Procurement Fraud Investigative Techniques

1. Procurement Fraud Investigative Techniques

2. Bureau of Special Investigations The Bureau of Special Investigations (BSI) is composed of a team of dedicated and highly trained professional investigators who help to improve State Government and make it more efficient.

3. Bureau of Special Investigations BSI investigates cases related to: • Violation of Commonwealth policies, rules, and regulations • Abuse of authority or misuse of property by Commonwealth Employees • Contract fraud and/or irregularities by Commonwealth Employees or Vendors • Commonwealth Employee Misconduct • Mismanagement of funds within Commonwealth agencies under the Governor's jurisdiction

4. Commonwealth of Pennsylvania Office of Inspector General 555 Walnut Street Harrisburg , PA 17101 USA To report welfare fraud, call 800-932-0582 To report misconduct by Commonwealth of Pennsylvania employees, call 877-888-7927 For general inquiries, please call 717-787-6835

5. Procurement

6. Procurement Process Contracting to acquire goods or services • Often based on relationships • Decisions to acquire made objectively and subjectively • Purchases dictated by company/Government policies and procedures • Conflicts arise between operations and financial controls • Process is often challenged by various work-arounds

8. Procurement Fraud

9. Procurement Fraud Definition: Unlawful manipulation of the process to acquire goods or services to obtain an unfair advantage. Dishonestly obtaining an advantage, avoiding an obligation, or causing a loss to public property through various means during procurement process by public servants, contractors, or any other person involved in the procurement.

10. Procurement Fraud Investigating Procurement Fraud: • Document Analysis • Computer Forensics • Data Analysis

11. Document Analysis A technique used to gather information during the requirements elicitation phase of a project.  It describes the act of reviewing the existing documentation of comparable business processes or systems in order to extract pieces of information that are relevant to the current project.

12. Computer Forensics The application of investigation and analysis techniques to gather and preserve evidence from a particular computing device in a way that is suitable for presentation in a court of law. The goal of computer forensics is to perform a structured investigation while maintaining a documented chain of evidence to find out exactly what happened on a computing device and who was responsible for it.

13. Data Analysis The reduction and organization of a body of data to produce results that can be interpreted by the researcher; a variety of quantitative and qualitative methods may be used, depending upon the nature of the data to be analyzed and the design of the study.

14. Procurement Fraud Schemes

15. Procurement Fraud Schemes • Conflict of Interest • Phantom Vendor • Split Purchases • Kickbacks • Personal Purchases • Duplicate Payment • Defective/Substituted Products • Fictitious Invoices • Bid Rigging

16. Conflict of Interest Description: Misusing position to award contracts to firms in return for personal gain (money, family employment, or other gratuities). Indicators: • Lifestyle changes • Refusal to change vendors • Failure to enable bidding procedures • Continuous use of same vendor • Significant increase in pricing • Increase in product complaints • Decline promotions * Case Example

17. Phantom Vendor Description: Employee establishes a fictitious vendor and submits false invoices for payment (or invoice may not exist to support payment). Indicators: • Photocopied invoices • Lack of invoices to support payments • Employee address matches vendor's address * Case Example

18. Split Purchases Description: Purchases made on the same day from the same vendor that appear to circumvent single purchase limits, i.e. splitting the transaction into more than one segment to avoid the requirement to obtain competitive bids or a budget ceiling. Indicators: • Multiple invoices dated the same day for the same product • Lack of invoices to support payments • Sequential or nearly sequential purchase/vendor invoice numbers

19. Kickbacks Description: Often facilitated through accounts payable. A company or individual submits an invoice for services that never occurred, or the invoice submitted is inflated by the amount of the kickback sent to the conspiring employee. Indicators: • Paid invoices that lack additional appropriates supporting documentation • Growing frequency of purchases from one vendor • Award contracts without bids • Increase in services • Continued use of same vendor

20. Personal Purchases Description: Employee utilizes company/Government funds to purchase personal items for self use or fraudulent gains. Indicators: • Employee address matches vendor's address • Altered or bogus support documentation • Initiated fraudulent purchase requisitions • Supplier not known • Post Office box addresses * Case Example

21. Duplicate Payment Description: Duplicate payments made to a vendor without services rendered to justify the second payment. This fraud is normally committed by a vendor with the collusion of an employee. Indicators: • Multiple duplicate payments of the same or similar amounts to a vendor for the same invoice number

22. Defective/Substituted Products Description: • When a vendor contractually consents to supply products using a certain grade, quality of parts, materials from designated companies or set standards, then fails to comply with the contract. These vendors often decide it is more profitable to use or substitute inferior parts or parts not made by authorized companies.  Indicators: • Lifestyle changes • Refusal to change vendors • Failure to enable bidding procedures • Continuous use of same vendor • Significant increase in pricing • Increase in product complaints and/or product returns * Case Example

23. Fictitious Invoices Description: Suppliers or contractors intentionally submit false (meaning that no services were provided), duplicate or inflated invoices.  The scheme can involve a contractor acting alone or in collusion with an employee of the victim organization who shares in the profits. Indicators: • Invoiced goods or services cannot be located in inventory or accounted for • No receiving report for invoiced goods or services • Discrepancies between invoice and supporting documents • Questionable or no purchase order for invoiced goods or services • Invoice prices, amounts, item descriptions or terms exceed or do not match

24. Bid Rigging Description : Bid rigging is a form of collusive price-fixing behavior by which firms coordinate their bids on procurement or project contracts, including arrangement of bidding process to guarantee selection of a vendor. Indicators : • Allowing rebids to selected vendors • Rotation of bids • Supplying faulty/inferior materials • Excessive control over selection process • Continuous use of vendor without business reason • Increased pricing • Substandard products

25. Red Flags

26. Procurement Fraud Red Flags • Unusual or unauthorized vendors • Large gifts and entertainment expenses • Unusual increase in vendor spending • Round-dollar amounts • Copies of supporting documentation in lieu of originals • Duplicate payments • Tips and/or complaints • Sequential invoices paid • Unusual/large/round-dollar amounts paid • Payments just under authorization level • Employee-vendor address match • Multiple invoices paid on same date • Slight variation of vendor names

27. Questions?

28. Contact Information Office of Inspector General 555 Walnut Street Harrisburg , PA 17101 USA James H. Timko | Special Assistant to the Inspector General Jatimko@pa.gov-Phone: 717.787.6835 | Fax: 717.724.6878 Robert A. Zeplin, CFE | Special Investigator 2 rzeplin@pa.gov -Phone: 717.783.7813 | Fax: 717.724.6828 Martin B. Molitoris | Special Investigator 2 mmolitoris@pa.gov -Phone: 717.214.1299 | Fax: 717.724.6833 To report welfare fraud, call 800-932-0582 To report misconduct by Commonwealth of Pennsylvania employees, call 877-888-7927 For general inquiries, please call 717-787-6835