Measures for Identifying and Reducing Fraud and Corruption Risks in Public Procurement

1. Measures for Identifying and Reducing Fraud and Corruption Risks in Public Procurement Irina Stefuriuc Office for Fight Against Fraud (OLAF) Unit D.2 – Fraud Prevention, Reporting and Analysis Unit Bucharest, 3.06.2014

2. Costs of Corruption • Scope of the study: 8 Member States and 5 sectors • Public procurement = about 20% GDP in the EU (2010: € 2.4 trillion) • Direct cost of corruption <2.9% , 4.4%> value of procurement published in the Official Journal = € 1.4 to € 2.2 billion

3. Costs of Corruption Table: costs of corruption by sector (Source: PwC) 3

4. Costs of Corruption Clean projects Corrupt/grey projects 5% loss 18% loss Average loss attributable to corruption: 13% 4

5. Types of corruption • Bid rigging • Kickbacks • Conflict of interest • Other – including deliberate mismanagement/ignorance

6. Types of corruption - analysis Table: types of corruption identified (Source: PwC) 6

7. Types of corruption - analysis (Source: PwC study) 7

8. Romania in the reports • Public opinion – 2013 Eurobarometer survey • 93 % survey respondents believe corruption is widespread (average EU 76%) • 25 % respondents report that theyhave been asked or expected to pay a bribe in the past year (EU average 4%) • Transparency International Index score Romania = 43 • Romania ranks 69/177 countries • In Europe, Romania ranks among 3 lowest (26/28)

9. Romania in the reports • The Romanian national public procurement system is hampered by numerous irregularities, conflicts of interest and high corruption risks: • insufficient transparency at all stages of procurement • excessively short deadlines for submitting tenders • changes to the initial information of the tender procedure that are published only at national level • excessively strict selection criteria • irrelevant or artificial algorithms for evaluation of tenders. (The EU Anti-Corruption Report, Annex on Romania) • Romania needs to • Develop uniform and effective prevention tools within contracting authorities and public procurement supervisory institutions • Develop a more efficient system allowing to early detect, remedy and sanction conflict of interest in procurement • Prove more commitment to tackle corruption & tighten the means to avoid corruption (ACR Report; CVM 2014 Report)

10. Romania in the reports • Public Procurement in Romania= 33.56 billion EUR in 2011 • 44% respondents prevented from winning because of corruption • 59 % respondents reported tailor made specifications • 53 % respondents observed collusive bidding • 57% respondents noted conflict of interests • 56 % respondents pointed to unclear selection and evaluation criteria 2013 Business EurobarometerStudy

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12. Fraud prevention tools – Red flags Red flags are: warning signals, hints, indicators of possible fraud! The existence of a red flag does not mean that fraud exists but that a certain area of activity needs extra attention to exclude or confirm potential fraud.

13. Fraud prevention tools – Red flags Rigged specification: • only one or abnormally low number of bidders respond to request for bids; • similarity between specifications and winning contractor’s product or services; • complaints from other bidders; • specifications are significantly narrower or broader than similar previous requests for bids; • unusual or unreasonable specifications; • the buyer defines an item using brand name rather than generic description.

14. Fraud prevention tools – Red flags Collusive bidding: • winning bid is too high compared to cost estimates, published price lists, similar works or services or industry averages and fair market prices; • persistent high prices by all bidders; • bid prices drop when new bidder enters the competition; • rotation of winning bidders by region, job, type of work; • losing bidders hired as subcontractors; • unusual bid patterns (e.g. the bids are exact percentage apart, winning bid just under threshold of acceptable prices, exactly at budget price, too high, too close, too far apart, round numbers, incomplete, etc);

15. Fraud prevention tools – Red flags Manipulation of bids: • complaints from bidders; • poor controls and inadequate bidding procedures; • indications of changes to bids after reception; • bids voided for errors; • a qualified bidder disqualified for questionable reasons; • contract awarded without new tender procedure even if fewer than the minimum number of bids were received.

16. Fraud prevention tools – Red flags Split purchase: • two or more consecutive, related procurements from the same contractor just under competitive bidding or upper level review thresholds; • unjustified separation of purchases, e.g. separate contracts for labour and materials, each of which is below bidding thresholds; • sequential purchases just under the thresholds

17. Fraud prevention tools – Red flags Conflict of interests (1): • unexplained or unusual favouritism of a particular contractor or seller; • continued acceptance of high priced, low quality work etc; • contracting employee fails to file or complete conflict of interest declaration; • contacting employee declines promotion to a non-procurement position; • contracting employee appears to conduct side business; • close socialisation between a contracting employee and service or product provider; • unexplained or sudden increase in wealth by the contracting employee; NB: *All these red flags may indicate kickbacks*

18. Fraud prevention tools – Red flags Conflict of interests (2): • contractor has a reputation in the industry for paying kickbacks; • undocumented or frequent changes to contracts increasing the value of the contract; • failure to advertise the tender; • arbitrary disqualification of bidders; • manipulating the scoring of bids during evaluation; • approval of unjustified single source awards; • one bidder's offer relies on unpublished information; • in secondary procurement: pressure by project officials on contractors to select a particular subcontractor or agent; • unjustified sub-contracting for dubious/unclear services NB: *All these red flags may indicate kickbacks*

19. Fraud prevention tools – an efficient use of red flags • Fraud schemes may be complex and difficult to detect • Awareness is crucial – detection at early stage increases the chances to reduce financial damage • Types of fraud and irregularities seldom occur in isolation • RED FLAGS are associated with different steps in the expenditure lifecycle => need to look beyond the procurement and monitor closely the execution stage too • Especially if more red flags are present – apply due diligence!

20. Fraud prevention tools – Practical guides Detection of forged Documents in the field of structural actions. A practical guide for managing authorities http://www.antifrauda.gov.ro/en/cooperation_with_olaf/cocolaf/COCOLAF_meetings/detection_of_forged_documents Identification of conflict of interests in public procurement procedures in the field of structural actions http://www.antifrauda.gov.ro/en/cooperation_with_olaf/cocolaf/COCOLAF_meetings/conflict_of_interests

21. Fraud prevention tools – checklists The Romanian Managing Authorities drew up and incorporated into the internal procedures: • an ex-ante checklist to be completed when performing the initial verification of the public procurement contract, • an ex-post checklist to be completed after signing the contract, when certain modifications occur during the contract implementation. • The checklists comprise a number of indicative, concrete situations. • If a situation is confirmed, the information must be send immediately to the competent structures to investigate the conflict of interests.

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23. Thank you!