LECTURE 7

WORLD BANK GUIDELINES ON PROCUREMENT FRAUD AND CORRUPTION

 Learning Objectives
At completing this unit students should be able to:
• Define fraud and corruption in procurement
context
• Give world bank definition of fraud and corruption
• State the challenges that fraud and corruption
pose to a country economy
• State world bank guidelines on prevention of
procurement fraud and corruption
 Definition of Fraud and Corruption

In the context of Bank operations, fraud and

corruption have been defined as follows:
• the solicitation,
• or the manipulation of loans or Bank
Group-financed contracts through any
form of misrepresentation
• payment or receipt of bribes,
• gratuities or kickbacks,
 Definition of Fraud and Corruption

• Staff abused their position or misused

World Bank Group funds or other public
funds for private gain.
 HOW CORRUPTION MANIFEST
ITSELF
Corruption manifests itself in some of these
ways:
• Influence the award of public contract
• Acquire benefits from government
• lower tax liabilities,
• obtain licenses,
• expedite government processes,
• affect judicial decisions, or lower penalties.
 HOW CORRUPTION MANIFEST
ITSELF
• theft
• misuse of public assets,
• falsification of accounts to cover diversion
of public funds to personal accounts,
• abuse of official discretion,
• or disclosure of privileged information to
help friends and relatives
• Corruption may either be grand or small
• Corruption may be periodic, affecting only
isolated actions in an otherwise clean
system.
• Or it may be systemic, permeating all
activities of the public sector.
• Corruption is a result of a complex
interaction of economic, institutional,
political, social, and historical factors
 ENABLERS OF FRUAD AND
CORRUPTION
• public sector policies generate economic rents,
• institutions are weak,
• political and bureaucratic power is exercised
for personal gain,
• society does not forcefully disapprove
corruption,
• and voice mechanisms are not strong.
• excessive discretionary power vested in public
officials,
 ENABLERS OF FRUAD AND
CORRUPTION
• monopolistic authority, (WAEC)
• lack of transparency in the functioning of
government,
• absence of effective accountability
systems,
• high cost of getting to public office,
• and low public-sector wages also
encourage fraud and corruption.
 The Bank’s Anticorruption Strategy

• The Bank’s mandate is to promote

economic and social development and fight
against corruption.
• The central part of its mission is to reduce
poverty and improve the quality of life of
people in developing countries and
transition economies.
• For this purpose, the Bank has adopted a
comprehensive anticorruption strategy.
 The Bank’s Anticorruption
Strategy
• Preventing fraud and corruption within World Bank projects;
• Helping countries that request Bank support in their efforts
to reduce corruption;
• Taking corruption more explicitly into account in country
assistance strategies, country lending considerations, policy
dialogues, analytical work, and the choice and design of
projects;
• Adding voice and support to international efforts to reduce
corruption; and
• Protecting the Bank from internal fraud and corruption.
 How and When Fraud and Corruption May Occur in Bank’s Projects

Fraud and corruption can adversely affect Bank

projects at any stage of the Project Cycle.
Some of the possibilities are indicated below:
• Project Design Stage
• Procurement Stage
Corrupt and Fraudulent Practices on the Borrower Side (purchaser or employer)

• Insufficient or inadequate advertising

• Excessively short bidding time
• Bidding time allowed is apparent, not real.
• Misuse of legal and administrative
requirements
• Inappropriate bidding procedures
• Procedures that violate the secrecy of
bidding
 Corrupt and Fraudulent Practices on the Bidder Side

Bidders may attempt to manipulate the

procurement process through corrupt
practices such as the following:
• Unjustified Complaints
• Collusion schemes
• Misleading bids
• Malicious front-loading - to minimize
borrowing to execute the contract or
unrealistic price
• Front-loading is a practice that allows bidders to minimize
borrowing to execute the contract. The savings obtained in
financial charges should be reflected in the bid price.
• However, excessive front-loading of unit costs, for parts of
the works that have to be executed, or goods provided,
mostly in the first year of a multi-annual contract, can
involve unacceptable risks for the purchaser.
• "Front-loaded"Bids
• A bid is "front-loaded"if the total price is
allocated in a manner where elements of the
work to be performed, and paid for, early in a
project bear a disproportionate amount of
cost, overhead and profit. In other words, the
contractor is attempting to maximize revenue
early in the project by assigning overstated
values to preliminary portions of the work.
• A front-loaded contract poses financial dangers for
a project owner. It is never in an owner's best
interest to pay a contractor an amount that exceeds
the value of the work in place. In a worst-case
scenario, it is a disincentive for completion. Even
assuming diligence and good faith on the part of
the contractor, it leaves the owner in a difficult
position. In the event of a termination for default or
convenience, the owner will have no effective way
to recoup the overpayment.
• Responsiveness
• In the public contract arena, front-loaded bids are
usually addressed in the context of bid
responsiveness. Does the front-loading of a low bid
represent a material deviation from the solicitation
and provide grounds for rejection? A frontloaded bid
is not automatically nonresponsive. The
misallocation of costs must be substantial. In the
words of the Federal Acquisition Regulation, it must
pose an "unacceptable risk"to the government.
• FAR 15.404-2(g) If unacceptable risk is not present, a federal
agency must accept a low bid despite the mathematical
misallocation of cost and profit to the front end of the
contract. Matter of Reece Contracting, Inc., Comp. Gen. No.
B-285666 (August 21, 2000); CCM September 2000, p. 5.
• Some bids are front-loaded to such a degree that they are
clearly nonresponsive. For instance, one low bid was
structured so that one-third of the fixed contract price
would have been disbursed upon completion of the clearing
and grubbing. Rejection of that bid was appropri[...]
• This practice may favour collusion between
bidder and purchaser.
• In this case, the purchaser will not object to a
heavily frontloaded bid, provided the bidder
pays a bribe. On the contrary, to favour
another bidder, an otherwise acceptable
moderately front-loaded bid can be
disqualified, on the grounds that its unit prices
are unbalanced
 Implementation Stage

• Corrupt contract amendments

• Unjustified complaints
• Overbilling/overpayment
• Lower than specified quality.
• Fraudulent justification of delays
• Flagrant theft - It is a form of corruption
that consists of diverting contract materials,
equipment or services to private channels.
 Implementation Stage
• Manipulation of Alternative Dispute
Resolution (ADR) procedures
 Financial Management

• Duplication of payments
• Alteration of and tampering with invoices
and other supporting documents
• Adulteration or duplication of accounting
records for different purposes
• Lack of supporting records
• Ineligible payments
• Misuse of funds
 Financial Management

• Unauthorized advance payments without

guarantee
• Unauthorized use of project property
• Excessively high operational expenditures
• Unreported discounts
 ACTIONS BY THE BANK IN CASES INVOLVING FRAUD AND CORRUPTION

• Reject a proposal for;

• Cancel the portion of the loan allocated

• Declare a firm ineligible, either indefinitely

or for a stated period of time, to be
awarded a World Bank contract
 Consequences of Frauds and Corrupt Practices to Countries

• It affects macroeconomic stability by encouraging

wasteful and ineffective government expenditures and
tax evasion;
• discourages investment, including foreign direct
investment;
• raises the cost of doing business;
• reduces competitiveness of domestic enterprises in the
international market;
• corrodes public institutions by subverting laws, rules,
regulations, and institutional checks and balances;
• and undermines political legitimacy or authority.
 Consequences of Frauds and Corrupt Practices to Countries

• corruption obstructs economic growth and

development;
• creates a serious risk of marginalization in the
global economy for countries with high levels of
corruption;
• imposes a disproportionately heavy burden on the
poor
• corruption reduces the development impact of
international assistance to developing countries
• weakens the support for aid programs.
 Dealing with fraud
• Regulating ethical behaviour
• It may be argued that measures for the
detection and prevention of fraud risk are
particularly important in procurement and
supply chain management, because
• individuals are responsible for developing and
managing commercial contracts and
relationships.
 Dealing with fraud
• Operate in a “stewardship” role, responsible for the
custodianship of finance and assets which are owned by
shareholders of the business.
• Potentially control very large sums of organisational funds.
• Are faced by many opportunities to commit financial fraud
or to misuse systems, power or information for personal
gain.
• Are in a position of trust within a business
• Are responsible for the standing credibility and reputation of
the organisation in its dealing with supply chain partners and
other stakeholders.
 Dealing with fraud
• Mechanisms supportive of good governance in
procurement; and specifically the prevention
of fraud and corruption, include the following;

• A strong internal control environment designed

to support business objectives and manage
identified areas of risk, robust internal policies,
and checks and control mechanism.
 Dealing with fraud
• The development and application of codes of
ethical conduct in procurement activities
• Effective budgeting, control and monitoring of
procurement spend across the organisation
• Clearly defined roles, responsibilities,
accountabilities and reporting structures for
procurement
 Dealing with fraud
• Controls over the authority levels of individual
buyers.
• Clear requirement for approvals and authorizations
of requisitions, procurements and payments
• Rigorous checking of procurement card statements,
invoices and other proofs of purchases, deliveries
and payments.
• The requirement of clear audit trails or ‘paper trails’
to enable the tracking of procurement decisions.
 Dealing with fraud
• The segregation or division of procurement
duties (so that, for example, the same person
is not responsible for authorizing and making
payments, which might enable falsification of
transactions)
• Rotation of projects buyers, to avoid any
particular buyer becoming too ‘cosy’ with any
particular supplier.
 END OF LECTURE

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