As I was reviewing our coverage of Procurement Fraud, and looking at how to best summarize it (something I will do at the end of the series), I realized that the tips, tips, and strategies provided thus far are very useful tools that procurement departments can use to thwart or catch fraud. But, at its core, procurement fraud remains one of the most challenging types of fraud to ferret out because relationships that extend beyond the four walls of the enterprise are difficult to monitor and track. Accordingly, CPOs and their teams must be vigilant because this fraud is so challenging to uncover.
Anyway, in rereading each article published in the past few weeks, I identified a key gap in the discussion – a formal definition of fraud. After all, how can an organization find something unless it knows what it’s looking for? As such, I’ll attempt to answer the question “What is Fraud?” by looking for a formal definition or formal definitions. Since there is no compelling need to develop a unilateral definition, I will directly leverage different sources to support this article, as annotated below.
What is Fraud?
- Let’s begin with a definition of fraud which, according to Wikipedia , “in criminal law, a fraud is an intentional deception made for personal gain or to damage another individual or entity. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud.”
- While Investopedia defines corporate fraud as the “activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company. Corporate fraud schemes go beyond the scope of an employee’s stated position, and are marked by their complexity and economic impact on the business, other employees and outside parties.”
- The United Nations includes fraud and corrupt practices under the same policy umbrella and offers this definition: “The definition of fraud varies among countries and jurisdictions. But in simple terms, fraud is any act or omission that intentionally misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation.Corrupt practices are generally understood as the offering, giving, receiving, or soliciting, directly or indirectly, anything of value to influence improperly the actions of another party… [For our purposes,] fraud is defined in a broader sense and includes, but is not limited to, theft, embezzlement, forgery and corrupt practices.” The UN continues by providing the following examples or types of procurement fraud
- Forging documents, preparing false entries in enterprise systems or making false statements to obtain a financial or other benefit to which a person is not entitled;
- Offering or receiving something of value to improperly influence a procurement process;
- Asking for or receiving money for providing information to a vendor in the procurement of goods and services;
- Asking for or receiving personal reward or other private gain in return for showing favor to a candidate in a recruitment process;
- The misuse or theft of a password for the unauthorized access to IT systems;
- Collusion or other anti-competitive scheme between suppliers during a tender process;
- Stealing or misappropriating UN assets.
- The U.S. GAO defines “fraud as a type of illegal act involving the obtaining of something of value through willful misrepresentation. Whether an act is, in fact, fraud is a determination to be made through the judicial or other adjudicative system and is beyond the auditor’s professional responsibility.”
- Black’s Law Dictionary cites several cases with different definitions including:
- “Fraud consists of some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury. As distinguished from negligence, it is always positive, intentional.”
- “Fraud, in the sense of a court of equity, properly includes all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence justly reposed, and are injurious to another, or by which an undue and unconscientious advantage is taken of another.”
I think you’re getting the point - fraud can, at times, be defined very specifically; other times, it includes a significant gray area. This gray area can make fraud hard to define and communicate within a procurement organization. And yet, while it can be hard to define, my sense is that most of us know fraud when we see it.
Next time, we’ll drill into more specific examples of procurement fraud as a way to help define it more clearly.