Tag Archive for: Fraud

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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The 2021 Bad Buying Awards – the Two Final Awards

Today, our final two Bad Buying awards for 2021!

Creative Fraud:  I-Tek, its Owner and Staff

Multiple Fraud Related to Imported Goods (and more…)

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

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

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

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

…..

Not Really Technology Award: Greensill Capital

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

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

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

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

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

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

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

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

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

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The Bad Buying Awards 2021 – Part 1

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

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

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

International (Private Sector): Kraft Heinz

Awarded for Creative Use of Supplier Contracts

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

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

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

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

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

………

International (Public sector): Balfour Beatty Plc

Awarded for Over-invoicing of US Defence Clients

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

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

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

Two more prize winners tomorrow!

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Theranos and FOMO as a Cause of Bad Buying

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

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

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

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

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

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

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

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

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

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Look Who’s Talking – FACT360 AI Detects Potential Fraud

The fraud section in my new book was great fun to write. I know you can’t and shouldn’t call fraud “fun” in any sense, but the case studies I researched were interesting, and often quite astonishing.

In one case I saw personally (which I couldn’t mention in any detail in the book) we discovered a fairly senior colleague, who everybody thought was a lovely, capable person, was actually involved in approving six-figure invoices from a fake supplier. The police thought this “firm” was probably linked to the “Russian mafia”, and we only found out about the fraud when the police discovered this gang was receiving large payments from my firm (and told us)!

Anyway, buying-related frauds can involve just internal staff, as in the case of fiddling your expenses or using the company charge card wrongly, or can be purely externally driven, as in the case of many “invoice misdirection” cases, or might involve both internal and external players. That third category is perhaps the most common and includes classic frauds such as overpayments to suppliers or biased supplier selection in return for bribes or inducements to the buyer.

But technology, artificial intelligence in particular, is helping to pick up some frauds through its ability to analyse huge amounts of data and spot trends, patterns, inconsistencies and oddities. I remember a presentation from two or three years back which talked about using AI to search through corporate payments or approvals. The idea was that you might find for instance a budget holder who always submitted an invoice for approval or payment on a Friday afternoon, when it might be scrutinised less carefully! Or someone who always makes purchases with a value of £9,999 if the cut-off for approval is £10K.

But more recently, I learnt of another interesting approach. In this case, the AI focus is on emails and documents that flow within the organisation and to external third parties. It has been developed by a firm called FACT360, which is led by Paddy Lawton, who founded, ran and then sold spend analytics software firm Spend360 to Coupa in 2017. I spoke to Lawton and fellow director Andy Slater to get a quick overview of what they’re up to.

Of their three core products, AI Forensics  is most relevant to buying-related fraud work. It analyses documents and emails and produces a network “map” of who is talking to who within an organisation and across organisational boundaries, including to suppliers, for instance. It generates insights from that communication flows as well as from the content of the messages themselves.

So for example, if you apply the analysis to Enron’s data, before that firm’s crash and disgrace, you can see that one particular person was at the centre of a major web of communication within the firm, even though he wasn’t apparently very senior. It turned out he controlled one of the technology “marketplaces” that enabled Enron to falsely claim to be making money on transactions. This analysis of what FACT360 calls “prestige” can tell you a lot about what is going on within an organisation, and who is really important or powerful. 

“And there are subtle changes in communication behaviour that occur and can be detected when actors plan and engage in covert activity” according to Slater.

One of the interesting corruption cases in my Bad Buying book tells the story of the Sainsbury’s supermarket potato buyer, who conspired over some years with a major supplier to pay over the odds for potatoes in return for bribes. Might Fact360 artificial intelligence have picked this up?  Probably, says Slater. It is likely that emails between the main players would have been more frequent than for other similar suppliers, or show different patterns in terms of timing or even use of language. There might have been more obvious clues in the content too.

Of course, knowing that your email trail could be used in his way might discourage fraudsters from using that medium, but there is always going to be some record of contact, unless the participants are using real secret service tactics! And the beauty of these emerging AI technologies such as FACT360 is that the user doesn’t need to know or define what they are looking for – the system will highlight where it finds potential “unknown unknowns”, as Donald Rumsfeld famously put it. 

We’re still at the early stages of understanding just how AI is gong to affect our lives, and it may be that some implications will not be positive for many of us. But using it to detect and deter fraud and corruption in our organisations – and reduce Bad Buying – must be one of the more positive aspects of this fascinating technology.

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Bad Buying Reviewed in The Times – and Why “Sophisticated Frauds” Usually Aren’t

Bad Buying was published last week, and whilst there wasn’t exactly a rush of media appearances, it was reviewed in the Times on Saturday (behind the paywall unfortunately).

The reviewer (Robert Colvile) enjoyed it, although he found it annoying / depressing that governments seem to make the same mistakes time and time again when it comes to spending public money. Well, yes, I’d agree of course, that being one of my reasons for writing the book! He also picked up on one important point that is mentioned in the book but perhaps deserves more focus.  As Colville put it in his review,

“And the mistake was usually pretty elementary (as a rule, anyone who talks about how their organisation was victim to a “very sophisticated” gang of thieves is telling porky pies: far more likely is that there was a failure to attend to the absolute basics).”

This is so true. We see it almost every time there is a fraud case – the organisation that has lost out claims it is the cleverness of the fraudsters, not the stupidity of management that is to blame. That is the case even if all the fraudsters have done is phoned up the finance department and said “hello, this is IBM here, we’ve changed our bank details, please can you pay our outstanding invoices now to this new account”. Very sophisticated…

But it is  certainly not just the public sector that gets caught out. EssilorLuxottica, the worlds leading lens and eyewear firm, was the target of a 190 million euro ($213 million) fraud at one of its factories in Thailand. At the end of last year, the firm announced that it had fired employees associated with the incident (well, you would, wouldn’t you) and was looking to recover the money.

An intelligent guess would suggest that this was a “fake supplier” fraud, where money was paid under the authorisation of someone internally to external firms that were controlled by the fraudsters.  Those firms would not in reality be supplying anything to EssilorLuxottica of course, and by the  time the fraud was spotted, those bank accounts would have been closed and the cash long since extracted.  But this was a huge amount of money to disappear from a single factory in Thailand – it  sounds like it could be equivalent to the firm’s entire annual revenue in that country.

Assuming that was the nature of the fraud, how on earth could such large sums of money be extracted without anyone noticing? What were the policies in place and processes to check up on those new “suppliers” and their legitimacy? Who was allowed to approve high value payments?  Did the firm outsource any part of the payment process to a third party services provider? (That can sometimes lead to weaknesses in the process and less focus on what is going on).  Maybe there was some sophistication here in the fraud, but it really does smack of poor internal management and controls.

Anyway, that story is really told to demonstrate that it is not just the public sector that can waste money and fall down on basic anti-fraud processes. I’d suggest that every procurement or finance leader and every Board should consciously think about this question – “if I wanted to defraud my organisation, how would I do it”? 

Think  through the different options and potential points of weakness, and evaluate whether there are processes, checks or policies in place that would stop you getting away with it. If the answer is “no”, then either tighten up quickly or accept that you might be the next person waffling on to the press about “sophisticated criminals”!  Personally, I would also fire the CFO if such a basic fraud was committed on his or her watch.

The Bad Buying book might be useful too if you are concerned about these issues.  It contains seven key anti-fraud principles, with some practical and clear advice on how you can at the very least reduce the chances of fraud and corruption affecting your organisation.

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