A project or government official can create a fictitious contractor, consultant, vendor or supplier that does not provide any actual goods or services in order to embezzle project funds. The fictitious companies often purportedly provide consulting or other hard to verify services, such as repair work or the delivery of consumables, rather than more tangible goods or services that can more easily be verified.
In similar schemes, project or government officials can set up and control “middleman” companies that are used to purchase goods or services from legitimate companies for resale at higher prices, or shell companies that subcontract all work received to other firms. Such “companies” often operate out of PO boxes, mail drops, residential addresses or shared business suites and cannot be found on the internet or in business or telephone directories.
Contractors also can set up fictitious companies to submit complementary bids in collusive bidding schemes.
RED FLAGS OF FICTITIOUS CONTRACTOR:
Red flags regarding the purported contractor:
- Paid contractor is not on the approved contractor list
- Contractor:
- Is not listed in business or telephone directories or business registries
- Does not appear on the internet
- Is not located at the listed address
- Contractor’s address is a:
- Mail drop, residence or another business location
- Post office box with no street address or phone number
- Contractor’s address or phone number matches project official’s
Contracting or purchasing red flags:
- Multiple purchases just under upper-level review or bidding thresholds
- Small initial purchase from contractor followed by much larger purchases (first purchase is to test whether it will be accepted)
Delivery and inventory red flags:
- Invoiced goods or services cannot be located or verified
- Contractor submits “boilerplate” or copied work product
- Unusual drop-ship or “deliver to” instructions
- Inventory “returns” without credit or refunds
Invoicing and payment red flags:
- Sequentially numbered invoices from a supplier over several billing periods
- Inconsistently numbered invoices under the same supplier’s name
- Different addresses or payment information for the same supplier
- Changes in ACH routing code or payment instructions for vendor
- Copied or unusual supporting documents submitted with invoice
- Invoice:
- Has an unusual or unprofessional appearance
- Is unfolded (meaning it was submitted without being mailed)
- Is for a round number if that is unusual
- Amounts do not comply with Benford’s Law distributions
Lifestyle red flags:
- Approving official displays sudden unexplained wealth or lives beyond means
Controls red flags:
- Weak controls: same employee can order, receive and approve payment for goods or services
CASE EXAMPLES OF FICTITIOUS CONTRACTOR
See actual case examples of fictitious contractor from investigated cases.
BASIC STEPS TO DETECT AND PROVE A FICTITIOUS CONTRACTOR
1. Identify and interview all complainants to obtain further detail.
2. Obtain the following documents:
- Lists of approved and paid vendors
- Contracts and purchase orders
- Invoices and supporting documents
- Receiving reports
- Inventory and usage records
- Payment records, including canceled checks
3. Examine the documents for the red flags listed above, particularly paid vendors that do not appear on the approved vendor list, on the internet or in business or telephone directories.
4. Conduct due diligence background checks to confirm the existence of a contractor or supplier.
5. Call and make an unannounced visit to the address of the suspect firm.
6. Match the suspect firm’s address and telephone numbers to the same for project or government officials.
7. Determine whether the suspect firm provided any goods or services; examine submitted reports for indications they were copied or are “boilerplate.”
8. Examine payments, invoices and purchase orders for contractors that provide goods or services that are difficult to verify. Note:
- Unprofessional appearing invoices (no pre-printed letterhead, etc.)
- Incomplete address or only P.O. Box
- No telephone or fax number
- Absent or inadequate supporting documents
- Payments without invoices or purchase orders
- Sequentially numbered invoices for the same vendor over an extended time period
- Invoice numbers for the same vendor out of sequence
- Quantities, pricing amounts or other numbers on invoices do not match Benford’s Law distributions.
- Checks with second endorsements
9. Review history of purchases from suspect contractors and note:
- Small initial purchases followed by much larger purchases
- Pattern of purchases just below upper-level review limits
- Unusual “ship to” instructions
- Inventory “returns” without contractor credits or refunds
10. Speak to other suppliers of the same type of goods or services to determine if the suspect contractor is known in the industry.
A fictitious contractor, consultant or supplier constitutes a fraudulent practice.