Red flags that indicate corruption in public procurement

Posted at 02/13/09 6:44 PM

How does one find out if there was corruption in the procurement of particular services or goods?

The book, The Many Faces of Corruption, which was published by the World Bank in 2007, enumerates examples of corruption schemes in government procurement and identifies red flags that indicate the possible operation of a particular scheme.

Corruption Schemes:

1. Kickback Brokers

    Red Flags:

  • Improper way of selecting bidder. Contracts are awarded to the same supplier without competition at higher-than-market prices.
  • An unnecessary middleman. A middleman or local is involved in a public contract and his addition has no obvious value to the performance of the contract.
  • Giving gifts. This occurs when procurement officials accept expensive gifts and dine in meals with bidders or their local agents.
  • Overtly rich government officials. There are rich public officials who are in-charge of overseeing or implementing the procurement program even though their salaries are low.
  • Reputation. Locals know the credibility of their officials and know when he/she accepts or demands bribes.
  • Repetitive poor contractors. Concurrent awarding of public contracts to poor performing contractors.
  • Ex-officials are suppliers. The former government officials become suppliers to the group that got the contract.
  • Family connections. Local agents or suppliers are closely related, either through family or friendship with officials who does the procurement program.

2. Bid Rigging

    Red Flags:

  • Identical bids, different bidders. The bids submitted by different contractors contain the same line items or the same bid.
  • Higher cost. All bids are higher than the projected cost.
  • Subcontracting losing bidders with or without the client’s knowledge.
  • Tampering of bids. Physical alternation in one or more bids especially during the last minutes or after submissions.
  • Higher prices than the others. The prices quoted are higher than those of the same items in another bidder’s quoted cost.
  • Anomalous cost difference. Obvious cost difference between the winners’s bid and the other bids.
  • Similar increase in bid prices. There is a common similar percent of increase in the bid prices even though they came from different bidders.
  • Various prices. There are different bid prices for the same line item.
  • Similarities. There are physical signs of collusion in the submitted bids (i.e. same handwriting, same numerical errors, same contact information, etc.)
  • Coercions from the procuring entity. Qualified bidders initially took steps to bid but decided to not continue.
  • Same rankings or no bids in rebids. Rebidding results show that the companies have the same ranking as the prior bidding or some bidders didn’t submit any proposal at all.
  • Increase in cost. There are increases in the costs of some line items when the project is rebid.
  • Prices of the items drop once a new bidder comes into the picture.

3. Use of Front or Shell Companies

    Red Flags:

  • New names. Unknown companies with no track records in doing government contracts serve as subcontractors to foreign or local contractors.
  • Secrecy jurisdiction. A subcontractor company is registered in a “secrecy jurisdiction.”
  • Payments are made against invoices to accounts held by companies registered in a secrecy jurisdiction.
  • Opaque structure. Subcontractor companies have an unclear ownership structure.
  • No names. The owners of the subcontractor companies are listed as law firms or as incorporation agents and not the individual’s names.
  • No offices. Subcontractor companies have no corporate facilities (i.e. headquarters, office space, etc.)
  • Personal numbers. The phone numbers provided by the subcontractor companies are personal numbers or answering services.
  • Companies that regularly win the contracts have unclear ownership structures.
  • Family business. The family members of senior government officials own or manage the companies that receive the contract.
  • Official sightings. Government officials are often seen in company offices or headquarters.

4. Misinterpretation of Facts

     Red Flags:

  • No recorded minutes of the public bid-opening meeting.
  • Not original. Minutes of the public bid-opening meeting are not signed in the original form by those who attended the meeting.
  • Delays. There are time delays between the public bid-opening and the dissemination of the minutes of the bid opening to all bidders.
  • Lacking records. Procuring entities fails to keep written records of the procurement process (i.e. written reports on bid evaluation process, minutes of the meeting, copies of submitted bids, copies of correspondence of the bidders.
  • Tampering bids. Submitted bids contain written corrections, deletions, or interlineations that changes key information (i.e. prices, validity period of the bid).

The Many Faces of Corruption: Tracking Vulnerabilities at the Sector Level
Edited by J. Edgardo Campos and Sanjay Pradhan
The World Bank, 2007

Chapter 9: Corruption in Public Procurement, A Perennial Challenge
By Glenn T. Ware, Shaun Moss, J. Edgardo Campos, and Gregory P. Noone