Tag Archive for: Fraud

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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!)

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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!

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Remember the Procurement Basics!

Not a Wetherspoons to be honest – the picture shows my favourite pub in the world, the Strugglers Inn in Lincoln

No matter how much we like to talk about sustainability, complex strategies and supplier relationship management, procurement has some basic elements that cannot and must not be forgotten.  A couple of recent cases act as a good reminder of that.

The first is a dispute between Wetherspoons, the leading UK pub chain with 843 branches, and AB InBev, the world’s largest brewer (they produce Budweiser, Beck’s, Stella, and also some beers that aren’t tasteless).  In November 2021, Wetherspoons agreed to make AB InBev their lead brewer (“preferred supplier”) of mass-market lager, replacing Heineken. ‘Spoons, as it is affectionately known, sells a good range of real ales and interesting cask beers but still offers the standard products too for the less discerning drinker.

But the dispute relates to disagreement over who is going to pay to install the T-bars (the branded fittings that include the keg beer taps) in all the Wetherspoons pubs. The argument has gone to the UK high court now, to decide which company should be responsible for carrying out the works needed to fulfil a contractual requirement for pubs to display a set number of AB InBev beers on their T-bars. Wetherspoon claims that both parties believed the brewer was responsible, in line with standard industry practice. AB InBev denies this, saying the work should be subject to a sperate agreement.   

For two such large and apparently professional firms to be arguing over this seems incredible really. Presumably there is a formal contract between them, and surely that would include a clear allocation of responsibility for costs associated with the change.  If that was not included in the contract, then that represents both Bad Buying and Bad Selling, I would argue.

So the first of today’s two key learning points is this. A contract must detail the responsibilities that each party is expected to meet in order to uphold the legal agreement.  Now in very large or complex contracts, there might be some minor details that don’t get captured up front, but in particular, any activities that have an associated cost must be clearly laid out. Otherwise, there is a high probability of arguments later, as Wetherspoons and AB InBev have discovered.  I know this seems obvious, and yet there they are, in the high court.

The second case is both serious and quite amusing. Metal traders at Stratton Metals sold 24 tonnes of nickel to a German customer recently. Nickel is a valuable metal, increasingly used in batteries for electric cars, so much in demand. It is sold as briquettes, packed into 2-Tonne sacks. But when the customer took delivery and opened the sacks, they discovered that half contained worthless stones rather than nickel!

This was highly embarrassing for the London Metal Exchange (LME), which facilitated the contract and is Europe’s only remaining “open outcry” trading floor – rather than sitting in front of computer screens, traders literally shout at each other to arrive at buying and selling prices. The LME also operates through a network of 464 warehouses around the world which hold metals in stock, although LME does not own or manage these facilities. The dubious sacks were in a Rotterdam warehouse.    

Nickel seems to be a bit of a favourite for dodgy dealings at the moment. Last month, Trafigura, the Singapore-based commodities firm, took a hit of $577 million to its accounts when it discovered a huge fraud involving missing cargoes of nickel – although it is not clear that is linked to this recent stones substitution.  Trafigura is taking court action against Prateek Gupta, an Indian metals tycoon, over the missing metal.

Anyway, we might draw two wider procurement lessons from this. The first is very simple. Always check that you have been supplied with what you have paid for. Actually, that is not too difficult when it comes to physical metals – it is considerably more difficult when it comes to complex services, for instance. But the principle and the risk for the buyer is the same. You said you would provide this, I contracted to pay on that basis, and you have delivered something else.

Secondly, the nickel case shows that trust is still an important part of doing business. Despite the comments above about the importance of a robust contract, even a good example will not always protect you against corrupt, criminal or fraudulent behaviour. Trust does matter; so if you have a supplier you can trust, remember that is worth quite a lot. Nobody wants to find stones instead of nickel in their warehouse, literally or metaphorically.

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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.  

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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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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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Purchasing Cards – Open to Fraud or Better than Purchase Orders?

An interesting procurement story emerged recently, but it got somewhat lost in the focus on the UK “not-a-budget-just-a-financial-statement” a couple of weeks back, which gave tax cuts to deserving premiership footballers, bankers and professional services firm partners.

The Labour Party investigated the use of corporate purchasing cards in the UK’s Foreign Office, the government department that was until recently run by Liz Truss, now our esteemed Prime Minister. That threw up all sorts of interesting expenditure, and Emily Thornberry, shadow minister, send a long letter outlining the issues and questions. At least one purchase appears to have been fraudulent and is under investigation. But Rayner highlighted an overall increase in card spend of 45% and various other items that on the surface look dodgy.

As Sky News reported, “The Foreign Office spent more than £4,300 of public money on two trips to the hairdresser and nearly £1,900 at the Norwich City FC shop when Liz Truss was at the helm, documents show”.

I can’t comment on whether transactions were legitimate of course. But there is a history of misuse of cards in the Department, as I featured in the Bad Buying book.  In 2019, a Foreign Office employee appeared at Southwark Crown Court in London. She was accused of blowing nearly £20,000 on government credit cards in a month-long “gambling binge”.  Laura Perry was alleged to have made almost 250 transactions over 30 days with an online casino, using Foreign Office purchasing cards.  She also allegedly used a card for a personal restaurant meal. She had been given the cards to book travel tickets, pay for accommodation and make payments for other costs incurred by government and visiting dignitaries. 

She claimed she had accidentally mixed up the card with her own – which can be done – but ultimately, she pleaded guilty to stealing £2,223. But she was cleared on the £20,000 accusation relating to the gambling, claiming it was her ex-boyfriend who used the card for that purpose.

However, cards do have advantages, not least in that they provide a better audit trail than expenditure made via requisitions, purchase orders, or simply the old “phone call to the supplier” method! Ironically, card spend gets a bad press in part because it is transparent, and we have to be careful before jumping to conclusions. Any major card scheme will see some exmaples of inappropriate purchases, but that does not invalidate their use and benefits. Here is an extract from “Bad Buying”.

“Some years ago, I talked to a logistics manager based in the UK Ministry of Defence’s Head Office. He told me he had not long returned from Afghanistan, where he was working as a logistician in a big military camp there. 

We talked about the need for buying processes to be flexible and for buyers and logistics people to be able to react quickly in military situations. The use of the Purchasing Card came up, and he explained there had been a bit of an internal furore when finance had looked at expenditure on the card in use at the Camp. One invoice related to expenditure on a range of golf equipment. That looked very strange, possibly fraudulent.

But it wasn’t. He explained that opportunities for rest and relaxation were limited for the troops in Afghanistan. Not many friendly bars, you couldn’t just go off for a run through the hills or take a trip to the beach. So, someone had the bright idea of buying some golf equipment and rigging up practice nets. Even non-golfers were getting into it, with more expert players offering lessons. The golf kit showed up on the Card bill, and looked odd, but most people would agree it actually was an appropriate and intelligent use of public money.

As a corporate executive, and on behalf of the firm, I’ve bought retirement presents, flowers for staff to celebrate a wedding or birth, strange items to be used on corporate away-days, booze, and many items that would have looked odd on that card bill. But all were justified and for the organisation’s benefit, not mine. Another case saw a government body chastised for spending money at a horseracing venue. But that was explained as the fees for a legitimate business meeting, booked in the hospitality suite on a day when no racing was taking place”.

So P-cards can be used positively in the public sector. Thornberry’s other issue is that the Foreign Office refused to answer some of her questions about the spend, saying the information could “only be obtained at disproportionate cost”. That is not acceptable – but we shouldn’t throw the P-Card baby out with the bathwater. Managed properly, cards have a useful role to play in the procurement armoury.

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Fat Leonard Escapes – then Recaptured! US Navy Procurement Fraud Back in Headlines

One of the major case studies in my Bad Buying book is all about Fat Leonard, (Leonard Glenn Francis), the 300lb (136kg) Malaysian businessman who bribed large swathes of the US Navy in the Pacific. In return for giving his firm work providing various services to ships in port, he provided cash, extensive hospitality, lavish dinners and favourite prostitutes to American naval staff.

That included procurement professionals and officers right up to Admiral level, some of whom are now going to jail. Even when whistle-blowers tried to alert senior naval staff, they hit a problem – the folk who received their allegations were being paid by Leonard too! It was one of the most extensive examples of endemic procurement-related corruption ever seen in modern times. As the BBC reported:

Prosecutors say he overcharged the navy to the tune of $35m (£30m) and plied officers with cash, gourmet meals, cigars, rare liquor and sex parties in luxury hotels…. Dozens of US naval officers have also been implicated. Four have been convicted so far and at least 27 other contractors and officials have pleaded guilty to accepting bribes.

Last weekend I was preparing for the US National Procurement Institute conference next month in Atlanta. The NPI is government-sector focused, so Fat Leonard is one of my stories for the “Bad Buying” session I’m running.  I googled him just to check on a couple of facts. To my surprise, there were dozens of brand new news items about him. And that is because he had skipped bail and disappeared!

He admitted bribery and corruption back in 2015 and had been co-operating with prosecutors, helping to convict a range of naval staff in recent time.  His own sentencing was coming up soon, but he was allowed to be detained at home in San Diego because he had been in poor health, including suffering from kidney cancer.

But on 4 September, police went to his house after they detected “problems” with the GPS ankle bracelet that he was supposed to wear. The problem was that it had been cut off, and Leonard had disappeared.  “Upon arrival they noticed that nobody was home,” US Marshal spokesman Omar Castillo told reporters at the time, demonstrating incredible powers of detection.  Neighbours mentioned seeing removal vans at the house over recent weeks – you would think someone might have worked out something was going on?

Anyway, a global Interpol warrant has been out for his arrest since then, and yesterday (Wednesday 21st September), the 57-year-old was arrested at Simón Bolívar de Maiquetía airport near Caracas by Venezuelan authorities.  Interpol says he entered the country from Mexico via a stopover in Cuba. Quite the tour of central America… But now he is due to be extradited back to the US, where we might assume his sentence will be harsher because of his escape attempt.

Questions remain about how many more naval staff will end up in court, and the other question is who will play Leonard in the inevitable film of his escapades? Orson Wells or Marlon Brando in their later years would have been perfect. Maybe Antonio Banderas in a fat suit?

But to finish on a serious note, there are relevant learnings for any organisation when we look at the Fat Leonard case. The US Navy processes for awarding and monitoring the contracts in question were clearly flawed, and whistleblowing must be managed properly. As I said in Bad Buying case study:

“If organizations don’t make it easy for honest people to expose what is going on, and have a failsafe route for concerns to be reported and acted upon, then there is a real danger that  corruption will become more and more embedded, as in this case. Other learnings around the buying process, monitoring of supplier pricing and billing are key; but whistle-blower protection is a relatively cheap and easy way of reducing the chance of shocking events like this.”

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Buyer / Supplier Collusion – A Difficult Fraud To Spot

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!

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