Governance gaps

From the August 2020 print edition

Recent Canadian legal decisions and public audits have uncovered multiple misappropriation schemes showing systemic weaknesses in public procurement. Rather than dismissing these cases as isolated incidents, public institutions should be asking themselves whether internal governance gaps are making them soft targets for similar spending scams.

For example, in its September 2019 decision in R. v. Ross and Dawson, the Nova Scotia Supreme Court found that two government employees, along with a supplier operating under different companies, defrauded the government of $2 million through a contract-splitting and bid-rigging scheme that awarded 640 small contracts to the supplier at significantly inflated prices. As a kickback, the supplier provided one of the government employees a company bank card to make recurring withdrawals from the cash machine at a local tavern.

Quoted without competition
The scam involved the purchase of equipment parts at the Shearwater military base in Nova Scotia. The purchasing clerk repeatedly split the required equipment parts into small orders so that the procurements never reached the contract value for open tendering through the government’s central procurement system. This allowed the clerk to direct all quote requests to companies controlled by the same supplier, who quoted without competition to win the contracts at inflated prices.

As this case illustrates, internal contract-splitters can bypass open tendering and collect kickbacks by colluding with external suppliers who are willing to defraud the government with rigged bids.
Similarly, in its March 2020 report entitled Investigation, the Edmonton City Auditor found that two City employees colluded with an external contractor to submit $1.8 million in false invoices, $1.6 million of which was paid and not recovered, for the rental of construction-related traffic signs that were never provided to the City. As the report detailed, the perpetrators took advantage of weak internal controls to facilitate the false billing scam since the City had no effective systems in place to check invoices for contracts that did not follow proper tendering procedures. Furthermore, there were no check-and-balances between the individuals who accepted delivery for goods and those who approved invoices for payment. This allowed the two employees to short-circuit oversight controls by bypassing the tendering process and authorizing their own invoices to the accounts payable department.

Since the payment department was not expected to review invoices for appropriate expenditures before making payment, no red flags were raised in the processing of multiple small fake invoices that totalled $1.6 million over a four-year period. While the City Auditor confirmed that the Edmonton Police Service had “opened a file” and assigned detectives to investigate the matter, this case illustrates how weak oversight exposes public institutions to fraudulent practices and exposes taxpayers to the misappropriation of public funds.

Finally, in its May 2020 decision in R. v. Charpentier, the Ontario Superior Court of Justice found the defendant not guilty of fraud in his role in a bid-rigging kickback scheme that involved government projects. The defendant admitted that he colluded with his employer, who owned a construction company, in an ongoing bid-rigging and price-fixing scheme involving other bidders vying for work on Ontario Ministry of Transportation construction projects. The defendant also admitted that he then colluded with a subcontractor on 43 of those projects to receive inflated sub-tenders, awarding $6.5 million in work to that subcontractor at inflated prices, and then received kickbacks exceeding $3.2 million from that same subcontractor.

Proving deprivation
However, the defendant beat the fraud charges because the Crown failed to prove that the defendant’s employer suffered “deprivation”, as required to prove the offence. The Court ruled that the evidence did not clearly establish whether the employer was a victim and suffered financially from the kickback scheme, or whether the employer was an accomplice who benefited from the kickbacks by sharing in the illegal proceeds. Since there was reasonable doubt over the ultimate destination of the kickbacks, the “deprivation” element of the offence was not proven, and the charges were dismissed.

While the defendant beat the charges of fraud against his employer, the case raises serious concerns over the duration of the price-inflation kickback scheme, why it was able to persist undetected for so long and how much that scheme and similar schemes have cost Ontario taxpayers.

These cases represent a small selection from a long list of similar examples that have uncovered fraudulent activities connected to the public procurement process within Canada and worldwide.
To avoid becoming another case study, public institutions should be reviewing their procurement practices to identify any governance gaps that make them a soft target for the next purchasing scam.

Paul Emanuelli is the general council of the Procurement Law office. Paul can be reached at [email protected]