Is supply chain disruption increasing procurement fraud?

With supply chain disruption being caused in the wake of the war in the Ukraine, is it a prime opportunity for fraud in the procurement system?

With many businesses having to look for new suppliers in tight time frames, there is a fear that hard-pushed procurement operations may not be able to conduct the same levels of due diligence on all the tiers of their supply chain.  

Recent research in the UK is suggesting that procurement fraud jumped 13% in the past year – with the number of fraud reports rising from 153 to 173 over the last twelve months*, shows research by Accuracy, an international independent advisory firm.

The data has been gathered by Action Fraud, the UK Government’s national reporting system for fraud and cyber-crime.

What is procurement fraud?

Procurement fraud is the misuse of funds or the abuse of power when purchasing goods or services and may involve employees syphoning off money from their employer in collusion with suppliers.

“Supply chain disruption, the cost-of-living crisis, and the increased sophistication and volume of cyber-security attacks have created the ideal breeding ground for procurement fraud,” says Roberto Maluf, Director at Accuracy.

“This fraud is a major hidden cost for businesses and can be difficult to detect. In some cases, procurement fraud schemes can go undetected for years, resulting in substantial losses for companies and investors.”

“Recovery of misappropriated funds through civil action can be difficult, meaning robust prevention and detection procedures are vital for businesses.”

Roberto Maluf, Director at Accuracy (Credit: Accuracy)

Home working and procurement fraud 

A move towards more hybrid working arrangements, with scrutiny of home workers more difficult for leaders to make sure correct processes are being followed at all times.   The increase of cyber-security attacks in recent years is another contributing factor, with malicious actors monitoring incoming and outcoming mail or using other means to access confidential tender data to gain an advantage over competing bids.

Red flags to look for 

  • Unusually low bids at the tender stage, particularly if these types of bids consistently win contracts
  • Rejection of viable bids for no good reason
  • Inadequate or missing documentation including contracts, quotes or technical documents
  • Conflicts of interest eg connections between procurement individuals and suppliers that fall outside the normal course of business
  • High volumes of orders immediately being made with a brand new supplier
  • Large volumes of small orders – this could suggest rigging to collude against larger suppliers
  • Significant changes in contract terms and value after the contract has been awarded
  • Unexplained change of lifestyle/increased wealth of procurement employee
  • Unnecessary or unexplained involvement of procurement employees or middlemen in procurement contracts

Procurement fraud is a global problem

This follows previous research featured in the PwC GLobal Economic Crime and Fraud survey that claimed more than half of organisations have experienced fraud.  

The most common global types include customer fraud, cybercrime, and asset misappropriation, of those crimes 40% came from internal and 40% from external perpetrators, the rest came from collusion between the two.

Latest figures from the Association of Certified Fraud Examiners (ACFE), more than $4.7 trillion is lost annually to occupational fraud worldwide.
Read four ways you can fight procurement fraud by Focal Point CEO Anders Lillevik.

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