Warning Signs of Fraud & Corruption in Procurement

Complaints may come from different sources, but all complaints should be taken seriously. Bidders, public officials, disgruntled employees of winning companies, and others  may lodge complaints that can help prevent and identify fraud and corruption. A complaint might be related to procurement – for example, narrow technical specifications that only one bidder can meet, which is potentially indicative of bid rigging or collusion. Complaints regarding poor quality of goods, works or services may be indicators of fraudulent implementation by a contractor. Also, corruption might be suspected if project officials or construction supervisors continue to accept such performance, especially after being put on notice regarding quality problems. It is important to have a concrete way for individual citizens to report corruption. Instruments such as hotlines provide a mechanism for any individual to confidentially report fraud, waste, and abuse related to projects or operations for which the World Bank provides financing. To report possible fraud or corruption issues related to World Bank-supported projects or activities, please use the Online Integrity Complaint Form: https://www.worldbank.org/fraudandcorruption

Large bidding packages are sometimes split up to enable many small local firms to compete for contracts. However, contract splitting can also be done to avoid competition from larger firms, thereby creating opportunities for fraud, corruption, or collusion because the smaller packages do not usually justify a high level of scrutiny. Whatever the purpose, multiple smaller packages can create a lot more administrative work and can put serious strain on a project. The major red flags of split contracts – two or more similar procurements from the same supplier in amounts just under competitive bidding or upper-level review limits – include:

• Unjustified separation of purchases – e.g., separate contracts for labor and materials, each of which is below competitive bidding limits but, when combined, are over such limits.
• Sequential purchase orders or invoices under upper-level review or competitive bidding limits.
• Contracts under the competitive bid limit followed by change orders that increase amounts of the contract.

Research has shown that the money used for bribes often comes from overpricing contracts through quite simple frauds, so ensuring value for money can help reduce integrity risks. The overpricing of contracts – defined as the difference between the expected price and the price actually awarded – may occur due to several factors. For example:

• An international contractor hires a local agent to assist with marketing, but the agent uses the fees to pay bribes on behalf of the firm.
• Office equipment is ordered at a price that seems reasonable, but the seller provides substandard or used equipment and the illicit profit is used to bribe project personnel.
• The rent of the project office is very expensive, but some of the rent is channeled back to high level officials for preferential treatment to an associated firm.

A group of companies working together to rig bids is sometimes referred to as a “collusive ring.” Collusive bidding refers to agreements by contractors in a particular trade to cooperate in order to defeat the competitive bidding process by assigning winners and inflating prices. It can occur in large and small contracts. The assigned winner might prepare the bids of the other bidders in the collusive ring and even dictate the prices they will bid. In other cases, the designated winner might use fake companies or its own subsidiaries or affiliates to submit bids that will lose in the evaluation process. Collusion can significantly inflate costs above reasonable estimates and, if left unchallenged, it can undermine competition and disrupt whole markets. Collusion in international projects often involves corruption, with government officials facilitating the schemes in exchange for bribes. In some cases, government officials organize the collusive bidding schemes and take a cut of the profits. Here are some examples of red flags related to collusive bidding:

• Companies might not want to waste a lot of time preparing bids that will lose, so a lot of copying often happens. A close review of bidding documents can often reveal unlikely similarities between bids, such as identical formatting or identical grammar and spelling mistakes. In some cases, the same people might appear in key positions in competing bids.
• There can be unusual similarities among bid estimates (e.g., competing bids differ by an exact percentage), unexplained inflated bid prices (i.e., total bid price or components of the bid seem unjustifiably higher than the cost estimate), a large proportion of identical unit prices for the same items included in bids submitted by different bidders, or unusually large last-minute discounts.
• Some signs of abuse can only be spotted across several bids – for example, when the losing bidder(s) becomes a subcontractor for the “competitor(s)” or when there is an apparent “rotation” of winning bidders, where firms in a collusive ring take turns to win contracts.

A fake or “shell” company is a company that exists in name only and usually has no formal registration number, no substantial assets, and no permanent business facilities or employees. Some investigations have found fake firms that were set up by project personnel.

• Many fake companies can be identified through simple checks such as searching for a company website, checking for the company name in the telephone directory, or checking the company’s legal existence in corporate registries.
• If no information can be found on a company in these searches, then something is probably wrong.
• Prospective employers should carry out specific reference checks with entities that have been listed as previous employers. Call them and follow up with an email where appropriate.

When bids are rejected without good reason, this can indicate that someone is trying to rig the bidding process. A company might be bribing an official to put pressure on the Bid Evaluation Committee to alter the scoring or find excuses for bid rejection. Sometimes the pressure is from a higher ranking official, on behalf of a friend or relative. Value for money is important, and the lowest bids are not always the best, so it is important that all bids are evaluated carefully and fairly. No viable bid should be rejected from a bidding process without good reason, nor should less technically qualified bids be accepted or weaknesses in less qualified bids be overlooked. Common methods to exclude qualified bidders include:

• Adopting unreasonable prequalification procedures – for example, unreasonably high annual turnover requirements.
• Failing to adequately publicize requests for bids – for example, only advertising locally.
• Making it difficult or impossible for prospective bidders to buy bid packages.
• Providing an unreasonably short time to respond to requests for bids.
• Adopting unreasonably narrow contract specifications – for example, using brand names to define contract requirements.
• Splitting purchases so that procured amounts are below the bidding limit (to allow non-competitive or sole source awards).
• Bundling contracts in unreasonably large or small amounts to discourage or eliminate certain bidders.
• Intimidating or threatening potential bidders to discourage or prevent them from bidding.
• Improperly disqualifying bidders for trivial or correctable errors.

In addition to the above list of common methods to exclude qualified bidders, red flags for the exclusion of qualified bidders include:

• One contractor or a few contractors win a disproportionate number of contracts of the same type.
• Apparently qualified companies consistently fail to bid or lose unfairly in the selection process.
• Fewer than the expected or normal number of bidders, based on similar prior contracts, submit bids.
• There are complaints from prospective bidders regarding the above practices.

An unusually high number of contract awards to the same company, without apparent justification – particularly in an otherwise highly competitive environment – could be due to fraud, corruption, collusion, or even coercion. However, if there is a problem of weak competition, or perhaps the client prefers one company over the others because of previous experience, one needs to review if there is a request for an exception to the approved procurement plan to allow that single bidder to gain multiple contracts within one project. Here are some red flags examples to look for:

• If a firm wins and tenders multiple contracts, this could indicate possible corruption, particularly if other corruption indicators are present.
• If a firm receives multiple contracts for a wide variety of disparate goods or services, this may be an indication that it is a shell company controlled by a project official. Multiple contract awards to the same firm can indicate collusive bidding, particularly if the awards appear on a rotating basis, with the winning firms appearing to dominate a certain geographical region, market or product line. In this case, conduct due diligence background checks on such firms if concerns arise.

Significant changes to a contract can be justified after it is awarded, but these changes always require careful review. Contract amendments, also known as “variation orders” or “change orders,” can be manipulated to facilitate corruption or fraud schemes. For example, a contractor acting in collusion with project officials can submit a very low bid to win a contract, knowing that promptly thereafter the officials will approve a change order to increase the price, allowing the contractor to recover its profit and fund bribes. Change orders often receive less examination than the initial bidding and contract award process, making them a popular way to fraudulently access funds. Here are some red flags to look for:

• Poorly justified or documented change order requests and approvals.
• A pattern of low bid contract awards followed by change orders that increase the price of the contract.
• A pattern of sole source contract awards just below the competitive bidding threshold, followed by change orders that increase the price above the threshold.
• One contractor or a few contractors receive a disproportionately high number of change orders compared to other contractors or to similar prior contracts.
• Weak control procedures regarding the review and approval of change orders (e.g., the same official certifies the need for the change order and approves it).

Bidding processes can take a long time to complete, and a firm might have to make changes to its staff, equipment, or facilities in the interim. Sometimes, however, a firm might enter a bid under false pretenses, promising things that it knows it cannot deliver. This is fraud. For example, a consultancy firm might promise a certain team knowing that those people will not really be available to carry out the contract. This kind of fraud, often referred to as a “bait and switch,” may occur soon after contract signing, suggesting that the intent to substitute was known beforehand. The client often feels obliged to continue the contract, especially if a rebid or reselection would be subject to high level review or take a long time.

• When a firm promises services at highly discounted prices, it is important to read the fine print before signing the contract.
• A firm that gives excuses for the promised products running out of stock or being more expensive than advertised is a concern.
• Check if the firm has the required skillset and inputs to produce the promised output.

Except in emergency situations, bidding processes should follow planned or pre-agreed steps. Extremely fast or slow processes in one or more of these steps can indicate wrongdoing. For government teams, it is good practice to have the steps of the procurement process carefully defined in terms of number of days for each, as well as clear allocations of roles and responsibilities, so that routine checks can be made as the process progresses. Examples of serious warning signs include:

• Unclear and no widely publicized rules to regulate the bidding process that are applicable to all bidders.
• No clearly defined pre-qualification and evaluation criteria.
• No publication of tender document lists of prequalified companies and bid results at different stages of the bidding process, or no access to bids after selection has been made.
• A long or intentional delay in the evaluation of the bids.
• Overall delays that are so extreme that bid guarantees need to be extended multiple times.

All contracts need to avoid creating undue risks such as those related to health, safety, and environmental damage. These types of risks often emerge in situations affected by fraud, corruption, collusion, or coercion. Investigations have provided many instances of such risks linked to poor quality that result from fraud and corruption – for example, when a contractor pays bribes to win a contract and then tries to recover the costs by delivering lower quality output than specified in the terms of the contract. Good contract management is essential to mitigate the risk of fraud and corruption. From contract award to completion, it is important to have effective monitoring in place, with appropriate checks on quality and quantity. To determine the right award decision, one also must be cognizant of abnormally low pricing, where a bid price is so low that it is questionable whether the contractor or supplier can deliver the contract for the price quoted. In such situations, contractors may seek to cut costs and health, safety, environmental and/or quality standards, or to make claims to recover their costs and profit margins. The Bank has issued guidance on identifying and dealing with abnormally low bids, available at www.worldbank.org/procurement

Here are some red flags to look for:

• Apparently substandard goods or works.
• Early failure of products or materials.
• High number of test or operational failures.
• Early or frequent repairs or replacements.
• High maintenance and repair costs.
• Discrepancy between a product’s specification and actual appearance (e.g., “new” product appears to be used).
• Generic or unusual product packaging, without normal inserts such as warranty cards.
• Inadequate testing procedures: contractor conducts its own tests.
• Contractor’s records indicate it purchased product or raw material that was not compliant with specifications.