Public integrity for an effective COVID-19 response and recovery

 Fraud, corruption, price gouging, and managing suppliers

The COVID-19 crisis has created three main integrity challenges for governments in the area of public procurement. First, governments are urgently procuring large quantities of goods and services, such as hospital equipment, medical ventilators, hand sanitisers, face masks, and health services, in order to meet the immediate needs of the health sector and affected communities. To address this, many OECD governments are enacting or reinforcing their emergency procurement procedures, using provisions that authorise and specify special procedures for emergencies. These provisions allow to procure necessary supplies directly from or via a pre-approved list of suppliers, without going through the standard, albeit lengthy, procurement processes. This may increase the integrity risks of procuring services and goods that do not meet quality standards and/or that are procured through corrupt means. While risks of fraud and corruption are always present in public procurement,1 they are elevated in emergency procurement processes. Past health and humanitarian crises, such as Hurricane Katrina in 2005 or the Ebola outbreak in 2014-16, have shown how these processes can be abused at the expense of those most in need of said goods and services (Schultz and Søreide, 2008[9]; Cray, 2005[10]; Kupperman Thorp, 2020[11]). Without the proper integrity and transparency safeguards in place, such emergency processes are vulnerable to abuse.

A second integrity consideration emerging from the COVID-19 crisis is the lack of stockpile preparedness across many OECD countries, leading to increased competition for necessary supplies globally. In this situation, the mechanics and bargaining powers of the public and the private sectors are reversed. Thousands of contracting authorities and private institutions are scouring the market for the same products that are produced by only a small number of suppliers. Furthermore, production in some of these companies is suspended or seriously affected by the lockdown measures. This exacerbates competition among public agencies and introduces haphazard practices in what is being described as an extremely chaotic market (Tanfani and Horwitz, 2020[12]). Additionally, many countries are introducing export curbs to satisfy their national needs, which affects product availability at the global scale. Given market dominance, many transactions are taking place off-book, and price volatility is extreme, with often significant advance payments required by vendors (Folliot Lalliot, 2020[13]). This could contribute to a paradigm shift in corrupt schemes, as buyers could now corrupt sellers in order to receive essential goods and services -- the reverse of what normally happens. Further, this risk could diffuse throughout the supply chain, since many of the supplies needed rely on scarce raw materials.

Finally, besides the procurement of goods and services required to directly address the current COVID-19 crisis, governments also have to manage ongoing public contracts. They must identify those particularly at risk and provide effective responses for suppliers seriously affected by the crisis and its impact on economic development. Governments, alongside their contracting authorities, must ensure that the suppliers most at risk are in a position to resume normal contract delivery once the outbreak is contained. Public procurement legislation often provides exceptional measures for paying ongoing contracts in emergency situations, for example allowing specific advance payments or exempting suppliers from penalties for the deficient performance of contracts. Such derogations to established practices that govern contractual relationships could open the door to corrupt practices, should those derogations not be subject to transparent guidelines communicated to all contracting authorities.

Some governments are putting strategies, regulations and guidelines in place to help their contracting authorities manage their suppliers portfolio, and making sure that fair, transparent and equitable mechanisms continue to govern contractual relationships. For example, the central purchasing body of Ireland, the Office of Government Procurement, developed an information note on good practices for contracting authorities during the COVID-19 outbreak (Office of Government Procurement, 2020[14]). Similarly, the Ministry of Internal Affairs and Communications of Japan issued “Measures to be taken for public procurement by local governments in response to COVID-19” (Ministry of Internal Affairs and Communications of Japan, 2020[15]). In the United Kingdom, the Cabinet Office issued a procurement policy note on “Supplier relief due to COVID-19” (Cabinet Office, 2020[16]). To ensure business and service continuity, the policy note provides that contracting authorities should pay all suppliers as quickly as possible to maintain cash flow and protect jobs. The note also emphasises that contracting authorities and suppliers should work collaboratively to ensure there is transparency during this period. Suppliers in receipt of public funds on this basis and during this period must agree to operate according to an ‘open book’ policy. This means they are required to make any data, including from ledgers, cash-flow forecasts, balance sheets, and profit and loss accounts, available to the contracting authority as requested, in order to demonstrate that payments have been made to the supplier under contract in the manner intended. Similarly, France and Italy have also developed and implemented new emergency procurement laws or guidance that deal specifically with the COVID-19 crisis (Dentons, 2020[17]; Brenot, Billery and Feroldi, 2020[18]).

 High risks and low controls

To mitigate the economic recession caused by COVID-19, governments are developing significant economic stimulus packages. Previous experiences with economic stimulus packages, most notably the one following the 2008 global financial crisis, show that the breadth and scope of such measures offer opportunities for and high risks of corruption, fraud, waste and abuse (Zagorin, 2020[21]; Office of the Auditor General, 2010[22]). Paradoxically, governments are relaxing controls in order to urgently spend funds, further amplifying these as well as strategic and operational risks, which can undermine the effectiveness and efficiency of such programmes.

This context puts pressure on public financial management systems, and more specifically internal control systems within public organisations. For instance, the pace of implementation of the economic stimulus packages requires adapting or relaxing routine control measures and ex ante due diligence. This can also involve simplifying requirements, such as limiting or delaying reporting, to allow managers time to focus on delivering services to the public.

Moreover, this situation is exacerbated by disruptions to the institutions that are typically responsible for accountability and oversight in government. These include internal audit functions, supreme audit institutions and parliamentary oversight committees. For example, in some cases, parliamentary oversight committees have been suspended, due to public health concerns or concerns over expediency. Many supreme audit institutions (SAIs) are also facing difficulties conducting audits and have postponed the publication of audit reports.

Despite the pressures facing internal control, internal audit and oversight functions within government, it is key to recall that these actors play a critical role in ensuring that public integrity is not compromised in the management of the economic stimulus packages and that these, in turn, produce the intended economic benefits. For example:

• Internal auditors can act as backstops to address any temporary control gaps and flag risks to management as controls and requirements change, and can provide real-time assurance on the validity of transactions as a result of emergency measures, using data matching and other analytical methods.

• SAIs can keep abreast of the modifications made to the public financial management systems and identify potential risk areas (Gurazada et al., 2020[23]) and, where necessary, adapt their routine end-of-year report audit activities, due to the volume of additional demands on the SAI’s audit capacity.

• Internal audit functions, SAIs and other oversight bodies can help promote transparency and high-quality open data to enlist the public in holding government officials accountable. The 2008 financial crisis and the subsequent recession offer useful examples for the current circumstances, demonstrating the mutual dependencies of transparency and accountability. In the United States, the Recovery Accountability and Transparency Board, which co-ordinated the work of the inspectors general monitoring the implementation of the American Recovery and Reinvestment Act of 2009, created an analytical platform that could identify recipient anomalies, and then tasked the inspector general for the particular programme to address issues. This had the dual benefit of preventing both fraud and corruption, while also building the capacity of the inspector general functions within the line ministries (Zagorin, 2020[21]). The public platform, Recovery.gov, allowed journalists and citizens to track their taxpayer money and see how the government was spending it.

Both internal and external auditors are also well placed to support governments in managing risks in the short term. For instance, they can provide useful insights to decision makers on the integrity risks associated with emergency measures, such as cash outflows to businesses and individuals.

 Economic downturns lead to more corruption and occupational fraud

While the majority of public sector employees have high standards of integrity, evidence from past recessions has shown that economic downturns lead to increased occupational fraud, embezzlement, bribery of public officials, and other integrity violations (Association of Certified Fraud Examiners, 2016[27]; Ivlevs and Hinks, 2015[28]; Gugiu and Gugiu, 2016[29]). Such risks increase when the following three factors are at play, which is particularly the case in sudden economic downturns: financial pressure, opportunity and rationalisation (ACFE, n.d.[30]). As an immediate and longer term consequence of the COVID-19, many individuals and especially small and medium enterprises will be facing increased financial shortcomings which may trigger corrupt behaviour or fraud. At the same time, mass redundancies that are especially pervasive during a recession create gaps in organisations' internal control and audit systems, leaving them more vulnerable to internal fraud and corrupt practices. Given the pressures, individuals may also rationalise wrongdoing through justification such as “everybody does it” or “if I don’t take the opportunity, others will” (OECD, 2018[31]).

Emerging corruption cases and scandals may also negatively impact on citizens’ perceptions of corruption and thereby undermining support for government measures and reform. In the worst case, they also provide further rationalisation for wrongdoing (Corbacho et al., 2016[32]). In turn, an increased level of corruption at various levels and areas raises the transaction costs of doing business and will have a negative impact on the resilience of economies after the crisis and be an obstacle to economic recovery (Ormerod, 2016[33]).