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Would You Employ These Men?

Assume you are a CPO recruiting for a senior procurement role.  The person will have some power in terms of choosing suppliers and negotiating contracts, although others will be involved too (because you understand the corruption and fraud risks around concentrating that sort of power in a single person).

You then discover that this individual recently paid a fine of several million pounds to the tax authorities because of a transaction from a few years ago. The tax authorities found that the individual had managed their affairs in a manner that crossed the line from “tax avoidance” into “tax evasion”, even if it was not deliberately criminal evasion.  But when you tackle the person about it, they explain it was simply “careless” and they had no intention of doing anything illegal.

I mean, they tell you, we’ve all done it. You just carelessly set up a new business but then register the shares in your father’s name, offshore of course, then set up a complex process so that you can still benefit personally from the value of those shares. And when they’re sold, you avoid capital gains tax. Just careless.  (You also discover he made a lot of money working for two oil companies that had an “interesting” history, including senior management fraud and corruption – although he wasn’t involved in that personally).

How do you feel as CPO? I would suggest this person would not be employed. There would be questions about their personal ethics and whether they could be trusted with the organisation’s money, let alone the reputational risk to the organisation and indeed to you if the CEO finds out who you are employing. 

Now let’s consider another case. Another senior procurement executive is about to award a contract to a single consultant to carry out a very sensitive strategic assignment at Board level. There are a handful of individuals – from different firms – in the running. Your executive makes the choice and the consultant starts work. You then discover that a few weeks before the appointment, your executive asked the chosen consultant if they could help him get a loan of £800,000. The consultant was indeed helpful, and linked your exec up with someone who could make that loan.

Where do we start with this? As the CPO, you might wonder first of all why your exec needs that loan – they’re paid a decent six figure salary, after all. That rings alarm bells. A gambling / drug habit to finance, maybe? Blackmail? Not good for someone in a responsible position handling the firm’s money.

But on the core issue, I think you would fire them, or at the very least put them on a final warning (if the internal policy is not strong enough to support a dismissal). It was totally inappropriate to ask a potential supplier for favours at any time, in particular when you are in the process of making a contract decision. Personally, I would not be able to trust this individual again, so sacking would be my preferred option.

You might have a little more sympathy with the consultant. They were put in a difficult position, and all they did was make a connection – it is not like they handed over cash. (However, you do feel a little awkward when you discover the consultant previously donated a lot of money to help restore your firm’s sports and social club …)

But you have to tell the supplier that the competitive process will need to be run again and unfortunately they will be excluded. They should have politely declined to help and really should have blown the whistle on the exec and come to you as the CPO with the story.

The case studies here are of course parallels to the stories of Nadim Zahawi, Conservative party chairman, and Boris Johnson, ex-Prime Minister, and his dealings with the Chairman of the BBC, who he appointed after asking him to help Johnson get a loan. To make matters worse, Zahawi was actually Chancellor (finance minister) at the time he was being fined. He was the ultimate boss of the tax authorities!

So we’ve got into a situation in the UK where the people who are running the country have ethical standards that we would not tolerate in a mid-level procurement manager. The feeling that the rules do not really apply to them, personal disregard for ethical behaviour (remember the long history of Johnson’s many children, deserted wives, and lovers having abortions), a lack of care about conflicts of interest – they are all character traits that would make us run a mile if we saw them in a potential recruit.

This is not just a rant against these individuals. The wider issue is that it sets a terrible example. Young – and not so young – business people, including those involved in procurement, look at the standards of behaviour and think “well, if that’s OK for our leaders, surely I can accept a trip to the Grand Prix from that IT firm who want our business”.  Or perhaps feel it’s OK to award a contract to a firm on the basis of a nod and a wink that there’ll be a nice job next year in that business on twice the salary.  

Once standards start slipping in an organisation or country, it’s tough to turn things around. My feeling at the moment is that the UK is rapidly sliding down the league table in terms of national corruption, ethics and standards of behaviour in public life. When we see this sort of thing going on in Nigeria, Turkmenistan or Myanmar, we shake our heads and say, “what a corrupt, backward country that is – look at the crooks and chancers they have in charge!” 

Well, here we are.

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What’s In Store for Bad Buying in 2023?

As we enter 2023, what do the prospects for Bad Buying look like? No doubt, we will continue to see regular procurement and contract related fraud and corruption. It will be greeted on discovery by the CFO explaining that “it was a very sophisticated fraud”. Usually, that is simply not true.  What the CFO (or CPO) means is “our processes were rubbish and wide open to criminal exploitation, but I can’t say that because you might question why I’m paid a six or seven figure salary to manage this shambolic process”.

Talking of fraud, the long-running controversy over PPE procurement in the UK will continue in 2023, with an announcement this week that the government is going to court over the supply of gowns from supplier PPE Medpro. One paragraph in the Guardian report on this leapt out at me.

“The legal claim states that the DHSC had paid PPE Medpro the full £122m for the 25m gowns by 28 August 2020. This was before any of the gowns had been inspected in the UK, and before all the gowns had arrived. Health officials rejected the gowns after a first inspection at the NHS depot in Daventry on 11 September 2020”.

I know the situation was desperate back in 2020, but to pay the full contracted amount before inspecting the product at all – it just seems incredible that any procurement professional would agree to that. Anyway, more to come on PPE this year, no doubt with more discussion of links to politicians, dodgy suppliers and billions of wasted money.

Moving on from PPE, the public sector (in every country) will continue to struggle with complex and technologically complex procurement in areas such as Defence and major IT programmes. We can hope that the UK Ministry of Defence sorts out the long-running Ajax armoured vehicle fiasco, another programme with potentially billions of pounds on the line.  The latest comments in December during a House of Lords debate seemed a little more positive but let’s wait and see. It’s not just the UK of course. Just before Christmas, we saw reports in the German press and on the Jane’s website about some of their army’s vehicles following a major training exercise.

“Germany suspended procurement of the Puma infantry fighting vehicle (IFV) on 19 December after 18 of the vehicles broke down in an exercise preparing for their first assignment to the NATO Response Force Very High Readiness Joint Task Force (VJTF) in January, when Germany takes over command of the force”.

But the UK MOD seems to have issues with low tech procurement too. Recent reports suggest that the organisation still hasn’t got to grips with maintenance of military housing, a long-running example of Bad Buying on several counts. It started with a dreadful PFI programme that cost the taxpayer billions, and now the relatively new contract for looking after the homes is not delivering satisfactory outcomes for those who live there.  A contract management failure maybe?

Of course, it isn’t just the public sector that demonstrates Bad Buying, although the private sector is better at keeping failures hidden. I would argue that the professional services market (audit, consultancy, legal services) demonstrates a long-term failure of markets, procurement and buyers generally. Last month, the 100 Group, which represents the Finance Directors of some of the UK’s biggest firms, wrote to the “big four” audit firms to complain about rising fees. To which we might respond – well, you are the clients, why don’t you do something about it?

In truth, there is an oligopoly in the audit market. So the firms can get away with saying they are “investing in audit quality,” whilst in practice the extra revenue is channelled into paying their partners more and more each year – £1 million plus now in large firms. EY also increased the salaries of its junior accountants by 13% recently – nice for those people no doubt, but we all know that it is the clients who will pay for that generosity.

To some extent, legal service and strategy consulting has gone the same way – higher and higher salaries for firm’s partners in particular, whilst clients get exploited. Yet too many buyers are unwilling to use approaches that might mitigate cost increases, such as applying real competitive pressure, negotiating hard and skilfully, managing individual assignments more carefully, or looking at alternative suppliers to the top (and most expensive) firms.

Anyway, I’ll leave you with four thoughts for the New Year – maybe they could form the basis of some procurement new year resolutions for your organisation!

  • Check that you have everything in place to minimise the risk of fraud and corruption in your procurement activities. You can’t make it 100% criminal-proof, but you can make wrongdoing much more difficult by applying reasonably basic processes, systems and policies.
  • Competition is still the best mechanism invented to drive positive outcomes and outputs from suppliers and contracts. Use it well and widely.
  • Be a little cynical – well, maybe more than a little – about what suppliers promise you and the claims they make about their products and services, particularly in areas such as technology.
  • Organisations that are “good at procurement” don’t just focus on the skills and knowledge of their procurement teams – they understand that a wide range of people in the organisation need to understand their own role in the end-to-end process. They must also have the right commercial skills to play their part in procurement success.
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Why You Should Think About Committing Fraud

I’ve read about a couple of procurement-related frauds in the media in recent days. They go to show that there is very little new in this game – both rely on tried and tested techniques, and both really would not have happened if some basic controls had been in place.

Accountant Jeffrey Bevan stole £1.7 million by making 50 fake payments to himself when he was payments manager for the accountant general of Bermuda (the islands equivalent of a finance minister). The payments were presumably disguised as going to “suppliers” and he spent the money on cars, multiple properties and gambling. He was sent to jail in 2018 but was back in court recently having been released, hence the news reports last week. A proceeds of crime hearing is trying to recover more of the stolen money from his pension, which Bevan claims is unfair.

This type of fraud is not unusual and there are several examples in the Bad Buying book. This case again shows that the perpetrator can be anyone, including senior managers, accountants, head teachers, NHS directors … In fact, it is generally more senior people who have the power to authorise payments, or to choose suppliers, so of course they are more likely to commit fraud.

But the mitigation of this risk is pretty straightforward. All payments (other than the very smallest) should be authorised by more than one person. Any new “supplier” must be checked out to make sure the organisation is genuine – and not owned by the person making the payment!  Bank details should be checked and again more than one person should be involved in authorising new payment details or changes to details. This is all common sense really, yet many organisations don’t follow the basic principles.

The second case featured a senior engineering manager for Coca-Cola Enterprises UK, Noel Corry (it actually hit the news a few months back but I missed it at the time). His role included identifying electrical contractors for bottling plants across the UK, but in some cases he handed out contracts to favoured suppliers where no actual work was ever undertaken.

He took more than £1.5 million in backhanders from the firms as well as getting season tickets for Manchester United. The judge didn’t send him to jail, saying he had suffered enough (my little joke there).  Actually, he was spared jail, which seems rather lucky, being given a suspended sentence. Two executives from the supplier side were also given similar sentences.

Corry ensured that work went to various companies including Boulting Group Ltd, Tritec Systems Ltd and Electron Systems Ltd in return for large sums of money paid directly or indirectly to him. The prosecuting QC said, “‘Mr Corry had the power to award general contracts directly or through a tender process. He would determine which work needed to be done and by whom…  Mr Corry would ensure that companies were awarded genuine CCE contracts at inflated rates or contracts were raised in their names for bogus work never intended to be completed. The companies would invoice and then be paid. The extra money generated created a slush fund held on behalf of Noel Corry”.

Again, we see a single individual with too much power to make decisions. In this case, the fraud involved awarding contracts as well as making dubious payments. But where was the procurement function in all this? Was there no check on why and how these firms won the work? And in terms of paying for work that was not even delivered, that comes back to having multiple sign-off on invoices, so someone could have asked what exactly had been done for the money being charged.

So do check that your organisation is not open to these or other basic procurement-related frauds. Get a group of your most creative colleagues together, peple who do also know a bit about your organisations processes and systems, and ask them to “think like a crook”. How would they extract money from your organisation? Where are the weak spots in your processes, checks and controls? Most organisations do still have such issues; so it is up to procurement (and finance) leaders to find them before the criminals do – and close those loopholes!

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Beware – Conflict of Interest Ahead!

I had the honour to speak at the Procurement Lawyer’s Association (PLA) annual dinner last week in London. 140 lawyers in a room together – actually a surprisingly lively and friendly audience, I’m pleased to say.

I was looking at their website before the event and noticed a paper the PLA produced a couple of years ago, all about conflicts of interest. It has a particular focus on public sector procurement, although many of the comments and recommendations apply just as well to the private sector. It runs to 56 pages, but the “Practical Guidance” summary (page 26) gives you most of the “meat” of the report, and is sensible and thoughtful advice. 

On reflection, I should have said more on that topic in my Bad Buying book. Although it is mentioned in the section on fraud and corruption, there is more I should have said. Talking to one of the lawyers at my dinner table last week, we agreed it is a major topic that is not discussed enough. We also each had some examples that indicate different aspects around the issue.

I remember as an interim CPO having a conversation with a relatively new Chief Executive in a large government organisation. He had joined from a large consulting and services firm, who were about to bid for a very large contract with our organisation.  I needed him to make a conflict of interest declaration, but initially he didn’t see the point as “I don’t work for them any more”.

Do you still have equity in the firm, I asked? Yes, was the reply. Do you still have friends, relatives, or lovers who work there? Yes, he said (to the “friends” at least)!  To be fair, I did get through to him why this mattered, and he agreed that his involvement with the procurement would have to be pretty arm’s length.

Sometimes the conflict can be more subtle and can even veer into real corruption. I knew of one independent consultant who had a good reputation for leading procurement projects in local government for a particular service – let’s say it was catering (it wasn’t, but it was that sort of thing). Oddly, it seemed that all the procurement exercises he ran ended up with the same catering firm winning. I then discovered that between his assignments for different councils, he always went back to consulting work with the same firm!  (Who knows whether he did real work with them or just got paid for his loyalty).

My lawyer friend highlighted a somewhat similar case – an independent consultant leading a procurement exercise who suggested that an unsuccessful bidder should perhaps engage him to provide them with training in how to write better bids. That could have been genuinely well meaning of course – but the price for his training was a lot more than you might expect. The implication seemed to be that employing him might well mean the bidder would do better next time the consultant was in a key project role.

So one point from all that is to look at conflicts of interest for anyone involved with the procurement process – internal staff, consultants or yes, even lawyers! We’ve also talked about the very difficult issue of “future” potential conflicts of interest. Mathew Syed in the Times called this “retroactive inducements” and it covers those cases where someone on the buy side favours a company because they believe, hope or expect that the favoured firm will help them personally in the future, with a great job or other benefits.

We’ve seen that in the procurement world but also more widely with other senior managers and even with politicians and special advisers. George Osborne, ex-UK chancellor, got a ridiculously lucrative job with Blackrock, an investment firm he had been responsible for regulating. That struck me as an unacceptable example of exactly this problem. We’ve regularly seen civil servants and advisers involved in awarding lucrative UK government and health service contracts to consulting or IT firms, then jumping ship for senior roles in the same firm.

Anyway, take a look at the PLA paper fi you are interested in this topic. And if you are running procurement processes, before you get going, don’t be afraid to explain to your colleagues (whoever they are) why this matters and why you need to know if they are conflicted in any way.

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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.

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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)

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Top German Broadcaster Resigns After Bad Buying (and more…)

In many countries, the image we have of German business and management is one of efficiency, formality and organisation. My view was shaken a few years back when I experienced the chaotic programme of work on the railways in and around Berlin, with chaos in stations and no help or communication apparent for confused travellers. Then we had the Brandenburg Airport fiasco, one of the best case studies in my Bad Buying book! It finally opened last year, 10 years behind schedule and billions over budget after a whole spectrum of incompetence, bad planning, fraud, and financial mismanagement had been demonstrated during its construction.  

Another more recent story shows that less than perfect side of German management. Patricia Schlesinger was the €300K a year the director (CEO) of Berlin-based RBB, one of nine regional public broadcasters in the country funded by the taxpayer. But she resigned this week after a series of accusations about money wasted, conflicts of interest and improper procurement – in fact, the word “embezzlement” is even being used.  Berlin’s public prosecutor is looking at accusations she used RBB funds to pay for lavish dinners at her home and private use by her husband of her company car and chauffeur.

Wolf-Dieter Wolf (crazy name, crazy guy…), chairman of the RBB board, also stood down. He is linked to some of the accusations and is seen as being complicit in her behaviour.  Perhaps most extravagant was the €658,112 spent on refurbishing her office, according to The Times – shades of Fred Goodwin, the ex-Royal Bank of Scotland head. When the new RBS HQ opened in 2005 there were reports of over-the-top office furnishings and his own “scallop kitchen” (denied by his lawyers, we should say)!

In Berlin, the parquet flooring for Ms Schlesinger’s office cost a mere €16,783, and (here comes a Bad Buying link) complaints by the internal compliance department that no other quotations for the work had been sought were overridden.

The accusations began in June with a report by the news site Business Insider that Schlesinger’s husband, Gerhard Spörl, a journalist, had been awarded a consultancy contract by the state-owned trade fair company Messe Berlin. That contract was allegedly signed off by the company’s supervisory board chief, the same Wolf-Dieter Wolf. Was this an example of nepotism and favouritism? Then other consulting-type contracts emerged with little evidence of proper procurement, with accusations of Schlesinger and / or Wolf in effect favouring their friends.

Of course, this apparent arrogance and disregard for rules is something we see frequently and is not limited by geography, sector or type of role. (The Bad Buying book has quite a few examples, as you might expect). The boundaries between disregard for the organisation’s money or rules and outright fraud are also sometimes difficult to define exactly. However, there seems to be a character trait that means some people just feel they deserve more, they deserve to be treated differently and the rules don’t or shouldn’t apply to them. Boris Johnson comes to mind, as does Carlos Ghosn, now an international fugitive after running Nissan and being accused of using corporate expenditure for his personal benefit.  

But back to the German broadcaster case, and I’m trying to think of a good way to close this article. I mean, if only there was a word for that feeling of pleasure we get from someone else’s misfortune, particularly when they think they’re better than you…!

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Thurrock Council Comes Up with a New Type of Bad Buying

Having spent several years researching, writing and now promoting the Bad Buying book, I thought I’d heard pretty much everything in terms of public sector organisations finding ways of wasting taxpayers money through incompetent or corrupt procurement, investment and spending.

But there is always something new, and the case of Conservative-run Thurrock Council in Essex and their investments in bonds linked to solar power is unique and astonishing. You can read the full story here – it is great work by Gareth Davies of the Bureau of Investigative Journalism, supported on this story by the Daily Mail.

Thurrock has invested in solar farm businesses owned by an individual called Liam Kavanagh. Now I suspect most procurement professionals are inherently suspicious of people who haven’t been around for long, or whose businesses are only recently established, but who buy multiple fancy cars / fancy homes. In the case of Kavanagh, “his jetset lifestyle included the use of a private jet, a fleet of super-cars and a Hampshire farmhouse with a swimming pool, wine cellar, home cinema and steam and hot tub room”.

As the Mail reported; “Cash-strapped Thurrock Council in Essex borrowed £655million of public money – the equivalent of triple what it spends on services each year – to invest in 53 solar farms across the UK. It agreed a series of deals with globe-trotting businessman Liam Kavanagh, whose integrity was later questioned by a High Court judge over £5million his company banked in ‘commission’.”

And now there appears to be some £130 million of Thurrock’s money that has “disappeared”, with questions over even larger sums owed to the council. Kavanagh has liquidated companies that took money from Thurrock and has re-arranged his financial affairs, leaving the council with concerns over up to £200 million that it is owed. Incredibly, much of the investment was made by borrowing from other local authorities, who could be in trouble if Thurrock then default!

Davies reports this.  “In an interview at the time, Clark (Thurrock’s CFO) described a bizarre arrangement, involving dozens if not hundreds of short-term loans, many as short as a month in length, with the effect that the council was in a perpetual state of borrowing from one local authority to repay another. Piecing together data in obscure spreadsheets revealed Thurrock had borrowed from at least 150 other councils”.  Thurrock also borrowed some £350 million from a Treasury-run lending body.

Local authorities seem to be a hotbed for financial waste, incompetence and fraud. There are many questions still being asked about Croydon’s property “business” – that council went bust and Whitehall had to send in “commissioners” to run it. The same has happened in Slough – dodgy property investment there too.

Nottingham Council decided to get into the energy business and its “Robin Hood Energy” firm stole from the taxpayer to give to … well, tens of millions in losses disappeared anyway. Gloucester tried something similar and failed.  My own local council, Surrey Heath, invested some £120 million in buying commercial property just before the bottom dropped out of that market. The valuation is now more like £50 million.

So the problems cover councils run by Labour (Slough, Liverpool) and the Conservatives (Surrey Heath, Thurrock). It does often seem to be council officials who are the driving force behind reckless investments and spending, while the councillors are not informed or don’t have the intellect or power to intervene. In the case of Thurrock, Davies reported that officials kept elected councillors in the dark for months and have not given full access to the details (as well as blocking FOI requests and questions).

Whilst Davies has to be careful in his reporting – “While there is no suggestion that any rules were breached….” he says, we must wonder whether in some of these examples, corruption was involved, although it is hard to prove. Do external parties (suppliers, property developers etc.) say to their inside-the-council enabler “look, I can’t give you anything now, but in five years’ time when the heat has died down, there’s a million for you”.  

Anyway, if it is not corruption, then we are seeing far too many examples of gross incompetence from our councils. And it is costing taxpayers many, many millions.

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Doctor Accused of Fraud Against Medicare

Two fraud cases in a row here … but a new (for me) angle today.

Procurement related fraud and corruption has interested me for many years, long before I started collecting case studies specifically to include in my Bad Buying book. So it is unusual to see a new type of fraud, but I came across a US case recently that was somewhat different to any I‘ve seen before.

At the heart of it, the scam is that an organisation ends up paying for goods that are not really needed (or maybe aren’t even delivered).  An internal budget holder creating their own company, setting it up as a supplier, then creating and authorising invoices and payments to themselves is the typical case. But here, it was more complex, as the fraud was against the US publicly-funded Medicare system.

At a federal court in Brooklyn Elemer Raffai, an orthopedic surgeon, was charged last month with health care fraud in connection with a $10 million scheme. He allegedly submitted false and fraudulent claims to Medicare and Medicare Part D plans. Raffai was arrested and was due to make his initial court appearance in the United States District Court for the Northern District of New York.

“In exchange for kickbacks from telemedicine companies, Dr. Raffai allegedly submitted millions of dollars in false and fraudulent claims to Medicare on behalf of beneficiaries without even examining them or based on conversations on the phone that lasted less than three minutes,” stated United States Attorney (Breon) Peace.

Dr. Raffai purported to practice “telemedicine” (phone or Zoom I assume) with the AffordADoc Network and other telemedicine companies. He was paid approximately $25 or $30 per patient consultation.  Between July 2016 and June 2017, he allegedly signed prescriptions and order forms for medical equipment, including orthotic braces, that were not medically necessary, simply based on a short phone call. Some $10 million in false and fraudulent claims were made to Medicare for that equipment and Medicare paid more than $4 million on those claims.

Presumably the “patients” were in on the alledged scam as well, and were recompensed for making the call to the doctor and playing their role in the process. And (again presumably) it was the manufacturers or sales agents for this equipment who were the masterminds behind it all. They received funding from Medicare for goods that either weren’t needed by the “patients”, or perhaps that equipment was never actually supplied. That isn’t clear from the information made public so far.  We might also hope that those firms have been or will be charged with fraud, as well as the doctor.

This type of fraud where different parties are colluding can be very difficult to detect – think of the famous Sainsburys potato example, which went on for years and was only detected in the end by the supplier’s external auditor. The buyer worked with a potato supplier that charged the firm over the odds, which funded bribes to the buyer. But one positive for those trying to fight fraud is that the more people are involved, the more likely it is that someone involved will “crack” and expose what is going on.  I wonder if that is what happened in this Medicare case, where many people must have known what was happening?

Another positive is that technology will increasingly be called into play to fight fraud. AI (artificial intelligence) can look at huge amounts of data, and perhaps in this case could have worked out that this doctor had a prescribing pattern that was out of line with his contemporaries.  I know organisations are using tools to examine payment records and look for anomalies; for instance, someone who always places orders with a value just below the threshold for further approvals.

Anyway, this is an interesting case and we will keep an eye on it to see what happens to Doctor Raffai.

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Fraud at Coca-Cola Enterprises- a “Basic” Example

There was major “Bad Buying” fraud case in the media last week. Perhaps the most surprising element of the story was that the offences were discovered in 2013, and related to some years before that, yet the case only came to court in 2022. Did it take than long to gather evidence? Is the Crown Prosecution Service really working on that sort of timescale? It’s a concerning issue in itself.

But back to the case and I’m afraid it was a “classic” fraud, a pretty basic case of an internal decision maker colluding with suppliers in return for payment. At Southwark Crown Court, Noel Corry, a former electrical and automation manager at Coca-Cola Enterprises Ltd (CCE), pleaded guilty to five counts of corruption and was sentenced to 20 months in prison, suspended for 21 months, plus 200 hours of unpaid work.

He accepted cash bribes, free tickets to events as well as sponsorship for his local football club, Droylsden FC near Manchester. A total of £1.5m was paid by Boulting Group Limited (now trading as WABGS Limited), Tritec Systems Limited, and Electron Systems Limited. The firms that paid the bribes were also fined – the first time the Met has prosecuted firms for failing to prevent bribery. That sets an interesting and good precedent. WABGS Limited was fined £500,000 – between 2007-13 the company benefited from contracts with CCE worth over £13m. Tritec Systems and Electron Systems were each fined £70,000 plus costs. Individuals at those firms also received suspended sentences.

Part of Corry’s job  was choosing suppliers to carry out work. Over some years, he favoured certain firms in return for cash payments. He could spend up to £50K without others getting involved, so I assume he made lots of small payments or contract awards to these firms.  “The court previously heard how Corry was given bribes through payments for “bogus” contracts for Coca-Cola, in which work was never carried out, or had Coca-Cola pay more than the actual amount charged for real work and was sent the difference”, as the Shropshire Star reported.

But in 2011, the firm changed the policy and the professional procurement team started getting more involved and a more structured process was implemented (hooray!)  They started getting suspicious as some firms changed their bids late in the process, and suspected that someone on the inside was tipping off firms about competing bids. That led to discovery of evidence which eventually led to prosecution. (Tip – if you’re committing fraud, don’t have a spreadsheet on your laptop called “Slush”)!

It’s all rather sad in some sense – of course it is good that he was caught, but his wife divorced him and their son has mental health issues now, according to the reports. And Corry eventually repaid £1.7 million to CCE.  So if you are ever tempted, just remember that it probably will ruin your life.

What are the lessons here for organisations? Well, I gave 7 key anti-fraud principles in the Bad Buying book, and several are relevant to this case – proper supplier selection processes, for example. But perhaps the most pertinent is this principle (taken from the book).

“Opportunities for collusion between suppliers, and between suppliers and buyers, must be minimized – Many frauds rely on collusion between buyer (or budget holder) and seller, so reducing the opportunity of this reduces the chances of fraud. Organizations should ensure there is always more than one person involved with any major purchase and in signing- off work with suppliers. Moving staff regularly is another option, so there is less time for the relationship, and perhaps the fraudulent plans, to mature. Some organizations have a policy that no one in a decision-making buying role will  stay for more than three years in that same job role, for this very reason.

It is not just professional buyers (procurement staff) to whom this applies. Indeed, it can be stakeholders such as budget holders or service users who by the nature of what is being bought find themselves getting too close to suppliers. I once discovered that my firm’s major IT equipment supplier was sponsoring our internal IT budget holder’s expensive car- racing hobby!

It may be very innocent, but when a marketing or IT manager makes it clear they don’t want professional procurement or finance colleagues involved in ‘their’ relationship with a key supplier, that can be a warning sign that it isn’t totally innocent. Organizations should look at discouraging closeness that goes beyond the need to work well with a supplier to get a job done. This should influence the organization’s policy on hospitality, gifts and entertainment, which should be clear and should err on the side of caution”.

So well done to CCE for eventually discovering this, but a better policy would have perhaps made it less likely in the first place. And if you work for a large organisation that allows budget holders to spend thousands without anyone else being involved, I can pretty much guarantee that one or more of your colleagues is committing exactly this type of fraud at this very moment.

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