Property and construction industry fraud – the criminogenic organisation

Let me start with an unhappy but possible paradox that corporate entities/corporations/financial institutions, and their employees can be criminogenic – That is to say, a system, situation, or place causing or likely to cause or breed criminal behaviour. This was the view of Diane Vaughan, that organisations can be criminogenic, because they encourage loyalty, (1998)

Home » David Rosen » Property and construction industry fraud – the criminogenic organisation

Let me start with an unhappy but possible paradox that corporate entities/corporations/financial institutions, and their employees can be criminogenic – That is to say, a system, situation, or place causing or likely to cause or breed criminal behaviour.

This was the view of Diane Vaughan, that organisations can be criminogenic, because they encourage loyalty, (1998) ‘Rational Choice, Situated Action, and the Social Control of Organisations’.

‘This in turn causes company personnel to sometimes perceive that the organisation might be worth committing crime to maintain and further its goals’.

How much more so is this the case, in these dark days of financial instability, and job insecurity, that employees might go that extra mile to secure a deal, to increase profit of the corporation, by attracting business, thus proving loyalty to their employer, and perhaps gaining as a reward, commission, promotion, job security, and a new source of income from a successful tender bid.

This is prevalent in the building and property industry both in the United Kingdom and the United States of America, and manifests itself in a number of ways:

1. Bid Suppression

This is where one or more competing companies agree with at least one other, to refrain from bidding, or agree to withdraw a previously submitted bid.

This scheme operates akin to a small-scale cartel.

A professional may be asked to send tenders out to a number of builders, by a client. He/she may have a favourite few, and those favourite few may be a cosy club acting on the basis of a share of commission, to price-fix, or agree to tender a non-effective bid, to attract and focus the buyer to accept what irresistibly is the only attractive bid to secure a tender.

2. Bid rotating/bid pointing

Developing bid suppression further, a group of vendors exchange information on contract tenders, taking turns to submit the lowest bid so that one month firm ‘A’ wins, and the next month, firm ‘B’ wins, and so on and so forth. Is this good business for those builder companies?

Maybe. Is it good for other building companies? Definitely not. It is anti-competitive. What about for other businesses? Again, anti-competitive. Builders are likely to have their own favourite sub-contractors, and they in turn will follow the anti-competitiveness meaning that other contractors and trades miss out on trading.

Bid suppression and bid rotating schemes are generally known as tender submission schemes.

3. Some thoughts on detecting and recognising tender submission schemes

How far do you trust the professional? Have you dealt with them before? Ask them to make a declaration of interest so as to avoid any conflict of interest that may arise (I.e. (I.e. What dealings has the proposer had with the proposed bidders previously?  In the last 3 years, how many times have the proposed bidders been proposed in similar bids by the proposer? Does the proposer have any financial interest in any of the bidders being successful by way of finder’s fees, fee-sharing, commission, a share of profit, shares directly or indirectly in tender company, or associated contractors as part of a bid ?)

How is the bid to be publicised ? To a few, or to several businesses ?

Has a tender date been set, and have any tenders been accepted late, with that late tender being the winning contract ?

Has a tender date been changed, with some tenders already submitted, and those other tenders submitted are more favourable?  Treat with scepticism.

Check the tender documents carefully, and compare the answers. Similarities? Same contractors and sub-contractors to be used?

These are just a few points to consider when considering tenders, or being considered as part of a tender process.

4.    Criminal Law

An advantage made or given, financial or otherwise, which influences and distorts judgment of acceptance, may be a corrupt practice and contrary to the Bribery Act 2010.

David Rosen – Head of litigation and specialist in fraud law

Cartel activities, price fixing, limiting supply of production, market sharing and bid rigging can be criminal activities under the Enterprise Act 2002.

Taking advantage of customers because of a higher trusted position in business or in society, may be contrary to the Fraud Act 2006.

Using a false tender document, false credentials, false estimates, etc.. may be contrary to the Fraud Act 2006 by using such documents as fraudulent tools to obtain a benefit by false deception.

Obtaining a financial advantage by fraudulent/false deception (I.e. false tender documents, ghost contractors and sub-contractors, etc…) may be contrary to the Theft Act 1976.

Some of these schemes, because of their size, may not be criminal acts, but most certainly they are morally corrupt, and we should all strive to frown upon, and turn away from such corrupt practices.

Professor Rosen is a Solicitor-Advocate, Partner and head of litigation at Darlingtons Solicitors. He is a working member of the Fraud Advisory Panel, a Certified Fraud Examiner, with the Association of Certified Fraud Examiners, a visiting Associate Professor of Law at Brunel University, specialising in civil and criminal fraud, and a member of the Society of Legal Scholars.

David Rosen • Fraud

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