May 16, 2018 May 16, 2018/ Guest User
Mandy Moody, CFE
ACFE Content Manager
Tim Harvey, CFE, head of global chapter development for the ACFE, recently shared a story with me about a networking event he held for the U.K. Chapter called "Find a Fraudster." The objective of the event was to move around the room and network with as many people as possible all the while trying to identify a fraudster in the room. Harvey said that they created a fictional history for their fraudster (a detective in real life), and she was told to lie to any question which would directly reveal that she was the fraudster, but to answer questions as agreed in her background. By the end of the night, three people had successfully identified the fraudster based on red flags or inconsistencies they had noticed. The same type of "clues" exist when preventing and detecting fraud.
Individuals who are engaged in occupational fraud schemes often exhibit certain behavioral traits or warning signs associated with their illegal activity. In the ACFE's 2018 Report to the Nations, survey respondents were presented with a list of 17 common behavioral red flags and asked to identify the red flags that had been displayed by the perpetrator before the fraud was discovered.
These six behavioral red flags have been the most common in every one of our studies dating back to 2008, with a remarkably consistent distribution:
Living beyond one's means
Financial difficulties
Unusually close association with a vendor or customer
Excessive control issues or unwillingness to share duties
Recent divorce or family problems
A general “wheeler-dealer” attitude involving shrewd or unscrupulous behavior
While the presence of these red flags doesn't imply that fraud is being committed, understanding and recognizing the behavioral red flags displayed by fraud perpetrators can help organizations detect fraud and mitigate losses. Read more findings from the world's largest global fraud study at ACFE.com/RTTN.
Following are the “red flags” of bribes and kickbacks
- Failure to adequately advertise the request for bids or proposals
- Unreasonable prequalification procedures
- Unreasonably narrow contract specifications that favor the winning bidder and exclude others
- Leaking of bid information to favor a certain bidder, and withholding critical information from others
- Discarding or changing bids after receipt, or improperly manipulating the scoring of bids
- Disqualification of other bidders for arbitrary or trivial reasons during bid evaluation
- Approval of unnecessary change orders to increase contract values after award (to allow the low bidder to cover the cost of the bribe)
- Splitting purchases to avoid procurement thresholds
- Approval of unjustified sole source awards
- Pressure by project officials on contractors to select a particular subcontractor or agent
- Contractor engages a questionable subcontractor or local agent (to handle bribe payments)
- Long delays in contract negotiations or award (as bribe demands are negotiated)
The Foreign Corrupt Practices Act and UK Bribery Act 2010 threaten severe penalties. But the UN still estimates that $1 trillion is paid in bribes each year, and a further $2 trillion is lost through corruption.
According to PwC's most recent Global Economic Crime Survey, economic crime in the UK has reached its highest level in the past 24 months. 56% of UK businesses surveyed stated that they were impacted by fraud, corruption or other economic crime. Astonishingly, this 2020 figure is the highest recorded by the survey and is well above the global finding of 47%.
In its Global Fraud and Risk Report 2021/2022, Kroll reported that the biggest threat related to bribery and corruption in the UK comes from a lack of visibility over third parties with a further 27% of the threat stemming from employees' actions.
So how can companies prevent bribery and corruption in their business, especially involving third parties and employees? Top of your list should be spotting the red flags that suggest that bribery or corruption could be taking place...
1. Unnecessary or inappropriate purchases
Corrupt payments can sometimes be concealed as bona fide expenditure. If an employee purchases unnecessary or inappropriate items from a supplier or contractor with no obvious business need, this could indicate a potentially corrupt relationship.
Watch out for frequent low-level orders or purchases of large quantities, particularly if there is no visible need for such items or those goods never seem to materialise.
Preventive measures
- Insist on double sign-off of purchase orders and verification checks on goods received.
- Ensure there is a genuine business need for all purchases over a designated threshold.
2. Questionable invoices
Corrupt payments and bribes may be concealed in invoices. For example, invoices may be submitted without any actual work being done and no supporting documentation, haemorrhaging funds away from the business. Invoices may also conceal corrupt payments, which appear as extra fees, expenses or charges.
Look out for over-inflated invoices or invoices that cannot be matched to any discernible output. Alarm bells should ring if fees, commissions or expenses are listed without supporting documentation. Always look for a pattern of questionable invoices, as this can indicate that the invoices are being used to fund bribe payments.
How to reduce this risk...
- Conduct due diligence on any suppliers, contractors and consultants before engagement. Ensure they have a proven track record and have the necessary resources/experience required to deliver the goods and services being offered
- Watch out for over-inflated invoices well above market rates.
- Ensure adequate oversight and monitoring of all business relationships.
- Ask questions if you see any unexplained costs or charges before signing off.
3. Continued acceptance of poorer quality
If an employee continues to work with or accept sub-standard goods or services despite complaints being made, this could be a strong indicator for possible corruption.
You'll need to consider whether they may be getting a kickback from the supplier or contractor for continued business.
How to reduce this risk...
- Insist on group decision-making for procurement contracts - no single person should have overall control over who is appointed; ensure a senior manager authorises all decisions.
- Arrange adequate oversight and monitoring of supplier relationships - with regular audits of their performance.
- Conduct due diligence on all suppliers to ensure they have a proven track record and have the necessary resources/experience required to deliver the goods and services being offered.
4. Conflicts of interest
The risk of bribery and corruption can increase with close connections or links between an employee and a supplier or contractor. At worst, nepotism and cronyism can cloud your judgement and lead to bad decisions which are not in the company's best interests. At best, this can give a perception of corruption.
Think about whether an employee has a personal or economic interest in a particular transaction or appointment. What is their personal relationship with them? Are there close links? Does their behaviour change when certain suppliers are mentioned? Are they acting differently or suspicious? Is there an insistence that they alone deal with a certain supplier? All this could indicate a conflict of interest.
How to reduce this risk...
- Implement a system for employees to register potential conflicts of interest - be sure to check this before appointments and decisions are made
- Conduct due diligence on all suppliers, contractors and consultants before engagement - make sure you know exactly whom you are dealing with
- Only make appointments and procurement decisions based on merit
- Remove any employee with a close personal relationship or connection to the supplier from the decision-making process
- Be aware of biases (e.g. halo effect, affinity bias, unconscious bias) and how they may impact decisions. Bias and stereotyping can be reduced by involving more people in decision-making, but watch out for groupthink.
5. Unqualified third parties
Bribery and corruption can occur via intermediaries and agents, who may appear to do no more than facilitating the deal.
Be suspicious if the third party your company is dealing with seems unqualified for the job they are contracted to perform if they have no track record in the industry in which they operate, if they lack facilities or resources required to perform the work if they come highly recommended by a foreign public official and seem able to bypass legal or bureaucratic hurdles effortlessly.
How to reduce this risk...
- Conduct due diligence on all suppliers, contractors and consultants before engagement - make sure you know exactly whom you are dealing with.
- Ask questions if something doesn't add up - wilful blindness is no defence.
6. Incomplete travel and expenses
Finally, bribes and corrupt payments may be concealed as travel expenses or hospitality. Expenses should only be reimbursed for legitimate business expenditure, backed up with supporting documentation.
Look out for travel and expense forms with missing receipts or that don't add up - e.g. a reported trip to a supplier's site that didn't happen. Sharp practices could signify something bigger like internal fraud or business money being used for improper payments.
How to reduce this risk...
- Ensure that claims for travel and expenses are backed up with necessary documentation and authorised by a local manager first.
- Implement an expenses policy and threshold - and regularly raise awareness of the rules.
- Ask questions - particularly for unjustified expenses or repeat costs.
By being aware of the potential signs of bribery and corruption, you can help to protect our company from penalties and safeguard our reputation. Not only will people know the signs to look out for, but the raised awareness could help put people off and prevent corruption from happening in the first place.
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