Can you spot a high-risk supplier? ICAC’s guide to conducting due diligence in procurement

By The Mandarin

Thursday December 6, 2018

Officials sometimes make the mistake of assuming another unit or organisation has completed due diligence checks on suppliers, perhaps during an earlier engagement or earlier in the process of the current engagement. In its first report on risk trends for senior NSW officials, the Independent Commission Against Corruption offered tips for spotting the red flags of a high-risk supplier.

It’s a situation so common in public sector procurement that ethical behaviour training use it as a role-play exercise: a politician is frustrated that a local constituent’s small business has lost out to a more established supplier for a government contract. The politician can’t understand why, maybe asks if there is a bias in selection process, and might even call for decision to be re-considered — with the none-too-subtle intent to influence the process to one more favourable to their preferred supplier.

In all likelihood, the politician hasn’t done any due diligence and probably doesn’t have the experience to spot the red flags that an official conducting a formal tender process would have. But there are plenty of other situations where due diligence can be lacking, or even intentionally skipped.

Suppliers who are sourced for smaller engagements may not be subject to the same standard of checking, ICAC warns in its first report to senior NSW officials released this week.

Consequently, those suppliers may get added to an agency or whole-of-government vendor master file. The commission says once a supplier has managed to get itself onto an agency’s VMF, perhaps via an initial small purchase order, it then has the opportunity for more income without being subjected to additional checks.

“In many cases, some basic checks on the supplier would have detected the conflict of interest, or at the very least, raised flags about why this supplier had been selected.”

While centralised procurement offices maintain panels of pre-approved suppliers, ICAC says contracting agencies should not assume all suppliers have been subjected to an exhaustive set of due diligence checks.

The commission’s past investigations show corruption risk is much greater where there is little or no separation between management and ownership of the company. In the corrollary, large, well-governed companies where management and ownership are separated have had very few corrupt conduct findings.

17 red flags associated with a high-risk supplier

  1. has no ABN, an invalid ABN or the ABN does not match to the Australian Business Register
  2. has an ABN that matches to a similarly named (but not identical or related) entity
  3. has recently formed or has no track record (ABN check shows the entity was just registered). This might also be noticeable if the supplier has low invoice numbers
  4. has changed its bank account details shortly after being added to the VMF or just prior to a significant payment
  5. has not registered for GST (or just recently registered)
  6. uses a generic email service (for example, gmail, hotmail or bigpond)
  7. does not list any known physical premises for the business or just has a PO Box
  8. has no landline or never answers telephone calls
  9. has no website or an amateur-looking website, stationery and logo
  10. does not advertise and/or has no online presence
  11. lacks relevant licences (or licence is recently acquired)
  12. has a record of adverse court, regulatory or tribunal findings is not insured or produces suspicious-looking certificates of currency
  13. has opaque ownership
  14. has one or very few customers; that is, a large dependency on the government agency to remain viable (this might be noticeable if the supplier has low and consecutively numbered invoices)
  15. relies heavily on subcontractors to perform work
  16. makes exaggerated claims about its client base or cannot provide the contact details of authentic customers that are prepared to provide referee reports
  17. has company directors with a history of closing down and re-starting businesses under a new name.

READ MORE: ICAC’s first report on the state of corruption in NSW

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