
Luton Borough Council was prosecuted by the HSE late last year following an incident at a high school in which an assistant headteacher was attacked by a pupil and left with life-changing injuries.
Councils spend around £55 billion a year on goods, works and services and while there are no comprehensive or up-to-date figures, losses to fraud and error are estimated to be anywhere between £275 million and £2.75 billion per year. Of the 86 councils which responded to the review survey, 23% reported instances of fraud or corruption within their procurement for the 2017/2018 financial year and the review accepts that this is likely to be just the tip of the iceberg, with the majority of incidents remaining undetected. Furthermore, by far the majority of those cases uncovered followed tip-offs or whistling blowing rather than having been captured by anti-fraud procedures per se.
The review identifies a number of forms which fraud or corruption may take at various stages of a procurement exercise and subsequently during the delivery of the procured goods, works or services, including risks posed by organised crime and cartels which may stem from within or outside of a procuring organisation, and may or may not involve collusion between an employee and external parties such as suppliers. During the operational stage of a contract, the review identifies risks arising through poor contract management and insufficient internal checks and audit processes, as well a lack of training, knowledge and understanding.
A number of interesting case studies are included in the review to illustrate instances of fraud or corruption uncovered at councils including the creation of fictitious suppliers to divert money to third parties; money paid for equipment which was not supplied; kickbacks and bribes paid in relation to the award of a contract and collusive activity in the submission of bids during a procurement exercise.
Case studies are also used in the report to highlight examples of good practice and measures taken by councils to counter fraud and corruption, including initiatives to combat housing benefit and council tax fraud; the creation of separate, dedicated fraud investigation teams; mandatory training and enhanced verification procedures.
Importantly, the review also identifies risk arising from the increased ‘commercialisation’ of local authorities, where councils are seeking alternative methods of service delivery and devising means of income generation through partnership working and setting up companies. The arms-length nature of alternative delivery structures and the use of council companies can increase the distance between a local authority and its suppliers while reducing visibility, oversight and effective governance, all of which can increase the risk of fraud and corruption occurring. Additionally, the review identifies a lack of commercial awareness and expertise within local government, which may result in councils failing to achieve the best value, as well as leaving them vulnerable to exploitation by their own staff and third parties.
Fraud and corruption may still be seen as a victimless crime by some – particularly if it concerns ‘government money’ – but of course, nothing could be further from the truth. ‘Government money’ is taxpayers’ money and every pound lost through error or fraud is a pound lost to the delivery of essential services, which councils and their service users can ill afford, now more than ever. The consequences for local authorities also extend beyond the immediate loss of money; procurement exercises may have to be cancelled and re-run from the beginning bringing increased costs and delay, and operational contracts may have to be terminated immediately with interim arrangements put in place until a new supplier can be procured. Criminal investigations and prosecutions can be expected; reputation damage and adverse publicity is likely to be substantial and councils may find themselves liable in cases where a supplier has failed to pay VAT. HMRC can show that the council failed to adequately undertake due diligence and as such ‘knew or should have known’ that VAT was not being paid.
The review makes a number of high-level recommendations for the MHCLG itself through its on-going work with the Local Government Association and counter-fraud organisations. But what can local authorities do to guard against fraud and corruption during and after the procurement process? While recognising that there is no “silver bullet” or one-size-fits-all solution, the review identifies particular areas in which councils could improve their resilience and advances measures which they might implement in each of those areas.
Improve understanding of risks
Build capacity and capability
Establish a culture of anti-fraud and corruption
Data quality and record-keeping
Procurement fraud and corruption are not theoretical threats to UK public authorities; instances are on the increase and while as yet there is no means of separately or centrally recording cases within the local government sector, in 2018, procurement fraud on the whole was in the top five of reported fraud types in the UK. Nationally, there is still much to do around standard definitions, measurement methodologies, reporting and recording. In the meantime, at a local level, councils are acknowledging that fraud and corruption are not just problems which happen to others, and taking measures to identify and mitigate the risks will help guard against the misappropriation of their ever-diminishing and increasingly precious financial resources.
With the ongoing Covid-19 pandemic providing more opportunities for criminals to defraud the taxpayers and the impending end and re-procurement of many complex and valuable PFI contracts, vigilance and fraud prevention in local authority procurement has never been more necessary or important.
If you have any questions about local government procurement and contract management please contact Mark Cook or Alex Lawrence.
MHCLG Review into the risks of fraud and corruption in local government procurement – A commitment from the UK Anti-Corruption Strategy 2017-2022, June 2020
Cabinet Office Cross-Government Fraud Landscape Annual Report 2018
The PwC Global Economic Crime Survey 2018
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