Bid-Rigging Schemes Can Be Difficult to Detect

False Bids Made One Company Appear the Best Choice

Two men entered guilty pleas in one federal investigation into fraud, money laundering and obstruction of justice involving a public housing project in Detroit, Michigan.

According to the FBI and court documents, the activity involved falsely inflated project bid documents submitted in the name of companies owned by Rodney Burrell, 57, and Brian Dodds, 52.

Burrell’s company was R&R Heavy Haulers and Dodd’s was D&R Earthmoving.

The false bids were used as part of a dishonest scheme to make it appear that the $11.9 million bid submitted by Ferguson Enterprises, Inc. was the lowest bid presented to perform demolition, earth work and utilities installation at the Garden View Estates project. The project involved a large-scale, multiuse public housing project being developed by the U.S. Department of Housing and Urban Development and the Detroit Housing Commission.

In exchange for allowing the false bid to be submitted in the names of their companies, Dodds received a subcontract from Bobby W. Ferguson, Owner of Ferguson Enterprises Inc., worth more than $300,000. In return for allowing the false bid to be submitted in the name of his company, Burrell and R&R Heavy Haulers received a subcontract from Ferguson worth more than $180,000.

According to the FBI, both men provided misleading and incomplete testimony to federal law enforcement agents and to a federal grand jury in an effort to conceal the commission of the conspiracy to defraud the United States. Burrell and Dodds pled guilty in late 2010 and testified for the prosecution in related litigation that continued into 2012.

In today’s highly competitive, global marketplace, gaining an edge over a competitor, however small, can mean the difference between winning and losing a bid. Companies submitting bids may be tempted to take steps to influence an “insider.” Alternatively, vendors may seek to exert influence over their competitors that are also submitting bids.

In one case involving a project for the U.S. Department of Housing and Urban Development and the Detroit Housing Commission, two men pled guilty to involvement in a bid-rigging scheme (details in the right-hand box).

Bid-rigging schemes can take place during the following bid phases:

Pre-solicitation – Employees may be bribed by potential vendors to create or invent a reason as to why a particular project is needed. Further, the employee may also receive some form of bribe to ensure the specifications or requirements closely match the strengths of the vendor paying the bribe.

Solicitation and Submission – In the solicitation phase, suppliers are given notice of the purchaser’s requirements and then allowed to submit their bids. Here are some possible schemes in this phase:

• Bids are only requested from the “preferred” vendor that paid a bribe, or bids are solicited from others, but subsequently ignored.
• Bids are received from fictitious bidders that on the surface appear to be legitimate. The vendor that created the fake companies is able to win the contract with the lowest bid.
• “Preferred” vendors are given advance notice of when bids will be due as well as the requirements that the purchasing company plans to include in the bid specifications.
• Competitive bids from vendors are destroyed, altered or excluded from the bidding process.
• A preferred vendor is given access to competitors’ bids and then allowed to amend or alter their bid.
• A purchasing company employee accepts a late bid from a vendor that is paying some form of bribe.

In addition to the schemes noted above, vendors may also decide to work together to ensure that each vendor is allocated an agreed-upon portion of the overall pool of work subject to bid. By sharing information with each other, vendors will be able to increase prices across the board, which means the purchasing company will be required to pay more than they would have had the vendors not conspired.

Detecting and preventing bribery schemes requires a multipronged approach. Consider taking the following steps:

Implement an employee hotline. In the fight against fraud, it is invaluable to have a hotline that employees, as well as vendors, can use to anonymously report concerns regarding suspicious or fraudulent activity.

Keep a close eye on employees involved in the bidding process.Employees who become involved in bidding schemes will quite often behave suspiciously. For example, the employee may direct a member of their staff to bypass or ignore a company policy or procedure. When questioned as to why, they may react in a very defensive manner. Alternatively, they may constantly complain that their employer is not paying them a competitive salary, yet they appear to be spending considerable amounts of money.

Prohibit excessive gifts. In order to prevent vendors expecting “you scratch my back, and I’ll scratch yours,” consider implementing and subsequently enforcing rules regarding the value, frequency and type of gifts that employees can accept from vendors. Without clear and concise rules, employees can often find themselves “owing” a vendor because they accepted considerable gifts and entertainment.

Watch out for vendors that win far too often. If a vendor consistently win bids, yet it appears no more qualified that its competitors, there may be cause for concern. Further, if the vendor’s employees appear to have a very close relationship with your company’s employees, consider engaging your accountant to conduct an independent review of the bids in which the vendor has participated.

Beware of vendors who overpromise and under-deliver. When a vendor wins a highly contested bid yet fails to deliver on its commitment, there may be reason to revisit the bidding process. The vendor may have received non-public information from an employee. For example, a vendor may have been made aware of the importance of certain specifications and subsequently ensured that its bid significantly exceeded those requirements.

By design, bidding schemes are meant to be difficult to detect. Since a company’s procurement process involves a lot of “moving parts,” detecting and preventing these schemes requires a concerted effort that calls for a forensic accountant.

© 2017