Category Archives: Bid-Rigging

Working Toward Non-Prosecution

A recent major article in the financial trade press alluded to the importance of the U.S. Foreign Corrupt Practices Act as a piece of US government regulation of which it behooves all fraud examiners to be aware. The reference got me to thinking about the confusion that still persists regarding certain provisions of the Act among corporate players as reported in the article in question following several high profile prosecutions. Enacted to great fanfare in 1977, the purpose of the FCPA was to prevent the bribery by the agents of US corporations of foreign government officials when those agents were negotiating overseas contracts. The FCPA imposes heavy fines and penalties for both organizations and individuals. The two major provisions address: 1) bribery violations and 2) improper corporate books and records as well as maintenance of inadequate internal controls. Methods of enforcement and interpretation of the law in the US have continued to evolve to the present day.

From the first, the FCPA spawned questions of definition and interpretation for those trying to comply, i.e., who is a “foreign official?” What is the difference between a “facilitation” payment and a bribe? Who is considered a third party? How does the government define “adequate” internal controls to detect and deter bribery and corruption?

The United Kingdom enacted its UK Bribery Act in July 2010 which really represented the first real attempt at an anti-bribery law to address some of these issues. The UK Bribery Act introduced the concept of “adequate procedures”, that if followed could allow affirmative defense for an organization under investigation for bribery. The UK Bribery Act recommended several internal controls for combating bribery and offered the incentive of a more favorable result for those who could document compliance. Among the controls:

• Establish anti-bribery procedures;
• A top corporate level commitment to prevent bribery;
• Periodic and documented risk assessments;
• Proportionate due diligence;
• Communication of bribery prevention policies and procedures to all involved parties to corporate transactions;
• Monitoring of anti-bribery procedures.

The concept of an affirmative defense for adequate procedures creates quite a contrast to the US FCPA which only offers affirmative defense for payments of bona fide expenses or small gifts within the legal limits of the foreign countries involved. The UK Bribery Act simply equates all facilitation and influence payments to bribery, thus eliminating much confusion. Finally, the UK Bribery Act dealt with the problem of defining a foreign official by making it illegal to bribe anyone regardless of government affiliation. Several countries such as Russia, Canada and Brazil have enacted or updated their anti-bribery regulations to parallel the guidelines presented in the UK Bribery Act. The key to the effectiveness remains enforcement.

Then, in 2010, the US Department of Justice and the Securities Exchange Commission released a guide book introducing several hallmarks of an effective FCPA compliance program. The publication of the guidebook is a development which, according to the article I was reading, many auditors and CFE’s remain unaware, even today. The Resource Guide provides our client companies with the tools to demonstrate a proactive approach to the deterrence of bribery and corruption. Companies found out of compliance may receive some consideration during the fines and penalty stage of their cases.

The guidebook recommends that companies doing business overseas:
• Establish a code of conduct that specifically addresses the risk of bribery and corruption;
• Set the tone by designating a Chief Compliance Officer to oversee all anti-bribery and anti-corruption activities;
• Train all employees to be thoroughly prepared to address bribery and corruption risk and document that the training took place;
• Perform fraud risk assessments of potential bribery and corruption pitfalls by country and industry;
• Review the anti-corruption program annually to assess the effectiveness of policies, procedures and controls;
• Perform audits (routine and surprise) and monitor foreign business operations to assure strict compliance with the published code of conduct;
• Ensure proper legal contractual terms exist within agreements with third parties that address compliance with anti-bribery and corruption laws and regulations;
• Investigate and respond promptly and appropriately to all allegations of bribery and corruption;
• Take proper disciplinary action for violations of anti-bribery and corruption laws and regulations;
• Perform adequate due diligence that addresses the risk of bribery and corruption performed by third parties prior to entering into any business relationship.

Fraud examiners should make their clients aware that a company which can provide evidence of compliance with these recommendations is afforded many advantages if they’re ever charged with a violation of the Act. Among them is a Deferred Prosecution Agreement (DPA). Under a Deferred Prosecution Agreement the Department of Justice files a court document charging the organization while simultaneously requesting that prosecution be deferred in order to allow the company to demonstrate good conduct going forward. The DPA is an agreement by the organization to: cooperate with the government, accept the factual findings of the investigation, and admit culpability if so warranted. Additionally, companies may be directed to participate in compliance and remediation efforts, e.g., a court-appointed monitor. If the company completes the term of the DPA the DOJ will dismiss the charges without imposing fines and penalties!

The DOJ and the company may alternatively even enter into a Non-Prosecution Agreement. Under such an agreement the DOJ retains the right to file charges against the organization at a later time should the organization fail to comply. The NPA is not filed with the courts but is maintained by both the DOJ and the company and posted on the DOJ website. Similar to the DPA, the organization agrees to monetary penalties, ongoing cooperation, admission to relevant facts, as well as compliance and remediation of policies, procedures and controls. If the company complies with the agreement, the DOJ will, again, drop all charges.

The good news is that, since publication of the guidebook, corporate compliance programs have continued to mature, and are now generally accepted as just another cost of conducting business in a global marketplace. The US government is continuing to clarify expectations with regard to corporate responsibility at home and abroad, and working with international partners and their compliance programs.

Increased cooperation between the public and private sectors to address these issues will assist in leveling the playing field in the global marketplace. Non-government and civil society organizations, i.e. World Bank and Transparency International, are playing a key role in this effort. These organizations set standards, apply pressure on foreign governments to enact stricter anti-bribery and corruption laws, and enforce those laws. Coordination and cooperation among government, business and civil entities, reduce the incidences of bribery and corruption and increase opportunities for companies to compete fairly and ethically in the global marketplace. Hence, every fraud examiner and assurance professional should strongly support these efforts while strongly encouraging our clients to become familiar with and comply with the provisions of the recently updated 2010 guidebook.

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.