For government and private institutions, the COVID-19 pandemic has meant acting quickly—so quickly, in fact, that companies run the risk of inadvertently setting aside traditional risk prevention procedures in an effort to ensure citizens, patients, and customers receive the health and medical support, care, and supplies they need.
Meanwhile, vast sums of money are flowing through the global economy. As of early April, imports and exports of medical products alone totaled $2 trillion—or 5 percent of all the merchandise traded around the world during the entirety of 2019, according to World Trade Organization data. Another $2 trillion is flowing from the U.S. government to taxpayers, companies, and local and state agencies to help respond to the novel coronavirus, with more expected to follow.
It’s a recipe sure to attract fraudsters, who are hard at work defrauding institutions and individuals affected by the COVID-19 outbreak. As news reports indicated in March, the coronavirus outbreak has created an “epidemic of scams,” with “fake cures, phony charities, and fraudulent promises” targeting consumers and institutional buyers alike. Scams range from fleecing agencies of cash and failing to deliver products to counterfeiting pharmaceuticals and critically needed personal protective equipment (PPE).
Institutions need a way to rapidly vet potential vendors during the COVID-19 epidemic—a way that will enable them to make fast decisions about potential business partners without sacrificing the safety measures that prevent fraud from occurring. Building a strong emergency procurement process allows institutions to follow best practices on an abbreviated schedule—and to protect their resources and the lives of their employees and the people under their care.
Typically, institutions like government agencies, large nonprofits, and corporations have a set of standard procurement practices that help detect and deter fraud. Vendors are often prequalified to verify their identity and their capability for fulfilling orders. A competitive bidding process may be in place to help avoid corruption and improve pricing. Due diligence checks are performed to verify information, and an extensive contracting process sets the parameters for quantities of goods delivered, quality control, payments, and timelines, among other factors. And internal approval processes are generally tiered, with more than one person reviewing contracts and invoices and making decisions.
The unprecedented nature of the novel coronavirus outbreak has sidelined the normal procurement rules for many institutions. Emergency spending is often done through sole-source procurements—or contracts are entered into without a competitive process based on the assertion that only one supplier exists that can fulfill a job’s requirements. In the spirit of meeting urgent needs, institutions are more apt to use unknown vendors and gloss over the need for due diligence. A single person may be approving agreements, and moving so quickly that the agreements are not put down in writing.
Understandably, when lives are at stake, a time-consuming procurement effort can be viewed as an impediment. Often, the institution involved simply does not have the ability or capacity to move quickly and follow best practices at the same time. Yet, skipping critical components, such as vendor due diligence, may actually increase the time needed to procure goods and services. Coping with fraud can consume far more time than it takes to prevent it.
A few examples of the types of fraud institutions have been facing include:
- Vendor Fraud. In these cases, the vendor does not have the product in question or the expertise to produce or deliver it. Government agencies have been prime targets: In April, a Georgia man—Christopher Parris—was arrested on charges of attempting to defraud the U.S. Department of Veterans Affairs of more than $750 million through an attempt to sell the agency 125 million nonexistent respirator masks and other PPE.
- Internal Fraud. Without competitive bidding, due diligence, tiered approvals, and other internal controls, temptation may grow for unscrupulous employees. They may inflate sales, make side deals with external vendors, and divert funds to their own accounts or to ones owned by relatives or accomplices. In just one recent example, a prominent public company in China announced that an employee had been arrested for conspiring with external vendors to inflate sales and forge documents for an online tutoring product intended for home-bound schoolchildren.
- Counterfeiting. Fraudsters have routinely attempted to supply fake, and potentially dangerous, products, particularly fake vaccines and other pharmaceuticals. In March, the U.S. Department of Justice shut down “coronavirusmedicalkit.com,” which was hawking fake vaccination kits that it claimed were produced by the World Health Organization. Also in March, Interpol arrested 121 people and seized $14 million worth of fake and potentially dangerous pharmaceuticals marketed as coronavirus treatments.
- Capacity Issues. Institutions can also waste critical time and resources simply because the vendor does not have the capacity to deliver. No ill intent may have been intended by the vendor—it may have underestimated logistical challenges of delivering goods during the crisis; its own employees may be sidelined by the virus or unable to come to work; or it may have been unable to convert its processes quickly enough to meet demand. Because speed is of the essence, an institution may not conduct the due diligence necessary to determine if the vendor can live up to its obligations.
- Price Gouging. A normal procurement process allows institutions to determine the most appropriate prices for goods and services. However, in the midst of the pandemic, unethical vendors are skirting state and local statutes that ban price gouging. For instance, New York State, desperate for medical equipment because of the COVID-19 outbreak there, has paid up to 15 times the normal price for vital supplies, according to a recent report by Pro Publica.
How do institutions avoid fraud? Simply put, they should try wherever possible to stick to existing procurement processes, as these processes help prevent fraud and corruption. During an emergency, time spent ensuring that a vendor will do its job may save lives later and avoid wasting critical time in the future.
Take, for instance, the PPE-related fraud that Christopher Parris allegedly tried to perpetrate against the U.S. Department of Veterans Affairs. The agency was not initially contacted by Parris directly. According to court documents, it was approached by a Louisiana-based industrial and safety supplies company that claimed to be able to provide large quantities of PPE. However, when Veterans Affairs asked the company to identify its PPE supplier, the information provided included Parris’s true name and phone number, ultimately enabling agency investigators to uncover his criminal record. Parris would also go on to use his true name to communicate with Veterans Affairs directly about the potential transaction.
Documents filed by federal prosecutors indicate that Parris was on pretrial release at the time, having been arrested in New York in January 2020 on federal criminal charges that alleged he was behind a 10-year Ponzi scheme that had defrauded investors of over $115 million. The case above illustrates why asking the right questions of potential vendors and conducting background investigations is so important.
Procurement processes can be tweaked to make them faster and more responsive. Institutions can develop emergency procurement processes that help ensure supplies are acquired quickly and safely, focusing on the most critical issues:
- Vet every vendor. All new vendors should be thoroughly vetted, with background checks conducted on the company and its principals to insure they don’t have a criminal history or a string of civil judgments for failing to live up to the terms of contracts.
- Evaluate vendor capacity. Determine if a vendor—whether new or existing—has the capacity to perform a job. Ask potential vendors: Do they have a background in supplying the product or service in question? If not, do they have a rational plan to convert their operations to produce the product? Do they have the necessary staff in place to produce the goods in question?
- Seek external resources. Institutions can engage third-party firms to speed up due diligence. Third-party firms typically have resources to quickly vet potential vendors, spot red flags, and determine if they are legitimate businesses with the ability to perform the tasks in question
Fraudsters thrive on chaos. The COVID-19 pandemic has created opportunities for them to target the agencies and companies most needed to fight the virus. By using caution, retaining their tested and critical procurement processes, creating a solid emergency plan, and asking for help from trusted third-party investigators, institutions—and the citizens, patients, and customers who count on them—can remain safe.