corruption risks in procurement

Author: Nyman Gibson Miralis

Subject: Corruption risks in procurement

Keywords: ICAC, procurement structures, corruption control, out-of-process procurement

 

Several investigations conducted by the Independent Commission Against Corruption (ICAC) have exposed corrupt conduct and identified common corruption risks in procurement processes.

In their publication Corruption Risks in NSW Government Procurement – The management challenge, the ICAC provides advice on how to manage risk in the procurement process.

 

Strengthening procurement structures

One of the best ways to control corruption in the procurement process is to ensure that the process is appropriately structured. This includes the way in which responsibilities are assigned, chains of command and structural arrangements.

There are a number of different ways to structure the procurement process, and the ideal structure will depend on the particular situation:

 

Centralised Procurement Structure

This structure makes sense where procurement is standardised and predictable. It is usually easier to control and more efficient than decentralised procurement.

 

Decentralised Procurement Structure

This structure is more appropriate when procurement is being done under conditions of speed or uncertainty, where the long lines of communication and red tape of a centralised structure might slow the process. However, there is less control under this structure, with a greater distance between the manager and those responsible for the procurement. There may therefore be increased risk for corrupt activities to occur when compared to a centralised structure.

 

“Hybrid” Procurement Structure

A Hybrid procurement structure incorporates elements of both centralised and decentralised structures. For example, there may be a central procurement unit that places staff into operational units where they act as procurement managers for that unit. The director of procurement is responsible for the final sign-off, rather than the director of the unit responsible for the procurement. The drawback of these types of arrangements is that they can introduce additional staff and coordination costs.

 

Reducing opportunities for corruption in the process

 

Process maps

A process map allows for easy identification of whether there are obvious corruption risks in the process, such as a person being responsible for both ordering and verifying delivery, which creates a risk of both over-ordering and under-delivery. They also highlight points of handover when a new person becomes involved in the process, which are prone to confusion that can be manipulated by someone intent on corruption.

Process maps can also help to identify whether there is in fact no one in charge of the procurement process, more than one person in charge, where there are senior managers not involved in decision making that possibly should be, and points where undeclared external associations pose the greatest risk.

 

Discretion

All managers and staff require some level of discretion to perform their jobs. This needs to be accounted for in the procurement process, whilst minimising the potential for corruption that this discretion can introduce.

This can be controlled by:

  • Creating limits on discretion at any point in the process, such as the amount of expenditure that can be authorised
  • Determining what goods and services are actually required. For example if this is decided by one person, there is the potential for them to recommend that what is needed are goods or services provided by a company that they have an interest in.
  • Determining what price should really be paid for specific goods and services. Where price is not well known, there is a risk of both poor value for money as well as a risk that corrupt overcharging cannot be detected.
  • Verifying delivery to ensure that non-delivery or under-delivery do not occur

 

Controlling out-of-process procurement

Sometimes procurement is undertaken outside of the established process, due to an emergency or during negotiations. Care needs to be taken to limit the potential for corruption that this can introduce.

 

Emergencies

Difficulties are presented when procurement is undertaken against short timeframes, especially if there is little available information. If procurement is delayed this can potentially worsen the situation, and if procurement is done too hastily money can be wasted.

While genuine emergencies do occur, it can create an opportunity for a corrupt person to get sign off on an improper procurement.

 

Direct Negotiations

Direct negotiations are an effective method to buy something different or at a better price, however they can introduce the potential for corruption.

For example, a public official may agree to extend a supplier contract in exchange for a bribe, or may contract work to a firm in which they have an interest.

 

The people factor

The behaviour of staff undertaking procurement, managers and suppliers is central to the control of procurement.

 

Improving employee competence

The level of procurement expertise and competence can influence the potential for corruption to occur. Training is an effective way to improve procurement competence amongst employees, however a number of factors should be considered:

  • Procurement rules change over time and depend on the specific procurement situation. Additional ongoing measures may be needed to support the training such as mentoring, pre-procurement guidance and debriefs following procurement
  • It can be more efficient to target the right people for training, rather than providing every employee with a basic level of training in processes they will rarely need to know
  • Staff turnover needs to be considered in maintaining competency levels

 

Managers and Procurement

The ICAC discovered in a 2008 investigation into a transport agency that managers were signing off on purchase orders or receipt of goods, without checking if the good/service was really needed or whether it had been delivered.

‘Tick-and-flick’ approaches are often adopted by managers due to time pressures, the belief that managers below them in the hierarchy who have signed off have completed the necessary checks, or due to generally trusting staff to do the right thing. Random monitoring can be an effective deterrent against corrupt activity.

 

Dealing with suppliers

Procurement managers may become overly cautious in their dealing with suppliers, worrying about conflicts of interest or unsolicited gifts, and causing a strained relationship. This can limit the potential benefits that could otherwise be realised through the relationship.

 

The importance of communication

Effective communication between suppliers and procurement managers can improve both procurement, and corruption control. Limited engagement between procurement managers and suppliers has created misunderstandings around procurement.

 

Managing conflicts of interest

Conflicts of interest involving suppliers can occur when:

  • A private interest is deliberately kept secret – for example, a manager responsible for procurement contracts a company that he/she or a family member owns, and does not disclose this fact
  • Professional relationships evolve into personal friendships – there is a risk that this will influence the procurement manager when making decisions about this supplier

 

Gifts and benefits

There are corruption risks of procurement managers involved in procurement receiving gifts from the supplier, in order to influence the procurement manager to make repeat orders from the company, purchase greater quantities or purchase additional products.

 

Conclusion

There is no single method to control corruption in procurement. The ICAC identifies the “three pillars” of corruption control as:

  • Strengthening procurement structures – designing procurement structures that minimise risks for corruption but also enhance efficiency
  • The process of procurement – designing procurement processes that also minimise risks and enhance efficiency
  • The people factor – managing people and improving their performance

 

 

Nyman Gibson Miralis are experts in corruption and bribery matters that involve multiple jurisdictional investigations. If you require assistance, contact one of our expert criminal defence lawyers