Procurement fraud can be committed by employees acting alone or in collusion with vendors. While fraudulent activities between suppliers/vendors and employees are not uncommon, these transactions are unacceptable as they create a host of challenges to the business if allowed to continue under the radar.
With this threat, the onus is on organisations to create a culture where fraudulent activities are easily identified and dealt with.
Some of the ways in which employees collude with vendors include:
- Pass-through schemes | where an employee or contractor sets up a business, which supplies goods or services to client.
- Conflict of interest | which occurs when an individual or organisation is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.
- Shell company schemes | which enable an entity that has no active business and usually exists only in name as a vehicle for another company’s business operations.
- Tender fraud | where the manipulation of the bidding/tendering process between employees of the issuer of the bid and the bidding company lead to bribes and kickbacks.
- Billing schemes | when an employee generates false payments to himself/herself using the company’s vendor payment system either by creating a fictitious vendor or by manipulating the account of an existing vendor.
- Bribery and kickbacks | when an employee participates in a bribery scheme when he or she accepts (or asks for) payments from a vendor in exchange for an advantage.
- Over-billing | is when a vendor pads invoices to charge the company for more goods than it ships or to charge a higher price than agreed. This can be done in collusion with an employee who receives a kickback, or by the vendor alone to defraud the company.
To prevent and detect vendor fraud, it advisable to conduct thorough background checks on new employees as well as implement checks and balances on payments to vendors.
In addition, it should become part of policy to separate the functions of check preparer and check signer, rotate duties of employees in procurement, conduct random audits of vendor files and conduct due diligence when setting up vendors.