Using machine learning to prevent procurement fraud in local government

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Fraud is big business in the public domain. A report from PwC in 2018 suggests that around half of organisations around the world, including government organisations, have been victims of economic crime—often fraud. Worse, around half of all frauds were committed by someone within the organisation, often through procurement fraud.

Businesses often underestimate the cost of fraud—but how much worse is the situation in the public sector, where there is no obvious victim except the taxpayer? There are no clear figures for the precise amount lost through procurement fraud. However, a recent estimate in the UK suggested that local councils were able to prevent or detect over £300 million in fraud in 2017/18. The undetected fraud levels could be considerably higher.

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Using machine learning to prevent procurement fraud in local government

Around the world, the public sector is undergoing a transformation in terms of its transparency and the value provided to taxpayers and citizens. Citizens are prepared to demand more, and not put up with poor service. Governments have also, however, woken up to the fact that citizens want more from them, but are not prepared to accept demands for more and more in personal taxes. They have started to recognise that an important element of government work now has to include preventing and detecting fraud, to safeguard taxpayers’ money, and ensure that it is spent on vital public services.

Fraud in local government

Local government is a particular risk area for procurement fraud. Local governments, including city management,  spend a lot of money, particularly because many now outsource significant amounts of service provision. They may also lack expertise in contracting and commissioning, and may, therefore, be an easy target for fraudsters. The procurement process is an obvious target.

Procurement fraud can occur at any stage of the procurement lifecycle, which makes it extremely complex to detect and prevent. Analysis suggests that for government organisations, procurement fraud is most likely to occur at the payments processing stage, although vendor selection and bids was also a vulnerable stage.

There are a number of ways in which procurement fraud can occur. Some involve collusion between employees and contractors, and others involve external fraudsters taking advantage of a vulnerability in the system. Organisations can also make themselves more vulnerable to fraud by not ensuring that employees follow proper procedures for procurement. One possible problem is, for example, dividing invoices up into smaller chunks to avoid particular thresholds. This is usually done in all innocence as a way to make procurement simpler, but it also leaves the organisation open to abuse because the proper checks are not made.

Taking action to address fraud

But if procurement fraud is on the rise, so too is counter-fraud work. Governments around the world have strategies and are monitoring the situation carefully. Many have increased the checks put on procurement processes, and have also provided more information to employees and potential contractors about how to spot fraud and potential fraud.

There is growing understanding that rules-based systems are not enough to stop fraud: they may help to detect it after the event, but they are unlikely to prevent it, even in combination with systems to reduce opportunity. Analytics-based systems, however, can both improve detection of fraud, and also start to predict it. They are often based on artificial intelligence (AI), which learns from previous cases, and can then detect patterns that may be associated with fraud, or process breaches that may be a problem.

From detection to action

Detecting anomalies, however, is just one step in the process of preventing fraud. It is only an indicator, and all indicators can do is to indicate. In fraud detection, indicators like anomalies highlight an area for further investigation. Then it has to be over to the fraud, audit and compliance teams to take a look.

Historically, fraud detection relied on audits, often months after the event and only on a yearly basis. Fraud teams would then often need further months to investigate. However, analytics-based fraud detection systems can flag up anomalies in real-time, and pass them over for immediate investigation. Payments or processes can be stopped pending investigation. It’s a completely different ball game.

#Analytics is a game-changer in detecting procurement #fraud. It is by far the most efficient way of doing so. Its use in local governments around the world is helping to save taxpayers’ #money and ensure that public services can be delivered. Click To Tweet
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About Author

Laurent Colombant

Laurent has been helping customers tackle financial crime using NLP, ML and analytics since the year 2000. After focusing on sanctions screening, anti-money laundering, payment fraud and terrorist cell financing he is now working to address Continuous Compliance monitoring for SAS customers. This includes P2P, T&E, Know Your Supplier and Insider fraud modus operandi. He’s the NEMEA pre-sale lead for the solution and believes it’s the next to hottest fraud detection solution in the market.

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