The salami olympics: how to spot a fraudster

The 2012 Olympics promise so much for so many in the local and sporting communities. But as with any large project, this could also be bounty time for fraudsters.

While grumblings over the size and scale of the Olympics budget continue, the issue that seems to have escaped the public’s attention is that the opportunity for fraud has now risen to between £466m and £932m. To put this into context, £675m was raided from lottery funds to pay for the Olympic building programme. Security costs alone are expected to amount to £838m. If the predicted level of fraud materialises - typically estimated to be between 5% and 10% of the total project cost - the Olympic Delivery Authority (ODA) may need to find additional funds to get the venues and other infrastructure completed on time.

History is a good indicator of where the major fraud risks lie. It is unlikely we will see a Nick Leeson-style major fraud. Instead, the money will probably be shaved away through a larger number of smaller frauds - often referred to as “salami fraud”. Procurement fraud is going to account for most of the losses - either overpayment for goods, non or under-delivery of purchased items or the provision of sub-standard goods. The provision of services will also be a risk as it is normally much more difficult to identify what is being provided in these cases.

“The money will probably be shaved away through a larger number of smaller frauds - often referred to as ’salami fraud’”

Before Athens won the bid for the 2004 Olympics, there were allegations by a rival bidder that an American consortium bribed the public order minister and the prime minister. This followed on from the conviction in 1983 of a Montreal administrator for accepting the gift of a country home from the contractor that provided concrete for the stadium at the 1976 Games.

Instances of fraud have also emerged from some recent projects in this country, namely the Millennium Dome and the Heathrow Express.

Notwithstanding the fact that there may be strict internal controls in place for the 2012 Olympics, manipulation of the contract awarding process (it is estimated that 20,000 contracts will be put to tender inviting about 120,000 bids) is likely to take place, which will result in some of the common salami frauds taking place.

Another area that may pose a risk is the number of fictitious employees on various sites. The ODA has already spotted this risk and has implemented fingerprint readers to identify workers entering or leaving the main Olympic site.

The ODA is already aware that fraudsters are circling, and steps have been taken to raise the awareness of fraud and encourage whistleblowers to come forward. But the rewards for fraudsters are such that authorities need to remain as vigilant as possible, particularly during the “final push” when controls can be overlooked under the pressure to complete the project.

The following are the most common signs of a fraudster in operation on a major construction project:

• Projects not put out to tender, often with the excuse that other suppliers have already said they were “too busy”
• Vague specifications or description of goods. This enables the lowest bidder to submit variation orders at a later date, which results in the final cost being higher than the other higher bids
• Rolls-Royce specifications (that is, only one supplier will be able to provide the goods or services)
• Connected parties. On the face of it, the companies that tender will be independent of each other - however, a closer look will reveal connections between the principals
• Companies that fail to submit a bid. These companies need to be spoken to - they will often say, “there was no point bidding as it was common knowledge that Company A was going to win so we didn’t waste time pulling together a bid”
• Companies that submit more than one bid. This indicates that they have been tipped off by someone on the inside that they have not won the tender and therefore have a second bite at the cherry
• Uncompetitive prices. If a price is much lower than competing bids, it is too good to be true. There are likely to be later variation orders or the quality of goods supplied may be suspect
• New or unknown suppliers (especially if they are not “authorised”). All suppliers should be pre-authorised or vetted before being able to submit a tender. In the run-up to the completion date, there will be pressure to use new suppliers and to by-pass internal controls owing to the urgency of the situation.

Andrew Durant is senior managing director in the forensic and litigation consulting segment of FTI Consulting