Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Procurement Fraud — Definition, Common Schemes + Examples
What is procurement fraud?
- Procurement fraud is the manipulation of the procurement process to gain an unfair advantage.
- Procurement fraud issue harms a company’s reputation and position in the competitive business environment.
- A company must train and monitor its employees to avoid procurement fraud and prevent future occurrences.
What is Procurement Fraud?
Procurement fraud is the manipulation of an organization’s procurement process to gain unfair financial benefits through dishonest, unethical, or illegal actions. It can happen in both the public and private sectors and often involves deception, corruption, collusion, bid rigging, kickbacks, or overcharging. The result is usually financial loss, damaged reputation, and reduced trust in the fairness of purchasing decisions.
Fraud often starts when companies run a bidding process where multiple suppliers compete for a procurement contract. It can occur when the selection is influenced by unfair behavior, such as an employee conspiring with a bidder to secure the award. Understanding how procurement fraud happens and how to reduce it helps protect company assets, reputation, and core values.
5 Common Schemes in Procurement Fraud and How to Solve Them
Procurement fraud can take many forms, but most cases fall into a few repeatable schemes that exploit weak controls and limited oversight. Below are five of the most common procurement fraud schemes and practical ways to prevent or stop them.
1. Bid Rigging (Collusive Bidding)
Bid rigging happens when suppliers secretly coordinate their bids so the “competition” is fake, and one agreed supplier wins the tender. Common patterns include bid rotation, cover bidding (fake high bids), and agreements to split markets or customers. This directly undermines fairness in the procurement process and inflates prices.
You’ll often see red flags like the same bidders winning in a predictable sequence, unusually similar pricing patterns, or competitors acting “too friendly” (e.g., losing bidders becoming subcontractors). These are typical indicators used in anti-collusion guidance and fraud detection materials. If it continues, the organization repeatedly overpays and locks out legitimate suppliers.
How to Solve It
Use anti-collusion tender design: avoid overly predictable, repetitive tendering patterns and review how lots are split and evaluated. Train procurement staff to spot bid patterns and require documentation for suspicious bid behavior, then escalate to compliance/legal when needed. Add strong bidder declarations (independence, non-collusion) and run basic bid analytics (price dispersion, winner rotation, identical formatting).
2. Kickbacks
Kickbacks occur when a supplier gives a personal benefit (cash, gifts, favors) to an employee or decision-maker in exchange for steering business or approving inflated terms. It’s a classic “corruption” scheme and can show up during supplier selection, contract award, or invoice approval. The procurement contract may still look “valid,” but it was won unfairly.
This scheme often pairs with other manipulation like biased specifications, waived requirements, or weak competition to ensure the preferred supplier wins. The organization typically pays more, gets lower quality, or accepts unfavorable service levels because the decision isn’t based on value. Over time, it damages trust and makes the procurement process easy to exploit.
How to Solve It
Create a strict gifts/hospitality policy with clear thresholds, approvals, and mandatory disclosure. Separate duties (requesting, approving, receiving, and paying) so one person can’t control the full chain. Monitor high-risk categories and suppliers with targeted audits (pricing, change orders, repeat awards) and ensure violations have real consequences.
3. Conflict of Interest (Undisclosed Relationships)
A conflict of interest happens when someone involved in buying has a private relationship or financial interest that could bias decisions (family ties, side business, future job promises). Even if no money changes hands, undisclosed conflicts can distort supplier evaluation and contract decisions. This weakens integrity and fairness in the procurement process.
It often shows up as “unusually tailored” requirements that fit one supplier, repeated awards to the same vendor without clear performance justification, or resistance to competition. The organization may end up with a procurement contract that is not truly the best option for cost, quality, or risk. These issues are widely treated as warning signs in procurement integrity guidance.
How to Solve It
Require conflict-of-interest declarations at key points (before tender design, before evaluation, and before award). Enforce recusal rules so anyone with a conflict cannot influence specifications, scoring, or approvals. Add oversight for high-value awards (second review of scoring rationale and evaluation notes) and rotate sensitive roles periodically.
4. Fictitious Vendors / Shell Companies
This scheme involves creating fake suppliers or using shell companies to receive payments for goods/services that were never delivered or were overpriced. Sometimes it’s entirely internal (an employee creates the vendor), and sometimes it’s a collusion setup with an outside partner. It’s especially dangerous because it can look “clean” in the system if controls are weak.
Common signs include vendors with minimal history, missing business documentation, suspicious addresses/bank details, or a vendor that only invoices one department or one approver. Fraud resources highlight how complex ownership structures can hide the real beneficiary. The result is direct financial leakage through the procurement process.
How to Solve It
Lock down vendor onboarding: verify legal registration, beneficial ownership (where feasible), tax IDs, and bank account ownership before activation. Use controls like “no single person can create + approve + pay” and require receipt confirmation tied to purchase orders. Run regular vendor master audits to detect duplicates, shared bank accounts, shared addresses, and unusual payment patterns.
5. Overbilling, Inflated Invoices, and Product/Service Substitution
Overbilling happens when a supplier charges more than agreed—extra hours, higher rates, hidden fees, or inflated quantities. Substitution happens when the supplier delivers lower-quality materials/services than specified but bills as if they met the contract requirements. Both exploit gaps between what was contracted, what was received, and what was paid.
These schemes can hide in change orders, vague specifications, weak inspection, or rushed approvals near deadlines. Warning-sign guidance emphasizes checking mismatches: invoices that don’t align with delivery records, unusually frequent amendments, or repeated “exceptions.” Left unchecked, the procurement contract becomes a tool for systematic overpayment
How to Solve It
Use three-way matching (PO–receipt–invoice) and block payment when key fields don’t match. Improve specification clarity and acceptance testing so substitutions are caught early, and tie supplier payment to verified performance/quality checks. Review change orders with extra scrutiny (justification, approvals, price reasonableness) and audit high-variance invoices.
Procurement Fraud Examples
Now we know the causes of why employees commit fraud. It’s time for us to tackle its different types to identify if an employee is committing fraud.
1. Employees collaborating with suppliers
Among the other types, employee collaboration with suppliers is the most common type of procurement fraud. This happens when an employee is assigned to purchase from a related supplier at a much higher price. This results in a sub-standard quality of the purchased product or service.
Due to the omission of fraud, the employee and the supplier will both benefit from their actions. Employee collaboration with suppliers to defraud the company is widespread. It is common in companies with no definitive sourcing process.
Another is when the procurement process is in the hands of an individual or a specific department. This can impact the company’s reputation when you get inferior raw materials to produce your products.
Acquiring inferior raw materials for your products will weaken the quality.
2. Overcharging the invoice
This fraud happens when there is an inflated invoice from the suppliers. Overcharging the invoice is done with caution by the supplier to conceal it when the audit comes.
One example of this is including services or products that are not provided, or although they look the same, are of inferior quality to the product you expected.
3. Companies set up by employees to commit procurement fraud
This type of fraud consists of a few employees creating fake companies. This type of fraud might be uncommon, but it will cost you the most.
This happens when the employees keep issuing payments to their fake companies. The issuance of payments might be small so as not to cause suspicion among them. Yet, it will harm your company severely over time.
4. Conflict of interest
You may think that you have overall control of the company. But fraud is different when there is a conflict of interest.
Conflict of interest occurs when an employee selects a vendor for the company related to it. It is not wrong to choose a bidder that you know. A conflict of interest becomes harmful if you choose a particular bidder when conducting the selection process.
It becomes damaging to the company when self-interest has become a priority rather than the company’s interest.
Procurement Fraud Triangle
There are some cases where employees may commit fraud even if the company has given incentives. You may wonder why this happens. Where did you go wrong in training your employees?
There are multiple reasons behind this. But these are the three main reasons why employees commit fraud, according to the Association of Certified Fraud Examiners (ACFE).
1. Perceived financial instability
The employee will see it as a window to commit fraud when experiencing financial problems. Financial problems can come from sudden expenses, personal debts, or living beyond your means.
2. Perceived opportunity
There will be an opportunity to commit fraud when an employee knows how to bend the controls in a company. Knowing how to conceal and hide transactions can lead an employee to commit fraud.
3. Rationalization
Procurement fraud starts when an employee justifies the intention to cheat to gain benefits. Thoughts like “I deserved to be well-compensated” can be an opening to commit fraud.
7 Strategies to Avoid Procurement Fraud
Every company has dealt with different types of procurement fraud for years. Yet, there is no definite solution to stop it.
There are ways to lessen procurement fraud, though you may not end it all at once. Let’s now discuss different ways to fight it.
1. Training employees in the standard procurement process
Training ensures employees understand the correct steps, approvals, and documentation required in your procurement process. When people know the rules, they are less likely to “shortcut” controls or approve purchases incorrectly. It also reduces honest mistakes that can look like fraud or create gaps that fraudsters exploit.
Effective training goes beyond a one-time presentation and includes real examples, role-based scenarios, and clear dos and don’ts. It should cover common red flags like unusual supplier behavior, split purchases, and missing documentation. Regular refreshers keep everyone aligned as policies, systems, or regulations change.
2. Informing suppliers of your rules regarding the procurement process
Suppliers should clearly understand your procurement process before they participate, including bidding rules, ethics expectations, and documentation requirements. When expectations are transparent, it becomes harder for suppliers to claim ignorance or pressure employees into side deals. Clear supplier rules also help prevent conflicts of interest and improper influence during sourcing.
This works best when suppliers acknowledge the rules formally, through a supplier code of conduct, tender declarations, and contract clauses. It also helps to explain consequences: disqualification, termination, or reporting if misconduct occurs. While loopholes can still exist, this sets a baseline that supports enforcement and accountability.
3. Strengthening the auditing of purchasing controls
A stronger audit function helps detect unusual transactions, policy violations, and patterns that suggest procurement fraud. Audits can identify issues like inflated invoices, repeated exceptions, or purchases that bypass competition. This creates a deterrent effect because employees and suppliers know transactions will be reviewed.
Randomized checks are important because predictable audits are easier to avoid. Sampling receipts, approvals, and delivery evidence across categories and departments can reveal hidden problems. Over time, audit results should feed back into better controls, updated policies, and targeted training.
4. The whole procurement process is not controlled by one individual
Fraud risk increases when one person controls too many steps, such as selecting suppliers, approving orders, confirming receipt, and approving payment. Separating duties makes manipulation harder because multiple people must agree for a transaction to go through. This reduces opportunities for collusion and limits the damage from one bad actor.
A practical approach is to assign different roles for requisition, approval, receiving, and invoice payment. Higher-risk purchases can require additional review or second approvals. Rotating responsibilities and involving different departments can further reduce the chance of long-term collusion.
5. Utilizing automation to control purchasing processes
Automation strengthens control by enforcing rules consistently, such as approval workflows, budget checks, and required documentation. It reduces manual errors and limits “off-system” purchasing that is harder to track. Digital records also make it easier to audit and investigate issues quickly.
Automated systems can flag anomalies like duplicate invoices, unusual spend spikes, or mismatches between PO, receipt, and invoice. They also improve traceability by keeping a clear history of who approved what and when. With good reporting, you can monitor the procurement process in near real time and respond before losses grow.
6. Set up an anonymous reporting channel and protect reporters
Employees and suppliers are often the first to notice suspicious behavior, but they may stay silent if they fear consequences. That’s why an anonymous channel (hotline, email, or reporting platform) is important for reporting issues safely. When people trust the system, fraud is more likely to be detected early instead of after losses grow. It also strengthens an integrity culture by signaling that the company takes misconduct seriously.
Protection is the part that makes the channel work in real life. You need a clear process for who receives reports, how they are investigated, and what follow-up is possible without exposing identities. Make anti-retaliation rules explicit and train managers on how to respond appropriately. If reporters feel unprotected or ignored, the channel becomes “just paperwork.”
7. Conduct vendor due diligence and regularly review vendor master data
upplier is added to your systems, verify legitimacy and risk indicators: registration details, ownership (when feasible), references, and overall reputation. Also, validate key operational details, such as address, tax identifiers, and especially bank account ownership. This reduces the chance of fictitious vendors, shell companies, or manipulated supplier setups entering your procurement process. A cleaner supplier base also improves sourcing quality and control.
The work does not end after onboarding because fraud can happen through changes to vendor master data. Run periodic checks for duplicates, multiple vendors sharing the same bank account, sudden IBAN changes, and unusual payment patterns. Put strong approvals in place so changes to critical fields require at least two independent reviewers. With consistent monitoring, it becomes much harder for fraud to stay hidden.
Conclusion
Procurement fraud undermines trust and value by distorting buying decisions through kickbacks, conflicts of interest, fictitious vendors, overbilling, and similar schemes. Even when contracts look “valid” on paper, hidden influence and weak controls can push costs up and reduce fair competition. Over time, this results in financial losses, reputational damage, and a weaker supplier base.
Because fraud often follows repeatable patterns, organizations can lower risk by combining prevention with early detection. Clear rules for employees and suppliers, stronger auditing, and separation of duties reduce loopholes and limit how much any one person can control. When supported by automation, anonymous reporting channels, and consistent vendor due diligence, these measures create layered protection that keeps procurement decisions compliant and value-driven.
Frequentlyasked questions
What is procurement fraud?
Procurement fraud is the manipulation of an organization’s procurement process to gain unfair financial benefits through dishonest, unethical, or illegal actions. It can include schemes like collusion, bid rigging, kickbacks, overbilling, or delivering poor-quality goods while still securing a procurement contract.
Why does procurement fraud occur?
Procurement fraud occurs when employees see an opportunity to defraud their company.
Is there a possible way to completely stop procurement fraud?
Unfortunately, procurement fraud cannot be eradicated. However, there are ways to minimize procurement fraud in a company.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
