Today, our final two Bad Buying awards for 2021!

Creative Fraud:  I-Tek, its Owner and Staff

Multiple Fraud Related to Imported Goods (and more…)

This case may seem relatively small compared  to  some of the mega-waste examples we have seen this year, but what made it a worthy winner was the way it combined three distinct types of procurement fraud in one rather neat package.

Beyung S. Kim, owner of Iris Kim Inc, also known as I-Tek, and his employees, Seung Kim, Dongjin Park, Chang You, Pyongkon Pak, and Li-Ling Tu, pleaded guilty to a procurement fraud scheme involving millions of dollars in government contracts over several years, mainly supplying various US defence agencies. They were sent to prison in August 2021, after providing everything from swimming trunks for West Point cadets to spools of concertina wire. The problem was that the goods were made in China, but were illegally re-labelled to look like US-made products. That violated the terms of the contracts as well as laws that stipulate certain contracts must be fulfilled by US-made products.

The second fraud came when investigators found that an employee who was a disabled military veteran was listed as the firm’s president in some bids – but he wasn’t. That meant the firm was eligible for contracts reserved for companies owned by disabled ex-service people. (We’ve seen a number of frauds of that nature in recent years, so of which are featured in my Bad buying book).  Finally, the conspirators also submitted false documents and lied about the value of the goods imported into the U.S. to avoid higher duties and taxes.

All in all, a pretty wide-ranging procurement fraud, covering several relatively common areas of illegal behaviour, adding up to an impressive winner of the Bad Buying Creative Fraud Award.

…..

Not Really Technology Award: Greensill Capital

Not an SCF FinTech, Just a Risky Lender (and Several Very Naughty Boys)

Greensill Capital, the firm built by Aussie farmer’s son Lex Greensill, collapsed in March, and the losses to investors who backed the firm are still unquantified but may run into billions. The UK taxpayer is also on the hook for state-backed loans and perhaps even pension support for steelworkers (because of Greensill’s close links with Liberty Steel).

Greensill presented itself as offering innovative tech-backed supply chain finance (SCF) products, but (to cut a long story short), their business model turned out to involve borrowing money cheaply by presenting the investment as low risk, then actually lending it out in a VERY risky manner.

Ultimately, it was lending money to the Gupta Liberty steel empire based on the “security” of vague future revenue flows that did for Greensill. Some of those revenues were supposedly going to come from firms that weren’t even current customers of Liberty!

This was not “supply chain finance” in the sense that any off us in the supply chain world had ever heard of before. It looked very much like unsecured lending with funds coming from sources (including Credit Suisse-promoted bonds) who were unaware of just how risky that lending really was.  Greensill also talked about being a “fintech” business, which they clearly weren’t, but dropping that bit of bulls**t into the conversation gave the firm more credibility. Their lending was facilitated through other genuine fintech-type platforms such as Taulia.  

Lex Greensill himself leveraged his role as a UK government “Crown Representative”, working to promote SCF within the Cabinet Office, to wheedle his way into winning some work in the public sector. He was supported for frankly incomprehensible reasons by a number of key people, including the late Sir Jeremy Heywood, the Cabinet Secretary. The various investigations showed that some senior procurement people and politicians were not taken in, including Minister Francis Maude, but Greensill got onto a Crown Commercial Service framework, and won contracts for offering NHS payments to pharmacies as well as “salary forwarding” to some NHS staff.  

Government’s Chief Commercial Officer at the time, Bill Crothers, initially didn’t seem keen but came round to the Greensill cause, and became a director of the firm, no doubt encouraged like ex-Prime Minister David Cameron by the prospects of making millions. Cameron’s behaviour has stained his reputation – such as it was – forever. Having left office, he harassed everyone he knew in government to promote Greensill’s cause, right through to 2020 when he tried to gain advantage for Greensill under pandemic financing and lending schemes.

We can’t call what happened “fraud” yet, although investigations that might lead to criminal charges are continuing. It is hard to believe that nothing criminal went on, but we will see. However, whatever it was, it fully deserves the Bad Buying Not Really Technology Award based on the scale, innovative nature and continuing implications of Greensill’s actions.  Indeed, if we had nominated an overall winner this year, I suspect Greensill would have won that ultimate accolade…

Happy New Year and let’s hope for less Bad Buying in 2022!

Welcome everyone and yes, it is time for the inaugural Bad Buying Award Ceremony – virtual of course.  Over the next three days we will announce the six winners of these prestigious awards, given to those who have demonstrated truly Bad Buying.

Our definition of Bad Buying incorporates a number of different but linked topics. Obviously, it includes failure in procurement (poor performance on the buying side of the table). It can also relate to a contract that goes badly wrong because of supplier performance, failure or fraud that is not properly managed or mitigated by the buyer, client or customer. Or it can be a more general fraud linked to the procurement process, such as fake invoice scams or corrupt collusion between buyers and sellers.

So today, we will start with our two international awards.  

International (Private Sector): Kraft Heinz

Awarded for Creative Use of Supplier Contracts

Food giant Kraft Heinz (KH) was charged by the US Securities and Exchange Commission (SEC) with mis-stating its accounts following the merger of Kraft and Heinz in 2015. The firms said the deal would deliver cost savings of $1.5bn a year, and procurement savings-related targets were set for staff. But after 2017, savings proved hard to find,  As the SEC said, management “pushed procurement division employees to come up with ideas to generate additional immediate, same-year savings”.

The dodgy accounting practices were then based around manipulation of supplier-related payments. For instance, buyers negotiated “prebates” (!!) – a sugar supplier gave KH $2 million up front in return for a 3-year contract, with the agreement that the money would be recovered by the supplier through the contract. Or  suppliers might reduce prices in the short term in return for a longer-term increase. These schemes when recorded as current-year “savings” and added immediate profit, rather than being accounted for properly.

Kraft Heinz had to restate its accounts, correcting a total of $208m in wrongly-recognised cost savings. The CPO, Klaus Hoffman and the COO Eduardo Pelleissone were accused of violating anti-fraud provisions, failure to provide accurate information to accountants and violating accounting controls.

Without admitting or denying the allegations, in September Pelleissone agreed to pay a civil penalty of $300,000.  Rather than addressing risks after being made aware of issues, “he pressured the procurement division to deliver unrealistic savings targets”. Hofmann agreed to pay $100,000 and was barred from serving as director or officer of a public company for five years. KH agreed to a penalty of $62m, also without admitting or denying the findings.

This was a very interesting and unusual case, which demonstrated approaches that the judging panel had not previously seen in their many years of procurement service. Given that creative application of supplier negotiation and contractual mechanisms, this was a very worthy winner of the Bad Buying International (Private Sector) Award.

………

International (Public sector): Balfour Beatty Plc

Awarded for Over-invoicing of US Defence Clients

In December 2021, the US housing management subsidiary of UK engineering and services firm Balfour Beatty agreed to pay fines and restitution of $65 million after admitting over-charging US defence clients for some years. Under the terms of the plea agreement, Balfour Beatty Communities agreed to make the payment  after a federal investigation into its scheme to claim performance bonuses by submitting false information to various clients. 

The issues came to light when living conditions at US Air Force bases were found to be unsatisfactory. The company’s homes did not meet fire safety codes and had mould, rodents, pests, radon gas, and other defects. An investigation then found that the firm maintained two sets of maintenance records at some bases. One included the issues of mould, asbestos, and leaks that were not promptly fixed, whilst the other showed fake quick repairs that allowed the company to claim contractual bonuses from the Pentagon.  As always in these cases, the company blamed a few rogue individuals who have presumably now left.  It also appears that the firm is still engaged on the contract which seems a little surprising.

In cases like this, it is arguably not so much “bad buying” as a “bad supplier”. However, where the issue runs for some time, it usually indicates a failure of contract management, as well as bad behaviour by the supplier. At least the client did eventually identify the issue and take action – but it is an interesting case study in supplier behaviour, and on that basis, Balfour Beatty and its affected clients win the Bad Buying International (Public Sector) Award.

Two more prize winners tomorrow!

(Two posts in a row about blood – that’s a bit weird)!

Earlier this month, Elizabeth Holmes went on trial in San Jose, California, accused of six counts of fraud.  That relates to the blood-testing firm she founded and ran, Theranos, which was claimed to use unique technology to perform a range of tests with just a small sample of blood. The claims were later revealed to be largely nonsense and in some cases the results might even have proved misleading or dangerous to the user. When one of the Theranos laboratories was inspected in Newark, California, in November 2015, the inspectors concluded that “the deficient practices of the laboratory pose immediate jeopardy to patient health and safety.”

The cautionary tale has been turned into a best-selling, award-winning and definitive book, Bad Blood by John Carreyrou and is going to be the subject of a film with Jennifer Lawrence playing Holmes.  But in real life, it seems that her defence during the trial may claim she was under the influence of her older and more experienced business partner and one-time boyfriend, Ramesh Balwani.  They may also claim that she really did believe in the product and it was others within the firm who misled her about the actual way it worked (or didn’t).

Although some experts warned from the early days of Theranos that there were questions to be answered about the product, Theranos raised hundreds of millions in investment from famous people such as Henry Kissinger and Rupert Murdoch.  Perhaps they were dazzled by this confident, smart young blonde woman, who seemed to be particularly effective at persuading older men to stump up large investments!

But as well as the investment aspect to the story, there was also a Bad Buying link to the events. Here is how I described it in my book (“Bad Buying – How organizations waste billions through failure, fraud and f*ck-ups)”.

“Buying failure comes into this because the pharmacy chain Walgreens spent $140 million with Theranos over seven years, hosting around forty blood-testing centres in their stores. They got very little benefit from that and recovered some $30 million after a lawsuit and settlement following the eventual disclosure of the issues. Amazingly, as Bad Blood reports, Walgreens’s own laboratory consultant, Kevin Hunter, had seen early on that something wasn’t right with Theranos. But the executive in charge of the programme at Walgreens said that the firm should pursue the pilot because of the risk that CVS, their big competitor, would beat them to a Theranos deal.

Again, buyers wanted to believe that something was real, even in the face of mounting evidence that it wasn’t. This relates back to comments around believing the supplier– those earlier examples weren’t demonstrating fraudulent behaviour, but the principle is similar. It is easy for a naive or gullible buyer to be sucked into believing what the supplier wants them to believe.

Suppliers will take advantage of this tendency – whether it is the relatively innocent ‘Yes, we can install this new IT system in six months’ or the more dangerous ‘This equipment will find hidden bombs’. And FOMO – the fear of missing out to the competition – is something else suppliers will use, and that can lead to bad decisions. It’s not just physical goods, either. The top consulting firm selling its latest ‘strategy toolkit’ will mention that the potential client’s biggest rival is also very interested”.

So the message is – treat claims made by suppliers about their products with caution, maybe even with a touch of cynicism if they seem unique, outlandish or truly earth-shattering! And don’t let FOMO take you into the realms of Bad Buying.

The arrest of Steve Bannon, President’s Trump ex-adviser, hit the headlines this week. Along with several other men, he is accused of siphoning off funds that were given to a charity which sought private donations to support the building of the Trump-promoted wall (fence, barrier, whatever) between Mexico and the USA.

Without getting into the mentality of the donors who would give their hard-earned cash for that cause, the case does point out the difficulties of knowing exactly where you money is going when you had it over to any charity.  There have been many examples over the years of charities that do genuinely support good causes, but appear to be just as interested in spending money on fancy offices and big salaries for executives.

Even an organisation as reputable as the Australian Red Cross ran into controversy recently when it had to defend its decision to spend up to 10% of bushfire relief donations on administration costs. That doesn’t seem too unreasonable to me, but in the past, it had promised to put 100% of all money raised directly to a cause.

Then there are the actual fraudulent “charities” that act as a front for criminal activities. For instance, four men were found guilty recently of fraud in the UK when they expropriated over £500K of donated money rather than using it for genuine purposes.  Collectors in camouflage trousers and “Save Our Soldiers” shirts rattled collection tins and conned people at railway stations into thinking they were giving to support disabled troops. But the  money went to fund the lifestyles of David Papagavriel, Terence Kelly,  Ian Ellis and Peter Ellis. That’s the reason I never put money in collecting tins if I don’t know the charity, by the way, even if it looks like a great cause.

The third type of charity-related fraud comes when a charity itself is the victim. Every organisation that sees large amounts of money flowing through it can be a target for what I define as “procurement related fraud”, and charities are no exception. There are some interesting examples of this in my new book, Bad Buying – How organisations waste billions through failures, frauds and f*ck-ups (to be published by Penguin Business on October 8th).

The fraud may originate from outside the organisation, but often there are insiders involved, or in some cases it can be a purely internal affair. For example, one story in my book covers the exploits of the CEO of an education charity, Philip Bujak. He was sentenced to six years in jail in 2018 at Southwark Crown Court in London for swindling some £180,000 out of his organisation. Using a company credit card, false invoices to Fake “suppliers” and other routes he got the charity to fund his honeymoon, and family events at hotels. One bill for a “charity conference” was really his mother’s 80th birthday party, and he was also keen on buying and restoring paintings.

So don’t think that everyone who works within a charity is automatically a good person. There can be the odd bad apple, which means that charities (like every other organisation) need to take strong anti-fraud measures to protect against internal or external villains. I haven’t got the space here to go through all those suggested steps, but my book goes into that in more detail, with seven key principles to avoid buying-related fraud and corruption listed and explained.  And we will come back to those here at a later date as well.

Meanwhile we will watch the Bannon case with interest …