www.transparency.

org

www.cmi.no



Author(s): Marie Chne , Transparency International, [email protected]
Reviewed by: Robin Hodess Ph.D., Transparency International, [email protected]
Date: 11 March 2010 Number:236
U4 Expert Answers provide targeted and timely anti-corruption expert advice to U4 partner agency staff www.U4.no

Query
Would you have any idea if companies or agencies use procurement compliance checklists to report
possible irregularities, suspicious cases or difficulties in the procurement process? Could you name
any examples and how such lists are designed?


Purpose
In order to improve our internal procurement system,
we are currently considering asking our procurement
officers at HQ and in our country offices to fill out a
compliance checklist. The idea is to get feedback from
them on a regular basis about possible irregularities,
suspicious cases or difficulties in the procurement
process. Next to this function as reporting tool, the
checklist should also serve as compliance tool: the
procurement officer declares that all cases that are not
reported in the checklist are to be considered as
'regular', for which he/she takes the responsibility.
Content
1. Designing a procurement a compliance
checklist
2. Examples of procurement compliance
checklists
3. References
Summary
Due to the volume, number and complexity of the
transactions involved, procurement is one of the
government activities most vulnerable to corruption.
Procurement compliance checklists constitute an
important element of corruption risk management
strategies in procurement processes, both in terms of
prevention and detection of fraud and corruption. They
can guide procurement staff through the process of
transparent and effective procurement and help detect
and report irregularities.
Compliance checklists reflect good practice in
procurement processes by providing a set of indicators
to assess adherence to the agencys procurement rules
and regulations. They are often structured around the
major phases of the procurement cycle and typically
cover the various risks associated with each phase of
the contracting process, using red flags and blinking
indicators. For successful implementation of such
compliance tool, checklists should be designed in a
participatory manner, be user-friendly and easy to apply
and supported by regular training and awareness
raising activities.
Examples of procurement compliance checklists
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1 Designing a procurement a
compliance checklist
Procurement is one of the government sectors most
vulnerable to corruption, due to the important financial
flows involved as well as the complexity of contracting
processes that provide both incentives and
opportunities for rent-seeking behaviors. Corruption in
procurement can take many forms and can occur at all
stages of the procurement cycle from the decision to
contract, the identification of needs, the specifications
of the contract, the tendering process, to the contract
implementation and final evaluation. Yet, corruption
risks are especially hard to detect because of the size,
number and complexity of the transactions involved that
often require high levels of technical expertise at all
stages of the process.
In addition, corruption schemes in procurement
processes are complex, technically challenging, and
often perpetrated by individuals who know exactly how
to abuse the system. The lack of proactive corruption
risk management processes in many organisations
further exacerbates detection challenges. Therefore, a
good, transparent and accountable procurement
system needs to ensure effective control, complaints
and review mechanisms to ensure that decisions are
conform to the procurement regulations.
What are procurement compliance
checklists?
Procurement compliance checklists are one of the
corruption risk management tools that can be used to
effectively monitor procurement processes, identify and
detect fraud and corruption risks at all stages of the
procurement cycle. They typically consist of a
comprehensive summary of existing standards and
requirements at all stages of the procurement process,
with the view to ensuring adherence to an agencys
procurement policies and guidelines.
Their potential benefits for managing corruption risks
are many, both in terms of fraud prevention and
detection:
They reinforce existing guidelines and policies
by providing detailed and clear expectations at
all stage of the procurement process;
They can help operationalise and translate the
objectives of fairness, openness, competition
and transparency into a set of detailed steps and
indicators;
They provide concrete guidance to procurement
officers on how to design procurement tenders
that minimise risks of fraud, corruption and anti-
competitive behaviours;
They allow the tracking of procurement decisions
and can help the detection of irregularities
through a system of red flags and indicators;
They support consistent procurement processes
across the agency;
They can serve as a comprehensive tool for
reviewing procurement processes and assess
compliance with existing guidelines.
Such compliance checklists are usually part of a
broader set of complementary measures that can be
implemented, including the establishment of clear
reporting procedures, effective complaints mechanisms,
adequate whistleblowing protection and an effective
system of internal and external controls.
Contents and structure of
procurement compliance checklists
Procurement checklists reflect good practice in
procurement processes, based on an overview of the
potential vulnerabilities associated with each phase of
the contracting process. In addition to monitoring
compliance with the agencys procurement guidelines,
they can guide procurement officers through the
process of managing the procurement exercise in an
effective and transparent manner.
According to the Business Anti-corruption Portal,
transparent and effective procurement processes can
be characterised by three major underlying principles:
Fairness: all competent suppliers should have
equal chances to participate;
Transparency: all procedural steps are based
on open, predictable, known and written
procedures, including the process and criteria
used for awarding the contract to ensure that all
participating bidders are treated on equal terms;
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Recourse possibilities: a transparent
procurement process should also allow for an
open and independent contestation mechanism.
At the operational level, cutting across all phases of the
procurement cycle, these principles should translate
into effective record keeping and documentation,
making sure that all bidding, procedure, evaluation and
award documents are publicly and timely available, as
well as public access to information through effective
communication channels, including by using online
systems where information can be shared with auditors,
complainants and the general public.
According to the U4 thematic page on procurement,
there is a broad agreement about the major features of
a competitive process that should be covered to some
extent by any compliance checklist, including:
Public notification of bidding opportunities;
Documentation of the needs for goods and
services, specifications, technical requirements,
etc
Documents clearly outlining the contracting
process, terms and conditions, criteria for
awarding the contract;
Submission of secret sealed bids that are
publicly opened at a specified date, time and
place;
Impartial evaluation and comparison of bids by
competent evaluators without interference by
bidders or other parties;
Award of the contract to the bidder complying
with all requirements and offering the best value
for money bid, as defined by the published
selection criteria;
Documentation of the contract award decision
and notification of the unsuccessful bidders with
the ground for decisions and relevant information
about the tender;
Effective supervision of contract implementation.
Compliance checklists are usually structured around
the key stages of the procurement cycle, including: 1)
Identifying the need; 2) Defining the contract
specifications; 3) Tendering process; 4) Awarding the
contract and 5) Managing and supervising contract
implementation. They typically cover the various risks
involved at each stages of the process by spelling out
detailed indicators of adherence to the agencys
procurement regulations, and providing a series of red
flags such as suspicious pricing patterns, statements,
documents and behaviour by firms, that can be used as
a warning system to identify potential suspicious
transactions.
Overview of procurement corruption
risks and red flags
Overview of corruption risks
The first step involved in developing a procurement
compliance checklist consists of mapping the various
risks associated with the various stages of the
procurement cycle and identifying indicators and red
flags for the detection of irregularities.
Most common schemes used to manipulate corruption
processes include bribery, kickbacks brokered by local
agents, various forms of bid rigging, collusion, influence
peddling, etc. As the World Banks Fraud and
Corruption Awareness Handbook states, corruption
schemes in procurement often involve more than one
type of misconducts, beginning by a bribe, followed by
bid rigging and finally fraud to cover up the scheme
(World Bank 2009):

Demand for payment. A government official
demands a bribe or kickback from a firm or
individual, or a firm or individual offers a bribe, in
exchange for a contract award. In most cases,
the corrupt official will permit the bribe payer to
inflate the price to cover the bribe and preserve
its profits.
Bid rigging. To ensure that the contract will be
awarded to the bribe-paying firm (whose prices
are now inflated to cover the cost of the bribe),
government officials manipulate the bidding
process to exclude other (presumably cheaper)
competitors.
Fraud. To recover the cost of the bribe, and to
exploit the corrupt relationship, the firmusually
with the knowledge and complicity of government
officialsinflates prices, bills for work not
performed, fails to meet contract specifications or
substitutes substandard products during
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implementation. This often requires further
corrupt payments to inspectors or auditors.
While it is generally assumed that corruption risks are
especially high during the evaluation phase of the
tendering process, when the bids are evaluated and the
award decision is made, practice indicates that many
procurement problems can also occur in the early stage
of the process, at the pre-tendering stage, where needs
are being assessed, planned and budgeted for and
choice is made on the required bidding procedures. A
2007 World Bank study provides an overview of
potential vulnerabilities associated with each phase of
the contracting process, including (Glenn T. Ware,
Shaun Moss, J. Edgardo Campos, and Gregory P.
Noone 2007):
At the project selection phase, demand for foods
and services can be manipulated, inflated or
artificially induced to identify projects with higher
return value.
During the tendering process, opportunities for
corruption include tailoring specifications to limit
competition or favour a particular bidder, abusing
confidentiality, limiting advertisement and
publicity, manipulating the preparation,
submission and evaluation of bids, etc.
At the contract implementation stage, there are
also many risks of fraud and abuse such as false
invoicing, overbilling, underperforming, failure to
meet specifications, contract changes and
renegotiations, etc.
The U4 thematic page on procurement also synthesises
some of the main corruption risks at each stage of the
process, providing a useful description of potential
fraudulent schemes.
Most common red flags
As part of its prevention program, the World Banks
Integrity Vice Presidency has developed a handbook -
the Fraud and Corruption Awareness Handbook - to
assist operational staff in early detection of fraud and
corruption, which describes how fraud and corruption
work and how they can be detected. A number of fraud
and corruption indicators are identified as well as
common corruption schemes that may become
apparent during a procurement process. Among these,
the 10 most common red flags of fraud and corruption
in procurement processes include (World Bank, 2009):
Complaints from bidders and other parties
are a vital source of information, as many
investigations lead to the discovery of fraud and
corruption.
Multiple contracts below procurement
thresholds can indicate contract splitting
schemes used by perpetrators to avoid higher
level review or competitive bidding.
Unusual bid patterns such as unexplained
inflated bid prices, round or unnatural numbers,
apparent rotation of winning bidders, etc, can
indicate collusive bidding.
Seemingly inflated agent fees can be used to
disguise corrupt payment, such as for example
the involvement of an unnecessary middleman.
Suspicious bidders can set up fictitious
companies or consulting firms to obtain the
contract or a shadow bidder can submit higher
price bids and give the appearance of
competition.
Lowest bidder unjustifiably not selected can
indicate bid rigging with project officials having a
hidden interest in a contractor.
Unjustified and/or repeated sole source
award should be closely reviewed, especially if
these requests are made for reasons of urgency.
Changes in contract terms and value with
regards to the price, amount or type of services
between the selection and the signing of the
contract should also be carefully reviewed.
Multiple contract change orders after the
contract has been signed can indicate collusion
between the client and contractor to increase the
value of the contract without delivery of
additional product or services.
Poor quality or undelivered good, works or
services is a strong indicator of fraud and
corruption.
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Guiding principles for designing and
implementing procurement
compliance checklists
Format
Procurement compliance checklists may use different
formats but should be tailored to the agencys
procurement guidelines and regulations.
They should be user friendly, easy to understand and
apply, providing a practical step by step approach for
each stage of the procurement process.
Some consist of a simple compilation of yes/no answer
questions for each stage of the process, while others
are more elaborate, explicitly listing specific objectives,
risks, criteria, evidence required and policy references
for each step of the process.
Coverage
Appropriate guidance should also be given with regards
to who should use the checklist, what project the
checklist applies to, who performs the compliance
reviews (whether internal or external staff and
agencies) and what are the consequences in case of
detection of irregularities.
In principle, all procurement activities could be
subjected to compliance reviews, depending on
available resources and capacity, as part of good
practice procurement processes. An alternative can be
to implement a risk based assessment to determine
which completed project will be evaluated using the
compliance review checklist.
The U4 thematic page on procurement mentions a few
factors that are likely to increase risks of fraud and
corruption that could be taken into consideration when
selecting which projects should be more systematically
assessed against the procurement compliance
checklists, including:
Size of the contract: The more money involved
the more incentive to demand a bribe, as bribes
are often calculated as a percentage of the total
amount of the contract.
Level of technical complexity: The more
technical (or seemingly technical) is the project,
the easier it can be manipulated, as the level of
complexity increases transparency, control and
oversight challenges.
Level of immediacy: the most attractive projects
are those in which the full purchase price or a
very substantial deposit is payable at an early
stage of the project.
Level of discretion: The discretionary authority
of public officials with regards to the power of
invitation, pre-qualification, choice of technology,
etc provides many opportunities for bribery.
Participatory design process
One shouldnt underestimate the potential resistance to
change that the introduction of such checklist may
create for procurement officials and employees used to
the old way of doing things and who may lack
incentives for reform, as such intervention may deeply
affect work processes, existing procedures and
institutional arrangements.
For the success, credibility and legitimacy of the whole
initiative, it is recommended to use a participatory
development process, involving key experts and
practitioners that will be directly affected by the initiative
and supported by a proactive change management
strategy. The group should be composed of individuals
who have the technical skills and expertise to review
procurement process design, risk rating, and reports
throughout the project cycle.
Implementation strategy
Procurement officials need to be made aware of the
risks, techniques and actors involved in corruption
along the procurement chain usually through regular
training activities. Regular awareness raising and
capacity building initiatives targeting staff of
procurement administration are therefore a crucial
component of any effective implementation of such
compliance tool. Training activities should not only
focus on procurement rules and procedures but also on
how to identify fraud and corruption risks along the
whole procurement cycle.
This implies that adequate human and financial
resources must be allocated to the intervention,
keeping in mind that, if properly implemented,
transparent procurement processes may lead to cost
saving.
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2 Examples of procurement
compliance checklists
While they are many examples of procurement
compliance checklists that have been developed to
prevent and detect fraud and corruption in procurement
processes, there is little information available on how
they have been used and implemented by the various
organisation and how effective they have been.
OECDs procurement checklists
Checklist on enhancing integrity in public
procurement
One of the most comprehensive checklists that has
been developed to guide policy makers in the
implementation of good practice procurement policies is
the OECDs 2008 Checklist for enhancing integrity
in public procurement. It is meant as a practical tool
that can be applied, adapted and developed in different
legal and administrative contexts. It aims at supporting
policy makers at the central level in promoting a culture
of integrity in the whole procurement cycle, from needs
assessment to contract management and payment. It
consists of two sections:
The first section provides 10 key
recommendations for developing an adequate
policy framework.
The second part provides guidance for
implementing this framework at each stage of the
procurement process, including the pre-tendering
phase consisting of needs assessment,
planning and budgeting, definition of
requirements and choice of procedures; the
tendering phase consisting of the invitation to
tender, evaluation and award; and the post
tendering phase - consisting of contract
management, order and payment.
Checklists for preventing bid rigging in
public procurement
The OECD has also developed a specific methodology
to help governments detect and combat bid rigging in
public procurement. Drawing on the experience of more
than 30 jurisdictions, the OECD Guidelines for Fighting
Bid Rigging in Public Procurement aims at assisting
procurement officials to, first, reduce the risks of bid
rigging through careful design of the procurement
process and, second, to detect bid rigging conspiracies
during the procurement process. The Guidelines
include two checklists, namely: a Checklist for
Detecting Bid Rigging in Public Procurement and a
Checklist for Designing the Public Procurement
Process to Reduce the Risks of Bid Rigging.
Although focused on a specific corrupt practice, this
easy-to-use checklist provides an example of a user
friendly tool for detecting bid rigging. This checklist can
be applied in a decentralised manner across central
and local government agencies. It has been developed
to help identify:
Markets in which bid rigging are more likely to
occur;
Practices that procurement agents can use to
detect bid rigging;
Suspicious pricing patterns;
Suspicious statements, documents and
behaviours by firms.
In particular, it identifies seven areas where special
vigilance should be exercised including vulnerable
markets, communication opportunities between bidders,
indication of relationships among bidders, suspicious
bidding patterns, unusual behaviours, similarities in
documents submitted by different bidders, etc.
Common benchmarking and assessment
methodology for public procurement
systems
Although not directly relevant within the framework of
this query, one should also mention the methodology
for assessment of national procurement systems that
the OECD developed (2006) to provide a common tool
which developing countries and donors can use to
assess the quality and effectiveness of national
procurement systems. The methodology is
accompanied by a benchmarking, compliance and
performance tool that provides a format that can be
used for assessing procurement processes, and
includes baseline indicators, compliance and
performance indicators, proposed actions, scores, level
of priority, etc.
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European Union
EU Supreme Audit Institutions checklist
for use in the financial audit of
procurement
In 2008, the Working Group (WG) on Public
Procurement of the Contact Committee of the Supreme
Audit Institutions of the European Union was mandated
to develop a common checklist for use in the
financial audit of procurement. This detailed checklist
is meant to be relevant and applicable to auditors
operating within different frameworks, requirements and
procedures.
It begins with the analysis of the procurement function
and is organised according to the major phases of the
procurement cycle, including the pre-tender stage, the
choice of procurement procedure, publicity and
notification used, identification of potential bidders,
evaluation of tenders and award procedure, taking
fraud and corruption risks into consideration. Specific
attention is also given to works and supplies as a
frequent form of direct contracting.
Other checklists for EU funded projects
With regard to the activities for prevention of
irregularities and fraud with EU Structural
Instruments, the DG Regional policy of the EU has
published in 2009 an information note of fraud
indicators that provides a list of fraud schemes and
related fraud indicators that may be relevant in the area
of structural action.
The European Social Fund also provides a
downloadable procurement checklist. This checklist is
also organised following the various steps of the
procurement cycles and consists of a simple list of key
questions and requests for documentation supporting
the procurement process.
Another example of a checklist used by an EU funded
project to assess whether all EU directives and
procurement rules and have been adhered to is the
Checklist for First Level Control (European Territorial
Cooperation 2009). The checklist is mainly concerned
for ensuring that procurement rules are properly carried
out and adequately documented.
Hong Kongs Independent
Commission Against Corruption
(ICAC)
ICAC has also developed a best practice checklist for
procurement processes for use by small and medium
enterprises. It differs from other checklists by its target
audience and very practical, down-to-earth approach,
providing tips and practical guidance at each stage of
the procurement process. It promotes the establishment
of sound and competitive procurement processes by
providing a checklist of effective and practical measures
to control each stage of the procurement processes.
The Business Anti-Corruption
Portals public procurement due
diligence tool
Although not a checklist per se, The Business Anti-
Corruption Portal has developed this public
procurement due diligence tool as a risk management
strategy to enable companies to assess and avoid
corruption risks when participating in developing
countries public procurement processes. The
recommended approach is to look for indicators and red
flags in the different phases of the process in order to
reduce risks of being subject to extortion, blacklisted,
not awarded the contract, etc when engaging in
tendering processes.
The due diligence tool consists of 3 documents and an
interactive tool that constitute a corruption risk
assessment tool in a specific procurement process:
The guidance document briefly describes the
overall principles for sound public procurement
and the risks associated with lack of
transparency, fairness and recourse possibility;
The procedure document guides through the
questions posed in the tool and the evaluation
matrix;
The risk assessment document provides a flow
chart of the questions posed in the procurement
tool and the phases in the procurement process
that they relate to;
The public procurement tool can be used to
determine the risks arising from procedural steps
in a public procurement process. Based on the
answers given, a general risk profile is given and
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www.U4.no 8

point to an evaluation matrix for either case of
good or bad recourse possibilities.
3 Reference
Business Anti-corruption Portal
http://www.business-anti-corruption.com/due-diligence-
tools/public-procurement-tool/
Contact Committee of the Supreme Audit Institutions of
the European Union (2008): Checklist for use in
financial audit of public procurement
http://eca.europa.eu/portal/pls/portal/docs/1/3088305.P
DF

DG Regional Policy (2009): Information note on fraud
indicators for ERDF,ESF and CF. European
Commission.
http://eufunds.bg/docs/COCOF_09_0003_00-
EN_Note_on_fraud_indicators_TC.doc
European Social Fund (nd ): Procurement checklist
http://www.esf.ie/GetAttachment.aspx?id=00a72f04-
3656-4d24-98eb-2740d3025560
European Territorial Cooperation (2009): Checklist for
first level control
http://www.esf.ie/GetAttachment.aspx?id=00a72f04-
3656-4d24-98eb-2740d3025560

ICAC (nd): Governance and internal control A best
practice (for use of small and medium enterprises)
http://www.icac.org.hk/filemanager/en/Content_1031/s
me.pdf

OECD (2006): Methodology for assessment of national
procurement systems
http://www.oecd.org/document/40/0,3343,en_2649_323
6398_37130152_1_1_1_1,00.html

OECD (2008): Checklist for enhancing integrity in public
procurement
http://www.oecd.org/dataoecd/54/41/41760991.pdf
OECD (nd): Designing tenders to reduce bid rigging:
Helping governments to obtain best value for money
http://www.oecd.org/dataoecd/36/40/42594504.pdf
OECD (nd): Detecting bid rigging in public procurement:
Helping governments to obtain best value for money
http://www.oecd.org/dataoecd/36/38/42594486.pdf
U4 Thematic Page on Procurement:
http://www.u4.no/themes/procurement/main.cfm
World Bank,Glenn T. Ware, Shaun Moss, J. Edgardo
Campos, and Gregory P. Noone (2007): Corruption in
Public Procurement: A Perennial Challenge. The many
faces of corruption, World Bank,
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS
/EXTPUBLICSECTORANDGOVERNANCE/EXTANTIC
ORRUPTION/0,,contentMDK:21136764~pagePK:2100
58~piPK:210062~theSitePK:384455,00.htmlm 200
Integrity Vice Presidency, The World Bank Group.
(2009): Fraud and corruption awareness handbook.
World Bank
World Bank (2009): Most common red flags of fraud
and corruption in procurement.
http://siteresources.worldbank.org/INTDOII/Resources/
Red_flags_reader_friendly.pdf