Contract fraud: is your organisation at risk?

February 2013 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

A seemingly endless stream of business fraud allegations flows continuously over our news tickers. The growing preponderance of corruption, collusion, coercion and fraud in the procurement of business contracts has thrust companies into the international limelight and forced organisations to become more accountable.

Be it major grant work awarded by government or other funding agencies, securing lucrative contracts around the globe, or using third-party intermediaries to aid in new business development, business organisations worldwide are becoming increasingly susceptible to corporate fraud and increasingly scrutinised by law enforcement agencies – and the public – in the manner by which they conduct business. And the risk of collusion increases markedly in the context of the economy and greater levels of subcontracting.

In the past year, law enforcement agencies have taken a more proactive stance to identify, apprehend and prosecute perpetrators of corporate fraud, levelling record fines against companies and harsh sentences against executives as a way to demonstrate intolerance towards fraud and judgment on those found guilty.

Business organisations worldwide – under the auspices of the US Foreign Corrupt Practices Act (FCPA), the UK Bribery Act, and myriad other laws laid down by governments worldwide – have been cajoled into re-examining their fraud compliance programs and incorporating tighter internal and external controls to identify irregularities, pinpoint infractions and mitigate the risk of damages.

Homing in on procurement fraud

Procurement fraud is a generic term describing fraud relating to the purchase of goods or the commissioning of services. Procurement fraud usually involves collusion between one or more members of an organisation’s staff and one or more outside suppliers.

Such transactions are identified as being ‘at risk’ due to the known or suspected involvement of government officials or politically exposed persons, irregularities in procurement processes and contract awards, and other red flags.

General examples of procurement fraud would involve: (i) persuading government officials to receive kickbacks during the procurement process; (ii) using outside contractors that have bid on substantial jobs with no previous experience; (iii) working with contracting companies which are owned by politicians; or (iv) forming working relationships with private sector partners, individuals or politicians who have been previously prosecuted in kickback schemes.

Frequent areas where misrepresentations often occur include unauthorised use of outside consultant resumes without the consultant’s authorisation, bait and switch offers on products or services, misrepresentation of past performance, provision of falsified bank guarantees, and misrepresentation of financial position.

Instituting an effective integrity program

In the world of anti-corruption, the best defence is, of course, a strong offence. Corporate good governance begins with a strong and well-executed compliance program. Therefore, corporations should institute and promote a ‘zero-tolerance’ anti-corruption policy which includes a controls-based, detailed approach to fraud and corruption that is fortified by internal training programs and broad-based integrity awareness campaigns.

Such programs, then, would include: (i) an effective overall compliance plan which has been developed with the assistance of outside counsel and is easily monitored and updated to conform to changing technology and new legislation; (ii) a formalised code of ethics that is presented and adhered to by the entire company; (iii) the creation of an ‘anti-corruption culture’ within the entire company; (iv) the establishment of direct internal corporate reporting systems and the personnel to effectively oversee and administer them; (v) ongoing and regular checks and audits of the company-wide system; (vi) evaluating and modifying the compliance plan and internal controls to make sure they are defendable on both a global and local level; (vii) appropriate and consistent disciplinary processes to deter irregularities; (viii) early detection of potential violations; (ix) voluntary self-referral and whistleblower reporting systems; and (x) remedial actions to address past cases of corruption.

Here are suggested initiatives which are designed to strengthen the company’s key internal and external control mechanisms, procurement and financial management practices, while increasing the transparency and effectiveness of the organisation’s operations.

Reporting, bookkeeping and contracting

Proper accounting and reporting provisions, as dictated by the FCPA, require corporations covered by the provisions to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Key measures here include: (i) the establishment and implementation of robust financial controls, making sure that relevant staff are made aware of the controls and measures in place; (ii) ensuring basic records of all financial and contracting records are maintained, and supporting documents are archived; and (iii) documenting clear procedures for reporting fraud to the proper authorities within the company.

The subsequent recording of all instances of suspected and confirmed fraud will help the company spot emerging patterns, identify areas of risk, measure losses and build an evidence base if fraud has occurred.

The company must properly account for all payments made to government officials, which includes any ‘facilitating payment’ to expedite routine government actions such as to issue a licence or permit, to process a visa, to provide services like mail delivery, security services, or utilities services, provided the payment is not prohibited by local law.

All standard bidding documents should contain language that clearly alerts bidders that documents submitted in support of bid proposals may be subject to independent verification by the company or its representatives, and that failure to authenticate a claim will result in the bidder’s disqualification from the bidding process and debarment from future business.

Outside agents: the area most prone to abuse

To avoid being held liable for corrupt third-party payments, the company should exercise due diligence and take all necessary precautions to ensure that business relationships have been formed with reputable and qualified partners and representatives. Due diligence is a fundamental component of integrity violations, backed by technical support and outside advice from counsel.Such due diligence may include investigating potential foreign representatives and joint venture partners to determine if they are in fact qualified for the desired position, whether they have personal or professional ties to the government, the reputation of their clientele, and their reputation with local bankers, clients and other business associates.

Businesses should train outside agents regarding all corruption and anti-bribery laws and consider adding requirements for compliance with these laws in all contracts with outside agents.

Further measures include the following: First, tight controls should include the exclusion of providers where there are reasonable grounds for deciding they cannot be entrusted with public money. The organisation should also interview questionable providers rather than relying solely on paperwork and certificates. Second, taking preventive measures to lessen the overall role of agents or conduits, thereby reducing opportunities for kickbacks. Third, maintaining a database of debarred and questionable third-party individuals, organisations and other entities to simplify the due diligence process before contracts are awarded and to prevent contracts from inadvertently being awarded to such entities. Finally, reviewing and revising contracts used to engage translators and interpreters to include language on adherence to the highest ethical standards of the company’s anti-corruption policy.

Education and communications initiatives

Best-practice corporate anti-corruption programs integrate an effective communications program that informs, educates and offers a variety of outlets and resources that employees can utilise to instil a universal code of business conduct and ethics, acquire information and expose irregularities. These programs emphasise the importance of working together and call upon every staff member of the organisation to collaborate and become vigilant in preventing fraud and corruption in every aspect of their job.

Aside from informing and educating, effective communications programs adequately define the role and obligation of each staff member in preventing fraud and corruption in their specific areas of responsibility.

Here, in no particular order, are some examples of best-practice solutions that can be integrated into a corporate good-governance program.

Conduct regular presentations, seminars or workshops pertaining to the organisation’s anti-corruption policy for business delegates, board of directors and key outside representatives. Such presentations raise awareness on such issues as spotting red flags for bribes, how to prevent fraud and corruption in consultancy contracts and project implementation, and improving governance in various industry sectors.

Clearly define what tools your organisation has to fight fraud and corruption, and identify mitigating measures that could be incorporated in operational and procedural processes to prevent integrity violations. Provide regular and mandatory anti-corruption orientation seminars to educate, create awareness and demonstrate the tools available to conduct due diligence to minimise the risk of integrity violations.

Regularly provide case studies from past company experiences and publicised cases involving corrupt practices.

Align Human Resource policies and procedures with fraud and financial crime issues. These anti-corruption procedures should be integrated into company-produced policies, principles and guidelines manuals.

Set out clearly defined roles and assignments of due diligence responsibilities for staff, including segregation of duties and delegation of financial responsibilities with appropriate report-back procedures.

Initiate open forums to discuss best practices, shared knowledge, methodology; websites and intranets are tools that work best to facilitate such info sharing.

Set up an integrity email reporting system for reporting allegations of fraud and corruption. Effective reporting systems allow for anonymity via a separate web-based email account for communications.

A similar ‘reporting hotline’ can be made available for employees to report concerns about questionable or improper accounting of financial matters and unethical, illegal or unsafe business practices. Such systems allow anonymous reporting via a toll-free phone call and are available worldwide 24/7. This enables employees to report concerns without fear of retribution or retaliation.

Produce web-based e-learning modules to educate new and existing staff. E-learning modules provide an excellent feedback system that adequately monitors the level of understanding among corporate staff.

Compile a ‘Frequently Asked Questions’ section on the company intranet as a rapid resource and quick reference for employees to access when integrity issues arise.

Through the proper establishment, administration and communication of a company-wide anti-corruption program the business will not only mitigate the monetary and legal damages associated with fraudulent, collusive or coercive practices, it will be capable of properly defending itself in the court of law (and the court of public opinion) when such allegations arise.

Zafar I. Anjum is chief executive officer of CRI Group, CFE, CIS, MICA. He can be contacted on +971 4 358 9884 or by email: zanjum@crigroup.com.

Zafar I. Anjum

CRI Group