Question

QUESTION 1: CONSTRUCTION/CIVIL FRAUD

A major infrastructure company, Mega Construction Corp. had been awarded a road construction contract by the government. For execution of the project, the company had sub-divided the geographies and execution areas and invited bids for the sub-contracting. The company had publicized a whistle-blower policy and received a complaint from one of the bidders about possible collusion between certain bidders. The matter was sought to be investigated by the management of the company.

As the company’s fraud expert, you are investigating this possible fraud and are preparing to take necessary actions to complete a thorough investigation.

REQUIRED:

(a) Determine the possible type of schemes being perpetrated and red flag indicators of the said conduct.

(b) What are the steps taken to complete the investigation and the evidence sought for prosecution of perpetrators?

Answer 1

Answer a

The most common schemes considered while collusion are as follows:

• Market division- Market division occurs when the bidding members agree to divide their market (e.g., geographical territories and client segments) thereby restricting competition
• Bid rotation- Bid rotation refers to an agreement among bidders to take turns in winning contracts.
• Price fixing- Price fixing refers to an agreement among competitors to fix prices at which goods and services are sold in a specific market.

The various red flags related to the above schemes are as follows:

Bid prices are unusually high- Bid prices would be relatively high compared the industry standards

Bidders loose on purpose- To favour one company the other bidders loose on purpose without even trying for genuine bid. They withdraw the bids in the last moment even without proper justification

Bids would be similar- The unit prices and bid prices would be identical and very close. This gives a clue that all the bidders have quoted the amount post discussion

Bidders take turns in winning- When there are group of 10 bidders for examples one bidder would give the best quote and other bidders quote in such a way that would lose by default

Lack of competition- Well know companies would not bid even after purchasing the bidding documents. Fewer bids would be received compared to the earlier tender.

Answer b

To proceed with the investigation necessary conversations and discussion should be carried out with industry representatives. The discussions could help identify the operation of collusive arrangements among bidders. The past contract awards and earlier bids and bidding documents could be verified as a part of investigation. The bids given can be compared with the industry standards and if the variation is quite abnormal it gives adequate evidence. There are possibilities of shadow bids to give appearance of competition. If the shadow bids could be identified it could serve as a evidence for prosecution. When the bids show unusual similarities like same contact details, letter head and errors it could even serve as a evidence for prosecution.