The Investigation of Suspected Contract Fraud

29 April 2009

The Investigation of Suspected Contract Fraud

Report to the Assembly by the Comptroller and Auditor General for Northern Ireland (NIA 103/08-09)

This Report by the Comptroller and Auditor General, Mr John Dowdall, is intended to highlight the issues involved in preventing and investigating suspected fraud in public sector contracts and to point out what should be best practice.

The key challenge, which goes to the heart of securing value for money from contracts, is to ensure that there is genuine competition between contractors and, at the same time, that contracts are fairly awarded. It is important to prevent collusion, either between groups of bidders or between bidders and those officials who are in a position to place orders. Public bodies are expected to be alert to these risks, and respond vigorously to any evidence of impropriety.

In the majority of contracts controls work well. However, property maintenance contracts have long been regarded as carrying a high risk of fraud, corruption and other irregularity and there is particular guidance on the controls necessary to minimise the risk of fraud in building services. The Report considers two case studies from the Belfast Education and Library Board which illustrate the challenges faced by public bodies in this area.

Allegations of Price-Fixing and Collusion in Schools Maintenance Expenditure

A whistleblower made a number of allegations, in 2003, of fraud within BELB’s and SEELB’s Property Services Units. The key allegation was that a price-fixing cartel was in operation. The whistleblower also alleged that BELB officers accepted inducements to award schools’ maintenance work to favoured contractors. As background to these allegations, BELB’s Internal Audit section had produced reports between 1997 and 2002 which included findings that a core of contractors was allocated the majority of the work in certain fields.

A number of investigations were undertaken into the whistleblower’s allegations. The first BELB report found no evidence of payments to Board officers. The second BELB report found that two contractors named by the whistleblower were consistently awarded the majority of jobs. The Department commissioned three further reviews, one of which was undertaken by a consultant who reported that he found evidence of contractor malpractice (and possibly fraud) involving consistent overcharging. However, PSNI considered that the evidence was not strong enough to support criminal charges and a further analysis carried out by BELB Internal Audit concluded that labour costs reviewed were in compliance with relevant guidelines. The consultant identified disciplinary offences committed by two officers. These officers were subsequently disciplined.

The Report draws out important lessons to be learned from this case. It emphasises the importance of developing and instilling a strong anti-fraud culture. Whilst the Board did take a number of actions, in NIAO’s view it did not adequately protect itself against the risk of fraud, through a strong control environment.

The Report also concluded that the Department of Education provided effective oversight of, and followed good practice in, its management of the investigation. The Department also consulted with fraud and other experts as appropriate.

Fraud Investigation into Library Building Works

In the second case BELB found it had paid £80,000 for work at Whitewell and Oldpark libraries which had not been done. The work was required to bring libraries into compliance with the access requirements of disability legislation. The maintenance officer who had authorised the payment to the contractors for the work which had been paid for but had never been started was suspended on full pay in August 2005. BELB commissioned a specialist team of trained and accredited counter-fraud specialists to investigate. Possible criminal charges were identified but, the absence of any documentation, undermined the prospect of a successful prosecution. BELB were advised to proceed with a disciplinary case. The maintenance officer’s employment was terminated in August 2007 on ill-health grounds and the disciplinary case was wound up. The Board is proceeding to recover the outstanding balance of £41,000 from the contractors.

On identifying this case BELB reviewed work undertaken in other libraries, to comply with disability legislation, and found it was often incomplete, poor quality and more expensive than anticipated. BELB has reviewed the work actually carried out in accordance with the schedule of works and estimated that, of the total of £287,000 paid for work in 14 other libraries, a further £110,000 was paid for work which was either not carried out or was not carried out to the required standard. The Board is seeking to recover these amounts.

DCAL, as the funding department for library building works, was content that the Board’s conduct of this investigation was well handled. DCAL asked all other Education and Library Boards to review their own procedures and provide assurance in the light of this case.