Understanding Procurement Fraud – A White Collar Crime

White collar crime comes in many forms, but procurement fraud is one of the little known types of white collar crime.  It can be extremely costly for business owners, but many business owners simply do not know of this serious issue.  This may be due to the fact that transactions that involve procurement fraud appear on their face to be legitimate business transactions that take place between a business and vendors that are assumed to be legitimate entities.  On top of that, many businesses who fall victim to a procurement fraud scheme do not report it to the authorities, instead choosing to settle the issue in private.  The following is a real life example taken from a recent news publication that highlights the fact that a business of any size may fall victim to procurement fraud.

Most simply defined, procurement fraud exists in situations when an entity gains an advantage, sidesteps an obligation or causes some sort of loss through dishonest actions of an entity, contractor, public servant or individual who is involved in said procurement.  One recent example of procurement fraud is highlighted in the San Francisco Chronicle’s online news publication SFGate.  The story is of a small store in Quincy, Massachusetts that is called Pat’s Mini Mart.  He has recently been charged with perpetrating procurement fraud that involved allowing customers to use their Food Stamp cards as atm cards in order to withdraw sums of cash rather than using the funds to purchase food as they were intended to do.

The owner of Pat’s Mini Mart is a gentleman named Pat Lu.  The scheme was relatively simple: An individual who was a Massachusetts Food Stamp recipient would travel to Pat’s Mini Mart with their EBT (Electronic Benefit Transfer) card, and would make a purchase using the card.  The illegal element of the transaction was that Lu would charge the card for far more than the actual purchase price of the items, and would then hand over the extra cash to the customer.  Pat’s Mini Mart would then receive the full funds from the food stamp card.  These transactions are absolutely illegal, and although it may not seem like such a serious issue when you take one individual case on its own, the funds definitely added up over the years.

In all, Lu has been charged with amassing at least $700,000 in fraudulent transactions, thus defrauding the government of well over half a million dollars.  Some other cases involving procurement fraud involve much larger businesses.  In certain cases, members of the management are so embarrassed to have fallen victim to a procurement scheme that they do not wish anyone else to find out that it occurred at all.  Estimates suggest that the average company will lose approximately 6 percent of yearly revenue due to procurement fraud, so it is clearly quite a serious issue that deserves attention.  If you are the owner of a business, you should be diligent to ensure that you do not fall victim to a procurement fraud scheme.