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Sample fraud awareness presentation

Combating Corruption and Fraud in WBG projects

Nigel Savage, JD, CFE International Fraud Expert and Man of Action

SavageFraud.com

Categories of corruption and fraud schemes• Corruption

o Bribes and kickbacks

o Hidden interests in contractors by project officials

• Bid rigging

o Rigged specifications

o Unbalanced bidding

o Leaking of bid information

o Change order abuse

• Fraud

o False statements and claims

o False and inflated invoices

o Failure to meet contract specifications

o Product substitution

• Collusive bidding by contractors o Agreements by bidders to inflate bid prices, rotate winning bidders, divide markets, etc.

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1. A BRIBE is offered or demanded in exchange for the promise of a contract award or other favor, which leads to…

2. Some form of BID RIGGING to exclude the other, often more qualified and less expensive bidders, and finally…

3. FRAUD in by the bribe payer, to cover the cost of the bribe and exploit the corrupt relationship. The fraud can take the form of:

False, inflated or duplicate invoices Failure to meet contract specifications Substitution of cheaper inferior materials or products

Fraud is the most costly and disruptive stage.

The schemes often are linked…

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Corruption

• Bribes & kickbacks • Conflict of interest

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Bribes and kickbacks Giving a “thing of value”

1. “Gifts, travel & entertainment 2. Sexual favors3. “Study tours”4. Rental of properties, etc. 5. Cash payments6. Payments thru subs, local partners,

consultants, etc. 7. Hidden interests

To influence a contract award or execution:

S selection P price Q quantity Q quality D delivery…and F facilitate fraud

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Why were bribes paid?

• To be short listed • For a contract award • To expedite the payment of invoices • For contract amendments and

extensions • To influence inspectors to accept

sub-par work or goods • To compromise auditors and NGOs• To avoid cancellation of the contract

for poor performance

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Corruption case exampleWest Africa

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Where the money ended up in the US…

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Conflicts of interest

For example, an employee:

Secretly owns a supplier or contractor, or

Sets up a “shell company” through which he or she purchases supplies at an inflated price, or

Has an undisclosed interest in property sales or leases, etc.

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Empty LotEmpty Lot Shop HouseShop HouseRice TraderRice Trader

Auto Repair ShopAuto Repair Shop

Front company addresses

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Iraq UN “Oil for Food” case

1. Regime UNDER priced oil

sold through middlemen

2. Collected kickbacks from the

middlemen and buyers

3. OVER pricedfood and medicine, etc.

purchased thru middlemen

4. Collected kickbacks from

suppliers

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Corruption red flags

• Complaints from losing bidders • “SPQQD” factors • Unjustified sole source awards • Multiple awards just under procurement thresholds • Pressure to select an unknown or unqualified contractor • Pressure to select a particular subcontractor or agent• Long delays in contract negotiations or award • Involvement of unnecessary broker or questionable agent • Undisclosed agent fees and commissions • Questionable contract amendments and extensions • Procurement staff live beyond their means

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Bid rigging

Unbalanced bidding Rigged specifications Excluding qualified biddersLeaking bid data Manipulation of bids after receipt Unjustified sole source awards Split purchases Change order abuse

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Bid rigging red flags

• Repeat [sole source] awards to the same bidders • Multiple awards just under thresholds (followed by change

orders or contract extensions)• Bids just at or close to budget or estimate• Narrow specifications• Ambiguous specifications• Unreasonable pre-qualification procedures • Short or inadequate notice to bidders• Fewer than the average or required number of bidders • Low bid awards followed by change orders

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Collusive bidding

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Adam Smith, The Wealth of Nations, 1776

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Collusive bidding: cartels

1 percentage point 1 percentage point steps variance fromsteps variance from

ABC ABC

Bidprice difference tothe designated

winner ascends in 10 mio CU steps

Severely overpricedearthworks component

Strange and unnaturalfinal bidprice

numbers

Companies B, C and F are

disqualified

Indicators Evidence

Cost Estimate:

104(1)d Embankment

191,930 m3 at 265.17 (unit price) = 50,894,239.32

© INT, The World Bank GroupReproduction and further distribution requires INT’s prior consent

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Collusive bidding red flags

• Connections between bidders, e.g., common addresses, fax numbers or personnel; assignment of contract to losing bidder, etc.

• Persistent unexplained high prices• Unusual bid patterns; e.g. bids an exact % apart • Rotation of winning bidders • Same bidders bid; new bidders excluded • Losing bidders become subcontractors • False or forged bid securities

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Fraud

• Delivery of expired, fake or adulterated drugs

• Reporting of exaggerated cure rates and project results

• False CV’s and company histories• False and plagiarized feasibility studies

and reports • Forged performance documents• Forged bid securities & manufacturer’s

certificates • Delivery of substandard goods or

equipment • False and inflated invoices

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Aid-financed rural “school”

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New aid-financed hospital

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“New” hospital equipment

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Narrow road

Road 30% narrower Road 30% narrower than specificationsthan specifications

No road surfacing, No road surfacing, contrary to contrary to specificationsspecifications

The contract wasThe contract was

paid in fullpaid in full

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‘’Ten Year” urban roadThirteen months after completion

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Design of spa for ecotourism centerDesign of spa for ecotourism center

Status after >50% disbursed with 30 days left to completion

Status after >50% disbursed with 30 days left to completion

Construction and billing fraud

Construction fraud

Poor quality concrete in slabs, beams and Poor quality concrete in slabs, beams and columns with extensive honeycombing columns with extensive honeycombing can result incan result in- a reduction of compressive strength- a reduction of compressive strength- a route for ingress of moisture to reach - a route for ingress of moisture to reach

and corrode the steel reinforcementand corrode the steel reinforcement

Plastered with cement to fill in the air holes at the surfacePlastered with cement to fill in the air holes at the surface The concrete mix itself appeared weak in cement content, both visually and to the touchThe concrete mix itself appeared weak in cement content, both visually and to the touch Columns were rotated a few degrees out of true in plan view which can lead to additional torsional stresses Columns were rotated a few degrees out of true in plan view which can lead to additional torsional stresses

at the junctions between columns and other structural unitsat the junctions between columns and other structural units Fixing of steel reinforcement within the formwork was of a poor standardFixing of steel reinforcement within the formwork was of a poor standard

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Fraud red flags

• “Outliers,” “mismatches,” etc. • Poor quality goods or works • Missing or altered supporting documents• Inconsistencies between contractor’s claims

and inspections • Culture of corruption of inspectors • No costs booked by contractor for work

claimed • Complaints from users