11.2: Unethical Behaviour

Ethics, according to Merriam-Webster (2015), are about the fairness, justness, rightness, or wrongness of an action. They are the set of moral principles or values that guide our behaviour. Ethical behaviour plays a significant role in procurement because procurement influences and controls significant financial resources by awarding purchase contracts. This may result in unscrupulous sellers trying to gain an unfair advantage over buyers by offering kickbacks or other financial incentives.

One of the challenges surrounding ethics is that no international agreement exists about what constitutes ethical behaviour on a global scale. For example, according to the Greek Reporter, the Greek Parliament declared that the traditional method of passing bribes in small envelopes may not be unlawful because they are a way of expressing gratitude for favours (Onti, 2013, para. 1). However, passing bribes in small envelopes could result in a jail sentence in many countries.

Types of Unethical Behaviour in Purchasing

Organizations can manage ethical behaviour in their workplaces by creating an ethics management program and using corporate governance to train their employees on their expected behaviour. These organizations cannot condone unethical behaviour; however, different forms of unethical behaviour still exist due to the constantly growing demand for low-cost products, competition, availability of counterfeit products, etc. Here are a few examples of the types of unethical buying that exist in procurement.

Personal Buying

This situation arises when buyers or purchasing departments purchase goods or services for personal rather than organizational needs. Examples include purchasing gym memberships for employees, potentially creating conflicts of interest. The rules in this area may differ in certain companies, but most have a zero-tolerance approach to this practice.

Financial Conflicts of Interest

Awarding business based on personal financial gain is an ethical violation. This, in effect, means that business is awarded to suppliers not on merit but for the financial gain of the buyer. Examples include taking direct bribes and awarding business to companies based solely on their ownership by close family members. Many companies’ employees write an annual statement declaring that neither they nor their family members have financial interests in entities that do business with the company or clearly declare any such relationships that exist.

Accepting Supplier Favours

This category involves the acceptance of gifts and favours from suppliers. Examples include dinners, golf outings, free travel, tickets to sporting events, and even cash. A major problem with supplier favours is that their objective is to get buyers to make a purchase decision based on factors other than the merits of the supplier’s performance. Procurement professionals need to understand the specific rules and regulations in place regarding supplier favours.

Sharp Practices

This is a broad category of behaviours that are designed to trick or deceive suppliers, often with lies or misinformation. The following are examples of sharp practices:

• Soliciting bids from unqualified suppliers to drive prices lower.
• Exaggerating purchase volumes to receive a lower cost per unit, then ordering lower volumes.
• Expecting suppliers to perform services but not compensating them for doing so.
• Taking advantage of suppliers in financial distress.

Reciprocity

This behaviour gives preferential treatment to suppliers who are also customers of the buying company. Reciprocity could also be present when buyers maintain that they will not do business with suppliers unless they purchase the buyers’ products in return.

Fraud and Corruption

Procurement and contract management under public investments are particularly vulnerable to fraud and corruption. This vulnerability is primarily due to the large amounts of money involved and the difficulties, at times, in effectively supervising a large number of contracts. In addition to procurement, vulnerabilities in contract and financial management are common. The schemes one often encounters occur in the following areas:

• Procurement: Corrupt payments to government officials and steering of contracts to favoured bidders; collusion among bidders in obtaining contracts; and submission of fraudulent bids intended to circumvent the competitive bidding process.
• Contract management: Fraudulent implementation, including misrepresentation of work, goods and services as having been delivered according to specifications.
• Financial management: Embezzlement of project funds through fictitious invoices and the diversion of funds/assets.

Why Is It Important to Fight Fraud and Corruption?

Recovery of illicit payments often leads to incomplete or unsound public investment outcomes. Since bribe-paying firms must find a way to recover these illicit payments and, where possible, increase profits, they will often resort to defrauding the project, thereby threatening its effectiveness. Audits have uncovered a number of methods that private firms have used to recover these costs:

• Charges for goods, works, and services are inflated.
• Goods and services are invoiced but never delivered (or quantities greatly reduced).
• Contract specifications are not met, resulting in substandard work or hazardous conditions.
• Products are substituted for inferior, less expensive and lower quality material than specified in contracts.
• For consulting contracts, the project is billed for the cost of senior consultants when lower-paid employees are performing the work or the project is billed for “ghost employees.”

Moreover, competition is reduced in a corruption-prone environment. More competent firms that refuse to make illicit payments have no chance to win contracts, leaving less capable companies to win contracts at higher prices and deliver lower quality.

How Does a Corruption Scheme in Procurement Work?

A corruption scheme often involves more than one type of misconduct. A corrupt scheme in procurement often begins with a demand for or offer of payment, followed by bid rigging and finally, fraud to cover up the scheme:

• Demand for payment: A government official demands a bribe or kickback from a firm or individual, or a firm or individual offers a bribe in exchange for a contract award. In most cases, the corrupt official will permit the bribe payer to inflate the price to cover the bribe and preserve its profits.
• Bid rigging: To ensure that the contract will be awarded to the bribe-paying firm (whose prices are now inflated to cover the cost of the bribe), government officials manipulate the bidding process to exclude other (presumably cheaper) competitors.
• Fraud: To recover the cost of the bribe and to exploit the corrupt relationship, the firm, usually with the knowledge and complicity of government officials, inflates prices, bills for work not performed, fails to meet contract specifications or delivers substandard products during implementation. This often requires further payments to corrupt inspectors or auditors.

How Can Corruption Be Detected?

This section highlights the red flags for each procurement action leading up to the contract award, as well as related fraud and corruption schemes.

Procurement Plan

The Procurement Plan should be scrutinized for the justification of items, procurement methods, review thresholds, and possible contract splitting. The plan should include agreements on the contract packages for procuring the identified goods, works, services, and consulting services, as well as the methods for procuring them. It should also list the respective timetables for the various procurement activities.

Suggestions

• Compare the procurement plan with the procurement schedule of the investment tender to identify any inconsistencies.
• Check whether the procurement method used aligned with the approved plan.

Advertisement

Advertisements can be manipulated to exclude bidders. To inform as many qualified bidders as possible, national law may require advertising for all large consultancy and international competitive bidding contracts. For national competitive bidding, the procurement action should be advertised in a widely circulated national or official gazette or on a free and open-access website for a reasonable time. Advertisements can be manipulated by limiting the circulation of the request for expressions of interest.

Suggestions

• Review past advertisements in similar procurements to identify and possibly follow up on any red flags.
• Encourage the procuring agency to keep a file of actual newspapers showing the advertisements and date of publication.

Bidding Documents

Bidding documents must be prepared for each proposed procurement action. The bidding documents, issued by the public agency or department, inform potential bidders how bids should be prepared, the evaluation criteria, and the contract requirements. In providing inadequate or erroneous information for the preparation of bids, corrupt officials may effectively exclude qualified bidders.

Suggestions

• Review bidding documents for red flags and ensure that audit rights and contractual remedies are included as appropriate.
• Ensure that the specifications, Bill of Quantities (BOQ), and Terms of References (TORs) for large-value and high-risk contracts are reviewed by an independent expert and that they are not altered at a later time without the agency’s approval.

Short-Listing and Prequalification

Short-listing and prequalification processes can be used to exclude qualified competitive bidders. For contracts requiring prequalification, prior review by agency staff should be mandatory for all documentation and proposals related to the pre-qualification process. The same holds for the short-listing of firms for large consultancy contracts.

Suggestions

• Ensure the prequalification or expression of interest contains sufficient information for the prospective companies to determine their eligibility.
• Assess the qualifications criteria used for short-listing to determine whether they align with the contract requirements.
• Review the prequalification and short-list evaluation report to ensure that the short-listed companies or firms have the required expertise.
• Review the reasons for the rejection of the submitted expression of interest.
• Check whether any indicators of hidden interests (use of shell companies) exist.

The exclusion of qualified bidders could ensure that only the preferred bidder, in whose bidding a government or project official may have a hidden interest, will submit a bid that fulfills the requirements.

Suggestions

• Review the pre- and post-qualification criteria carefully to ensure they align with the contract requirements.
• Review the Bid Evaluation Report (BER) and ensure detailed justifications are presented for the rejection of submitted bids, especially the lowest-priced bid.
• Ensure that the agency has established controls for the submission, opening, and evaluation of bids and that compliance is monitored and results reported.
• Follow up on any complaints received during the bidding process.

Pre-Bid Conference

Pre-bid conferences can be used to facilitate unbalanced bidding. Pre-bid conferences and site visits are often scheduled during the bidding period to clarify any ambiguities or discrepancies in the documents and to give potential bidders information on the bidding process and the government’s expectations. The pre-bid conference is usually followed by a clarification letter or modifications to the issued bidding documents, which must then be sent to all the companies that bought the bidding documents. However, government officials may refrain from sharing timely, sufficient or correct information with all the bidders in order to give an unfair advantage to the favoured bidder.

Suggestions

• Review pre-bid conference documentation for (i) signed attendance lists in comparison to the list of sold bidding documents or short-listed companies and (ii) minutes containing a record of questions and responses and verify that answers have been distributed to all companies having purchased the bidding documents.
• Verify that changes to the bidding documents have been made following the conference.

Bid Submission

Corrupt procurement staff may accept late bids, tamper with bids, or exclude valid bids. Bids must be received by the agency prior to the date and time indicated in the bidding documents. Corrupt project staff may (i) accept late bids submitted by favoured bidders with inside information about prices from other bidders; (ii) tamper with the bids received, e.g., by discarding elements of the bid in order to disqualify the bidder; or (iii) exclude bidders by denying access to drop-off points or by failing to open bids.

Suggestions

• Ensure that the procurement staff understand the procedures for the bid submission process and assist in establishing clear and transparent procedures, including:
  • Ensuring that the bids are received by staff who are not otherwise involved in the procurement process.
  • Maintaining a secure box where bids can be securely dropped off without opening the box and thus giving access to the other bidders.
  • Keeping submitted bids in a safe with limited access and appropriate controls.
  • Bringing all bids submitted to the bid opening ceremony at the same time.

Bid Opening

A key risk in the bid opening phase is the manipulation of bid prices. The bid opening must be conducted in public at the address, date and time specified in the bidding documents. The bids should be opened immediately after the bid submission time. Various tactics may be used to steer contracts to favoured bidders, e.g., the price read aloud for the favoured bidder does not match the actual bid price or a “new” price is later written into the bid.

Suggestions

• Ensure the project procurement officer is aware of the appropriate bid opening procedures, including:
  • Ensure control of the bid opening and keep minutes of the opening.
  • Check attendance sheets for names and signatures of all bidder representatives (including printed names).
  • Verify that each bid was sealed and accompanied by a bid security, if required, utilizing the assistance of a randomly selected representative.

Bid Evaluation Committee

Inadequate technical competency of the BEC could pose a corruption risk. Bid Evaluation Committees (BECs) review and evaluate the submitted bids and recommend to which company the contract should be awarded. The BEC has wide discretion in excluding bidders and can abuse this authority as part of a corrupt scheme. On occasion, government officials purchase positions on the BEC to influence decision-making.

Suggestions

• Ensure BEC members are selected in accordance with the established procedures.
• Ensure the responsible procurement officer is available to the BEC to answer any procedural questions.
• Confirm the BEC has the necessary technical expertise to evaluate the bids.
• Verify that BEC members sign an affidavit stating that they do not have a conflict of interest in performing their duty, such as current or past affiliation with any of the bidders.

Bid Evaluation Report

Questionable evaluation and unusual bid patterns may emerge in the Bid Evaluation Report (BER). After the completion of the evaluation process, the Bid Evaluation Committee should present its BER to the implementing agency, which describes the results and the process by which the BEC evaluates the bids received. The BER may include a number of indicators of bid rigging, e.g., questionable disqualifications and unusual bid patterns.

Suggestions

• Review and compare the bids submitted with the BER and each other.
• Review the BER for justifications for the rejection of submitted bids and the recommendation for award.
• Review the BER with the issued bidding documents for any inconsistencies.
• Review the signed copies of all the scoring tables used by the BEC members for any inconsistencies.
• Review the timeframe of the evaluation process.
• Verify that the number of submitted bids is equal to or less than the number of bidding documents sold.
• Compare the BER with the minutes of the bid opening to ensure that the bid values, number of bids, and bid securities are the same.

Draft Contract

Questionable deviations from the bidding documents may signal fraud to benefit a contractor or government official. Regardless of which procurement schedule is used, the terms and conditions of a contract cannot, without the contracting agency’s prior approval, materially differ from those on which bids or proposals were asked.

Contract Delivery

Scheme: Failure to meet contract terms. Firms may deliberately fail to comply with contract requirements. The contractor will attempt to conceal such actions often by falsifying or forging supporting documentation and billing for the work as if it were done in accordance with specifications. In many cases, the contractors must bribe inspection or project personnel to accept the substandard goods or works, or supervision agents are coerced to approve substandard work. Listed below are common frauds committed by companies failing to meet their contractual obligations.

• Product substitution: Contractors may substitute inferior and often cheaper products than those specified in the contract.
• Deviation from specifications: Companies may seek to deviate from their contractual obligations. In one case, the Terms of Reference (TOR) of a consulting firm required that it analyze various cost estimation packages and recommend three options. The firm failed to do so, recommending only its own solution. In civil works, contractors may seek to reduce the thickness of a road surface, fail to sufficiently compact the soil, and avoid costs by vibrating the cement, resulting in air pockets and reducing the road’s load-bearing capacity and width.
• Substandard work: Failure to exercise key controls, lack of independent oversight, and bribery of the supervision agent are the main elements allowing for this type of scheme.
• Failure to deliver: Contractors sometimes leave project sites without completing the civil works they have committed to. In other cases, the training, equipment and consultant reports are not delivered at all.

Suggestions

• Require independent annual technical, financial, and procurement audits for high-risk investments.
• Expand the audit scope to include transaction testing and fraud detection.
• Include unannounced site visits by independent technical experts during the supervision missions.
• Institute contract management training for project officials.
• Check, as part of a procurement and financial management review, specifically the controls regarding:
  • Contract management — payment listings by contract/contractor
  • Duplicate payment control
  • Certification of goods and services received
• Conduct annual procurement post reviews and ensure follow-up on the findings.
• Institute strong complaints handling procedures and publicize the procedures.

Contract Changes

Scheme: Abuse of contract amendments and change orders. Contract amendments and change orders usually represent legitimate modifications to the signed contracts. However, they can be abused. A common scheme involves collusion between a favoured contractor and project officials to award a contract to the contractor at a low price, followed promptly by one or a series of change orders (often just below the change order no-objection threshold of 15% of the original contract value).

Suggestions

• Evaluate change order requests, analyze them for legitimacy and request supporting documents, as appropriate, before approval.
• Verify the physical existence of key goods, works, and services outputs during supervision. Reviews can confirm:
  • Consistency between work completion certifications and implementation progress
  • Adequacy of supporting documentation
  • Legitimacy of officers certifying goods and services received
  • Timely asset registration

Attribution

“11.2 Unethical Behaviour” is remixed and adapted from the following:

“Chapter 8: Ethics, Social Responsibility and Sustainability” from Procurement in the Supply Chain World, copyright © 2022  by Angela Reid-Regier and Bryan Snage, is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Fraud and Corruption Awareness Handbook: A Handbook for Civil Servants Involved in Public Procurement, copyright © 2013 by the International Bank for Reconstruction and Development/The World Bank, licensed under a Creative Commons – Attribution 3.0 Intergovernmental (IGO) License, except where otherwise noted.

The multiple choice questions in the Checkpoint boxes were created using the output from the Arizona State University Question Generator tool and are shared under the Creative Commons – CC0 1.0 Universal License.