Red Flags for Corruption in Procurement

Corruption in procurement can happen anywhere at any time. Whether accepting an all-expenses-paid golf weekend from a vendor, slipping a building inspector a little cash to ignore a problem, or funneling overcharges back to the buyer, corruption takes many forms. It can happen anywhere in the supply chain.

Public-sector procurement is rightfully under scrutiny for ethics breaches, but private-sector corruption is also a problem. Many countries have regulations against giving or accepting bribes and other forms of corruption. Companies have developed ethics codes outlining actions that could lead to termination and prosecution.

However, despite ongoing programs worldwide, corruption and other crimes are challenging for many companies. In the PwC Global Economic Crime and Fraud Survey, 46% of organizations reported being victims of fraud, corruption, or other economic crimes. 

What is Corruption? 

According to Transparency International, corruption is the abuse of entrusted power for private gain.

Corruption can happen anywhere and involve anyone. The most common factor is that it happens behind the scenes, out of public view. From a small payoff to win a contract to money laundering schemes that span the globe, corruption relies on the complicity of others.

Corruption is adaptable and resilient, evolving in response to changing regulations, technology, and market conditions. Corruption can be coerced due to an imbalance of power or voluntary if both parties benefit.

The national and company culture and regulatory situation contribute to an environment where corruption can thrive.

The United Nations Convention against Corruption (UNCAC) reports, “A procurement system that lacks transparency and competition is the ideal breeding ground for corrupt behavior and thus most important international codes on anti-corruption and public procurement rest heavily upon these fundamental principles, in order to discourage corruption.”

Wherever corrupt business practices occur, they distort markets and create unfair competition. The lack of transparency and misdirection of resources undermines sustainable economic growth, the rule of law, the environment and human rights.

Public procurement contracts are a common target for corrupt practices. Often, the stakes are very high, such as lucrative defense contracts and public works projects. Corruption doesn’t necessarily involve money or other things of value exchanged. It can occur when companies secretly collaborate on bids and pricing for their benefit, for example.

The Procurement Collusion Strike Force from the U.S. Department of Justice identified collusion and anticompetitive conduct that undermines the competitive bidding process.

Bid rigging: Firms that should be competitors agree to bid so that a designated firm delivers the winning bid.

Price fixing: Competing sellers agree on what prices to charge by limiting maximum or minimum prices.

Customer or market allocation: Competing firms agree to split up customers by geographic area to reduce or eliminate competition.

Corrupt agreements generally happen behind closed doors. The participants defraud customers by holding themselves out as competitors, although they have agreed not to compete. This conduct leads to consumers and taxpayers paying more for products and services and depriving them of the benefits of true competition. 

Red Flags for Corruption

Corruption in an organization may be hard to spot. It could be small-time ad hoc bribery or systemic influencing operations to accomplish a corporation’s goals.

Here are a few common corruption warning signs that may be occurring in your corporation and supplier base. 

Conflicts of Interest

It may be hard to spot conflicts, but they result from relationships or interactions that benefit either or both parties. Actions involving conflicts include accepting gifts or benefits, having a prior business or personal relationship, or accepting employment during or after leaving a government post.   

Criminal Associations

Organized crime groups cultivate contacts to gain information and influence decisions. Criminals may take jobs within the organization or a supplier. These groups are a threat to all levels of an organization.

Misuse of Discretionary or Regulatory Authority

People in positions of authority may ask for bribes to accept or reject applications to bid on projects, grant licenses or approve project reviews. These positions may be subject to conflicts of interest, such as a private sector employee taking a job with the regulatory agency over their industry.

Misuse of Information

Disclosure of public or private sector information by unauthorized persons can have serious consequences, especially if it involves classified or sensitive information. The information could lead to bid rigging or price fixing.

Procurement

The procurement function can be particularly vulnerable to corruption due to the monetary value involved. Conflicts of interest can inadvertently arise if policy compliance is not monitored closely.

Recruitment and Employment

Organizations may be vulnerable to misconduct due to poor practices in recruiting and post-employment. Hiring corrupt or criminally involved staff can undermine the organization’s financial standing. Public sector employees accused of corruption may resign before the investigation is complete, going unpunished and available for work in other public positions.

Source: Independent Broad-based Anti-corruption Commission, Victoria

Be Aware of Corruption Red Flags 

Many organizations already have anti-corruption policies and procedures in place. But the red flags can appear without warning. It’s critical to follow up training with oversight and management attention. Monitor procurement activities at random and conduct thorough due diligence on suppliers before and during the engagement. Effective internal controls and separate duties can reduce the potential for corruption in the procurement process. Anonymous reporting mechanisms – hotlines, reporting portals, etc. — allow employees to identify corruption that may involve superiors.

Corruption is a never-ending scourge for public and private sector procurement. With solid policies in place and diligent compliance efforts, you may see the red flags before they can do harm.