Fraud in Outsourcing
great deal of emphasis has been placed in recent years on outsourcing.
Often this has been done without adequate consideration of the risks of
fraud and corruption.
often gives rise to many opportunities for fraud and corruption, most of
which are difficult to detect.
the most obvious risks are those of collusion; either between the
tenderers as a group or between a tenderer and an employee.
inquiries in New South Wales and Victoria into the building industry have
shown widespread collusive practices between groups of tenderers. These
practices have supposedly ended; but allegations of collusion in other
industries continue to surface periodically.
practices take a number of forms, including:
sharing a market between tenderers, so that they pretend to compete
against each other without ever in fact really competing;
paying tenderers to stay away;
paying other tenderers to put in "fictitious" tenders;
having related companies tender to make the process seem more competitive
and help establish a benchmark price;
paying each unsuccessful tenderer a fee by loading the tender price;
payments to collusive tenderers are not always in the form of cash, but
can also take the form of subcontracts, returning the favour in kind, etc.
collusion between tenderers and staff is notoriously difficult.
of this arise far too frequently for anyone in charge of outsourcing to
assume that it could not happen in his or her organisation.
one person responsible for outsourcing commented: "The temptation is
great and the risks are low. It is difficult to expect that people will
dishonest practice is capturing information and technology, sometimes also
referred to as "data-raiding".
this situation tenderers bid low in order to get the contract because they
intend capturing information, technology or techniques from the
are often then packaged and on-sold to other organisations, including
competitors of the organisation from which the information, technology or
techniques were taken.
they are not packaged for on-selling, but are integrated into the
tenderer's standard services or products.
other occasions they are grafted on to other products or services that the
tenderer is developing for selling.
outsourcing activities often naively believe that their information,
techniques and technologies are adequately protected from tenderers.
the protection they have is fairly limited, especially when they do not
take special measures to protect their interests.
Foot in the Door Price and Variation
deceptive and often dishonest practices include "foot in the door
pricing" and "variation killings".
involve submitting a low tender with the intention of initially making a
loss but thereafter making excess profits to more than compensate.
refer to work that the contractor does that is different to the work
described in the contract. It is usually charged for at far higher
prices than the contract work.
is said that in contracting you get the milk from the contract and the
cream from the variations.
are often able to find areas in the tender documents that will allow other
interpretations, lower quality goods and services to be delivered, etc.
can sometimes be relatively easily manipulated to produce extremely
lucrative variations for the tenderer.
organisations outsourcing their functions are hit with these activities
they often find that they are worse off than they would have been if they
had retained the services in-house.
to contain variations in contracts has been likened to trying to hit a
target that not only keeps moving, but also keeps changing shape.
Conflicts of Interest
may be able to obtain unfair advantages through being involved in
conflicts of interest.
example is where an accounting firm providing audit services is called in
should the internal audit branch of an organisation be outsourced;
if it should be outsourced, what factors should be considered in deciding
who to award the audit activities to; and
what audit work should be done by the contractor, how should it be done,
and so on?
fair observer would have to say that the accounting firm could easily
manipulate the process so that the audit of the organisation is given to
the accounting firm.
are many other conflict of interest situations, many of them involving
fraud, that can arise in outsourcing.
this article we have considered a few of the risks of fraud and corruption
It is an area that should be considered to be high risk and subject to the most intense scrutiny.
For more tips, advice and practical pointers see Fraudproof Your Business Manual.