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 OLAF.D.2 – Fraud Prevention Unit Naples - 25.06.2014

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 OJ = • EUR 1 470 million and EUR 2 247 million

3. Costs of Corruption Clean projects Corrupt/grey projects 5% loss 18% loss Average loss attributable to corruption: 13% 3

4. Costs of Corruption Table: costs of corruption by sector (Source: PwC) 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. Italy in the reports • The risk of corruption in the allocation of EU funds creates a reputational risk for the funds and threatens their efficient and effective use. • A set of anti-corruption reforms was launched by the Italian Government in 2012 (including new anti-corruption law from November 2012), aiming at ensuring a more balanced approach towards anti-corruption policies. However, many issues needs to be addressed, i.e. comprehensiveness of the new provisions on private sector corruption and whistleblower protection. • In the Transparency International Corruption Perception Index, Italy scores 43 (100 being the best) and ranks among 4 countries in the EU with the lowest score. The EU Anti-Corruption Report – Annex – Italy, p. 2-3

8. Italy in the reports • Public Procurement in Italy = 2.91% of GDP (2011) • 70% of the Italian businesses state that corruption is widespread in public procurement managed by public authorities. • 52% of the respondents reported tailor made specifications • 45% of the respondents observed collusive bidding • 54% of the respondents noted conflict of interests • 55% of the respondents pointed to unclear selection and evaluation criteria • 52% of the respondents observed involvement of bidders in the design of the specifications 2013 Eurobarometer Study

9. Discussion

10. 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.

11. 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.

12. 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);

13. Fraud prevention tools – Red flags Conflict of interests: • 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; • contracting 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;

14. 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; • job not re-bid even though fewer than the minimum number of bids were received.

15. 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

16. Discussion

17. Fraud prevention tools – Practical guides Detection of forged Documents in the field of structural actions. A practical guide for managing authorities. Identification of conflict of interests in public procurement procedures in the field of structural actions.

18. Good practice – transparency platforms • Bussola della trasparenza • Avviso Pubblico • ITACA • CAPACI • Linee guida

19. Fraud prevention tools – Transparency Retrieved from http://datanest.fair-play.sk on February 6, 2014

20. Discussion

21. Thank you for your participation! Andrea Bordoni – Strategic Analyst Mateusz Chylarecki – Policy Analyst OLAF.D.2 – Fraud Prevention, Reporting and Analysis Unit OLAF - European Anti-Fraud Office European Commission Rue Joseph II 30 B–1049 Brussels http://ec.europa.eu/anti_fraud