Anyone know what's the number two form of economic crime, in terms of losses? Believe it or not, it's procurement fraud.
I grew up in a small town south of “Big D” and in my neck of the woods having two first names is, well, normal. So, when Will Farrell’s character, Ricky Bobby (my nickname-sake), uttered those fateful words in Talladega Nights, “If you ain’t first, you’re last”, I just thought it was funny. But when I applied those words of wisdom to what I do professionally (Fraud Fighter), I realized something.
Asset misappropriation, or theft, is the number one form of economic crime on the planet. We hear about it every day in some form of media; but how often do we hear about number two, procurement fraud?
According to PwC’s 2014 Global Economic Crime Study, 29% of all organizations are impacted by this economic crime every year. That’s 1/3 of every government agency and private or publicly traded business on earth. Yep, folks, that’s a heck of a lot!
Calculating the global losses to procurement fraud has proven very difficult, with little in the way of published facts and figures for this highly unreported crime. However, if we look at just the US federal government, the Department of Justice reported, “Settlements and judgments in cases alleging false claims for payment under government contracts totaled $1.1 billion in fiscal year 2015.”
I know what you are thinking…only $1.1 billion in 2015…doesn’t the federal government concede to program integrity losses greater than $100 billion each year? Yep, but the $1.1 billion figure is for settlements and judgments, meaning DOJ civil or criminal charges were pursued. If my Criminal Justice degree serves me correctly, when 100 people commit a crime, one of them will be prosecuted. So, doing that math, it’s feasible that procurement fraud could be as costly as our federal program integrity losses.
What can be done to address procurement fraud?
To detect and prevent procurement fraud, you need hybrid analytical approach, with the following steps:
Business rules are a good place to start. If bidders show up on a disbarred list, don’t give them a contract. If too many invoices come in on the same day, check them out. Simple enough. However, business rules typically only catch simple schemes and data entry errors.
Anomaly detection looks for behaviors that are unusual or unexpected.
- Historical anomaly detection looks at changes in behavior over time. If the system sees a sudden, drastic shift from historical patterns – with nothing to explain it – this would be flagged and factored into the overall fraud risk score.
- Peer grouping or clustering compares one’s behavior to the norm for a similar peer group and identifies behaviors that are drastically different from what would be expected for that group or type of procurement.
- Profiling defines the typical attributes of good guys and bad guys. When it sees a pattern that matches that of known fraudsters, the system recognizes and flags it accordingly.
Text mining identifies patterns and anomalies from unstructured data, such as reports and emails. For example, if a procurement officer who makes $65,000 a year emails pictures of extravagant purchases, you might want to check it out.
With advanced analytics, you can build models that identify attributes or patterns that are highly correlated with known fraud, even for complex and emerging schemes. Analytics answers questions that manual or ad-hoc methods miss. Does this look like the typical habit of bid riggers or those known for counterfeit parts? Does this series of invoices, stair-stepping up and down in dollar value, indicate a vendor trying to find the threshold of scrutiny?
Since much procurement fraud involves collusion, associative linking is invaluable. Link analysis finds relationships among entities based on static attributes (such as phone numbers, addresses or bank accounts) or transactional attributes (business relationships, referrals, etc.). A relationship might be innocuous, but even for valid business you want to be able to show you have done due diligence vetting relationships.
Independently, each method is good at detecting a certain type of fraud, but when used in combination, you can see so much more.
Procurement fraud may not be first but we can’t treat it like it’s last. Time to shake and bake the problem with analytics. (Just see the movie.)