Procurement Fraud March 2017 - PowerPoint Presentation

1. Procurement FraudMarch 2017

2. Procurement Fraud Procurement fraud is the second most frequently reported form of economic crime behind asset misappropriation, according to a study.The PwC Global Economic Crime Survey 2014 showed 29 percent of organizations had experienced procurement fraud, and it was most common at the RFP vendor selection stage, followed by the bid process.

3. Types of Procurement FraudFavoritism - SteeringUndue InfluenceConflicts of Interest Bias (blackballing)Bid RiggingManipulation of ScoringCollusion Anticompetitive Practices

4. Procurement Fraud – Favoritism Favored VendorOccurs when the procurement process is structured such that the favored vendor is awarded the contract unfairlyMay involve bribery/kickbacksMay involve steering a contract award to a vendor who is a family member, friend, or otherwise favored by someone in authorityCost of the bribe/kickback is usually included in cost of serviceSome sort of bid rigging is usually involvedInvolves collusion between the vendor and the purchasing agent or other person in authority – “This job is yours”

5. Procurement Fraud – Steering an Award SteeringPerson in authority inside the public procurement unit structures the process to ensure that favored vendor is awarded the contract“I want Firm XYZ to get this job”Steering can occur at various stages of the process:Pre-solicitation stage (Private meetings with vendors)Solicitation stage (Restrictive specifications – shortened timeline)Submission stage (Leak inside information – price of other bids)Evaluation stage (Manipulate scoring – favored vendor)

6. Procurement Fraud – Undue InfluenceThe procurement process can be influenced by unethical:Procurement OfficersManagementInfluence can beOvert – directly impacts the purchase processCovert – provides information to favored vendor – giving them an advantage over competitorsIndirect influence Government officials or management uses their position to influence others involved in the procurement process

7. Procurement Fraud – Undue InfluenceAdvance communication of bidding/RFP ProcessCollusion with someone in authority inside the public procurement unitGovernment officials or management puts pressure on procurement officer or evaluation committee member on who to award to or how to scoreManagement insists on: rushed purchases, shortened public notice, “emergency” procurementsEfforts are made to reduce legitimate competitors

8. Pre-solicitation StageProcurement FraudPromise to favored vendor that they will get the contractSpecification fraudSpecifications unique to favored vendor’s productRFP is too specificOnly one vendor can meet requirementsRFP is too vagueDetails are secretly given only to favored vendorBid splittingSplitting large purchases into small purchases under the bidding requirements

9. Solicitation StageProcurement FraudMain goal is to eliminate competitionCould include bids from fictitious vendors Solicit vendors that are not qualifiedShortened time limit for bidding processGive advance notice and information to favored vendorvendors take turns winningContracts at above market pricesLose bids of other qualified companies

10. Submission StageProcurement Fraud Abuses can occur in the sealed bid/proposal processAcceptance of late bid/proposalsFalsifying date bids/proposals receivedOpening of competitors bids/proposals – informing favored vendor of other bids or information in competitor’s proposals, including pricingEmployees that control the bid/RFP process are often a major target for bribery/Kickbacks

11. Evaluation StageProcurement Fraud Blackballing legitimate competitorsLeaking false information about a vendor, Submitting artificially low scores Inflating scores of the favored vendorCollaboration between evaluation committee membersBlock voting for favored vendorConflicts of interest – Management or someone in authorityEvaluation committee membersPurchasing agentBribery/kickbacks to evaluation committee members

12. Case Studies

13. #1 State Director Resigns Amid Alleged Violations Of Procurement LawsCiting “serious violations” of state procurement law, Gov. Herbert forced the resignation of the Dept. of Alcoholic Beverage Control Director and called for an audit of the agency. The Governor noted: “There is no latitude for ethical indiscrimination in public officers. Not only do I expect, but more importantly, the public expects, that those in public service will be held to the highest standard of accountability, especially when it comes to the use of taxpayer dollars.” Auditors have been focusing on hundreds of payments made by DABC to a company run by the son of the now former Director. Records show that the son’s company received more than $272,000 in payments that include more than 250 purchases for just under $1,000, including, in some instances, three or four payments a day. By law, state agencies cannot artificially divide an invoice and submit payments under $1,000 at a time to avoid conducting a competitive bid.

14. State Contracts Protect Against FraudAuditor General: “Savings Would Be Realized by Following Procurement Rules” “DABC employees made purchases without properly obtaining competing bids for items over $1,000, resulting in excess costs to the state.” No Bids With BidsItem Price Paid Lower Price Savings % SavingsShelf Talker $1,440 $720 $720 50%Warning Signs $2,650 $1,918 $732 28%Store Supplies $1,458 $1,164 $294 20%Receipt Paper $4,394 $3,621 $773 18%State Contract save public entities from paying significantly higher prices

15. #2Purchasing Agent Abused Position of Trust The AG’s Office announced that a purchasing agent for Corrections has been indicted for using his position to steer state money for his own financial gain. The purchasing agent faces charges of conflict of interest, accepting gratuities, procurement fraud and larceny. The purchasing agent developed a personal financial relationship with a vendor that won a multi-million dollar statewide contract for firearms/ammunition. The purchasing agent was a member of the five-person team that solicited, reviewed, and awarded the contract. He was also the purchasing agent who used the statewide contract to order approximately $250,000 per year in supplies from the vendor. The vendor wrote checks payable to the purchasing agent totaling over $80,000 that were for the purchasing agent’s personal benefit.

16. #3Detroit Mayor Indicted on Charges of Racketeering Indictment says Mayor extorted money from contractors, state and non-profit donors and engaged in bribery and extortion involving public contracts.Held up $12-million amendment to sewer contract until contractor agreed to pay favored vendor $350,000 for work – favored vendor didn’t work on the project.Schemed to steer contracts and emergency orders to favored vendor in connection with a $19.8-million water main replacement contract. Rigged a water main contract so favored vendor’s team would win. Afterward, favored vendor extorted more than $12.9 million from the other team members. Rigged award of $21-million security contract to make sure favored vendor's company would win. Favored vendor netted $1.2 million in the scheme.Tried to force an official overseeing the demolition of Tiger Stadium to give the contract to favored vendor, even though he wasn't low bidder. When that failed, retaliated against the official by having him fired.

17. #4County employee pleads guilty in bid-rigging scandal A former County director pled guilty to dozens of charges of bid-rigging and embezzlement. He and three other county employees were rigging the county’s contracting system in order to funnel more than $8 million in work to shell companies they created. They would create fake bids from other contractors so that the companies they formed could win the contracts. The director oversaw the majority of the contracting process, which is why his scheme went undetected for so long. Prosecutors said, “This individual was given a lot of liberty and was in charge of supervising himself.” The other three men involved in the scam face similar charges and are set to appear in court later this year. All four are also facing a civil lawsuit brought by the County.

18. #5Utah Man Pleads Guilty in Procurement Fraud SchemeA Utah man pleaded guilty in federal court in a bribery and fraud scheme involving federal procurement contracts. According to court documents, while he worked as a procurement manager at Hill Air Force Base, he disclosed non-public information and provided favorable treatment to a vendor in the procurement process.  According to the statement of facts, he was offered $1.2 million in payments and other things of value if Vendor “A” were to receive future contracts from the U.S. government. In exchange for the payments he received, he gave Vendor “A” favorable treatment during the procurement process by disclosing government budget and competitor bid information, which helped Vendor “A” win the contracts.

19. #6Charter School Director Resigns Over Conflict of InterestFour Albuquerque charter schools put their director on paid administrative leave amidst an FBI investigation.The state auditor’s office reported an apparent conflict of interest when they discovered that the school system awarded contracts to an aviation company owned by the schools' director. The contracts, totaling more than $1 million since 2008 for the schools' aviation program.

20. #7County Employee Falsified Documents for Personal Gain A county employee was taken into custody on charges of forgery, felony theft by conversion and financial transaction card fraud. The amount in question is estimated to be in excess of $10,000. Investigators have determined that a county employee falsified government documents and used government funds for personal use. The employee used a county credit card for personal purchases and then modified billing statements to make them appear valid by altering county purchase orders and receipts.

21. #8Purchasing Agents Arrested In Kickback Scheme The head of an office supply company and 22 purchasing agents were arrested and accused of taking part in a kickback scheme that defrauded public entities of $1.8 million. The organizer of the scheme was the owner of an office supply company. As part of the scheme, the office supply company offered a 25 percent kickback to purchasing agents of customers who agreed to buy supplies and then to approve deliveries that were 50 percent short of the ordered amount. The office supply company would ship 500 boxes of copier paper to a customer, then state in the invoice that the shipment was for 1,000 boxes and bill the firm accordingly. Corrupt purchasing agents would receive a kickback of 25 percent of the value of the undelivered supplies.

22. #9Purchasing Agent Indicted The District Attorney's office indicted a former purchasing agent for stealing $1.2 million from a school district.The purchasing agent was responsible for ordering and approving payment for all supplies and materials. The purchasing agent instructed vendors to submit false invoices for goods that were never delivered and approved invoices for payment in exchange for money, jewelry, trips, and cars. If found guilty, the purchasing agent could face up to 22 years in prison.

23. #10City Employee Resigns Amid Investigation into Ties with Consulting Firm The plan by a City in Utah to install energy-efficient streetlights has been put on hold due to a flawed RFP process that has spurred a criminal investigation. Public documents point to the possibility that a former city employee played a part in drafting an RFP that benefited himself and a business partner. The City’s Facilities Manager resigned after 13 years with the city. City Council minutes, show that the former Facilities Manager told council members he had been looking at lighting solutions and recommended XYZ Company as an economical source for lighting using alternative-energy sources, noting that XYZ could typically beat retail prices by 30 percent to 45 percent. However, what he failed to disclose was that he previously had been a partner in XYZ. Due to vendor concerns, the RFP was canceled and rewritten. According to City officials, the first RFP was too strict and raised concerns that the lighting project was being steered to XYZ company. Competing vendors expressed concerns about how the RFP was so specifically drafted. It appears that the RFP was drafted jointly by the former Facilities Manager and XYZ company. The City did not discover the former City Facilities Manager’s ties to the consulting firm until allegations were made about the RFP’s perceived irregularities.

24. #11Purchasing Agent Arrested For Conflict of Interest A city employee was arrested and charged with conflict of interest for taking kickbacks as manager of the agency's fleet maintenance department. The city employee is charged with taking unlawful compensation or reward for official behavior. He was arrested at work and jailed on $25,000 bail. Auditors noticed that large quantities of goods were being purchased from a local distributor and past employer of the city’s fleet maintenance manager. During the investigation, it was discovered that the fleet maintenance manager was still employed as a sales agent for the distributor. Records show that city fleet maintenance manager received nearly $3,000 in commissions from the local distributor for goods he purchased for the city from his past/present employer – a clear conflict of interest.

25. #12Road Contractor Convicted in Bid-Rigging Case The owner of paving company was convicted by a state jury of two counts each of conspiracy to commit bid–rigging. The company owner bribed state employees with gifts and colluded with a former DOT maintenance manager to make his company the sole source contractor on a $4 million contract to repair cracks on highways. An investigation disclosed that the maintenance division routinely circumvented the normal bidding process to award contracts to the company. A state grand jury indicted the owner of the paving company along with five DOT employees.

26. #13County employee pleads to procurement fraud A County employee pleaded guilty to dozens of charges after he and three other employees were indicted for pulling off one of the largest procurement fraud scandals in county history. He and three other county employees were rigging the county’s contracting system in order to funnel more than $8 million in work to shell companies they created. They would create fake bids from other contractors so that the company they formed could win the contracts. It is hard to tell whether the county got the best deal for its money because there weren’t other legitimate bids to compare to prosecutors said. The division chief oversaw the majority of the contracting process, which is why his scheme went undetected for so long. “This individual was given a lot of liberty and was in charge of supervising himself.” The other three men involved in the scam face similar charges and are set to appear in court later this year. All four are also facing a civil lawsuit brought by the County.

27. How to Prevent Procurement Fraud“Best Value” State Cooperative ContractsSeparating CostsCost-Benefit AnalysisReport Procurement Fraud

28. “Best Value” State Cooperative Contracts Prevent Fraud“Best Value” State Contracts = 100% Compliance with Procurement Code Public Entities Avoid Favoritism, steering, bias Undue influence Conflicts of interest Bid Rigging Score Manipulation Collusion Anticompetitive Practices

29. Service Districts$28M usage(voluntary use)Higher Education$262M usage(voluntary use)State Agencies$575M usage(required use)School Districts$389M usage(voluntary use)Cities$188M usage(voluntary use)Counties$212M usage(voluntary use)State Purchasing750 “Best Value” Cooperative Contracts$1.6 Billion Total Usage

30. Separating Cost In The RFP Process Helps Prevent Procurement Fraud

31. 63G - 6a – 707(5) Separating Cost (5)(a) Except as provided in Subsections (5)(b) and (8), each member of the evaluation committee is prohibited from knowing, or having access to, any information relating to the cost, or the scoring of the cost, of a proposal until after the evaluation committee submits its final recommended scores on all other criteria to the issuing procurement unit.

32. Separating Cost Prevents Procurement Fraud Separating cost dramatically reduces the possibility of one individual having too much influence in an evaluation committee because 20% to 40% of the total score (cost) is removed from their influence.

33. Cost-Benefit Analysis In The RFP Process Helps Prevent Procurement Fraud

34. 63G-6a-708Cost-Benefit Analysis If the highest score awarded by the evaluation committee is awarded to a proposal other than the lowest cost proposal (difference $10,000 or 5%) the procurement unit shall make an informal written cost-benefit analysis. . .

35. Higher Ed Employee Indicted in Kickback and Bribery SchemeFederal prosecutors announced that a university facilities engineer has been charged with stealing hundreds of thousands of dollars in a procurement fraud case. The indictment states that the facilities engineer had procurement authority to award contracts for work costing less than $30,000 without seeking competitive bids. Prosecutors say he directed more than $825,000 to two companies that performed little or no work. Those firms (one owned by the university employee’s son-in-law) kicked back more than $410,000 in bribes to bank accounts he controlled.He faces up to five years in prison and a $250,000 fine when sentenced.

36. Contractor Had Relationship With UDOT Employee The head of a construction company that won part of a $1.1 billion state contract acknowledged that he had a romantic relationship with a UDOT employee. A UDOT spokesman said the employee was demoted for an ethics policy violation when UDOT executives found out about it. Although the employee didn't have a role in deciding who the winning contractor would be, UDOT officials thought she should be reassigned as a precaution. UDOT policy doesn't specifically forbid employees from having romantic or physical relationships with contractors or those bidding on contracts, but it does say employees must "conduct themselves in a manner that is above reproach.” The UDOT spokesman added, "We felt she was violating our ethics policy that states emphatically employees should not engage in activities that are in conflict with their duties.”