Protecting your business from procurement fraud: Best practices and red flags

Procurement fraud represents one of the most significant financial risks facing UK businesses today. In the first half of 2024 alone, just over £570 million was stolen in payment fraud as criminals continue to ruthlessly target organisations and individuals alike. This staggering figure highlights the scale of the problem affecting British businesses.

At its core, procurement fraud occurs when individuals or organisations manipulate the purchasing process for personal gain, resulting in substantial financial losses, reputational damage, and operational disruption. The impact extends beyond direct monetary losses, damaging vendor relationships, employee morale, and stakeholder trust. Small and medium-sized enterprises (SMEs) are particularly vulnerable, as they typically lack the robust controls and resources that larger organisations can implement to defend against such threats.

Common types of procurement fraud

Fraudsters have developed numerous schemes to exploit procurement processes for personal gain. By familiarising yourself with these tactics, you can better protect your organisation from becoming a victim.

1. Bid rigging and collusion

This occurs when suppliers coordinate their bids to manipulate the competitive bidding process. Suppliers might agree to take turns winning contracts, submit complementary bids at artificially inflated prices, or withdraw bids to favour a particular vendor. This type of fraud undermines fair competition and typically results in organisations paying more than necessary for goods or services.

2. Kickbacks and bribery

Kickbacks involve employees receiving personal benefits from suppliers in exchange for favouring them in the procurement process. These benefits might include cash, gifts, travel, entertainment, or other forms of payment. Such arrangements create conflicts of interest and lead to decisions that prioritise personal gain over organisational value.

3. Conflict of interest

Procurement professionals may have undisclosed financial interests or personal relationships with vendors. When these relationships influence buying decisions, organisations often receive poorer value for money or substandard goods and services. Conflicts of interest can be particularly challenging to detect when relationships are deliberately concealed.

4. Phantom vendors

This scheme involves creating fictitious suppliers to divert funds. A dishonest employee might set up a shell company, process fake invoices, and approve payments to this non-existent vendor. The funds are then redirected to personal accounts, resulting in direct financial loss with no goods or services delivered.

5. Purchase order and invoice manipulation

Fraudsters may manipulate legitimate purchase orders or invoices by altering quantities, prices, or payment terms. This could involve duplicate invoices, inflated charges, or billing for goods or services that were never delivered. Without proper verification processes, these manipulations can go undetected for extended periods.

Red flags and warning signs of procurement fraud

Early detection is crucial for minimising the damage caused by procurement fraud. The following indicators often suggest fraudulent activity might be occurring within your procurement processes.

1. Unusual or excessive spending patterns

Look for sudden increases in spending with particular suppliers, frequent purchases just below approval thresholds, or unusually high prices compared to market rates. Consistent overspending in specific departments or cost centres might also indicate systematic fraud.

2. Vendor anomalies and discrepancies

Be alert to vendors with incomplete information, matching addresses or bank details to employees, sequential invoice numbers despite sporadic business, or multiple vendors with similar details. Vendors who win an unusually high percentage of bids or who consistently submit bids just below competing offers warrant further investigation.

3. Lack of documentation or audit trails

Missing or incomplete documentation, particularly around vendor selection or bid evaluations, may indicate attempts to conceal fraudulent activities. Watch for inadequate specification of goods or services, vague contract terms, or post-transaction modifications to contracts or purchase orders.

4. Employee behavioural indicators

Changes in employee lifestyle that seem inconsistent with their income, unusual relationships with vendors, resistance to procedural changes, or refusal to take holidays might signal involvement in fraudulent activities. Employees who insist on managing specific vendor relationships exclusively should also raise concerns.

Best practices for preventing procurement fraud

Prevention remains the most effective approach to procurement fraud. The following strategies create a robust defence system that significantly reduces your organisation's vulnerability to fraudulent activities.

1. Implementing robust internal controls and approval workflows

Establish clear segregation of duties, ensuring that no single individual can control all aspects of the procurement process. Implement appropriate approval thresholds and ensure that approvers have sufficient information to make informed decisions. Regularly review and update authorisation matrices to reflect organisational changes.

2. Conducting regular audits and data analysis

Schedule both routine and surprise audits of procurement activities. Use data analytics to identify unusual patterns or relationships that might indicate fraud. Consider periodic rotation of both internal and external auditors to ensure fresh perspectives.

3. Providing employee training and awareness programmes

Ensure that all staff involved in procurement understand fraud risks and their responsibilities in prevention. Training should cover ethical standards, conflict of interest policies, and procedures for reporting suspicious activities. Refresher training should be provided regularly to maintain awareness.

4. Establishing a code of conduct and whistleblower policy

Develop a clear code of conduct that addresses conflicts of interest, gift policies, and ethical expectations. Create safe, anonymous channels for reporting suspected fraud, and ensure that whistleblowers are protected from retaliation. Promote an organisational culture that values integrity and transparency.

How to detect and investigate suspected procurement fraud

Despite strong preventive measures, some fraudulent activities may still occur. When suspicions arise, these methodical investigative approaches can help you uncover the full extent of any fraudulent scheme.

1. Forensic accounting techniques

Employ forensic accounting methods to trace suspicious transactions and establish patterns of fraudulent activity. This might include examining financial records, comparing transaction details across systems, or reconstructing chronologies of events to identify irregularities.

2. Data analytics and fraud detection software

Leverage advanced analytics tools to process large volumes of procurement data and identify anomalies. Modern software can detect patterns invisible to human reviewers, such as unusual timing of transactions, unexpected relationships between data points, or statistical outliers in pricing or quantities.

3. Interviewing witnesses and gathering evidence

Conduct thorough, well-documented interviews with relevant parties, including employees, suppliers, and other stakeholders. Approach these conversations strategically to maximise information gathering while minimising the risk of evidence tampering or collusion among potential fraudsters.

Steps to take when procurement fraud is confirmed

Once you've gathered sufficient evidence to confirm fraudulent activity, swift and decisive action becomes necessary. A comprehensive response should address legal, financial, and organisational aspects of the situation.

1. Reporting to authorities and legal action

Engage with appropriate authorities, which may include the Serious Fraud Office, Action Fraud, or local police depending on the scale and nature of the fraud. Consult with legal counsel to understand options for criminal prosecution, civil recovery, or other legal remedies.

2. Recovery of lost funds

Work with legal and financial advisors to pursue recovery of misappropriated funds. This might involve insurance claims, civil litigation against perpetrators, or negotiated settlements. Document all losses thoroughly to support recovery efforts.

3. Disciplinary measures and employee termination

Implement appropriate disciplinary actions against employees involved in fraudulent activities, following established HR policies and legal requirements. Review and strengthen hiring practices to reduce the risk of employing individuals with fraud histories.

The role of technology in preventing and detecting procurement fraud

Modern technology offers powerful tools that significantly enhance fraud prevention and detection capabilities. These solutions provide visibility, control, and analytical power that manual processes simply cannot match.

Procurement and spend management platforms

Modern procurement systems provide transparency, standardisation, and auditability throughout the procurement lifecycle. These platforms can enforce policy compliance, provide visibility into spending patterns, and create unalterable records of procurement decisions and approvals.

Artificial intelligence and machine learning algorithms

AI and machine learning technologies can analyse vast datasets to identify subtle indicators of fraud that traditional methods might miss. These systems become more effective over time as they learn from data patterns, continuously improving their fraud detection capabilities.

Final thoughts

Procurement fraud presents a significant risk to UK organisations of all sizes, but with appropriate awareness, controls, and technology, this risk can be effectively managed. By implementing the strategies outlined in this guide, organisations can protect their financial resources, maintain stakeholder trust, and ensure that their procurement processes deliver genuine value.

Taking a proactive approach to fraud prevention is invariably more cost-effective than addressing the consequences of fraud after it occurs. Begin by assessing your current vulnerabilities, prioritising improvements to your control environment, and fostering a culture where ethical behaviour is both expected and rewarded.

Protect your business from procurement fraud with Spendesk's comprehensive solutions. Schedule a demo with our team today to see how our platform can strengthen your controls, enhance visibility, and safeguard your organisation against fraudulent activities. Let us show you how implementing the right tools can transform your procurement processes while reducing risk.