The Procurement Fraud Equation. Tom Caulfield

The Procurement Fraud Equation Tom Caulfield

Specializing in assessment and mitigation strategies for procurement integrity to reduce the risk of financial and reputation losses 2016 ACFE Law Enforcement and Government Anti-Fraud Summit

PROCUREMENT FRAUD EQUATION By Tom Caulfield Experience in Oversight, Building Effective Contracting Integrity and Compliance Programs, Risk Assessments, and Anti-Fraud Strategies.

Procurement Fraud Equation The Procurement Fraud Equation is a visual depiction of five components that influence the likelihood and type of procurement fraud that can be perpetrated against an organization as shown in a mathematical formula. It also represents the five bodies of knowledge necessary to be effective in procurement fraud prevention and detection.

MATHEMATICAL

PERP WALK

THE PROCUREMENT FRAUD EQUATION (Pgs + PM3 + PT2) x (P5r + S44) = PF

(Pgs + PM3 + PT2) x (P5r + S44) Pgs = product (goods/services) = the 3 procurement methods PM3 = the 2 payment types PT2 P5r S44 = the 5 personality risks = the 44 traditional schemes

(Pgs + PM3 + PT2) x (P5r + S44)

GOODS or SERVICES (Pgs + PM3 + PT2) x (P5r + S44) = PF Type of Products

GOODS or SERVICES (Pgs + PM3 + PT2) x (P5r + S44) = PF Type of products be it goods or services will influence the fraud scheme that can be deployed!

PROCUREMENT METHOD (Pgs + PM3 + PT2) x (P5r + S44) = PF 3 Overarching Procurement Methods

(Pgs + PM3 + PT2) x (P5r + S44) = PF

PROCUREMENT METHODs (Pgs + PM3 + PT2) x (P5r + S44) = PF 1. Sealed Bidding 2. Contracting by Negotiation 3. Sole-Source

PROCUREMENT METHODs (Pgs + PM3 + PT2) x (P5r + S44) = PF 1. Sealed Bidding 2. Contracting by Negotiation 3. Sole-Source 4. Simplified Acquisition

SIMPLIFIED ACQUISITION The simplified government procurement procedures are for purchases that are $150,000 or less, but over $3,500 (micropurchases). Simplified acquisition represents on average 90% of the federal government s purchases, although they account for normally less than 20% of the total procurement dollars. Simplified acquisition removed many competitive restrictions on government purchases.

SMALL BUSINESS ACT In keeping with the mandate of Section 15(g) of the Small Business Act, SBA's Office of Government Contracting sets goals with other federal departments and agencies to reach the statutory goal of 23 percent in prime contract dollars to small businesses.

8(a) BUSINESS DEVELOPMENT PROGRAM Designed to help socially and economically disadvantaged businesses, the program helps entrepreneurs gain access to new economic opportunities. The goal of the program is to assist disadvantaged companies to thrive in a competitive business environment. ADVANTAGES Sole Source - By law the Federal Government has to award a percentage of all contracts to Minority-Owned businesses. Evaluation Preference - Receive preference in open bid contracts.

MULTI-AWARD CONTRACTS (MAC) & GOVERNMENT WIDE ACQUISITION CONTRACTS (GWAC) MAC & GWAC are a type of indefinite-quantity contract which is awarded to several contractors from a single solicitation. Delivery of supplies, or performance of services, is then made via an individual delivery/task order placed with one of the contractors pursuant to procedures established in the contract.

Certified Public Accountants (CPA) Internal Auditors Procurement Professionals 1. The Needs Generation Phase 2. The Selection of Purchasing Method Phase 3. The Solicitation Phase 4. The Evaluation/Selection Phase 5. The Performance/Delivery/Monitoring Phase 6. The Payment/Closeout Phase

Certified Public Accountants (CPA) Internal Auditors Procurement Professionals 1. The Needs Generation Phase (6) (5) (3) = [14]! 2. The Selection of Purchasing Method Phase (1) (2) (2) = [5] 3. The Solicitation Phase (3) (6) (4) = [13] 4. The Evaluation/Selection Phase (4) (4) (5) = [13] 5. The Performance/Delivery/Monitoring Phase (5) (3) (6) = [14]! 6. The Payment/Closeout Phase (2) (1) (1) = [4] The higher the score the greater the reported risk! [14]

PAYMENT TYPES (Pgs + PM3 + PT2) x (P5r + S44) = PF 1. Fixed-Price 2. Cost Reimbursement

FIXED-PRICE CONTRACTS Under fixed-price contracts the government agrees to pay the contractor a mutually agreed upon compensation for contract performance. Therefore, with a fixed-price contract the fraudster needs to create a scheme that reduces their cost margins and appears to stays within the terms and conditions of the contract, for example through inappropriate manufacturing, counterfeit parts, falsifying delivery amounts, or using lower cost laborers.

COST REIMBURSEMENT Under cost-reimbursement contracts, the government agrees to pay the contractor a mutually agreed percentage of the contractor s cost to perform, plus profit. With cost-plus contracts the fraudster will create a fraud scheme that allows them to increase profit through deception related to the companies cost for contract performance, for example by inflating cost, or submitting the same cost multiple times, or submitting reimbursement request for cost not incurred at all.

Risk to the Government PAYMENT TYPES Level of Effort Time and Materials Cost Plus Fixed Fee Cost Plus Award Fee Cost Plus Incentive Fee Cost No Fee Cost Sharing Fixed Price Award Fee Fixed Price Incentive Firm Fixed Price w/epa Firm Fixed Price Risk to the Contractor

THE 5 PERSONALY RISKS (Pgs + PM3 + PT2) x (P5r + S44) = PF

PERSONALITIES Each fraudster and/or abuser can be reduced to one of five personality risk profiles and each one is motivated differently, thus creating a different strategy for preventing and detecting their actions. These deceitful acts occur for different reasons in the mind of the fraudster or abuser, but each one succeeds by compromising procurement policies, procedures, and/or requirements. Therefore, it is important to understand the various personality risk profiles in order to prevent and/or detect these acts and mitigate its risks.

PERSONALITIES 1. Situational Fraudster 2. Deviant Fraudster 3. Multi-Interest Abuser 4. Well Intentioned Non-Compliance Employee 5. Disengaged Non-Compliance Employee

SITUATIONAL FRAUDSTER

SITUATIONAL FRAUDSTER 1. Situational Fraudster 2. Deviant Fraudster 3. Multi-Interest Abuser Labor mischarging by an individual Theft of government/company items Defective product Not bribes, gratuities, kickbacks, etc. 4. Well Intentioned Non-Compliance Employee 5. Disengaged Non-Compliance Employee

SITUATIONAL FRAUDSTER Frustrated at work. Rationalized right to illegal enrichment. Perpetrates at the right occasion. Normally because of weak controls. Other employees within the organization are never surprised that the person was involved in the fraud.

DEVIANT FRAUDSTER 1. Situational Fraudster 2. Deviant Fraudster 3. Multi-Interest Abuser 4. Well Intentioned Non-Compliance Employee 5. Disengaged Non-Compliance Employee

DEVIANT FRAUDSTER Always proactive in their search for opportunities to commit fraud. Possibly perceived as one of the company s hardest workers or best contractors. Carries the "veil of trust" from others in the organization. Sometimes described as a "wheeler-dealer.

10% - 80% - 10% 1. Situational Fraudster (80%) 2. Deviant Fraudster (10%) 3. Multi-Interest Abuser 4. Well Intentioned Non-Compliance Employee 5. Disengaged Non-Compliance Employee

PROCUREMENT ABUSE Procurement Abuse includes actions like: Misuse of authority or position; Misuse of access to sensitive procurement information. *All with the intent to advance one s own interest or those of a family member, friend, or particular contractor.

PERSONALITIES 1. Situational Fraudster 2. Deviant Fraudster 3. Multi-Interest Abuser 4. Well Intentioned Non-Compliance Employee 5. Disengaged Non-Compliance Employee

NON-COMPLIANCE EMPLOYEE There are two types of Non-Compliance Employees: Well-Intentioned and Disengaged Never talked about during courses Where a Fraudster and Abuser creates a direct financial loss Non-Compliance Employees create an indirect and unnecessary exposure

PERSONALITIES 1. Situational Fraudster 2. Deviant Fraudster 3. Multi-Interest Abuser 4. Well Intentioned Non-Compliance Employee 5. Disengaged Non-Compliance Employee

WELL INTENTIONED NON-COMPLIANCE EMPLOYEE Believes their deviation will cause no harm. Believes their actions add efficiency. Strong knowledge of your procurement Processes/Requirements. Does not identify the true scope of the requirements. Knows key words to say or not say.

PERSONALITIES 1. Situational Fraudster 2. Deviant Fraudster 3. Multi-Interest Abuser 4. Well Intentioned Non-Compliance Employee 5. Disengaged Non-Compliance Employee

DISENGAGED NON-COMPLIANCE EMPLOYEE Gallup Poll 24% - Actively Disengaged. Will not perform any of the Schemes. Opens the organization for the Fraudster. Little or minimal effort into procurement steps. Will not check a contractor s bond. Will not check past performance. Will not confirm delivery of the product prior to approval for payment. Disgruntled or dissatisfied employee.

WILD-GOOSE CHASE 1. Situational Fraudster 2. Deviant Fraudster 3. Multi-Interest Abuser 4. Well Intentioned Non-Compliance Employee 5. Disengaged Non-Compliance Employee

PERSONALITIES http//www.procurement-integrity.net 1. Situational Fraudster 2. Deviant Fraudster 3. Multi-Interest Abuser 4. Well Intentioned Non-Compliance Employee 5. Disengaged Non-Compliance Employee

THE 44 SCHEMES (Pgs + PM3 + PT2) x (P5r + S44) = PF

THE SCHEMES Undeniably, the universal and most significant threats to achieving and maintaining honest, fair, impartial and legal contracting comes from the 44 traditional schemes of procurement fraud or abuse and the multitude of ways each of those schemes can be performed. The success of these malicious acts are driven by the motivation of the perpetrator(s), the scheme they are deploying, the fraudsters ability to influence a decision point within a procurement process, and the effectiveness of the entity s procurement integrity controls.

THE EQUATION (Pgs + PM3 + PT2) x (P5r + S44) = PF 44 Traditional Schemes Bribes Gratuities Kickbacks Extortion Inflated Claims Multiple Claims False Claims Counterfeit Parts Phantom Vendor Product Substitution Bid Rotation Market Sharing Conflict of Interest Bid Suppression

INTENDED MANIPULATION Selection of the vendor Cost of what the buyer will pay Quality being provided

THE EQUATION (Pgs + PM3 + PT2) X (P5r x S44) = PF 44 Traditional Schemes

THE EQUATION (Pgs + PM3 + PT2) x (P5r + S44) = PF 44 Traditional Schemes 1. The imagination and motivation of the perpetrator 2. The type of scheme they were deploying 3. The product being procured 4. Their access & type of procurement method being used 5. The effectiveness of your organizational procurement integrity controls

AUTHORITY vs. INFLUENCE Important to remember The difference between authority and influence sometimes in procurement fraud it is the influence over the authority that has the greater impact. Darleen Druyun, former No. 2 acquisition executive for the Air Force, was sentenced to nine months in prison for negotiating a job with Boeing at the same time she was involved in contracts with the company, the nation's second-largest Defense contractor.

READ THE CONTRACT Contract provisions are a notorious area in which auditors and investigators believe they have clear evidence of theft only to discover that the money was taken in compliance with a provision of the contract that the auditor or investigator failed to study and understand.

REVIEW REQUIREMENT The description of the requirement and the justification is critical review them anytime you have an allegation of fraud missing justifications or weak justifications are one of the best fraud indicators of an insider in collusion with a vendor.

UNDULY NARROW If there is collusion between the customer/program person and the vendor, the insider may attempt to draft unduly narrow requirements or specifications thereby only allowing a preferred contractor to qualify, or the corrupt insider might draft unduly broaden specs to qualify an otherwise unqualified bidder.

PRE-AWARD CONSPIRACY Requirements Justification RFP Evaluations Negotiation/Award Selection Delivery Payment

CHANGE ORDER ABUSE After the procuring entity awards the contract, the corrupt contractor and insider submits fraudulent change orders. o To increase its price. o To improperly extend or expand contracts. o To avoid rebidding.

THE SCHEMES Bribery, Gratuity & Extortion Conflicts of Interest Rigged Specifications Collusive Bidding Excluding Qualified Bidders Unbalanced Bidding Leaking Bid Data Manipulation of Bids Unjustified Sole Source Split Purchases Kickbacks Defective Pricing Cost Mischarging Co-mingling of Contracts Defective Products Product Substitution Counterfeit Parts Purchase for Personal Use Phantom Vendor Change Order Abuse False Statements & Claims

(Pgs + PM3 + PT2) x (P5r + S44) = PF The Procurement Fraud Equation is a visual depiction of five components that influence the likelihood and type of procurement fraud that can be perpetrated against an organization as shown in a mathematical formula. It also represents the five bodies of knowledge necessary to be effective in procurement fraud prevention and detection.

PROCUREMENT FRAUD An intentional perversion of truth somewhere in the acquisition process for the purpose of inducing another to part with something of value, or to surrender legal right. http//www.procurement-integrity.net The misrepresentation is fashioned by a fraudster(s) who has a deep operational knowledge of the procurement process and therefore many times is connected to the contract.

CONTACT INFORMATION TOM CAULFIELD Chief Operating Officer 540.907.8654 Tom@Procurement-Integrity.net

The Procurement Fraud Equation Tom Caulfield