Accountancy firm Crowe and credit rating company Experian have said that large enterprises and governments experienced 59% of procurement fraud in the United Kingdom, costing them $120 billion (£89 billion) collectively. It is estimated that over $2 trillion (£1.6 trillion) total is lost each year due to procurement fraud, or 4-8% percent of an organization’s procurement spending. This figure dwarfs other areas such as corporate tax avoidance, where HMRC estimates that $94 billion (£70 billion) was avoided between 2011 and 2015.
The main difference is that procurement fraud is so varied that it makes it virtually impossible to detect. More importantly, procurement fraud is difficult to detect because it is often embedded in a genuine expense. For example, when a construction contractor submits an invoice for 100 hours of work in a week, eight of those hours may be fraudulent. This may seem negligible, but when you consider that every purchase in an organization can include an element of fraud, the scale of the problem becomes clear. It is not just about the financial loss; there are many reputational issues too.
Why Procurement Fraud?
There are two main reasons: greed and opportunity. In terms of motive, we see both individuals and groups committing acts of fraud because they want something for themselves. They might be looking for personal gain, or trying to get away from someone else, or simply seeking revenge on a competitor.
Several studies have shown that around 50% of fraudsters are motivated by either monetary reward or benefits gained by committing a crime. For example, in 2018, a Massachusetts Bay Transportation Authority (MBTA) procurement official was indicted for receiving over $300,000 in illegal bribes and gratuities from a construction company that performed work for MBTA.
Individuals may also notice a weakness in a business process, as trivial as a broken approval process, that allows for invoices to be paid to existing suppliers without checking the outstanding purchase order amount. The problem is that weaknesses can surface at virtually every step of the procurement lifecycle, across the entire supply chain. Additionally, fraud often occurs when suppliers become close with an individual with authority inside an organization that can provide undetected access. Fraudsters see an opportunity to profit from weaknesses and begin exploiting them.
What Can Be Done?
Here are three ways to help your business become less vulnerable to fraudulent activity:
1. Use data analytics tools: Data analytics tools give you access to information about how well suppliers perform against agreed standards. You can use this information to identify potential risks early on, which could save your company millions in wasted spending.
2. Choose suppliers carefully: The larger and more complex your supply chain, the greater the risk for procurement fraud. If you buy goods and services from many suppliers, you should try to choose suppliers based on quality rather than price. Quality is not always reflected in the cost, but this means you need to be wary of the cheapest option. Using data to draw definitive conclusions about a supplier’s performance is a good way to remain objective when selecting.
3. Create a robust process: It is important that have a robust supply chain management process in place. You should be able to trace back how a supplier was added to your supply chain, the selection criteria for any awarded contracts, their ongoing financial standing, and the people involved in managing the relationship.