Combat the ongoing rise of fraud and bribery in the construction industry

Fraud and bribery present formidable challenges, with recent reports indicating that they account over 40% of all crime in the UK, resulting in an annual cost of £7bn. The construction industry has consistently been identified as particularly vulnerable to these threats. In fact, a survey conducted two years ago found that more than a quarter of construction firms have fallen victim to fraudulent activities.

The danger persists, with reports of mandate fraud this year targeted at businesses in the industry. Other cases include high-profile cases of collusion and bid rigging have resulted in substantial fines imposed by the Competition and Markets Authority as recently as October 2023.

The government has enacted legislation to address fraud head-on. The Economic Crime and Corporate Transparency Act (ECCTA), which received Royal Assent on 26 October 2023, introduces the eagerly awaited 'failure to prevent fraud' offence. This legislation applies to large organisations defined as meeting two of the following criteria; more than 250 employees, more than £36m turnover and more that £18m in total assets. 

Tier one contractors and others across the supply chain will be affected. This will see organisations held to account if they profit from the fraudulent actions of their employees and other associated parties such as agents and subcontractors. Crucially the defence against such charges hinges on demonstrating adequate anti-fraud measures.

Due to the complexities at play and this new legislation due to come into effect imminently, construction businesses need to ensure they are prepared to respond to and manage both internal and external fraud and bribery risk. This is to not only protect their profits and assets, but also their reputation.

The fraud hotspots in construction

Fraudsters can strike different areas of the sector, both internally and externally. High pressured development and infrastructure projects, resource challenges, battling project timescales with economic uncertainty, present ripe conditions for fraud and bribery to take place. Complex, fragmented structures, project plans and supply chains make detection hard and the impact damaging. The areas prone to exploitation include the below.

Tendering: insiders manipulating bids during the tender process to award contracts to a particular supplier. Bid rigging may see prospective suppliers commit fraud by manipulating bids to increase likelihood of a particular organisation winning, often resulting in financial kickbacks for losing parties. 

Mandate fraud: third parties, purporting to be suppliers or the organisation itself, submit requests for bank account changes, if actioned resulting in payments being paid to the fraudster. Given the current prolific nature of such cases, organisations should take a proactive approach and be mindful of any payments they are due to receive; following up quickly and effectively with any associated organisations for payments they do not receive as expected, to help quickly identify whether they have been a victim of payment diversion fraud. 

Expenses and invoice fraud: employees or suppliers submit unsolicited or inflated claims or invoices for payment, exploiting weaknesses in the expense reimbursement and invoicing processes.

Bribery: employees accept payments, gifts, or other benefits in exchange for preferential treatment or for awarding contracts or business to specific vendors, a violation covered by the Bribery Act 2010.

Asset misappropriation: this can involve stealing supplies, plant, equipment or other company assets for personal use or resale; including ordering surplus materials, for personal gain.

Payroll fraud: this encompasses activities such as altering time records, claiming overtime hours not worked, or creating fictitious employees. Recent instances include payroll diversion fraud, where fraudsters gain access to systems to redirect salary payments by changing bank account details. 

Secondary work and CIS: with the rise of agile working and many construction professionals working in both the private and public sectors, there is an increased risk of employees working more than one job to the detriment or conflict of another. The Construction Industry Scheme (CIS) is undergoing reform, and awareness of these changes are necessary ahead of the April 2024 deadline, a driver in the changes has been due to the challenge of tax fraud. 

Data theft: this can include stealing or copying sensitive company information, such as customer lists or intellectual property, for personal gain or to sell to competitors.

The building blocks to construct an anti-fraud culture 

There are several preventative anti-fraud and anti-bribery procedures that can be implemented to mitigate the threats identified. The Association of Certified Fraud Examiners (ACFE) states that 29% of fraud is due to a lack of internal fraud prevention controls, with 20% overriding existing controls and 16% due to a lack of management review. Effective protocols to enhance detection include: 

• implement a regularly reviewed anti-fraud policy that outlines the organisation’s approach to fraud, responsibilities, and tone from the top. The policy should be widely publicised, internally and externally, and supported by a response plan for when incidents occur. In addition, there should be an annual strategy for combating fraud; 
• schedule periodic anti-fraud training for all staff as well as bespoke training for high-risk areas such as finance, procurement and HR/recruitment. Training should incorporate the publication of successful sanctions where appropriate to demonstrate the organisation’s approach;
• conduct formal fraud risk assessments to identify and measure areas within the organisation susceptible to fraud. These areas may require further proactive testing, training and increased controls. The fraud risk assessment should feed into the annual fraud strategy, which defines the areas of focus for that year; and
• establish confidential and clearly defined reporting channels, reinforced by a robust whistleblowing policy and process. Act promptly upon suspicions of fraud by launching thorough investigations, documenting evidence meticulously, and involving the police as necessary. Swift action can curtail further losses and mitigate the impact of fraud.

Navigate tomorrow’s construction challenges 

The industry must take proactive steps to mitigate and prepare for when, not if, fraud and bribery takes place. The UK’s £7bn fraud problem will continue through a combination of geopolitical uncertainties, economic headwinds, new risks through the investment in technology. 

Secondary legislation following the approval of the Economic Crime and Corporate Transparency Act will soon require organisations that meet the criteria set in the act, to establish procedures to prevent fraud. It is crucial for organisations to act proactively by implementing robust fraud prevention measures, adapting to the changing dynamics of the workplace, and investing in advanced technologies. 

For more information on the ECCTA or for guidance on the preventative steps to take contact RSM’s fraud risk expert Andrea Deegan or your usual RSM contact.