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Procurement fraud

Procurement is big business, and that makes it an attractive target for criminals.

Every day, billions* are spent on equipment and services to run operations, maintain asset life cycle and develop new business. Procurement is big business, and that makes it an attractive target for criminals. PwC estimates that almost 30% of organisations have been hit by procurement fraud in the last year. Other recent studies show that an average of 5% of total spend could be lost as a result of internal or external fraud. This can happen anywhere along the procurement process from bid to execution.

The energy sector is particularly vulnerable to procurement fraud because of its big capital spend, cost of operations and vital investment in infrastructure. It also operates in some locations that are simply very high-risk for procurement fraud. This also increases the number of systems and cross-border interactions.

Large organisations more generally face a common issue: they are decentralised and most of them are siloed from both an IT and operations perspective. This situation has usually developed over time, often as they have grown through acquisitions or geographically. They have often been decentralised for optimum efficiency through delegation and creation of smaller agile teams, and siloed to focus on their own objectives and deliver quickly. This setup, however, has disadvantages as well as advantages, and in particular is not very efficient for procurement. The organisation might need to be siloed for operational agility, but it still needs a global view to scale buying, optimise logistics and spend, and detect threats to the business.

Most large companies require tens of thousands of suppliers to provide services, equipment and inventory across different countries. This means it can be very challenging to obtain a holistic view of those suppliers, assess the risk of doing business with them or simply get a thorough understanding of exchanges with them. For instance, a supplier could easily provide the same equipment at a different price to different departments or country operations. These challenges have to be addressed in any multinational organisation that wants to improve its bottom line.

*For ex, $500b CAPEX to be spent among the world's largest oil and gas companies in 2018
https://www.rigzone.com/news/capex_among_worlds_largest_og_firms_to_rise_to_just_under_500b_in_2018-17-apr-2018-154268-article/

Knowing your Supplier: a game changer

One big part of the answer to many of these problems is knowing your supplier (KYS). This is the cornerstone of any streamlined procurement process and purchasing optimisation. It helps many areas of the business, including leveraging the cost of purchasing, improving negotiation arguments or optimising stock inventory.

With an ever-increasing number of suppliers, complex supply chains, with vendors, consultants and intermediaries in risky countries, it is key to carry out thorough checks when bringing on board a new business partner. It is equally important to manage the supplier database on an ongoing basis, to make sure that you know about changes in incorporation, shareholder structure, country of operations and so on. All this information needs to be analysed to make sure suppliers have not been set up as ghost vendors to defraud the company, and that they are not colluding with each other or with your employees. This does not even consider the growing series of regulations about ethical conduct and dual usage goods on the sell side.

With so many parameters and information, KYS risk assessment results in a multi-dimensional matrix that only advanced analytics solutions can help understand and optimise.

Analytics to the rescue

PwC’s Economic Crime Survey suggests that data analytics is by far the most efficient way to fight procurement fraud. It is significantly better than other detection methods such as rotation of personnel, user rights segregation, tip-offs, yearly or ad hoc audits, and encouragement of whistleblowing.

PwC’s Economic Crime Survey suggests that data analytics is by far the most efficient way to fight procurement fraud.

Data from EY suggest that 72% of companies consider big data techniques are the single most efficient tool to fight internal and external fraud. Key benefits are better risk assessment, faster identification of fraud, ability to identify unethical behavior and a preventive instead of reactive approach. Forensic Data Analytics and Continuous Monitoring are becoming far more common, but they rely heavily on deriving intelligence from ever-increasing volumes of purchase requests, purchase orders, invoices, return notes, and suppliers.

Data analytics are too rarely used to detect fraud even though it is clearly the most efficient technique – very much ahead of routine audits, rotation of personnel, tip offs or whistleblowing. The techniques that SAS deploys for its customers include a wide array of advanced analytics ranging from anomaly detection to the generation of networks that bring to surface eventual collusions, bid rigging or even corruption. The solution scores anything from a supplier to a purchase order in an automated and continuous manner allowing companies to not only meet regulatory requirements but also prevent fraud. Text analytics are also used to indicate the probability of two invoices being related and possibly being double. Checks with external data bases are key when onboarding and conducting due diligence of third parties and risk scoring those as well.

Data #analytics are too rarely used to detect #fraud even though it is clearly the most efficient technique. @lcolomban & @DozoulD on #ProcurementFraud Click To Tweet

Getting it right

Tests show that using these techniques can result in up to 20% detection of purchasing at risk. Savings just in the first year of use can be up to $80 million.

But preventing procurement fraud is about more than just saving money. The Chief compliance and ethics director of a large telco company said, “Who cares if it’s legal or illegal if it’s wrong?”. Ephraim Tlhako, Chief Analyst Advisor at Eskom, noted:

Eskom has a fiduciary responsibility to ensure that all of its payments are legitimate. Using advanced analytics to identify suspect transactions and relationships in our massive data, in near real time, will enable us to be better stewards of public funds. The savings will also allow us to electrify more homes, build more generating capacity to meet growing demand, and avoid unplanned outages by better maintaining our aging fleet. One of the key benefits of the SAS solution is that it can be extended to also help on the revenue-protection side by identifying potential energy non-technical loss, generating even greater savings for the company.

Energy companies, in other words, have a responsibility towards their customers to prevent procurement fraud, and ensure that customers’ money is not wasted. The bottom line is that analytics offers the best, most efficient way to deliver on that responsibility.

This article is co-authored by David Dozoul, Head of EMEA Energy Practice - SAS' Global Energy Practice and Laurent Colombant Procurement Integrity Lead NEMEA Fraud and Compliance.

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About Author

Laurent Colombant

I am an experienced executive in Fraud, AML and CTF in the Financial Industry. Skilled at putting together new offers, promoting ideas, leading teams of business and systems professionals in defining, designing and developing software. Mu specialties are Big data, analytics and getting things done.

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