Has fraud corrupted your supply contracts? If your business solicits bids for goods or service contracts, there’s a risk that employees will solicit or accept kickbacks to favor certain vendors. Or, they might steer a bid to a vendor based on their personal ties to the company’s owner or employees. Here’s how to prevent this unethical — if not illegal — behavior from corrupting your business’s purchasing process.

Kickbacks leave traces

Kickback recipients accept bribes to steer business to certain vendors. Although kickbacks are common in some industries, they’re unethical and can severely damage a business’s reputation, cost you more than buying the same goods or services from other vendors and lead to legal entanglements.

Fortunately, you can spot kickback activity if you know what to look for. Signs include:

• A scarcity of qualified contract bids, suggesting competition wasn’t actively sought,
• Narrow bid requirements, which may indicate specs were tailored to a particular vendor,
• Moving deadlines, implying that a preferred contractor was outbid or didn’t complete its proposal on time, 
• Poorly drafted bid solicitations, indicating an effort to leave some room to maneuver in awarding the bids, and
• Outside help in writing specifications.

This last practice could allow vendors to insert their own practices or products into future bids, thereby curtailing competition.

Family ties and other trip-ups

Not all fraud related to contract awards involves kickback payments. Sometimes employees favor businesses simply because they’re owned by family members or friends, or the employees themselves have a business interest in the supplier.

For this reason, you should perform background checks on contract bidders so you know their affiliations and ownership and whether they’ve been accused of illegal or unethical practices in the past. Similarly, make sure that employees who participate in awarding contracts are above reproach. If you find that an employee is related to the owner or management of a supplier, bar the employee from working on any purchasing contract that involves the vendor.

And if you haven’t already done so, put in writing the standards by which you expect employees and vendors to conduct business. Review and update your standards regularly and require bidders and purchasing department employees to read and sign them.

Subtle but dangerous

Has fraud corrupted your supply contracts?  Supply contract fraud can be subtle, but it potentially damages your company’s reputation and financial stability. If your procurement practices routinely involve deadline changes, don’t draw as many bids as you would expect or attract widely divergent bids on the same projects, look more closely at your bidding policies. What you find may surprise you.

(This is Blog Post #727)