Report into the risks of fraud and corruption in local government procurement
On 8th June 2020 the Ministry of Housing, Communities and Local Government (MHCLG) published its report into the risks of fraud and corruption in local government procurement (the Report).
Councils in England alone spend in the region of £55bn a year procuring and commissioning supplies, works and services. Whilst there is no single estimate for the level of fraud and corruption in local government procurement, the Report (which can be accessed here) references the Cabinet Office's Cross-Government Fraud Landscape Annual Report (2018) which estimates a range of 0.5% to 5% for fraud and error.
Given the overall estimated local government expenditure, this gives an estimated range of corruption of £275m to £2.75bn each year.
It is against the backdrop of these estimates that the Report identifies areas of risk. The Report sets out in significant detail areas of best practice and case studies from contributing Local Authorities and we have set out below only a few areas of key interest.
What is procurement fraud and corruption?
The Report recognises that previous efforts to combat fraud and corruption within procurement have tended to focus on the stages between inviting tenders and the contract award itself. It is emphasised that increased efforts are needed across all stages of the procurement, including before the tender begins, after the contract award and during the lifecycle of the contract.
The Report identifies that there is no common definition for procurement fraud and corruption, and uses the following the definition in the Report:
… any fraudulent or corrupt activity occurring within the entire procurement lifecycle, from decision to procure through to the conclusion of the contract and including all purchasing with a value below the level of a formal tender process. This will therefore include commissioning, contract management and purchasing, as well as the tendering process itself.
One of MHCLG's objectives through the Report is to agree a standard working definition across the public sector to ensure that cases are recognised and reported consistently.
Areas of risk
In chapter 8, the Report sets out its detailed findings and identifies various areas where there is a heightened risk of procurement fraud and corruption. These include risks of organised crime and cartels, risks arising from the capacity and capability of Local Authorities, and risks that occur throughout the life of the contract. Additionally, it is identified that there are risks associated with increased commercialisation.
The Report recognises that many Local Authorities have formed companies or partnerships as an innovative way of operating whilst generating income. Whilst this has clear benefits to the Local Authority, it also introduces a further separation between the council and the supplier. The arms' length nature of these operations, coupled with reduced oversight, could increase the risk of fraud and corruption.
These risks are flagged, in particular, in transactions with Local Authority companies where contracts are awarded directly, and where council representatives act as directors for these companies. In these circumstances, risks should be mitigated by the introduction of clear governance structures and documented terms of references, with potential conflicts of interest managed transparently and systematically.
The Report also recognises that where a Local Authority begins to operate in a commercial structure which it is unfamiliar with, this can present novel challenges for the Local Authority (such as the legal implications and the tax risks arising in that structure). Local Authorities will need specialist expertise to navigate these issues, either through significant development and training within the organisation, or via the appointment of external specialist advisers. The Report suggests that Local Authorities may also have limited commercial awareness which may result in a failure to secure best value for money and which leave them exposed to a greater risk of fraud or corruption.
Identifying fraud and corruption
MHCLG has highlighted throughout the Report that the number of reported cases of fraud and corruption does not support the estimated extent of procurement fraud and corruption in local government.
The Report indicates that this reporting issue might stem from potential cases not being identified and recognised on the ground, and it may be that there is a need for greater resource and expertise in this area to help identify potential cases of procurement fraud and corruption.
With that in mind, the Report includes a Procurement Fraud and Corruption Risk Matrix (Annex 6) which sets out risk areas at each stage of the procurement lifecycle (from pre-tender to implementation, and covering commissioning where no formal tender process is required).
These risks are then linked to "red flags" as well as to possible mitigation measures. This is not an exhaustive list (and many Local Authorities will already have implemented many of the mitigation measures) but is a tool to assist in the identification and management of risks.
The Report also identifies that mandatory fraud awareness training should be implemented for Local Authority staff and Members.
In the light of the above, the Report sets out in Annex 5 various resources that have been shared by Councils including, amongst other things, fraud awareness training materials, guidance on the evaluation process (including suggestions on managing conflicts of interest) and examples of governance processes and terms of reference.
These resources are a valuable source of information for identifying areas of best practice already in place at other Local Authorities.
Suggested next steps for Local Authorities
The Report identifies various suggested activities for the public sector as a whole, as well as suggestions for MHCLG, the LGA and Local Authorities to take forward in order to mitigate against the risks of procurement fraud and corruption. For Local Authorities, there are a range of possibilities to incorporate into their business practices, including:
- Improving understanding of risks: including introducing mandatory fraud awareness training for all staff, and raising awareness of the risks of procurement fraud and corruption.
- Increasing capacity and capability: including developing counter fraud capacity, conducting investigations into suspected procurement fraud, conducting fraud risks assessments and reviewing capacity to manage contracts effectively from the outset.
- Developing anti-fraud and corruption culture: setting the right tone from the top within the council and highlighting the importance of collaborative, cross-departmental, working. Councils should also take action against all responsible for procurement fraud and corruption, and should, where possible, publicise cases and prosecutions to serve as a deterrence.
- Reporting and implementing appropriate systems and processes: including appropriate due diligence, and the transparent and systematic management of conflicts of interest and gifts and hospitality.
- Improved data quality and recordkeeping: storing accurate and detailed records secure and readily accessible, and working with MHCLG to deliver the MHCLG transparency commitment to improve transparency of spend.
In the light of the increased use by Local Authorities of commercial vehicles (often structured to be outside the scope of the Public Contracts Regulations) we also see the need for clear governance frameworks to be put in place and regularly reviewed, to ensure continued confidence (both internally and externally) in procurement by the commercial arms.