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Procurement fraud: ‘A wolf in sheep’s clothing’

Procurement fraud is surprisingly common, and complexity can make it hard to spot – the pandemic certainly isn't making it any easier. Bill Mew explains why procurement fraud is like a wolf in sheep clothing, let loose by the pandemic’s disruption to supply chains.

3rd Nov 2020
CEO and founder Crisis Team
Columnist
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Wolf in sheep's clothing: Metaphor manipulation showing flock of sheep observed by a wolf appearing like a sheep
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Procurement fraud, a form of insider corruption, is widespread but hard to spot without data analytics. It lowers revenues, ruins reputations and distracts from the crucial work of businesses.

The extent and scale of the crime are rarely fully known in an organisation. Most companies are unaware that procurement fraud going on in the background, like a wolf in sheep’s clothing – hiding in plain sight. 

Often committed by long-term employees, known suppliers and others close to the organisation, procurement fraud is estimated to put up to five percent of business spend at risk each year. Research from SAS has revealed that it is now more common than bribery, corruption, and cybercrime.

Procurement is one of the areas most prone to fraud, according to PwC. Its Global Economic Crime Survey (GECS) noted that while the overall level of UK businesses experiencing

fraud fell from 55% in 2016 to 50% in 2018, there had actually been an increase in the number of organisations reporting certain types of fraud, notably bribery and corruption and procurement fraud. It also found that the UK is lagging behind much of the rest of the world in harnessing technology to detect and prevent fraud.

The pandemic

Supply chains have been under pressure as businesses have experienced a domino effect, with disruption leading to shortages in materials and cashflow that in turn have led some firms to remodel their supply chains and explore reshoring:

  • Disruption: while businesses may have overcome the initial impact of the pandemic, they are still suffering intermittent aftershocks, each time suppliers find themselves in lockdown for example, and this will continue.
  • Shortages of materials: the new normal has also seen shortages and price hikes for raw materials in certain sectors
  • Cashflow challenges: efficient cost management has always been essential but as company margins continue to be squeezed, it is becoming critical.
  • Reshoring: some businesses have responded to the disruption and shortages by choosing to adjust their sourcing strategies and seeking to increase the resilience of their supply chains. Recent disruption has shown that any cost savings from far-shored, inexpensive suppliers can come with greater risk. And single supplier relationships that maximised purchasing power in good times, can be seen as a single point of failure during periods of disruption.

Procurement processes must be rigid enough that they are hard to circumvent. But they must be flexible enough that procurement can be carried out efficiently without undue costs in the form of checks or disruptions to internal operations. 

During the pandemic, we have seen more than the normal amount of changes. At the same time, we have also seen a far lower level of the kind of direct contact that might have provided natural checks. This has opened a window of opportunity for an increase in procurement fraud.

An intelligent approach

Intelligence needs to be applied across all three elements of any transaction: 

  1. Tracking the goods moving in one direction
  2. The payment moving in the opposite direction 
  3. The data moving in both directions

Prompted by GDPR and regulations around bribery and anti-money laundering, firms have been seeking to get a better handle on their data and payments. Given the volume of transactions, the smart ones have adopted artificial intelligence (AI) to sift through them all efficiently.

The ‘Cinderella’ element in the equation has always been the tracking of goods where few organisations have adopted a smart approach to logistics and inventory. The really smart approach though is to be able to apply AI across all three.

With audit resources limited, there is a real need to be able to easily and accurately spot anomalies in the flow of goods, payments or data. AI-enabled big data analysis across all three can provide quicker and more accurate identification of potential issues for further investigation.

Effective data crunching

The main challenge is the amount of data that needs to be crunched and analysed for procurement fraud prevention. 

Human investigators and basic detection software cannot cope with such data volumes. But advanced analytics, machine learning, and AI can do this effectively. With the capabilities to process and interpret data quickly and consistently, they can even make money back for the business. 

Both advanced analytics and AI are able to pick up on the data points and tell-tale signs of fraudulent activity and alert the business before any damage is done. The crucial insight they then generate from the raw data enables fraud prevention teams to make better, more informed decisions.

As organisations reassess their sourcing strategies to increase supply chain resilience and consider reshoring certain elements, it is a good time to consider applying the rigorous controls using analytics. If procurement fraud is anything near the estimated five percent of business spend, then measures to prevent it should pay for themselves.  

At some point in the future, we will look back at how we responded to the pandemic and addressed different kinds of fraud and wonder why we hadn’t always applied intelligence to the way we monitor procurement.

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By AshBavalia
05th Nov 2020 10:23

Procurement fraud in normal times and in normal businesses may well be as described above but the recent cases of fraud with Government contracts point to something completely different and nefarious in nature.

Instead of procuring through a tried and tested supply chain containing established experts in their field who are vetted and compliant to industry standards, this Government have used newly formed suppliers with no knowledge, trading history or expertise in the required fields. For example, buying PPE through shell companies, contracting ferry companies without ferries, the list goes on and on.....

What we have here is a fundamental abuse of Government power and public money for procurement that hasn't necessarily ended in fraud but was in fact inherently fraudulent from the outset!

Make of that what you will!

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