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05 May 2011

Procurement and funding fraud: Are you safe?

by Alexandra Wedutenko, Caroline Hogan

It is important that you proactively guard against fraud and not merely assume fraud will not occur.

Fraudulent conduct which occurs during a procurement or funding process may lead to loss of revenue, inefficient use of resources, damage to the security or standing of the Commonwealth, damage to the culture of the organisation, and/or costly and intrusive litigation.

It is important that you proactively guard against fraud and not merely assume fraud will not occur. The most effective protection strategy is a credible prevention and detection regime, but if fraud occurs you should deal with it promptly.

What is fraud?

The Commonwealth Fraud Control Guidelines 2011 define fraud as "dishonestly obtaining a benefit, or causing a loss, by deception or other means". This includes obtaining benefits by deceit, charging the Commonwealth for non-delivery or incomplete delivery of goods, abusing Commonwealth facilities, bribing or corrupting Commonwealth employees, and evading payments owed to the Commonwealth.

Fraud may also involve providing false or misleading information in a tender or funding application, or the unlawful use of information, property or services.

How can fraud occur?

Fraud may occur during the tender/funding process or after the contract has been awarded. Fraud may benefit the tenderer or applicant (respondent), an agency officer, or a third party, and could involve co-operation between the parties.

Examples of fraud include collusion and bid rigging, misrepresentation, giving false or misleading information, or bribery. The risk of this type of fraud can be reduced by using clear and transparent processes and effective probity measures.

Another common example during a procurement or funding process is a conflict of interest, where a member of the assessment panel or the decision-maker is linked to, or has a particular interest in, a respondent. This often arises where someone will receive a financial or personal benefit if a particular respondent is awarded the contract or grant.

Identifying and managing conflicts of interest (as well as potential or perceived conflicts of interest) form a vital part of risk management. One way to do this is to have respondents, and all team members involved in the assessment of responses, either declare that they have no actual, potential or perceived conflicts of interest, or identify those they do have so they can be managed. Agencies should also establish a system for reporting and managing conflicts as they arise throughout the procurement process.

What are your responsibilities?

Commonwealth procurement is governed by a legislative and policy framework which ensures that the government receives value for money and the process is conducted in an ethical, transparent and accountable manner.

The Financial Management and Accountability Act 1997 (FMA Act) and Commonwealth Procurement Guidelines (CPGs) create an overarching framework which applies to agencies covered by the FMA Act and, in the case of the CPGs, to some Commonwealth Authorities and Companies Act 1997 (CAC Act) bodies procuring goods and services. A similar regime under the Commonwealth Grant Guidelines (CGGs) now also applies to grants.

Under section 44 of the FMA Act, Chief Executives must manage Commonwealth resources in an efficient, effective, economical and ethical manner, which includes implementing a fraud control plan.

The Commonwealth Fraud Guidelines 2011 apply to agencies covered by the FMA Act. A body subject to the CAC Act is not subject to the Guidelines unless the Finance Minister has made a General Policy Order (GPO) under section 48A of that Act. The Guidelines state that CAC bodies which are not subject to a GPO should consider applying the Guidelines as a matter of policy.

The Guidelines are a Legislative Instrument registered in accordance with the requirements of the Legislative Instruments Act 2003, and individuals and agencies have a legal obligation to comply with the requirements set out within the Guidelines.

Agencies must employ measures to detect and prevent fraud against the Commonwealth. This includes fraud within its outsourced functions performed by external service providers. They must also conduct risk assessments at least every two years, and develop and regularly review fraud control plans. Agency CEOs must report annually to their Minister on fraud and fraud control measures and certify in their Annual Reports certain matters in relation to their agency's fraud control measures.

Mitigation strategies

An effective way to protect against procurement and funding fraud is the commitment to, and the employment of, probity measures by all agencies, employees and external service providers.

It is important to foster and maintain an ethical culture within an organisation from the outset of any procurement or funding process. Before the release of complex procurement or funding documentation, agencies should consider engaging external probity advisers to ensure that proper probity procedures are in place and are implemented throughout the transaction. When conducting risk assessments, agencies should focus on the tendering or funding processes and contract management.

The behaviour of leaders is an important factor. Agencies should strive to sustain an ethical culture and organisational integrity by educating staff and promoting risk management strategies. Staff should be regularly reminded of the Code of Conduct and the risks and dangers of procurement fraud, and risk management reviews should be undertaken regularly.

Within an overarching probity framework, agencies should ensure that the rules of the process are clearly stated. The procurement/funding documentation, including the statement of requirement and draft contact, should clearly define all parties' expectations, roles and responsibilities. It should also require respondents to verify their bids by providing details of current clients, past experiences and independent referees.

The draft contract should clearly identify the goods or services to be provided and each party's obligations. The evaluation methodology should be clearly described and the evaluation process should be documented to ensure that there is a clear audit trail of the decision-making process.

Respondents should also be required to confirm that no assistance was received from an agency official or other respondent and that they themselves have not improperly assisted with another bid.

Finally, agencies should create and maintain conflict of interest registers and communication registers documenting all communication between the Department, industry and respondents. Utilising such measures and complying with the CPGs and CGGs will help protect against fraudulent conduct.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.