Red Flags in Procurement

IADB PFP & OII November 2007

Inter-American Development Bank
VPC/PFP & PRE/OII
1300 New York Avenue, Washington, DC 20577 Phone (202) 623-1456 Fax (202) 623-1579

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Contents:

I. II. III. IV. V. VI.

Scope of Red Flags Program Methodology Deviations Prevention Reporting Case Studies

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A joint Study By:

The Procurement Area of the PDP Division (PDP);
Ensures the good application of the Procurement Policies in all project procurement activities financed by the Bank; verifies that the funds are used for the purposes for which they are intended; and ensures that the bidding processes are conducted with proper competition, transparency, publicity, due process and equality.

The Office of Institutional Integrity (OII);

Investigates allegations of fraud and corruption. Also works on the side of prevention and promoting awareness on issues of fraud and corruption and integrity. Fraud and Corruption can be reported at: http://www.iadb.org/integrity/contact.cfm

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I. Scope of the Project:

Analysis of the most common Corrupt and Fraudulent Practices in Project Procurement. Development of a system to help identify and prevent such practices.

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Red Flags Program:

What?: Identification of practices that are or could be a source of fraud and corruption in Bank financed activities; Why?: Increase capacity to prevent fraud and corruption; Increase transparency and integrity in the procurement process. How? Red Flag Matrix (IT Based/PROMIS) Training Dissemination of Technical Materials.

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Sources of Information:
Analysis based on a Sample of:
52 substantiated cases of fraud and corruption investigated by OII between 2004 and 2007

Review of Existing Systems in comparator institutions (I.e. ADB, UN, WB, OECD) Interviews with officers from comparator institutions Review of documents and literature published by IOs.

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II. Methodology:
Classification of Cases according to the different stages of the procurement process; Identification of Types of Corrupt Practices (Deviations) at each stage of the process; Analysis and Comparison of existing Red Flags systems in International Organizations and Best Practices Creation of a Red Flags Matrix.

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Procurement Process

The Procurement Process:

Preparation Phase Submission Phase Evaluation Phase Execution Phase

1) Preparation Phase 1) Preparation Phase

* Assessing procurement needs;

2) Submission Phase 2) Submission Phase

* Bidders submit the bid or proposal documents to the Executing Agency * Bid or proposal documents will ground the Evaluation Committees decision to award the contract

* Preparing corresponding bidding documents and procurement notices; * Publicizing the procurement notices and issuing the bidding documents or requests for proposals

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The Procurement Process (Cont.):

Preparation Phase Submission Phase Evaluation Phase Execution Phase

3) Evaluation Phase 3) Evaluation Phase

* Determine the bid or proposal responsiveness and decide on the award of the contract * Objective application of all the evaluation criteria detailed in the bidding documents or request for proposals

4) Execution Phase 4) Execution Phase

* Goods and Works: Borrower must carry out the contract with diligence and efficacy and must provide the works and the goods in the conditions and timing agreed to in the contract * Consulting services: Winning bidder must provide the Bank with the agreed service with diligence and efficiency

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Phases of the PP at which violations occurred:

Preparation i Phases e P re pa ra t o n P ha

2%2 %

Ex e c u t i o n P h a s e 4 1% Execution Phase

Bid Submission S ubmissio n P ha se 3Phase 9%

B id/ P ro po s a l

41%

39%

B id/ P ro po s a l Ev a l u a t i o n Phase Evaluation P h a s e 18 % 18%

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Deviations

III. Most common deviations:

Submission of Falsified Documents Breach of Confidentiality Manipulation of the Procurement Process

Deviations
Misrepresentation

Misuse of Bank Funds

Conflict of Interest Fraudulent Request for Reimbursement

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1) Submission of Falsified Documents:

Examples: Submission of falsified documents Fraudulent Certificate of Previous Experience Forgery of Signatures Falsified Resume Submission of Falsified Financial Statements

2) Manipulations of the Procurement Process:

Example: Manipulation of the results to favor one specific consultant. Manipulation of the TORs to favor a specific consultant. Non competitive proceedings where they should have been.

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3) Misuse of Banks Funds:

Example: Non existing recipients Unsupported Expenditures Self Dealing Kickbacks Mismanagement of funds Embezzlement

4) Conflict of Interest:
Example: Family and Friends. Fraudulent Hiring of Consultants. Member of Selection Committee participating as bidder.

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5) Fraudulent requests for payment:

Example: Falsification of TORs to obtain payments Falsification of receipts to obtain payments Falsification of documents to obtain payments

6) Misrepresentation:
Example: Lack of consent of the consultants included in the bid. Exaggeration of previous experience.

7) Breach of Confidentiality:
Example: Disclosure of results before publication
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Prevention

How to prevent these problems?:

Training

Technical Materials

Red Flags Database

Prevention

Monitoring

Sanctions & Awareness

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1) Training
The Bank is developing a training program on how to identify and prevent fraud and corruption in procurement related activities.

The program will be addressed to all officials who have responsibilities in the procurement process. (Staff and Ex. Agencies) Training will focus on how to identify risk and corruption at the different stages of the procurement process. Training will be based on the lessons learned though a practical approach based on the analysis of cases of VPC/PFP and PRE/OII and the elements regularly added in the Red Flags Matrix.

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2) IT use of Database of Red Flags

PFP & OII anticipate implementing a Red-Flags matrix designed to help project teams improve their ability to identify and address fraud and corruption in project design and execution.
Procurement Cycle A) Preparation Phase
# 1 Red Flag Are the TORs coherent w ith the outline of the project and/or the document identifying the needs for the Bankfinanced project? Is the price in one of the bids significantly different than the others? (Very narrow or very w ide variance) (Should this be part of the next section?) Red Flag What to detect? Modification of Yes TORs to inflate the tasks necessary for the execution of the contract and obtain payments for unnecessary w ork A bid is exactly 5% No low er than the Confidential Estimates w hen all other bids are 25% over the same Estimates. Level of Risk Who Decides? What to do? 3. Medium OII Submitt OII Deviation Manipulation: Influence in a devious manner any stage in the Procurement Process.

#N/A

#N/A

#N/A

Breach of Confidentiality: Disclosure of privileged information to third parties in undue circumstances and/or timing

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Red Flags: Evaluation of the Levels of Risk

A system based on the appreciation of risks will be used to:
1 - To increase the prevention of fraud and corruption 2- To set "proper filters" so that only relevant cases be sent to OII.

Risk Assessment
# 1 2 Questions Is this activity financed by the Bank Group? Answ ers Answ ers Answ ers Answ ers Answ ers Yes Yes Yes Yes No Yes No No No

If the facts in the red flag w ere true, w ould they constitute a violation Yes of the Banks prohibition against fraudulent and corrupt practices? Is any of the parties included in the sanctioned list of the IDB, the WB or other international organizations or debarred by national Yes authorities? High Level of Risk: Where to subm it the concern for Revision: OII

No High OII

Yes Medium OII

No Low PFP

No N/A N/A

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3) Dissemination of Technical Material

Drafted by PFP & OII, under the form of a report or semi-annual report, containing relevant information illustrating the Banks capacity to detect, investigate and sanction fraud and corruption. The material will be disseminated to Staff and Executing Agencies

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4) Monitoring the Red Flags Program

Annual / semi-annual retrospective analysis to identify behaviors that could be a source of fraud and corruption in Bank financed operations.

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5) Disclosure of Sanctions and Increased Awareness

New sanctions procedure makes the List of Sanctions available to the public to increase deterrence effect. OIIs Annual Report provides information on prevention of corruption List of Sanctions: www.iadb.org/oii OII Annual Report

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V. Reporting
Allegations and Fraud can be reported confidentially and securely at: www.iadb.org/oii What happens next: All allegations are reviewed by OII, keeping specific details and complainant identities confidential. OII conducts a preliminary review answering the following 3 questions:
Is project financed by the Bank? Does it constitutes a violation of the Banks Procurement Policies? Does it provide sufficient credible information for investigation?

Official investigation is opened and sanctions proceedings might be recommended.

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Contacts
VPC/PFP Procurement, Financial Management and Portfolio Monitoring Division. PRE/OII Office of Institutional Integrity

Thank You!

Inter-American Development Bank

VPC/PFP & PRE/OII
1300 New York Avenue, Washington, DC 20577 Phone (202) 623-1456 Fax (202) 623-1579

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