, , ,

What Happened to Ethics, we ask “Professional” Services Providers!

Bad buying obviously covers every potentially sector and category, but I have had a long interest in professional services spend and procurement for many years, including as co-author of “Buying Professional Services”, my first published book.

A couple of recent stories highlighted that although most of the people working in that sector are highly educated and intelligent, they can still behave just as badly and even illegally as any petty criminal.

The first story was about a survey of lawyers run by the “rolllonfriday” website, anonymous of course given that 35.5% of the respondents admitted that at some point they have been guilty of adding time that hadn’t been incurred to their time sheets (which then means the invoices to clients are also inappropriately inflated). As the report said,

Thirteen percent admitted they did it regularly, 12.6% confessed to being “occasionally” culpable, while around 10% said it was something they had done, albeit “rarely”. 

Well, that probably won’t come as any surprise to most of us, but it was interesting to see our suspicions as cynical buyers confirmed. It reinforces the view that whenever possible, engaging professional service providers on some sort of fixed fee, outcome, output or success based basis is better than a simple “time and materials “ hourly or daily rate.

However, it can be difficult in the world of law, because we often don’t know just how much work will arise from a particular assignment, particularly if other parties are involved (litigation for instance). So it is hard for the parties to arrive at a sensible view of risk, which you need in order to agree a fair fixed price.

You should always look for where you can define some sort of clear work package and agree a price for that, but one thing buyers can also do is challenge their provider if bills look “padded”.  Many people feel nervous about actually digging into a statement and saying to their lawyer, “so did you really spend 30 minutes on that two-line email”?

Now they are unlikely to immediately back down and reduce that bill, but next time, they might just think “perhaps I’ll just put 20 minutes for this email” because they know you will challenge. So don’t be scared to be a nuisance and analyse billing carefully.

The second piece of news was even more shocking. Consulting and auditing firm KPMG was fined  in  the Netherlands for endemic cheating around professional examinations taken by their staff. As the Times reported, “The Public Company Accounting Oversight Board in the United States found that between 2017 and 2022 hundreds of KPMG workers in the Netherlands, including senior partners and managers, had shared questions and answers with one another. This included for exams that they had to sit to test their understanding of professional ethics”.

Cheating on an ethics test! You have to laugh really. But I don’t understand why it is the US regulator doing the fining though rather than the Dutch equivalent.  

To make it worse, KPMG lied to the investigators, saying they knew nothing at senior levels about the answer sharing – but it turned out two board members had indulged in these activities themselves! A $150,000 fine was also imposed on Marc Hogeboom, who used to run KPMG’s Dutch audit division, and he was banned for life from working for any firm that audits American public companies.

These people are auditing public companies and giving investors confidence (or otherwise) in those businesses – so having the right skills and training is critical beyond just KPMG’s own operations. The cheating means there may be incompetent people doing important work, which is not a good thought, and of course it means buyers have paid for people whose qualifications (which largely determine the level of fee paid) were bogus. Maybe some big clients should sue the firm now.

It seems that it isn’t the first time this has happened and KPMG is not the only firm that has transgressed. Last week the American regulator also fined Deloitte’s businesses in the Philippines and Indonesia $1 million each for answer-sharing on professional tests. And two years ago EY was fined $100 million by the US Securities and Exchange Commission, because a “significant number” of its American auditors cheated on the ethics component of their Certified Public Accountant exams.

The lack of ethics and morals of those involved is quite shocking for supposed “professionals”. Whilst the latest fine was substantial, it does not seem to be enough really to reflect the seriousness of the crime. I think it would have been appropriate to ban KPMG from all audit work in the Netherlands for a few years. I also think maybe a few jail sentences for the most senior people involved might have made others sit up and take notice.

So the advice to procurement people is this. As with the lawyers, don’t necessarily believe everything your consultants or auditors tell you, or everything they put on the invoice, just because you think they are ethical and trustworthy professionals. Not all seem to fit that description.

/0 Comments/by
, , ,

US Government Takes Down Procurement Fraudster

This story from the Homeland Security Today website dates from a couple of months ago, but it is an interesting procurement fraud case, as it does not involve any internal participants – it is a purely supplier-based fraud. Whilst that is certainly far from unique, it is probably not as common as those driven by internal staff or through collusion between internal and external players.

In this case, Cory Collin Fitzgerald Sanders, age 39, of Hagerstown, Maryland, was sentenced to 45 months in federal prison, followed by three years of supervised release, for wire fraud, false claims, and making and using a false document in connection with his companies’ performance on federal contracts. He also had to pay around $200,000 in fines and restitution.

The offences related to his two telecoms firms between 2015 and 2020.  The charges were pretty wide ranging but generally related to contracts with federal agencies that required his firms, Sandtech or Cycorp Technologies, to provide new telecommunications equipment which was still under manufacturers’ warranty. 

He contracted to supply new equipment, but then actually provided second hand, or non-warranted equipment instead. He claimed to have accreditation from the OEMs (original manufacturers) that would protect his customers when in fact he didn’t. He also was not authorized to provide certain IT services to the federal government, but represented to government officials that he was. It sounds like he invoiced in a fraudulent manner too, getting the agencies to pay for “deficient or non-existent performance”.

“Mr. Sanders deserves to be held fully accountable for his actions to defraud the U.S. Government by routinely providing telecommunications equipment that did not meet contract specifications and submitting false documentation in an attempt to cover up his scheme,” said Special Agent in Charge Greg Gross. 

The US government does seem pretty hot on prosecuting dodgy suppliers, more so than I’ve seen generally in the UK, for instance. In this case, a prison sentence of 45 months again feels more severe than “white collar criminals” tend to get in the UK. That’s a good disincentive for others who might be tempted to commit fraud, of course.

So what can procurement people and others do to protect their organisations against this sort of fraud? There are a few potential risk mitigation steps.  Firstly, checking out the credentials of any new supplier (and their directors) is important. And take up references wherever possible. Maybe that would not have stopped Sanders – but it certainly makes it harder to create new firms for fraudulent purposes.

Another obvious point is that goods delivered, whatever they are, should be checked to make sure they align with what was contracted for. And don’t assume that any accreditations and certifications are genuine – documents and emails can be forged. It is better to go back to the source if you can  – you could go back down the supply chain and check with the OEM that a distributor really is properly accredited, for instance.

So the usual safeguards against procurement fraud come into play again – and you can get the full list of mitigating actions and plenty of good advice on avoiding fraud and corruption in the Bad Buying book of course!

/0 Comments/by
, , , ,

Babylon’s Burning… the Story of the Failed “AI” Health App

The Sunday Times has really got into its investigations recently, and after its excellent expose of the UK’s HS2 rail programme, last week it looked at another issue with a definite “Bad Buying” angle.

Babylon Health, set up in 2013, was going to revolutionise healthcare. Ali Parsa, the founder, is a serial entrepreneur whose previous venture, Circle Holdings, also had some issues (he stepped down from Circle before he set up Babylon). Circle ran Hinchingbrooke Hospital in England, the first fully outsourced hospital. Initially, it seemed to go well, and Parsa was a highly visible cheerleader for the operation, but after a couple of years, Circle pulled out leaving the NHS to pick up the pieces.

But with Babylon, Parsa seemed to have a real product that could benefit everybody. It was an AI powered diagnostic platform that could tell you what health problem you had after a short online consultation. The “app” scored better than doctors on medical tests, Parsa claimed, and could provide excellent diagnosis and care at a fraction of the current cost. For the permanently hard up health services in the UK and US, it seemed too good to be true – and of course it was. However, Parsa used political connections to win business, as the Times reported. Between 2015 and 2022, the company had 22 meetings with government ministers.

“Babylon’s deals with the NHS, which saw it receive at least £22 million over the past three years alone and helped it to woo investors, were in part due its links with the Conservative Party and the backing of Hancock, the health secretary from 2018 to 2021. The Tories received more than £250,000 in donations from individuals and companies with stakes in Babylon Healthcare, including Hancock, whose failed Tory leadership bid in 2019 received £10,000.”

However, the newspaper’s investigation found high-pressure sales techniques and some claims for the product that were simply false. For example, at the Royal College of Physicians in 2018, Parsa showed how Babylon’s AI used a phone’s camera to analyse the facial expression of a female patient to pick up subtle cues that a doctor might miss. This is how the Times describes it.

“This is a real consultation,” Parsa said on stage. “This is what we have built. None of this is a show.”

It was a show. The facial-analysis tool, a prop for a demo, never made it to market. The “patient” in the video was an executive assistant at Babylon… This sleight of hand was a small example of a culture fixated on form over substance, a trait common in Silicon Valley but dangerous in healthcare.” 

Indeed, the much vaunted AI was little more than a decision tree written in Excel based on doctors’ knowledge. Soon, sceptics began testing it and found that it could easily mistake a heart attack for a less serious panic attack, or an ingrowing toenail for gout. I remember various people on Twitter talking about how dangerous it was and calling out Babylon as a con.

But the firm managed to raise $1.2 billion from investors between 2013 and a stock market float in 2021, and at one point Babylon was valued at some $4.2 billion. But after that float, some badly judged deals started affecting the firm’s finances, just as more expert voices also pointed out the technical failings. For instance, the Royal Wolverhampton NHS Trust signed a ten-year deal for a digital-first GP service that would allow patients to use Babylon’s digital tools. But Babylon cancelled the contract in 2022, saying it just could not afford to invest in the service.

Finally in August this year, the firm collapsed into administration and the remnants were picked up by a couple of trade buyers. Parsa has pretty much disappeared, as has most of his own fortune.

It all reminds me a little of the Theranos scandal – the fake blood testing equipment launched by Elizbeth Holmes (who is now in a US jail). Babylon was not as fake as that, and Parsa is not accused of wrongdoing, but the principal of something that everyone wanted to work, but really was built on sand, is the same. And there is also FOMO – the “fear of missing out”. This is an extract from the Bad Buying book section on Theranos.

“Buying failure come into this because retailer Walgreen’s spent $140 million with Theranos over seven years, hosting around 40 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 Walgreen’s 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 … it is easy for a naïve 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”.

One day, there is little doubt that a real AI-powered system will be really useful in the world of medical diagnoses. So maybe Parsa was just ahead of his time?  But that is two of his “innovative” businesses that have cost health services time and money without much benefit in return. So I’d be very careful next time he announces he has a great idea…

/0 Comments/by
, , ,

Always Check Those Invoices!

The US Government Department of Justice recently issued a news release.  

“Booz Allen Hamilton Holding Corporation has agreed to pay the United States $377,453,150 to resolve allegations that it violated the False Claims Act by improperly billing commercial and international costs to its government contracts. Booz Allen, which is headquartered in McLean, Virginia, provides a range of management, consulting, and engineering services to the Government, as well as commercial and international customers”.

I do love the precision of the final $150 on that number! Couldn’t they have rounded it slightly?

The accusation was that between 2011 and 2021, the consulting firm charged costs to its government contracts and subcontracts that should instead have been billed to its commercial and international contracts. That particularly applied to some indirect costs. So the government was allegedly paying for activities and services that had nothing to do with the work the firm was actually doing for government organisations.

Now allocating overheads can be a tricky issue, as many of us know. And Booz Allen issued a statement, as you might expect.

“Booz Allen has always believed it acted lawfully and responsibly. It decided to settle this civil inquiry for pragmatic business reasons to avoid the delay, uncertainty, and expense of protracted litigation. The company did not want to engage in what likely would have been a years-long court fight with its largest client, the U.S. government, on an immensely complex matter. The company fully cooperated with the government and is pleased to move forward.”

So there is no admitting liability or guilt here. I can understand why the firm does not want a long, expensive fight – on the other hand, if you were 100% sure of your position, many firms would choose to take it further rather than handing over quite such a large amount of cash.

The most amazing element of this story is this. The investigation was sparked by a whistleblower, a former Booz Allen employee, Sarah Feinberg, who tipped off the authorities about the alleged misconduct from 2011 to 2021. And now she will receive no less than $69,828,832 as a thanks (it’s that precision again…)  

$69.8 million!  Good grief, I’m going to have a good think now about every firm I’ve ever worked for and whether they might have done anything “naughty” in their dealings with the US government …  

The moral of thee story is simple. Check your billing from professional service firms. I once took on a senior interim commercial/procurement role in government with an organisation that had around 100 consultants from one firm working on its major programme. That was £500K A WEEK we were paying this firm (it better be nameless…)  

I took a look at the invoices – incredibly there was no contract manager for this contract – and found that amongst other things, we were being billed for the senior partner’s assistant. The partner was only working about a day a week on our project, but we appeared to be paying a grand a day, every day, for his PA. We were also billed for the whole day for the whole team when I knew they had stopped work at lunchtime for their office Christmas Party! “An unfortunate error” I was told.  I saved £50K with one phone call there…

Of course, if you can structure any professional services assignment on a fixed price basis, most of these issues are avoided. That approach is usually – although not always – better for the buyer and actually arguably for the provider too. That is another question in this Booz Allen example. Why was so much government work being done on what sounds like a pretty loose “time and materials” basis?

/0 Comments/by
, ,

Support to Disadvantaged Suppliers Attracts Fraudsters

Programmes to support minority owned businesses, smaller firms, social enterprises and the like via public sector procurement have become increasingly popular over recent years in many countries. The Social Value Act in the UK in 2012 made this sort of action more prevalent in the UK, but the USA is probably where such schemes are longest established.

However, the irony is that the more successful such programmes are in terms of actually directing spend towards such suppliers, the greater the temptation for fraud and corruption to spring up. Genuine firms that need support might lose out to unscrupulous criminals and conmen/women.

One mechanism for that is basically using what we might call “non-value for money” evaluation criteria to award contracts to a supplier that doesn’t really deserve them. That can lead to distortion in the selection of winning bidders. “This firm’s bid wasn’t the cheapest but they are a small firm / owned by a women / promise to employ lots of disabled local people. That gave them lots of marks for “social value” in the bid evaluation”.  What isn’t made public is that the firm is also owned by the budget holder or decision maker’s sister-in-law.

The other quite common fraud is where a firm is apparently owned by a person or people who qualify as a “minority” but in fact, control rests with non-minority owners. We have seen that a lot in the USA and also in countries such as South Africa which have had schemes to give preference to black-owned businesses in public procurement.  I gave several examples of this in the Bad Buying book from both of those countries.

But this is still going on – a recent report in the Chicago Tribune highlighted a current case. It is not clear yet which of those two mechanisms is suspected here; is it disguised ownership or the use of minority programmes to favour a firm for improper reasons?  But federal prosecutors are “investigating possible minority-contracting fraud involving a series of Chicago government contracts worth hundreds of millions of dollars, including many with ties to a clout-heavy trucking and recycling company owner, according to sources and documents obtained by the Tribune”.

James Bracken and his wide Kelly own several companies engaged in construction, waste management and transportation. Investigators have asked city agencies for copies of bid documents and more relating to several contracts and for information relating to the city’s women and minority owned “set aside” programmes.

The programmes started in 1990 with the aim of awarding at least 25% of the total value of all city contracts to minority businesses and 5% to women-owned operations. But there have been accusations of fraud from the beginning. Company owners, chasing multimillion-dollar contracts, have put up phony “frontpeople” to get certified as minority or women-owned. Another route is to claim that a high percentage of work will got to minority subcontractors. In my experience, that is the sort of claim that rarely gets checked once a contract is operational!

A lot of this comes down to procurement carrying out the appropriate due diligence and checking out firms at the bidding stage, managing contracts well once they are operational, and of course keeping an eye out for conflicts of interest and other potential drivers of corruption. It is a constant battle between the forces of good (procurement, usually) and evil (certain dodgy potential suppliers and general low-life scum!)

/0 Comments/by
, ,

An Interesting Fraud – – Maybe Bad Supplying Rather then Bad Buying?

There are a number of very common procurement frauds; well covered of course in the Bad Buying book.  “Inside jobs” based around a corrupt employee take a number of forms but often consist of someone internal diverting spend to fake companies that they control or have a stake in, or to companies that are paying them a bribe. Fraud from outsiders often means submission of fake invoices, or diverting invoice payments away from genuine suppliers to the fraudster.  However, most frauds could be prevented by some sensible and standard policies and processes.   

So having collected examples of fraud and corruption in a fairly serious manner for over a decade now, it is rare for me to see a new variant. But a recent case in the US was quite unusual, in that it was based on buyer impersonation, which we don’t see very often. I’m sure it has happened before, but this was certainly not a common or garden case. Indeed, it was quite impressive in a way, with the fraudster showing impressive attention to detail, and a good understanding of how procurement works. And the failing was not actually with procurement policy or people; it was the suppliers who were conned and whose processes let them down.

Fatade Idowu Olamilekan,  a citizen of Nigeria, was extradited from Nigeria to the US (with good cooperation between the authorities in each county) and recently sentenced to five years in prison in the US in connection with a scheme to fraudulently obtain and attempt to obtain millions of dollars.

From 2018 to 2020 he obtained details of various procurement executives in the US government sector. In particular, during the pandemic, he impersonated the Chief Procurement Officer of New York State to fraudulently obtain medical equipment, including defibrillators.  He set up email addresses that were as close as possible to the correct ones for the relevant people and organisations. He then contacted suppliers, principally those already working with New York, and said he was looking for quotes for items.

After they submitted quotes, he told the suppliers that they had been successful and won the contract, and issued them with fake purchase orders (POs). The goods were to be delivered to warehouses that he nominated, and from there he shipped them to locations in the UK, Australia and Nigeria.  The payment terms on the POs was 30 days, which is pretty standard, so didn’t raise any alarms. But of course that gave him 30 days to move the goods somewhere else once they were delivered, before the supplier started looking for their money. Presumably, when their cash didn’t arrive, the supplying firm eventually got through to the real buyer, who would then explain that they knew nothing about this order.

All very clever, although getting goods rather than direct cash via a fraud leaves you with the problem of disposing of the stolen goods. Criminals rarely get anything like the real value of their ill-gotten gains (so the bloke in the pub trying to flog me a laptop said).  So that’s a downside of this type of activity. 

Whilst this wasn’t really a very hi-tech fraud, it does raise some interesting questions as we move into the AI world.  A single phone call from the supplier and conversation with a real procurement manager from New York would have put an end to this within minutes.  So as transactions and even sourcing processes become more and more automated, you can imagine a situation where a clever fraudster uses a fake AI bot to place orders, which will then be processed by the suppliers’ AI powered bots. How long would it be before the supplier bot realises it has been conned?

This is not something I’ve thought about too much, but as we enter the ChatGPT era, there’s going to be a whole new world of Bad Buying fraud and corruption to think about and look out for!

/0 Comments/by
, ,

What’s Wrong with the Auditing Market?

The consultancy group PwC was hit recently with a £7.5m fine over a string of errors while auditing the engineering company Babcock’s accounts, including creating a false record of documents for a sensitive government contract.

In one case, there was no evidence that PwC’s audit team had actually bothered to review a 30-year-contract worth up to £3bn, and in another, the team (none of whom spoke French) had failed to check a €640m (£570m) contract written entirely in French.  There was no evidence PwC tried to translate the documents to confirm the terms of the deal.  PwC’s auditors were also found to have “created a false record” of the audit evidence they had actually gathered in relation to a sensitive government contract.

Yet profit per partner for PWC last year was £920K  Are audit partners in the big firms really worth best part of a million a year? They are not entrepreneurs who have built a business, or indeed CEOs running a major organisation. And it’s not just PWC – KPMG was fined £14.4 million last year for its failings in the audit of Carillion, the construction firm that went bust in 2017. Second-tier firm Grant Thornton messed up over the Patisserie Valerie audit, after the firm collapsed because of alleged internal fraud in 2019.

Meanwhile in the US, Ernst & Young LLP (EY) EY got a massive $100 million fine from the Securities and Exchange Commission (SEC) and agreed to various measures to address ethical issues. The firm was charged for “cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter.”

What is wrong with auditors?  You would think in a well-functioning market, firms that behaved like this would fail and be replaced by better players.   But this is an oligopoly, and the barriers to entry are huge, and perhaps insurmountable. Ironically, the more rules and governance imposed by governments on auditors, then the harder it is for new market entrants to break in – we haven’t seen a significant new player really during my entire working life. The “switching costs” are high for clients too, and the big firms build very close relationships with senior corporate executives which helps to reduce the chance of competition.

The end result is that clients are paying too much, and often not getting good work in return. Although professional procurement involvement in buying these services has increased somewhat in recent years, frankly that does not seem to have had much impact. 

Close to home for me, the Surrey Heath Council accounts for 2019/20 are still in draft form and have not been signed off by the auditor, BDO.  In an election leaflet pushed through our door the other day, the ruling Conservatives say this – “FACT: Our accounts are ready but our auditors BDO continue to miss deadlines (including for Lib Dem councils). We are working hard to find new auditors and increase transparency”.

At least the draft accounts report is available for public inspection, which reveals that the author does not know how to use apostrophes  (“the Council has managed to deliver substantial saving’s on interest payable …)

But if this delay is down to the auditors, surely this is gross incompetence and mismanagement from BDO?  Is this not worthy of a wider barring of the firm from public sector work?  Or (I know this is hard to believe), might a political party be publishing misleading information? I honestly don’t know the answer to that question – but seriously, if auditors are incapable of getting a council’s accounts signed off three years after the end of the year in question, then they shouldn’t be doing this sort of work at all.

/0 Comments/by
, ,

Spotting the Dodgy Bidder

After a couple of weeks featuring the travails of the Chartered Institute of Procurement and Supply, let us return to the day-to-day world of Bad Buying.

Looking through a list of recent procurement-related frauds, there were the usual “fake invoice” incidents, still probably the most common way to extract money from an organisation. In most cases, it is an insider driving that, setting up fake companies and signing off payments themselves, but sometimes there may be external help too.

But then I spotted an interesting example of a type of fraud that is rarely reported. It involves a firm (or individual) submitting false information to a buyer and winning a contract on the basis of that information.  Now we might ask whether it is unusual to see this because it rarely happens – or because the perpetrators just don’t get caught!

In this case, Raymond White (who has used several other names during his long and not particularly illustrious criminal career) defrauded the US government by “submitting fraudulent documents and false information about himself, his company’s business, and his company’s finances in order to obtain a $4.8 million contract to build a munitions load crew training facility at Joint Base Andrews, Maryland”.

He also obtained a bond guarantee from the United States Small Business Administration in connection with the same contract, and just for good measure, he committed identity theft by using another person’s signature and Social Security number (presumably to avoid using his own name, as he was a known criminal!)

For his company, Kochendorfer Group USA Inc., to bid for the contract he submitted fake bank statements, accounting firm reports from a “firm” he had invented, and false financial statements. They showed the firm had plenty of cash when really it had almost nothing.  We shouldn’t laugh but some of it borders on the absurd – he also submitted a “false resume and firm dossier, which described fictitious construction jobs and provided fake references.  White claimed, among other things, that he had overseen the construction of a World Cup soccer stadium in Brazil from 2012 to 2014 when in fact, he  was in federal prison during that time frame, serving a prison term on a prior fraud conviction”.

I mean, if you’re going to lie, you might as well go big – not a local housing development but a World Cup stadium! Anyway, he won the contract but fortunately, the client (the National Guard) discovered the fraud before any work actually took place. White pleaded guilty, not surprisingly, and he will be sentenced in May.

If you are reading this and thinking, “this couldn’t happen here”,  then presumably you always check financial statements and take up supplier references, whether that is talking to another customer of the firm involved or indeed an employer or client if it is an individual contractor. Well done. But it doesn’t always happen.

A few years ago, I advised a firm that was challenging a procurement decision made by a very large UK government central department. Basically, another bidder had told lies in their bid and had won the contract. That bidder had provided a reference that would have exposed a lie – IF the Department has taken up that reference. There were other aspects of the bid that were dodgy and would have been exposed if the buyer had made a call or two. For instance, the bidder claimed that they were strong in certain regions of the UK when they clearly weren’t

When my client challenged this, the Department had an interesting response. They said that they were not required by procurement regulations to pursue references, or indeed that they had any obligation to check that anything a bidder said in their proposal was accurate and true! Now technically that might be correct, but we suggested to the Department that a judge might well make the assumption that a reasonably competent buyer had a duty to do some basic work around bid veracity! The Department went away to think about it, no doubt consulted their lawyers… and then re-ran the competition.

Obviously, buyers don’t always have time to check out every single detail of a bid and all the surrounding information and intelligence about the potential suppliers. But we are responsible for at least assuring ourselves that when someone claims to have built a football stadium in Brazil, they actually did, rather than being in jail at that time.  

/0 Comments/by
, , ,

Supplier Collusion (Part 2) – Which Industries Are Vulnerable?

In part 1, we started discussing the presentation from Zac Trotter of the US Department of Justice at the recent NPI conference in Atlanta. He’s an attorney who specializes in searching out, investigating and prosecuting cases of supplier collusion (what a fascinating job!)

We talked about the types of collusion in part 1, but here are Trotter’s thoughts on what makes a market, product or sector susceptible to collusion. These factors will increase the likelihood of such supplier behaviour.

  • Few sellers – that makes it easier for suppliers to get together and fix the market.
  • Limited number of qualified bidders – there may be markets with many suppliers but if only a few are qualified perhaps to bid for particular government work, that will make it easy for them to collude.
  • Difficult for new competitors to enter the market – new suppliers are less likely to be part of existing collusion and can break the stranglehold of the conspiracy.
  • Few substitute products – if buyers can’t easily switch, they may have to accept higher pricing or limited competition.
  • Standardized products – if the buyer is content with products from all the firms involved, it is easier for suppliers to rig bids or allocate business between them.
  • Repetitive or regularly scheduled purchases – again, this helps suppliers allocate work and plan an effective conspiracy.
  • Rush or emergency work – this type of work is likely to be awarded via a less rigorous procurement process, and it is also easier for a supplier to “no bid” without raising suspicions, which can help to allocate work around the colluding firms.

After we published part 1, there were some interesting comments on LinkedIn from readers. One suggested that detecting collusion might turn out to be a practical and productive use for AI. We might imagine how AI could analyse a large quantity of data around responses to tenders and look for evidence of suspiciously high bidding, bids with similar wording, or other suspicious patterns of behaviour from suppliers that might indicate potential collusion.

Clearly, you would need a lot of information available to be analysed – so maybe it is something that would apply more perhaps to a government that could interrogate tenders from many different buying organisations rather than it being feasible for an individual business. But an interesting thought.  

Finally, here is a short case study taken from the Bad Buying book, which illustrates the type of market that can be open to collusion and fraud of this nature. Incidentally, six years on from the European commission imposing fines, the truck cartel described here is still facing huge claims from buyers of trucks. Damages in the billions of euros are likely to be awarded when the case finally goes through the courts.

“Which markets are most vulnerable? It’s clear that it is easier to set up, control and sustain a cartel in markets with a relatively small number of players. But geography also comes into play here. The construction market in most countries includes many firms, yet that sector has seen cartels thrive on a limited geographical basis or in a specialist sub- market, where the number of players is smaller.

One cartel in a relatively tight market was formed by six huge European truck manufacturers. Daimler, MAN, Volvo / Renault, DAF, Iveco and Scania are facing billion-dollar damages claims from their customers, mainly logistics and transportation firms, for illegal price- fixing.

By April 2019 more than 7,000 transport companies from twenty-six countries had filed more than 300 claims in the German courts. That follows fines of €2.9 billion on four truck manufacturers imposed by the European Commission in 2016/17.  The Commission found that between 1997 and 2011 the truck manufacturers exchanged information about prices, price increases and when new emission technology would be launched. They also passed on associated costs to their customers”.

So don’t assume that your organisation could not possibly be experiencing supplier collusion – as Trotter said, it happens in a wide range of different industries, from manufacturing to financial services, from airlines to construction. Keep an eye out for suspicious supplier behaviour, in bidding (or not bidding), pricing or sub-contracting.  If you’re in the US, you have the Department of Justice to support you; the European Commission plays a role in the EU, and the Competition and Markets Authority is the body to speak to in the UK.

/0 Comments/by
,

Supplier Collusion on the Agenda at NPI Conference

At the National Procurement Institute conference in Atlanta earlier this month, delegates (public sector, mainly from US cities) heard an interesting presentation from Zac Trotter, a Trial Attorney from the Antitrust Division at the US Department of Justice. He stressed that his comments were not representative of the Department, which I guess he has to say, but he gave a very clear and engaging explanation of his fascinating area of expertise – fighting against supplier collusion. His focus was on the mechanics of collusion, with additional comments on how procurement professionals can look out for it.

Competition is key to getting value for money, he said, something we can all agree with. But collusion does happen, and because of its secretive nature, can go on for years, or even decades, without being discovered. And public procurement is a big target for fraud of this sort because of the amounts of money involved. As a US judge recently said, “Like bears to honey, white collar fraudsters are drawn to billion-dollar federal programmes”!

In US law, the Sherman Act of 1890 (Section 1) defines the attributes of the collusion offence as:

  • Agreement or conspiracy to restrain trade (that is subject to interpretation and clarification as it is a very broad definition)
  • Participants knowingly joined – and intended to agree (as conspirators)
  • Interstate or foreign commerce (a “technical” provision)
  • Statute of limitations is 5 years

Prosecutors need to establish agreement between two or more people for a case. Interestingly, juries are more inclined to convict if there is evidence that conspirators knew what they were doing is wrong. But there doesn’t always need to be “hard” documented agreement to collude. A “course of conduct” can show guilt – for instance, if one firm always bids low, whilst two bid high but become sub-contractors to the winner. If that keeps happening, it might provide strong circumstantial evidence for prosecution. For buyers, consistent high bidding from the same firm should be a “red flag” for procurement – why would the firm bother if they keep losing, unless there was something else in it for them?

The three types of collusive behaviour were described by Trotter as;

  1. Allocation agreements
  2. Bid rigging agreements
  3. Price fixing agreements

Allocation agreements mean suppliers colluding to “divide the pie” in a particular manner. That might be based on splitting business by markets,  geography, customer (big, small), or products. Watch out for when a supplier doesn’t bid when you might expect them to. (e.g. they bid for a men’s uniform contract but not for  women’s uniforms). Or perhaps a competitor pulls out of a market for no obvious reason.

Bid rigging – here, suppliers raise the price of products or services above a true “market” value, effectively setting an artificial price. There may also be pre-determined winners and losers of contracts. Bid rotation is a technique where suppliers agree to a defined pattern of different firms winning work, or divided up in other ways (clearly, this is linked to the ”allocation” technique). Then we see “cover bids”, where suppliers submit deliberately expensive bids to make it look like there is competition, or “bid suppression”, where suppliers refuse to bid in order to reduce competition. So buyers should watch out for firms saying, “we’re too busy to bid”.

Price fixing – means the customer has no genuine way to negotiate, as firms fix or otherwise determine the price at which products are sold. That might mean coordinating price increases, or setting price floors, or a new surcharge that everyone in the industry implements together.  

There are big penalties now in the US for this behaviour. Participants can go to jail and there are potentially very large fines. Penalties of up to $100m have been imposed fairly recently on sectors  from canned tuna to cancer treatments. The courts can also award “restitutions” to those affected, suppliers can be barred from government contracts and there have been civil lawsuits too. Nevertheless, collusion continues in many industries.

(Part 2 to follow)

/0 Comments/by