Procurement and billing fraud consists of various types of deceitful activities within the purchasing and payables processes of a business. These malicious acts can include the seemingly routine selection of vendors, the awarding of business, the payment of invoices and other similar functions. Since these tasks ultimately involve the disbursement of company funds to third parties, all steps within these processes are susceptible to fraud. These types of frauds generally fall within one of the following categories:

  • Procurement Fraud
  • Billing Fraud
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Procurement Fraud

Procurement Fraud

Procurement fraud can involve any type of dishonesty or deceit by internal or external parties involved in an organization’s appropriation of funds. Perpetrators of procurement fraud can be unethical employees, unscrupulous bidders or vendors and even organized crime groups.

Procurement fraud is a prevalent issue for all three levels of government in Canada, in addition to a diverse collection of other organizations that fall within the public and private sectors.Frequently, procurement fraud can result in an unfair and uncompetitive selection process with the organization paying above market value for goods and services. Procurement fraud can take many forms, but usually involves one or more of the following:

  • Procurement Process Manipulation by External Bidders
    1. Bid-rigging (including bid suppression, bid rotation, and market division) – A predetermined arrangement between bidders whereby one will emerge victorious through the selection process, which is ensured by ‘losing’ competitors either submit intentionally low bids, withdraw bids or agree not to bid on the contract.To feign a fair and just process the bidders may alternate successful bids,or agree to win in certain market segments or geographical areas while relinquishing certain opportunities to their competition
    2. Fictitious and phantom bids – Bids or quotations that are entirely fabricated, submitted by companies that do not exist or do not possess the ability and have no intention to provide the goods and services in question
    3. Undisclosed relationships between proponents – Competitive bids or quotations are submitted by entities that have a covert relationship with each other
    4. Price fixing – Competitors agree among themselves to charge certain prices for particular goods and services
  • Procurement Process Manipulation by Internal Employees
    1. Bid tailoring – Bid specifications are created with the intent of providing an advantage to one bidder (or a select few bidders)
    2. Deadline manipulation – An employee involved in the procurement process extends, shortens or ignores established bidding deadlines with the explicit purpose to create an advantage (or disadvantage) for certain bidders
    3. Leaking confidential information – A employee involved in the procurement process offers confidential information to one bidder, resulting in an unfair advantage for the bidder in question
    4. Unjustified sole and single sourcing – An decision maker that represents the organization gives the directive that specific goods and services should be purchased from a particular vendor even though viable alternatives and vendors are an option
  • Conflicts of Interest – Conflicts of interest can occur when an internal employee with influence or involvement in the procurement process has an undisclosed relationship with one of the bidders or proponents. Examples include situations in which the employee:
    1. Is secretly an owner, partner, or shareholder of one of the bidders
    2. Is employed by one of the bidders and receives wages or consulting fees
    3. Has received loans from – or provided loans to – one of the bidders
    4. Is a family member or close friend of a principal player involved with one of the bids
  • Corrupt Payments and Benefits – These include bribes, kickbacks, secret commissions and other payments and benefits. They are provided by bidders or vendors to one or more of the internal decision-makers involved in the procurement process. These corrupt payments and benefits can be in the form of:
    1. Cash
    2. Payments to companies that are controlled by the corrupt employee
    3. Payments made to third parties and to the benefit of the corrupt employee
    4. Gifts and other non-cash benefits

Once an insincere vendor has been awarded with a contract to provide specific goods or services to an organization, they can perpetrate additional frauds against them by the manner in which they invoice. This type of fraud is referred to as ‘Billing Fraud’.

Red Flags

  • The same vendor seem to frequently submit a successful bid
  • Unqualified vendors seem to be bidding on,and acquiring contracts
  • The competitive process seems flawed, as qualified vendors seem to be excluded for no apparent reason
  • Employees appear to advocate for certain vendors to be retained (or for other vendors to not be considered) without justification
  • Goods and services that are delivered by certain vendors appear to be of an inferior quality, more expensive or unsuitable for their intended use (when compared to the goods and services offered by their competition).
  • Relevant documentation with respect to competing quotations is missing or incomplete
  • Awarded contracts to a particular vendor are justified (though many deem them to be of a suspicious nature), since the same proponent submitted competing quotations

Billing Fraud

Billing Fraud

While procurement fraud involves questionable tactics with respect to how vendors are selected, billing fraud involves irregularities with the invoices that are issued by vendors. Billing fraud is perpetrated by external vendors, often through an act of collusion with internal employees.

Billing fraud can involve:

  • Fraudulent Invoicing, including:
    1. Fictitious invoices – Invoices for goods and services that were not provided;
    2. Inflated invoices- Invoices that reflect higher prices than what was initially agreed upon, or quantities (such as units of products or hours of labour) that were not provided in full;
    3. Duplicate invoices – Invoices that are submitted for the same goods and services that accounted for on previous bills and invoices;
    4. Inaccurate invoices – Invoices for goods and services that are provided to an entity other than the organization that paid for them.
  • Other Deceptive Billing Practices, including:
    1. Substituting inferior products, product brands or services for those contained within an agreement or contract
    2. Substituting a more expensive, higher-margin or higher quantity of product than what was agreed upon
    3. Misrepresenting the goods and services described in an invoice
    4. Adding excessive mark-ups to the invoice
    5. Bidding a low amount to secure a contract, and then subsequently billing for ‘change orders’or other ‘add-ons’
    6. Invoices for fictitious, exaggerated, unallowable or duplicate expense reimbursements (this applies to situations in which a vendor is allowed to pass certain expenses on to its customer)

Red Flags

  • Invoice descriptions of expenses are routinely generic in nature, and lack particular elements unique to the contract in question
  • People, locations, and other tangibles that do not exist are referenced in the invoice description
  • Invoice descriptions are very similar to descriptions on other invoices. Noteworthy examples include services rendered by the same vendor or by different vendors (revealing that the same work may have been billed more than once)
  • The information in the ‘bill to’ or ‘ship to’ fields on an invoice does not correlate with other relevant information

Procurement and Billing Fraud

Mr. Peng was employed by the Canadian Transportation Association (henceforth referred to as the CTA), and was responsible for maintaining the structural integrity of the train tracks that were spread across the country. For the previous 10 years, Mr. Peng had been engaging in fraudulent acts – specifically, billing fraud-by sending the CTA monthly invoices for parts needed for the train tracks. These invoices were sent from ‘Nail’s Re US’, a company that he had registered, where Mr. Peng was the sole director and officer.His scheme remained intact because the contract had been awarded to a company with a similar title: ‘Nail R US’. They were procured to provide the equipment that would be required to repair the train tracks.

Mr. Peng’s scheme to defraud the CTA remained undetected for a prolonged period of time. As his thirst for greed continued to consume him, he wrongfully assumed that he could ‘up the ante’ and attempted to defraud the CTA to an even greater extent. When greed and desperation set in, chronic fraudsters tend to believe that they will not be caught and exposed.He went on to create fake invoices, using his registered company as a sub-contractor to the legitimate company that had been awarded the contract, ‘Nail R US’.

Mr. Peng was able to continue with his acts of deceit and fraud until his retirement. It was then that the new acting manager (who had temporarily assumed the role of Mr. Peng) questioned the authenticity of ‘Nail’s Re US’, since it had become apparent that two companies with very similar names were routinely billing the CTA for the same products. The payment for these products was being sent to different bank accounts, at different financial institutions. The new acting manager knew that ‘Nail R US’ was the approved vendor, and so it further called into question the dealings of ‘Nail’s Re US’. The acting manager decided that the best course of action would be to retain forensic accountants to further investigate.

Relevant Evidence:

  • Invoices submitted
  • Banking records of the suspected fraudster
  • Electronic Communication, such as text and email
  • Interviews with the suspect and other relevant parties

To determine whether your organization may be susceptible to procurement and billing fraud, take the following brief survey: