Corruption and fraud - the basics

How to detect corruption and fraud

Reports

Most serious fraud and corruption cases begin with a report or tip from an informant, and once detected, many such frauds can’t be proven, at least within a reasonable time and budget, without an inside witness.

Programs to facilitate and encourage reports are therefore quite important.  Such programs include:

• Installing and publicizing confidential "Hotlines”
• Announcing an anti-fraud program and requesting confidential reports
• Sending confidential questionnaires to employees and contractors
• Voluntary disclosure, temporary amnesty and compliance programs for contractors
• Informant reward programs
• Whistle blower protection Programs

Discovery of a “red flag”

If the case begins with the discovery of a red flag:

1.    Match the red flag to the potential scheme(s). 

For example:

• Unusually high bids from all bidders could indicate bid rigging
• Acceptance of high priced, low quality work could indicate kickbacks
• Payment of an invoice without a receiving report could indicate a phantom vendor

2.    Then look for other red flags of the potential scheme(s). 

For example, if the first indicator suggests the possibility of a phantom vendor, look to see if the suspected vendor:

• Is on the approved vendor list
• Is listed in business directories
• Has a valid address
• Has a mail drop address
• Has submitted sequential invoices

and so on, looking for other indicators until the matter is resolved.

Don’t obsess over any one indicator – look for a number or pattern of indicators of the suspected scheme.

3.    If there are significant indicators of the suspected scheme(s), determine if there are legitimate explanations.  If not, continue the investigation.

Proactive" tests for fraud

Internal corporate and external, on-line public record databases can be queried for indicators of fraud and corruption.  See the examples below.

Internal database queries for kickbacks and conflicts of interest

• Large price increases over a short period of time by a particular contractor or vendor
• Significant increase in quantities purchased from a particular contractor 
• Continued acceptance of low quality goods (as indicated by higher rates of returns or credits)
• Multiple purchases just under upper level approval or bidding limits

On-line database searches for kickbacks and conflicts of interest

Check:

• Real property records, neighborhood demographic information to see if the suspect employee is living beyond his means 
• Business filings for affiliations with the vendor, or to find front companies used to receive kickbacks
• Court records for legal proceedings
• Media records for background on the suspect contractor and employee
• On-line address and telephone directories to match vendor and employee information

Internal database queries for phantom vendors

• Paid vendors that do not appear on the approved vendor list
• Invoiced items that do not appear in receiving or inventory records
• Multiple purchases just under upper level approval or bidding limit
• Sequential invoices or inconsistent invoice number systems for the same vendor name

On-line database searches for phantom vendors

• Vendor address is a mail drop
• Vendor address, telephone number or zip code matches employee's
• Vendor street address is invalid
• Same as kickbacks, above, to show approving employee has unexplained wealth or undisclosed outside business

To be most effective, "proactive" database queries should be combined with traditional investigative methods, such as systems to encourage reports, interviews and document review.

Contract and procurement fraud schemes and red flags

How to detect corruption and fraud

Basic steps in the investigation of corruption and fraud

Representative U.S. fraud and corruption statues and their elements of proof

How to prove fraudulent knowledge and intent

How to refer a case for criminal prosecution

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