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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

    www.iadb.org3

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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

    9

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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

    10

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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