Bid-rigging Scheme Grounded

The indictment of alleged fraudsters highlights the need to assess risks in awarding procurement contracts.

Comments Views

A U.S. Marine Corps chief warrant officer and two executives of a defense contractor have been indicted for allegedly conspiring on a bid to perform maintenance on the Marine Helicopter Squadron helicopters used to transport the U.S. president and vice president, Reuters reports. Prosecutors say the Marine Corps officer leaked confidential information on the cost of the proposed bid contract to the CEO and president of Louisiana-based Valour LLC. The officer then participated on a selection board in which he rated Valour higher than other bidders, despite the Marine Corps having concerns about the company's past performance.

Lessons Learned

Although it is difficult to quantify precisely how big a problem bid-rigging in procurement processes is, numerous independent sources provide some parameters for this fraud threat. The 2014 Association of Certified Fraud Examiners (ACFE) Report To The Nations on Occupational Fraud (PDF) cites corruption — within which bid-rigging is conceptually situated — as the single biggest category of fraud observed within the government and public administration sector (36 percent), with a median loss of US$200,000 per incident (see Figure 24 of the report). Furthermore, corruption is consistently the largest fraud type observed across most industries.

While not as recent, a 2007 Organisation for Economic Co-operation and Development (OECD) document, Guidelines for Fighting Bid-rigging in Public Procurement (PDF), states that "In OECD countries, public procurement accounts for approximately 15 percent of gross domestic product. In many non-OECD countries that figure is even higher." And finally, a 2007 evaluation by the Canadian government's Competition Bureau of its anti-bid-rigging activities cites comparative data for the United States: "As of December 2007, the (U.S. Justice Department) Antitrust Division was dealing with 139 grand jury investigations, of which 40 percent were potential cases of bid-rigging and 60 percent were investigations of price fixing or frauds."

Much has been written on this subject, and both the ACFE Report To The Nations and the OECD anti-bid-rigging guidelines contain excellent information and advice on the red flags and methods internal auditors should be aware of in fighting bid-rigging fraud. Both a systematic approach to identifying and mitigating contract fraud risk, as well as a balanced, accountable, and transparent approach to identifying contract requirements are fundamentally important in reducing this kind of threat to organizations. There are two areas that bear highlighting.

Perform a thorough fraud risk assessment of the planned procurement and process. The first, and probably most important, step in tackling bid-rigging fraud is identifying the risk of fraud. How the procurement is defined is important because this in turn can be linked to the different areas of the procurement cycle that may be exposed to the risk of collusion or manipulation, and to what extent.

Procurement officers and their collective knowledge are essential to conducting this risk assessment work. They should understand the dynamics of the markets in which major purchases are made and should be able to correctly assess the degree of risk collusion from market behavior that may not arouse suspicions from a less-informed buyer.

Risk and control considerations include:

    • With regard to the identification of needs, there should be a clear requirement for the product or service that has been approved by an independent person or board. Individuals inside the fraud victim organization can have hidden relationships with potential suppliers and bidders that they can use to influence or bias the decision-making process around the identification of needs for a procurement.

    • Similarly, any material goods, results, or savings promised to be delivered should be clear, transparent, and auditable.

    • As a key control mechanism, bid packages should require bidders to sign and submit a noncollusion affidavit stating that the bidder has not colluded and informing bidders of penalties should they violate laws or regulations.

      A thorough risk assessment also will identify areas where training is needed to strengthen the awareness of purchasing department employees with indicators of bid-rigging, price-fixing, and other types of collusion.
       

Contract specification and design is a key area where bid-rigging fraud can be engineered or biased. Is the specification understood and agreed on by the relevant participants of the organization, or is this understanding and agreement only held narrowly, such as by one individual? This is a scenario in which organizations not only find themselves at risk from bid-rigging fraud, but also from unknowingly (or knowingly) tailoring contract specifications to obtain a predetermined procurement outcome. Specific questions include:

    • Is the specification narrow to favor a particular individual or company? This can happen frequently when the organization and its representatives have had a satisfactory ongoing relationship with the same supplier or bidder, giving rise to a sense that the existing supplier is "best suited" to continue providing the service or goods. As a result, organizations may exclude legitimate bids and could be confronted by legal complaints and challenges.

    • Does the organization adhere to clear rules regarding contract scope changes? Bidders often submit price quotes based on detailed descriptions of services or products the customer wants. Particularly in government operating environments, work often is added to the contract after it has been awarded, including work that was totally unrelated to what was originally proposed. That might make the winning bidder happy to make more money, but other bidders can rightfully complain that they never got a chance to bid on the new work. Changing the scope of the contract requirements after the contract is awarded typically is considered a violation of internal contract rules. Moreover, insiders to the organization awarding the contract may have conspired to make contract changes even before the contract was awarded. Organizations should require changes to contracts to be documented in the form of contract modifications or amendments.

    • Does the organization award contracts without competition when there's an urgent need for critical items without delay? If so, does the urgency really exist or is it the result of poor planning or because of collusion between the vendor and those within the organization to avoid competition? Procurement officers, auditors, and others with oversight roles in the contracting process should be vigilant and closely scrutinize such arrangements to determine how the organization designated the sole source supplier and verify whether that supplier really is a sole source of expertise or supply of goods and services.

Other issues to watch for in the contract specification stage include deliberately writing vague specifications to allow favored but not necessarily best-qualified bidders to succeed, designing specifications to result in eventual bid-splitting, and allowing a potential bidder to view the specifications earlier than its competitors, especially when this influences the final contract specifications.

Internal Auditor is pleased to provide you an opportunity to share your thoughts about the articles posted on this site. Some comments may be reprinted elsewhere, online or offline. We encourage lively, open discussion and only ask that you refrain from personal comments and remarks that are off topic. Internal Auditor reserves the right to remove comments.

 

 

Comment on this article

comments powered by Disqus
  • MNP_Natonal Can Conf_July2017_Premium 1
  • LockPath2_July2017_Premium 2
  • IIA_GRC_July2017_Premium 3