Tag Archives: Auction Fraud

What am I Bid!

A couple of recently reported high profile cases (one from the governmental and one from the private sector), involving bid rigging in the mid-western construction industry merit a consideration of the principle fraud scenarios involved.  The ACFE tells us that in a legitimate competitive bidding process, vendors submit confidential bids stating the price at which they will complete a contract or project, based on the specifications set forth by the purchasing company. Legally, all bidders are supposed to be able to bid under the same terms and conditions. Bid-rigging schemes occur when an employee fraudulently assists a vendor in winning a contract. The competitive bidding process can be tailor-made for bribery, as several suppliers or contractors vie for contracts in what can be a very cutthroat environment. An “inside influence” can ensure that a vendor wins the sought-after contract; thus, many vendors are willing to pay for this influence.

The way competitive bidding is rigged depends largely upon the level of influence of the corrupt employee. The more power a person has over the bidding process, the more likely the person will be able to influence the selection of a supplier. Therefore, employees who participate in bid-rigging schemes tend to have major influence over the competitive bidding process. Potential targets for accepting bribes include buyers, contracting officials, engineers and technical representatives, quality or product assurance representatives, subcontractor liaison employees, or anyone else with authority over the contract awards.

Bid-rigging schemes can be categorized based on the stage of bidding at which the fraudster exerts his or her influence. Thus, bid-rigging schemes can be separated into three categories: pre-solicitation phase, solicitation phase, and submission phase.

–Pre-solicitation fraud: This occurs before bids are officially sought for a project. There are two distinct types of pre-solicitation phase bid rigging scenarios. The first is a need recognition scenario in which an employee is paid to convince her company that a project is necessary. The result of such a scheme is that the victim company purchases unnecessary goods or services from a supplier at the direction of the corrupt employee. The second is a specifications scenario, in which a contract is tailored to the strengths of a supplier: the vendor and an employee set the specifications of the contract to accommodate the vendor’s capabilities.

–Solicitation fraud: During this phase, the purchaser requests bids from potential contractors. Fraudsters attempt to influence the selection of a contractor by restricting the pool of competitors from whom bids are sought. In other words, a corrupt vendor pays an employee to assure that one or more of the vendor’s competitors do not get to bid on the contract. Thus, the corrupt vendor can improve its chances of winning the job. There are several different variations of basic  solicitation schemes:

-Bid-pooling: Several bidders conspire to split up contracts, assuring that each gets a certain amount of work. Instead of submitting confidential bids, the vendors discuss what their bids will be, so they can guarantee that each vendor will win a share of the purchasing company’s business. Furthermore, since the vendors plan their bids in advance, they can conspire to raise their prices.

-Bid-splitting: Some companies and government divisions require that a purchase or contract over a certain dollar amount go through a formal bidding process. In these cases, a company pays an employee to split a contract into small dollar amounts that will not require a formal bid. Then, the employee simply gives the contract to the vendor offering the kickback, thus avoiding the bidding process altogether.

-Fictitious suppliers: Another way to eliminate competition is to solicit bids from fictitious suppliers. The perpetrator uses quotes from several fictitious companies to demonstrate competitive pricing on final contracts. In other words, bogus price quotes can validate actual (and inflated) pricing of an accepted contract.

-Time advantages: Competition can be limited by severely restricting the time for submitting bids. That way, certain suppliers are given advance notice of contracts before bid solicitation, so they have adequate time to prepare. These vendors have a decided advantage over the competition. A vendor can also pay an employee to turn over the specifications to him or her earlier than to his or her competitors.

-Limited scope of solicitations: Bids can be solicited in obscure publications or during holiday periods, so some vendors are unlikely to see them. This eliminates potential rivals and creates an advantage for corrupt suppliers. In more blatant cases, the bids of outsiders are accepted but are “lost” or improperly disqualified by the corrupt employee of the purchaser.

–Submission fraud: During this phase, bids are given to the buyer. Competitive bids are confidential and are supposed to remain sealed until the date all bids are opened and examined. People with access to sealed bids are often the targets of unethical vendors. Some vendors will pay to submit their bid last, knowing what others bid or to see competitors’ bids and adjust their own bid accordingly.

In bid-rigging scenarios, an employee sells his influence or access to confidential information. Since information can be copied or sold without taking it outside the organization, there is no missing asset to conceal. The perpetrator merely must conceal the use of influence or the transfer of information. S/he also needs to ensure that all of the appropriate documentation is available in case someone reviews his or her decisions. An illegally won contract results in profits that a vendor would not have earned under normal conditions. The vendor employee responsible for arranging the bid-rigging can be rewarded with cash, a promotion, power, or prestige.

Companies are far from defenseless in controlling for these types of abuses.  CFEs and other assurance professionals can proactively advise on the setting up of policies and on the establishment of controls over the bidding process and by helping to verify, through on-going testing, that they are enforced.  In reviewing the bid-letting process, management or its auditors should look for:

-Premature disclosure of information (by buyers or firms participating in design and engineering), indicating that information was revealed to one bidder and not the others.
-Limited time for submission of bids (so only those with advance information have adequate time to prepare bids or proposals).
-Failure to make potential competitors aware of the solicitation, e.g., by using obscure publications to publish bid solicitations or the publication of bid solicitations during holidays.
-Vague solicitations regarding time, place, or other requirements for submitting acceptable bids.
-Inadequate control over number and destination of bid packages sent to interested bidders.
-Purchasing employee helps contractor prepare a bid.
-Failure to amend solicitation to include necessary bid clarification, such as notifying one contractor of changes that can be made following the bid.

Clients should also be advised to examine contract specifications before bids are solicited and to check for any of the following conditions:

-Instances of unnecessary specifications, especially where they might limit the number of qualified bidders.
-Requirements inadequately described. A vendor might bribe an employee to prepare vague specifications with the intention of charging more money after being accepted as the approved vendor.
-Specifications developed with the help of a contractor or consultant who will be permitted to bid or work on the contract.

We can also advise our clients to closely review bid acceptances to ensure that all policies and controls were enforced. Specifically, they should look for the following:

-Specifications tailored to a particular vendor.
-Unreasonably restrictive pre-qualifications.
-An employee who defines a “need” that could only be met by one supplier.
-An employee who justifies a sole-source or noncompetitive procurement process.
-Changes in a bid once other bidders’ prices are known, sometimes accomplished through deliberate mistakes “planted” in a bid.
-Bids accepted after the due date.
-Low bidder withdraws to become a subcontractor on the same contract.
-Falsified documents or receipt dates (to get a late bid accepted).
-Falsification of contractor qualifications, work history, facilities, equipment, or personnel.

Clients are also well advised to examine contracts relative to other contracts. Determine if any of the following conditions exist:

-A large project condensed into smaller projects to avoid the bid process or other control procedures.
-Backup suppliers that are scarce or nonexistent (this may reveal an unusually strong attachment to a primary supplier that is bribing an employee).
-Large write-offs of surplus supplies (this may indicate excessive purchases from a supplier that is bribing a purchasing agent).

Clients might additionally look for indications that bidders are in collusion, such as:

-Improper communication by purchasers with contractors or their representatives at trade or professional meetings.
-A bidders’ conference, which permits improper communications between contractors, who then can rig bids.
-Determine if purchasing agents have a financial interest in the contractor or have had discussions regarding employment.

CFEs, equipped with their in-depth knowledge of fraud scenarios, can bring powerful antifraud controls to any enterprise habitually involved in a competitive bidding process as a core component of its business strategy.

Offered & Bid

Our Chapter was contacted last week by an apparent victim of an on-line auction fraud scheme called shilling.  Our victim bought an item on the auction and subsequently received independent verification that the seller had multiple ID’s which he used to artificially increase the high bid on the item ultimately purchased by our victim.  On-line consumer auctions have been a ubiquitous feature of the on-line landscape for the last two decades and, according the ACFE, the number of scams involving them is ever increasing.

The Internet allows con artists to trade in an environment of anonymity, which makes fraud easier to perpetrate. So every buyer of items from online auctions not only has to worry about the item being in good condition and every seller has to be concerned about being paid, they must both also worry about whether the other party to the transaction is even legitimate.   Common internet auction fraud complaints include products that never arrive, arrive damaged, or are valued less than originally promised. Many complaints also stem from sellers who deliver the product but never receive payment. Almost all auction sites have responded over the years by  instituting policies to prevent these types of fraud and have suspended people who break the rules. eBay, for example, has implemented buyer protection and fraudulent website protection programs, as well as several other safeguards to prevent fraudsters from abusing their auction services but the abuses just seem to go on and on.

What apparently happened to our victim is called shilling.  Shilling occurs when sellers arrange to have fictitious bids placed on their item to drive up the price. This is accomplished either by their own use of multiple user IDs (as our victim suspects of her seller) or by having other partners in crime artificially increase the high bid on their item; typically, these individuals are friends or family members of the seller. If the shiller sees a legitimately high bid that does not measure up to his or her expectations, s/he might burst in to give it a boost by raising the bid. This auction activity is one of the worst auction offenses and is cause for immediate and indefinite site suspension for any seller caught in its performance by any legitimate auction.

A related ploy that also raises lots of complaints is called sniping.  Sniping is a bid manipulation process in which an unscrupulous bidder bids during the last few seconds of an auction to gain the high bid just as the time runs out, thus negating the ability of another bidder to answer with a still higher bid. Most bidders who successfully engage in this practice do so with the aid of sniping technology. In general, sniping is legal; however, most online auctions sites have instituted no-sniping policies, as the practice is devious and may harm legitimate, honest bidders.

Then there’s bid shielding.  Bid shielding is a scam in which a group of dishonest bidders target an item and inflate the high bid value to discourage other real bidders. At the last moment, the highest bidder or other bidders will retract their bids, thereby shielding the lower bidder and allowing him to run away with the item at a desirable, and deceitful, price.

In the relentless drive for more customers, some sellers resort to bid siphoning which occurs when fraudulent sellers lure bidders off legitimate sites by offering to sell the “same” item at a lower price. They intend to trick consumers into sending money without delivering the item. By going off-site, buyers lose any protections the original site may provide, such as insurance, feedback forms, or guarantees.  This practice is often accompanied by sellers embellishing or distorting the descriptions of their wares. Borrowed images, ambiguous descriptions, and falsified facts are some of the tactics a seller will utilize in misleading a buyer with the end of guiding her to participation in a siphoning scheme.

The second chance scammer offers losing bidders of a closed auction a second chance to purchase the item that they lost in the auction. As with siphoning victims, second chance buyers lose any protections the original site may provide once they go off-site.

One of the most common complaints associated with on-line auctions is price manipulation.  To avoid price manipulation, consumers need to understand the auction format before bidding. Sellers may set up the auction with questionable bidding rules that leave the winning buyer in an adverse situation. For example, say you are a winner in an auction. You bid $50, but the lowest successful bid is only $45. The seller congratulates you on your win, and requests your high bid of $50 plus postage.  As another example, let’s say the highest bidder retracts his bid or the seller cancels it, which leaves you the highest bidder. The seller then wants you to pay the maximum bid amount, citing that the previous high bidder had outbid you. Finally, let’s say you win a straight auction with a high bid of $85. The seller contacts you and instructs you to send your high bid, plus shipping, packaging, listing fee costs, and numerous other charges.

Our last example relates to the practice of fee stacking which refers to the addition of hidden charges to the total amount due from the winning bidder after the auction has concluded. Shipping and handling fees can vary greatly; therefore, the buyer should inquire before bidding to avoid unexpected costs. Typically, postage and handling fees are charged at a flat rate. However, some scheming sellers add separate charges for postage, packaging, handling, and shipping, and often devise other fees to tack on as well, leaving the buyer with a much higher purchase price than anticipated.

Then there’s the flat failure to ship the purchased merchandise.  This is the one type of on-line auction fraud that most people have heard of even if they don’t themselves participate in on-line auctions and involves a seller receiving payment for the item sold, but not shipping the merchandise. If the merchandise does not arrive, the buyer should contact the seller for the item or request a refund, hopefully having kept a receipt of payment for the purchase. If the purchaser made the purchase with a credit card, s/he can contact the credit card company to deny the charges. If the buyer gets nowhere with the seller, the buyer should contact the U.S. Postal Inspection Service, as the failure to ship constitutes mail fraud.

On the other hand fraudulent buyer claims of lost or damaged items are also considered mail fraud. Some buyers falsely claim the item arrived damaged or did not arrive at all, and thus refuse payment. Sellers should insure the item during shipping and send it via certified mail, which requires a signature verifying receipt.

A related buyer scam is switch and return.  Let’s say you have successfully auctioned a vintage item. You, the seller, package it with care and ship it to the anxious buyer. But when the buyer receives it, he is not satisfied. You offer a refund. However, when the buyer returns the item, you get back an item that does not resemble the high-quality item that you shipped. The buyer has switched the high-quality item with a low-quality item and returned it to you. The buyer ends up with both the item and the refund.

The on-line market is awash in fakes. The seller “thinks” it is an original; but the buyer should think again. With the use of readily attainable computer graphics and imaging technology, a reproduction can be made to look almost identical to an original. Many fraudsters take full advantage of these capabilities to dupe unsuspecting or uninformed buyers into purchasing worthless items for high prices.

If you are a fraud examiner working with clients involved in the on-line auction market or a buyer or seller in those markets …

— Become familiar with the chosen auction site;
— Understand as much as possible about how internet auctions work, what the site obligations are toward a buyer or seller, and what the buyer’s or seller’s obligations are before bidding or selling;
— Find out what protections the auction site offers buyers;
— Try to determine the relative value of an item before bidding;
— Find out all you can about the seller, especially if the only information you have is an e-mail address.  If the seller is a business, check with the Better Business Bureau where the seller/buyer is located;
— Examine the feedback on the seller and use common sense. If a seller has a history of negative feedback, then do not deal with that seller;
— Consider whether the item comes with a warranty, and whether follow-up service is available if it is needed;
— Do not allow the seller or buyer to convince you to ignore the rules of a legitimate internet auction.