Page 1
Construction Industry Fraud Awareness & Prevention Program
Presented by
James L McGovern, CPA, CFF, CVA McGovern & Greene LLP
www.mcgoverngreene.com
Page 2
Construction Industry Fraud Awareness,
Detection and Prevention
Page 3
The Construction Industry suffers
from fraud and corruption
Page 4
Fraud Examiners must be aware
and ready to prevent the schemes
Page 5
The industry is susceptible to a
myriad of frauds
Page 6
Training and education will help
detect and prevent fraud
Page 7
Economic Crime is a major
problem in the construction industry
Page 8
Construction related cases keep the
U.S. Justice Department busy
Page 9
Construction industry generates the
most corruption cases
Page 10
If they all get along, they can make
more money
Page 11
Odd-man out blows whistle
Page 12
Amnesty program provides “Get
out of Jail Free Card”
Page 13
1/3rd of construction companies
were victims of significant fraud
Yes
33%
No
67%
Page 14
Construction Industry Fraud
reporting lags behind others
Page 15
Construction Companies approach
fraud differently
Page 16
Misappropriation and Corruption &
Bribery are most common offenses
Page 17
Types of Economic Crime affecting
the industry: Types of Economic Crimes Affecting the Construction Industry
0 10 20 30 40 50 60 70
Money Laundering
Cybercrime
Product Piracy/Counterfeiting
Financial Misrepresentation
Industrial Espionage
Corruption & Bribery
Asset Missappropriation
% of Respondents
Page 18
Contractors often overvalue
contingent assets
Page 19
Owners often undervalue
Contingent liabilities
Page 20
Fraud creates collateral damage
Page 21
Audits are best
source of detection
Page 22
Commons means of detection
include: How Economic Crime is Detected in the Construction Sector
0 5 10 15 20 25 30 35 40 45 50
Tip-off
Changes in Management
Internal or External Audit
Risk Management Systems
Accidentally
% of Respondents
Page 23
Companies may be overconfident
Page 24
Audits do not assume “best
practices” are being followed
Page 25
“Tip-offs”
are also
fruitful
sources of
intelligence
Page 26
Elements of fraud and corruption in
the industry are familiar
Page 27
Bribery, Illegal Gratuities and
Extortion are common
Page 28
Bribery = Giving or receiving to
influence an official act
Page 29
Illegal Gratuity = Giving or receiving
for or because of an official act
Page 30
Ways to prove intent include:
Alteration of documents
Concealment/Destruction of evidence
“False exculpatories” (Lies)
Personal gain
Obstruction of justice
Pattern of conduct — repetition
Testimony of co-conspirator
Admissions/Confessions
Page 31
Thing of Value can be almost
anything
Cash
Gifts
Trips/Travel
Loans
Meals and
Entertainment
Use of Credit Cards
Page 32
Extortion requires use of actual or
threatened force or fear
Page 33
Many construction industry frauds
occur before a contract is awarded
Page 34
Contractors and Buyers often
collude
Page 35
Tailoring Specifications creates an
unfair advantage
Page 36
Recognizing non-existent or
dubious needs is another fraud
Page 37
Purposefully vague specifications
create an opportunity for fraud
Page 38
Red Flags of specification related
frauds include:
Restrictions that limit
competition or Sole
Source procurements
Contractor consults on
specs and bids work
Design consultants
show up as sub
Specs inconsistent with
prior projects
Page 39
Buyer assisted bid rigging requires
inside help
Page 40
Collusion can include anyone with
the ability to influence the decision
Page 41
Common schemes include:
Abusing the sealed
bid process
Submission of bids
by non-existent or
“dummy” companies
Unbalanced Bidding
Page 42
Red Flags of contractor/buyer
collusion include:
Acceptance of late bids
Falsification of
documents or receipts to
get a late bid accepted
Change in a bid after
other bidders’ prices are
revealed.
Allowing the low bidder
to withdraw and become
a subcontractor
Page 43
Public projects are more vulnerable to
Contractor bid rigging
Page 44
Types of Contractor Bid Rigging
schemes include:
Rotational Bidding
Page 45
Types of Contractor Bid Rigging
schemes include:
Complimentary
Bidding
Page 46
Types of Contractor Bid Rigging
schemes include:
Bid Suppression
Page 47
Types of Contractor Bid Rigging
schemes include:
Territorial Bidding
Page 48
Types of Contractor Bid Rigging
schemes include:
Predatory Bidding
Page 49
Most schemes require a cartel of
willing contractors
Page 50
Corrupt union officials establish
building trade cartels
Page 51
Red Flags of Contractor Bid
Rigging include:
Rotational/territorial
pattern to winning bids
Qualified bidders do not
submit bids
Successful bidder
subcontracts to losers
Firms that could bid alone
form JV’s
The same math or spelling
errors in bids
Page 52
MBE Misrepresentation attempts to
take advantage of set aside goals
Page 53
Some agencies require contracting
$’s be placed with qualified MBE’s
Page 54
“Set asides” and “price allowances”
create incentive and opportunity
Page 55
False certification is a common
fraud
Page 56
Establishing a minority “front”
is also common
Page 57
Opportunities for fraud continue
after a contract is awarded
Page 58
Theft is still the most common
offense
Page 59
The size and traffic flow make
most sites difficult to secure
Page 60
A lucrative black market provides
ample motive
Page 61
Ways to deter theft include:
Discouraging on-site
storage
Requiring central storage
of materials
Requiring workers to wear
ID tags
Installing video cameras
Employing adequate
security staff
Consistently pressing
charges
Page 62
Materials Substitution can
create significant risks
Page 63
Common excuse is “the substituted
goods are just as good”
Page 64
Common schemes include:
Delivery of materials
lacking required tests or
falsification of test
results
Delivery of
counterfeit/look-alike
products
Passing off of specially
created samples
Surreptitious movement
of inspection tags
Page 65
False claims seek payment for
work not performed
Page 66
Time & Materials contracts are
especially vulnerable
Page 67
Change Orders also present ample
opportunity for fraud
Page 68
False claims for impact costs are
also common
Page 69
Ways to deter false claims include:
Start with a well defined scope
and specs
Maintaining a timely CO review
process
Including right to audit clauses
Conducting periodic random
audits
Negotiating predetermined unit
prices
Require certified payrolls
Page 70
Fraudulent Performance Bonds can
have severe consequences
Page 71
Fraudulent Performance Bonds can
have severe consequences
Page 72
A myriad of frauds harm the
construction industry
Page 73
Awareness and Detection =
Prevention and Profit
Page 74
Contact
information:
Jim McGovern
McGovern & Greene LLP
105 W. Madison Street
Suite 406
Chicago, Illinois 60602
Telephone: (312) 419-1961
Fax: (312) 419-1962
Email: [email protected]
Web Site: www.mcgoverngreene.com