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www.iadb.org1300 New York Avenue, Washington, DC 20577

Phone (202) 623-1456 Fax (202) 623-1579

Inter-American Development BankVPC/PFP & PRE/OII

Red Flags in Procurement

IADB PFP & OIINovember 2007

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Contents:Contents:

I. Scope of Red Flags ProgramII. Methodology

III. Deviations

IV. Prevention

V. Reporting

VI. Case Studies

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A joint Study By: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: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: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:Sources of Information:

Analysis based on a Sample of:

52 substantiated cases of fraud and corruption investigated by OII between2004 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: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

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The Procurement Process:The Procurement Process:

Submission

PhaseEvaluation

Phase

Execution

PhasePreparation

Phase

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* Assessing procurement needs;* Preparing corresponding

bidding

documents and procurement

notices;

* Publicizing the procurement

notices and issuing the bidding

documents or requests for

proposals

* Bidders submit the bid or

proposal documents to theExecuting Agency

* Bid or proposal documents will

ground the EvaluationCommittees decision to award

the contract

2) Submission Phase2) Submission Phase1) Preparation Phase1) Preparation Phase

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The Procurement Process (Cont.):The Procurement Process (Cont.):

Submission

PhaseEvaluation

Phase

Execution

PhasePreparation

Phase

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* Goods and Works: Borrower

must carry out the contract withdiligence 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

4) Execution Phase4) Execution Phase

* Determine the bid or proposalresponsiveness and decide on

the award of the contract

* Objective application of all theevaluation criteria detailed in the

bidding documents or request

for proposals

3) Evaluation Phase3) Evaluation Phase

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B i d / P r o p o s a l

Ev a l u a t i o n P h a s e

18 %

B i d / P r o p o s a l

S u b mi s s io n P h a s e

3 9 %

P r e p a r a t i o n P h a s e

2 %

Ex e c u t i o n P h a s e

4 1%

Phases of the PP at which violations occurred:Phases of the PP at which violations occurred:

Preparation Phase

2%

Execution Phase

41%

Evaluation Phase

18%

Bid Submission

Phase

39%

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Deviations

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III. Most common deviations:III. Most common deviations:

Deviations

Submission of

Falsified Documents

Breach ofConfidentiality

Misrepresentation

Fraudulent Request

for Reimbursement

Manipulation of theProcurement Process

Misuse of BankFunds

Conflict of Interest

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1) Submission of Falsified Documents: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

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.

2)2)Manipulations of the Procurement ProcessManipulations of the Procurement Process::

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Example:Non existing recipients

Unsupported Expenditures

Self Dealing

Kickbacks

Mismanagement of funds

Embezzlement

3) Misuse of Banks Funds:3) Misuse of Banks Funds:

4) Conflict of Interest: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:5) Fraudulent requests for payment:

Example:

Falsification of TORs to obtain payments

Falsification of receipts to obtain payments

Falsification of documents to obtain payments

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Example:

Disclosure of results before publication

7) Breach of Confidentiality:7) Breach of Confidentiality:

Example:

Lack of consent of the consultants included in the bid.

Exaggeration of previous experience.

6) Misrepresentation:6) Misrepresentation:

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Prevention

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Prevention

Sanctions &

Awareness

Training

Red Flags

DatabaseTechnical

Materials

Monitoring

How to prevent these problems?:How to prevent these problems?:

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1) Training1) 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 Flags2) IT use of Database of Red Flags

PFP & OII anticipate implementing a Red-Flags matrix designedto help project teams improve their ability to identify and address

fraud and corruption in project design and execution.

# Red Flag What to detect? Red Flag Level of Risk Who Decides? What to do? Deviation

1 Are the TORs

coherent w ith the

outline of the project

and/or the documentidentifying the needs

for the Bank-

financed project?

Modification of

TORs to inflate the

tasks necessary for

the execution of thecontract and obtain

payments f or

unnecessary w ork

Yes 3. Medium OII Submitt OII Manipulation:

Influence in a

devious manner

any stage in theProcurement

Process.

2 Is the price in one of

the bids significantly

different than the

others? (Verynarrow or very w ide

variance) (Should

this be part of the

next section?)

A bid is exactly 5%

lower than the

Confidential

Estimates w hen allother bids are 25%

over the same

Estimates.

No #N/A #N/A #N/A Breach of

Confidentiality:

Disclosure of

privilegedinformation to

third parties in

undue

circumstances

and/or timing

Procurement Cycle

A) Preparation Phase

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Red Flags: Evaluation of the Levels of RiskRed 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.

# Questions Answers Answers Answers Answers Answers

1 Is this activity f inanced by the Bank Group? Yes Yes Yes Yes No

2If the facts in the red flag w ere true, would they constitute a violation

of the Banks prohibition against f raudulent and corrupt practices?Yes Yes No No No

3

Is any of the parties included in the sanctioned list of the IDB, the WB

or other international organizations or debarred by national

authorities?

Yes No Yes No No

Level of Risk: High High Medium Low N/A

Where to submit the concern for Revision: OII OII OII PFP N/A

Risk Assessment

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3) Dissemination of Technical Material3) 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 Program4) Monitoring the Red Flags Program

Annual / semi-annual retrospective analysis to identify behaviorsthat could be a source of fraud and corruption in Bank financedoperations.

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V. ReportingV. Reporting

Allegations and Fraud can be reported confidentially and securelyat:

www.iadb.org/oii

What happens next:All allegations are reviewed by OII, keeping specific details andcomplainant 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 proceedingsmight be recommended.

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ContactsContacts

VPC/PFP

Procurement, FinancialManagement and

Portfolio MonitoringDivision.

PRE/OII

Office of InstitutionalIntegrity

Thank You!Thank You!

www.iadb.org

1300 New York Avenue, Washington, DC 20577

Phone (202) 623-1456 Fax (202) 623-1579

Inter-American Development BankVPC/PFP & PRE/OII