Tag Archive for: Corruption

Over the holiday period, we heard a lot more about the case of Medpro, the firm that is being taken to court by the UK’s Department of Health and Social Care over the supply of PPE, gowns in particular, which allegedly turned out to be unfit for purpose. The beneficiaries of this, the high profile Michelle Mone, a member of the House of Lords, and her husband Doug Barrowman, produced a documentary arguing their side of the case, and gave an interview on the BBC. This came after the couple had originally denied publicly that Medpro was anything to do with them, with Mone lying to the press and then getting lawyers to issue threatening letters to various publications.

The general response to all this new self-generated publicity was not very favourable for the couple. The interview was called a “car crash” and was likened to the Duke of York’s famous “I was at Pizza Hut and I don’t sweat” interview with Emily Maitlis in 2019. There are some questions though which still need answering on the government’s side of the story.

  • Why is this the only legal case that the government appears to be pursuing? There have definitely been other examples of quality issues, and cases of firms that look at least as dodgy as Medpro winning major PPE contracts. Is there a logic to this or has the government chosen to pursue Medpro because of Mone’s profile, know there would be more publicity given her involvement and that would show the authorities were taking action?
  • Mone claims that she has an email from an official on the PPE team saying, “the gowns have been approved by technical”.  But that seems to be pre-delivery so the approval was before anyone had seen the actual delivered product, which seems odd. Maybe there were samples? But the gowns were apparently inspected by Uniserve, the logistics provider appointed by the government, from July 2020 in China.  And £122 million was paid out in the summer of 2020 for the gowns, which would usually suggest the buyer is content with what has been delivered. 
  • The government says that random testing in April 2022 found that 54 of the 60 randomly selected Medpro gowns weren’t sterile. But that is almost two years after delivery. Even if those tests were accurate, Medpro lawyers may argue that the gowns might have become unsterile in the intervening almost two years, perhaps because of sub-optimal storage conditions?
  • As a buyer, if I have inspected the goods, told the supplier they meet my specification, and handed over the payment as per the contract, then it is pretty unusual, and very difficult to go back a year or two later and say, “hang on a minute, I’ve had another look and I don’t like that stuff I bought from you after all”. In my experience, the supplier would be likely either to laugh or (if they valued my business) say something vaguely sympathetic such as, “Peter, you said it was fine – you must appreciate we can’t really do anything at this stage, terribly sorry”.

However, the fact that Mone lied about her and Barrowman’s involvement and personal gains from the deal is a major issue working against them. There is also the question of alleged bribery. This has been part of the investigation, but there has been no hint as to who it was that Medpro might have  bribed. Their political contacts? PPE procurement people? Other officials?  Flows of money are usually relatively easy to check, unless it is literally £50 notes in a brown envelope, so that’s still an  interesting unanswered question.

In any case, this is likely to be a big story through 2024, not least because Labour will emphasise “Tory sleaze” when it comes to the UK election. Labour has also promised to appoint a “covid corruption commissioner” to look into PPE contracts, so this story will no doubt run and run.

It feels like the new UK Procurement Bill has been moving through Parliament for years – it is only a year in fact, although before that there was an extended period of consultation.

One of the themes of the Bill is that it should be easier for the contracting authority (CA) to “bar” or disqualify suppliers from bidding altogether. That has been possible for many years if the supplier or one of its directors had committed certain criminal acts, but the new legislation includes exclusion for poor performance for the first time.  There is also exclusion for “improper behaviour” which has led to a supplier gaining an unfair advantage in the competitive process.

However, the authority will also have some flexibility. The new rules mean that the existence of a mandatory or discretionary exclusion ground is not enough in itself to throw the bidder out of the process.  The CA has to first decide if the circumstances giving rise to the exclusion are likely to happen again. That’s quite a difficult and potentially controversial assessment to ask the buyer to make, in my view. There is also going to be a centrally-managed list of firms that have been barred.

It will be interesting to see whether there will really be any significant change of behaviour in this area. In truth, CAs are very cautious about barring firms, fearing I suspect legal challenge and endless argument getting in the way of running the actual procurement process. I’m not sure that will change.

An interesting example of this unwillingness was reported recently on the Nation Cymru website. Campaigners have accused a National Health Service Trust of ignoring anti-fraud regulations by allowing two firms that have been convicted of bid-rigging to form part of a consortium to build a new cancer centre in South Wales. The Acorn Consortium is the preferred bidder for constructing the new Velindre Hospital in Cardiff. That project has faced strong opposition on environmental and medical grounds, and it is those against the construction who have raised this issue.

Nation Cymru has described how two of the consortium members – the Kajima group and Sacyr – have been found guilty of fraud offences in Japan and Spain respectively. As the website reported,

“Kajima was sentenced for bid-rigging in March 2021, with one of its executives receiving a suspended prison sentence and the company itself being fined 250 million yen (around £1.53m) for its role in the scandal, which involved a number of firms colluding with each other on the construction of a railway line to maximise their profits. Sacyr received a penalty of €16.7m in July 2022 for its part in creating a cartel aimed at aligning bids for government contracts”.

When asked why this had not led to exclusion, a Velindre University NHS Trust spokesperson responded: “The robust procurement process has been undertaken in line with procurement law, UK and Welsh government policy and all required due diligence has been undertaken.” 

I’m not sure that’s a good enough explanation really. When the spokesperson was asked to explain in more detail why “regulation 57” (which covers this sort of thing) did not apply or was over-ruled here,  they “did not offer an explanation”.  I do think they should say more.

But conceptually it’s a tricky one. With my buyer’s hat on, do I really want to kick out what presumably is my best bidder because two possibly quite minor consortium members did something bad hundreds or thousands of miles away? On the other hand, we do have regulations for a purpose. 

In terms of the justification, having had a quick read of “regulation 57” (it’s some time since I studied “the regs”), I suspect the answer lies in the famous “self-cleaning” clause. That says, “Any economic operator that is in one of the situations referred to in paragraph (1) or (8) may provide evidence to the effect that measures taken by the economic operator are sufficient to demonstrate its reliability despite the existence of a relevant ground for exclusion”.

So basically, if a supplier can show that it has taken lots of steps to make sure it will never, ever get involved in bid-rigging again, or any of the other reasons for mandatory OR discretionary exclusion, and the buyer is naïve enough – sorry, I mean if the buyer analyses those declarations and decides they are valid, then the supplier is back in the game.

You can see the logic in this, but it is a bit of a “get out of jail” card really. It’s also another reason why in practice, we so rarely see suppliers barred. It will be interesting to see whether anything changes once the new Bill has been implemented – but I have my doubts. Barring is potentially just so fraught with hassle and risk.

We have local council elections in England on Thursday this week (May 4th). According to the opinion polls, the Conservatives may lose one thousand seats to Labour and (in areas like Surrey where we live), the Lib Dems.  Of course, as a mere procurement author and commentator, I wouldn’t dream of suggesting how you should vote. I mean, if you think we have seen growing prosperity in recent years, improving public services, clear rivers and lakes, a great train service, a ruling cadre that deeply cares about the people… you should vote accordingly.

Personally, I would like to see more councils where there is no single party in control, or at least where the control does and can change over the years. Where the same party rules for decades on end, complacency can set in, or elected councillors can even start behaving in an unethical or criminal manner.

We’ve seen some extreme cases of this in recent years. It is not just one political party behind these disasters either – it was Labour led councils that failed in places including Slough, Liverpool and Croydon, and the Tories in Thurrock, Woking and Northamptonshire. But they have all presided over financial disasters, with gross incompetence always a factor and accompanying fraud in some cases. 

Certainly one common thread is the secrecy, lack of openness and transparency that we see in the behaviour of the councils. My own local council, Surrey Heath, is not quite a disaster on the scale of some of these others, but the Tory council made an extremely misjudged investment in commercial property in Camberley town centre, buying right at the peak of the market. In terms of asset value, that has cost the local taxpayer over £50 million and counting. But the deals were stitched up by a very small cabal of councillors and executives – not even all the Tories in council knew what was going on. Hopefully, the Lib Dems will win here this week, then at least we might get to see the full accounts and the full story behind what went on.

In the case of Thurrock, it was brilliant work by journalist Gareth Davies that exposed the huge and very “strange” investments that may end up costing the taxpayer £500 million in real cash losses. Again, there was no transparency and councillors refused to disclose information for year, even after Freedom of Information requests. (I will be astonished if no-one ends up in court over this case).

Many of the cases involve “bad buying” in a conventional procurement sense too. That was certainly true in Croydon, where construction and refurbishment contracts were part of the story – that is another case where we don’t know yet if the driver was fraud, incompetence or both.  In other examples, it is dodgy investments (which is “buying” of a sort, I suppose), and we also see ridiculously extravagant payoffs to top executives too.

At the end of 2022, Labour published their plan for greater devolution of power. If Labour win the next election, the government will devolve more budget and control to local councils and mayors. I’m all for that in theory, but given what we have seen in the last few years, it also makes me nervous.  If Keir Starmer really wants to do that, he must put in place some checks and balances to make sure we don’t just see more Croydons and Thurrocks, but with even bigger sums of money.

Transparency needs to be addressed, public scrutiny should be made easier, and there should be a strengthened audit regime for councils. But the problem with audit is it is after the event when the money is already gone! So maybe there should be some sort of pre-expenditure check for projects, investments or contracts over a certain amount?  Perhaps a reincarnated Audit Commission could fulfil that role? Anyway, just throwing more money and power at some of the incompetent and /or crooked muppets we have seen around local government in recent years does not seem sensible.

In all the controversy over Gary Lineker, I missed another football-related story last week when it first broke. Barcelona, the legendary Spanish football club, are in trouble.  Following a tax investigation into Jose Maria Enriquez Negreira – a former vice-president of Spain’s referees’ committee – and a company he owns, it turns out Barca paid 8.4 m euros (£7.4 million) between 2001 and 2018 to Negreira and his firm.

That half a million a year was supposedly for consulting services. The explanation is that Negreira was advising Barcelona on how their players should behave around different referees. Barcelona say that his firm, Dasnil 95, which it described as “an external technical consultant”, was engaged to compile video reports related to professional referees “with the aim of complementing the information required by the coaching staff”. It added that contracting the reports was “a habitual practice among professional clubs”.

Well, we haven’t seen too many other clubs as yet admitting that they did follow the same practice, so Barca may well be in trouble.  And even if that was as far as it went, it doesn’t look good, as the club was trying to gain what most would consider to be an unfair advantage. But of course there is speculation that the payments were even more “corrupt” than that, being made with the intent to buy favourable treatment from referees for the club.  It doesn’t help that the contracts with Dasnil 95 were verbal and the lack of formal records suggests the parties were not keen on transparency!

As the BBC reported, a Barcelona court heard “that Barca, former club officials and Negreira had been indicted for “corruption”, “breach of trust” and “false business records”. These lawsuits, brought by the Barcelona public prosecutor’s office, target the club, as well as former presidents Josep Maria Bartomeu and Sandro Rosell”.

Whatever the outcome of this case, it highlights an important point that is highly relevant to all of us when it comes to corruption and inappropriate corporate behaviour. It is not just the direct intent behind the action that matters; how it looks and is perceived by others is also important.

I may be absolutely certain that my decision making about a current procurement decision is fair and unbiased. I can swear on my life that I have no preference as to which of the short-listed bidders win. But if colleagues see me having dinner at the £250-quid-a-head Fat Duck with the sales director of one of those firms … maybe we were discussing matters totally unrelated to the current competition, but how does it look? It looks bad, and that is Barcelona’s problem here. Their actions look really, really bad.

I checked on the Chartered Institute of Procurement and Supply’s Code of Conduct, and was pleased to see this. Members should; “ Avoid any private or professional activity that would create a conflict of interest or the appearance of impropriety…”

The key word there is “appearance.”  Just telling me that of course you are honest and decent is not enough; if something would not look right, then don’t do it.  

But of course, there are difficult and grey areas. I have in my dim and distant past accepted corporate hospitality from some suppliers. I justified it as – for instance – an opportunity to meet a supplier’s CEO, who I might not get to see in the normal course of business as a medium-sized customer. I played in a Virgin Airlines golf day once when I was trying to use Virgin as a lever to get a better deal from BA, who did not want to negotiate.  I wanted to speak to Richard Branson directly and thought the golf was my best chance.  However, he seemed much more interested in talking to his lovely stewardesses who were there as hosts, rather than mingling with the customers, and I played really badly too. Served me right…

Some organisations have imposed very tight ethical rules in terms of behaviour with suppliers, which is admirable but maybe can go too far at times. I do think that if I’m visiting a supplier’s factory or offices, and they offer me lunch in their cafeteria or a sandwich at the local pub, I’m not going to get hung up on who pays for that.

I remember visiting a packaging factory in Belgium (the trip paid for by my own employer) and being given a little ashtray as a thanks for coming so far to see the firm. It featured a picture of the factory, and was made by the local pottery, so it would have seemed silly and ungrateful to refuse it, even though I have never smoked a single cigarette in my life. It raised 50p at the charity shop later… But at least those policies that are absolutely crystal clear about hospitality, gifts and so on have the benefit that no transgressor can claim they didn’t understand the rules.

Anyway, I think Barcelona are in trouble here unless they can show that paying for that sort of service really is commonplace amongst other clubs.  And in our own lives, it is worth remembering that if it looks wrong, sounds wrong, or feels wrong… then it almost certainly is wrong.

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.

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!

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.

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)

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.

What is the most difficult type of procurement-related fraud to detect? In my book, Bad Buying, there are plenty of examples of different fraud, some related to dodgy invoicing, fake suppliers or invoices, purchasing card fraud and more. But perhaps the hardest to detect are around collusion between a buyer (or someone else with power “on the inside”) and a supplier, with “backhanders” being paid in return for favours or preference shown to the supplier.  

Last month a case that goes back some 10 years finally came to its conclusion. Not only did it have that sort of collusion at its heart, but it was also interesting to us because the victim was a firm well known in the procurement world – services firm Achilles, who run supplier qualification, risk and information services across industries including construction, transport, and energy.

Back in 2011, their interim head of IT, Brian Chant, led the process for choosing an IT supplier to whom Achilles would outsource significant work.  However, the firm that was successful in winning the work, with Chant’s endorsement, also paid him some £475,000, according to the evidence presented in court. As the Register website explained,

“Unknown to Achilles was the fact that Chant, of Andover in Hampshire, had quietly approached the eventual winner beforehand to hand-hold them through the procurement process – and to arrange a hefty secret margin straight into his wallet”.

Chant left Achilles and joined Hampshire Police as its head of IT in October 2014 – a post he held until his arrest in 2016. But only now has the case been resolved. It seems that the criminal activity was discovered by the tax authorities initially, who were looking at VAT claims made by the IT company relating to invoices from Chant’s consulting firm.  That led on to the criminal investigation, and finally to Chhant being sent to jail for 6 years.

What makes this type of fraud so hard to spot? Well, particularly if the contract is in a specialist area, it may be difficult for others in the buying organisation to realise that the fraudster is pushing the supplier selection decision in a particular direction. It may even be that the favoured supplier is not a bad choice (outside the corruption issue), and there may be no obvious losses to the organisation on the buy-side.  

You also don’t have the ongoing potential evidence and chance of discovery that exists if, for instance, fake invoices are being submitted for payment, or someone is spending money outside policy on a purchasing card. Unless the payments from the supplier to the crook are picked up, then it is hard to gather evidence of this sort of behaviour.

What seems odd in this case is that the supplier and the people involved at that firm have not been named or – as far as we can see – prosecuted. I’m curious how they have avoided that. It’s hard to see really how they could have thought these were legitimate payments to Chant’s firm.  It feels like other customers of that firm deserve to know its identity, apart from anything else.

So what can you do to try and avoid this sort of fraud? A strong procurement function (or even a single person for smaller firms) can help ensure that supplier selection processes are structured and as objective as possible. Involving multiple people in the analysis and the decision-making also helps, and of course, you should also ask those involved in procurement if they have any conflicts of interest. However, someone who is capable of fraud probably won’t worry about lying at that point!