducing line item
• Winning bid price the same as cost estimate

Data requirements:

Primary data sources:

• Bid evaluation committee members and bidder contact info
• Winning and losing bids
• Bid notice and due date
• Debarment list
• Procurement thresholds

Other useful data sources:

• Line item bid prices
• Contract date and price
• Change orders and amounts
• Procurement plan information
• Previous similar tender results

For more information on all eight common bid-rigging schemes and follow-up steps, see:

Bid Rigging Schemes

 

Corruption – Bribes and Kickbacks

Indicators include:

• Bid-rigging indicators, above
• SPQQD indicators

SPQQD refers to the following factors regarding a procurement from a particular contractor or vendor:

o Irregularities in the (S) ELECTION of the contractor or vendor
o The payment of unexplained high (P) RICES
o The purchase of excessive (Q) UANTITIES of goods, works, or services
o The acceptance of low (Q) UALITY goods, works, or services
o The (D) ELIVERY and acceptance of items that do not match the purchase order or contract

A pattern of SPQQD abuses over time by certain contractor or vendor and procurement official is most significant.

Data requirements:

See bid rigging, above.

 

Shell company vendor

These are vendors that are secretly owned by procurement agency officials.

Indicators include:

• Vendor located at a non-business address or not listed on the internet
• HR/vendor matches (employee and vendor list the same cell phone number, etc.)
• Vendor not on approved vendor list
• Sole source purchases above competitive threshold
• Multiple purchases just below competitive threshold
• Split purchases
• Segregation of duties violations (same person orders, approves, and receives purchases)
• SPQQD factors
• Vendor provides variety of disparate goods or services in contrast to existing vendor norms (per vendor codes and product codes)
• Prompt payment in contrast to the existing payment norm

Data requirements:

Primary data sources:

• Vendor master file
• HR master file
• Purchase order, receiving, invoice, payment information
• Procurement thresholds
• Segregation of Duties requirements

Other useful data sources:

• Benchmark prices
• Vendor and product code lists
• Payment date

 

Phantom vendor

Also known as ghost suppliers, these are fictitious vendors set up by insiders to embezzle funds.

Indicators include:

• Vendor not listed in corporate registries or directories or on the internet
• Vendor located at non-business address
• Paid vendor not on approved vendor List
• HR employee record/vendor record match
• “Fuzzy match” vendors with different bank accounts
• High number or percentage of sequential invoice numbers
• Broken sequence invoice numbers
• Purchases just below competitive thresholds
• Split purchases
• Benford’s Law violations
• Small initial purchase
• Vendor provides hard-to-verify goods, works, or services (per product code)

Data requirements:

Primary data sources:

• Approved and paid vendor lists
• HR and vendor master files
• Purchase order, invoice, receiving, payment information

Other useful data sources:

• Procurement thresholds
• Benford’s Law distributions
• Vendor and product code lists

 

Purchases for Personal Use, Resale or Diversion

This is a very common abuse that can be quite costly if not adequately monitored and controlled.

Indicators include:

• Purchase of inappropriate personal “consumer items” per product code
• Purchased items not in inventory
• Different “ship to” address
• Split purchases
• High number of purchases of certain items susceptible to personal use (laptops, tires, gas, etc.)
• Returns without credits
• Multiple purchases just below thresholds
• Small initial purchase
• Incomplete information on purchase order or invoice
• Purchased items, volumes differ from procurement plan
• Employee has outside business (used to resell or divert products)

Data requirements:

Primary data sources:

• Vendor product codes
• Purchased item product codes
• Purchase order, invoice, and receiving records information
• Procurement thresholds

Other useful data sources:

• Returns and credits
• Inventory records
• Procurement plan information

 

False, Inflated, and Duplicate Invoices

Whether done intentionally or inadvertently, this is a common problem that can be quite costly if not controlled.

Indicators include:

False invoices:

• Invoice information does not match purchase order, receiving, or payment information
• Sequential invoice numbers
• Broken sequence invoice numbers
• Outliers in price, quantity
• Benford’s Law violations
• Missing information on invoice

Inflated invoices:

• Invoice price, quantities greater than the purchase order price, etc.
• Total payments greater than total invoice amounts

Duplicate invoices:

• Invoices with same number, dates, quantities, item description, or amounts

Data requirements:

Primary data sources:

• Purchase order, invoice, receiving, and payment information, including:

o Dates
o Invoice numbers
o Item number, descriptions
o Product codes
o Price and quantities
o Receiving information
o Payment amount

Other useful data sources:

o Benford’s Law distributions