How To Spot And Prevent Procurement Fraud

No company wants to be the victim of a scam, but in today’s market, it’s often a question of “when” rather than “if” it happens. According to the Australian Competition and Consumer Commission, small businesses had the highest median loss and displaced $3.5 million in 2021. Procurement fraud is one of the most significant threats any company should look out for.

What is this type of scam, and how can decision-makers keep an eye out for it? Here is a look at procurement fraud, how to identify it, and tips on not falling victim to it.

What Is Procurement Fraud?

Procurement fraud is any manipulation of the buying process, whether that involves items or contracts. A scammer might promise a product or service and not deliver it, or they could knowingly sell a substandard item while assuring the customer it meets their needs.

For example, one manufacturer was caught in a government defrauding case for not performing safety testing on eyeglasses and providing faulty items, which violated their contract. Someone committing procurement fraud may also perform a kickback, charging more than the materials cost and pocketing or giving away the extra.

A business might also tailor its bids to fit a specific contractor instead of a pool, leak bid data to guarantee success to one bidder, or manipulate the results to ensure their favorite company wins the bid. However, bribery and conflict of interest are perhaps the two most well-known kinds of procurement fraud.

The Signs to Watch Out For

Procurement fraud can infiltrate a business before leaders know it’s there. Here are some common signs to keep an eye out for before they have disastrous results.

Resistance to Changing Vendors

Sometimes, an employee or board member makes money through kickbacks or conflicts of interest, but the higher prices prevent the company from using them. Workers who hear about the possibility of changing vendors might show strong opposition to the adjustment.

They may routinely sign contracts with a particular business despite there being no advantage to working with it. In this instance, it could be because they are making money through procurement fraud.

Seemingly Unfair Prices

The cost of a product or service has skyrocketed, and the vendor no longer accepts the discounts they once offered. While the cost of materials has gone up, the new price doesn’t seem to match.

This occurrence might be the result of price fixing, where a group of contractors agrees to influence the production or cost of an item instead of relying on the market.

Fake Invoices Could Indicate Procurement Fraud

Pay close attention to invoices — do any of them appear photocopied or lack the proper documentation?

Maybe the vendor’s address is a P.O. Box or one that turns out to connect to a staff member? Do some invoices occur on the same day every month or year for similar amounts and the same invoice number?

These are all signs these papers are likely fake, and someone could be pocketing the payments.

How to Prevent Procurement Fraud

Malicious activity is difficult to predict, but here are a few ways to reduce the chances of procurement fraud.

Thoroughly Vet New Vendors

The vetting process for new partners must be thorough, whether searching for an employee creating a fake contractor or an outside entity forming a scam. Verifying their identifying information, such as a driver’s license, phone number, passport, or other documentation, can help companies avoid scammers and reach genuine vendors.

Discuss Any Changes

A decline in a product or service quality or an unwarranted price increase could indicate procurement fraud. Make sure to have a discussion with the contractor, bring up these changes and ask for an explanation. It may be time to seek other vendors if their response is unsatisfactory.

Keep Contractor Relationships Flexible

Even if a business has worked with a supplier for years, that partnership could still sour. Review any long-term contracts and see how the quality of the material has held up. A decline and rising costs could signify fraud.

Additionally, no one worker should be responsible for a contractor relationship. Keep communication open to multiple people to avoid one person benefiting from an illegal agreement.

Stop Procurement Fraud in Its Tracks

Scams affect hundreds of organizations worldwide. They will happen, no matter the steps a business takes to avoid them, but companies can reduce their chances of losing profits by taking the time to prevent procurement fraud.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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