Covid 19: Transparency, integrity and fraud on public authorities

Public authorities are playing a central role in the Government's response to the challenges brought about by Covid-19.

Enormous sums of public money are being made available to support supplier cash flow during the pandemic. Public authorities must act to ensure that suppliers at risk are in a position to maintain required services as far as possible and resume normal contract delivery once the outbreak is over.

The Cabinet Office has published information and guidance for public authorities on such payments in Procurement Policy Note ("PPN") 02/20.[1] This has been supplemented by a series of guidance documents and model interim payment terms for supply and construction contracts.[2]

PPN 02/20 is clear. Public authorities and suppliers should work collaboratively to ensure transparency during this period. Suppliers found to be taking undue advantage or failing in their duty to act transparently and with integrity will face action to recover payments made.

However, at the same time as PPN 02/20 was published, further guidance was issued warning of the inherently high risk that fraudsters will try to take advantage of these emergency measures.

In this article we analyse (1) the main fraud risks, (2) fraud prevention measures and (3) contractual mechanisms to recover money.

Prevention is better than cure. Proving 'fraud' or a lack of integrity or transparency after the event is likely to be difficult and costly. There is a real risk of failing suppliers or contractors going out of business after this crisis or being unable to meet repayments if pursued. It is therefore important to ensure that adequate contractual mechanisms are in place to make it easier and quicker to recover public funds.

(1) The main fraud risks:

PPN 02/20 deals with adjustments to public authority practices to help ease the immediate financial pressure on suppliers, contractors and the wider supply chain. The general instruction to public authorities is to maintain payments where possible, use forms of contractual relief short of termination and ensure accelerated payment of invoices.

The tension at the heart of PPN 02/20 and the Government's wider response is that public funds are designated as a central pillar of the crisis response. Public authorities are being encouraged to pay suppliers swiftly and, in some cases, temporarily suspend existing contractual checks and balances. At the same time government policy recognises that this is a climate in which fraud on public authorities is likely to escalate. This can range from wastage of public funds, by suppliers or contractors securing continued payment in full for curtailed or non-essential services, to outright fraudulent payment demands.

When referring to fraud risks, PPN 02/20 and the associated model contract terms (see further below) use the terminology of not acting with the required 'transparency' or taking 'undue advantage'. In this context, lack of transparency refers to shortcomings in making financial information, staff payment records and other reasonably requested data available. Undue advantage is not further explained, but it seems designed for more serious cases where support measures are abused.

Further guidance is found in guidance entitled 'Fraud Control in Emergency Management' published by the Cabinet Office.[3] It recognises the heightened fraud risk at this time and identifies two particular sources of imminent danger:

• first party application fraud (i.e. the risk that an applicant may misrepresent their circumstances to qualify for new forms of support); and
• third party impersonation fraud (i.e. the risk that a third party may impersonate a business to access support).

In the public authority context, the first is more likely to be a concern. A supplier or contractor that was already falling short of key performance indicators ("KPIs"), service level requirements ("SLRs"), milestones or timescales may well seek continued payments from public authorities through a Covid-19 relief request, and is likely to secure such funds absent careful vetting and given accelerated processing. The second type of fraud is also a concern where public authorities are required to work with new providers, rather than trusted suppliers, given the scale of demand for certain services or equipment.

(2) Fraud prevention measures:

PPN 02/20 and related guidance[4] provides public authorities with a useful toolkit to mitigate the risk of fraud despite the resource pressures and urgency of the crisis response.

(a) Targeted identification of payments and the 'open book' approach:

PPN 02/20 makes it clear that:

• Suppliers should be asked to identify in their invoices which elements relate to services they are continuing to supply (i.e. "business as usual") and those which are attributable to the impact of Covid-19.
• Public authorities should avoid payments where there is no contractual volume commitment to supply.
• Particular care should be taken when dealing with suppliers who have a history of underperforming, in particular if they were subject to an existing improvement plan.
• As a condition of payment support, suppliers must agree to operate on an 'open book' basis and make cost data available to the public authority.

Operating on an "open book" basis is at the core of what is meant by 'transparency'. It is widely defined in PPN 02/20 as making available to the public authority "any data, including from ledgers, cash-flow forecasts, balance sheets, and profit and loss accounts, as required and requested to demonstrate the payments made to the supplier … have been used in the manner intended." That broad definition is mirrored and improved upon in the Model Interim Payment Terms[5] for variations of general supply contracts and the model terms in the 'Guidance Notes for Construction Contracts'.[6] Public authorities ought to familiarise themselves with and consider using  the  detailed and different definitions of "Open Book Interim Data" in these model terms.

(b) New auditing and verification practices:

PPN 02/20 advises public authorities to continue to undertake necessary checks, but to resolve any issues urgently and to reconcile minor discrepancies at a later stage. Careful but speedy auditing and verification practices are critical. More concrete recommendations are found in the 'Fraud Control in Emergency Management' guidance including:

• Integrating fraud control personnel into the policy and process design to boost understanding of fraudulent patterns as they begin to emerge.
• Using low-friction counter measures to prevent fraud risk where possible.
• Undertaking post-event assurance checks to look for fraud.
• Keeping under review the distinction between emergency payments and longer term services, and revisiting the control framework periodically. As we get closer to the second stage of the crisis response with forthcoming relaxations of lockdown arrangements, such reviews should be considered.

(c) Trusted suppliers and blacklisting:

One key risk mitigation measure is to make use of existing trusted suppliers – either through framework agreements or, where possible, flexibilities in the procurement regulations which permit direct awards. Where public authorities have existing framework agreements with trusted suppliers, turning to these to meet increased demands is likely to reduce the risk of third party fraud. However, any new contracts or amendments to existing contracts or framework agreements will need to comply with established procurement and/or competition law rules (which have not been relaxed or amended in response to the pandemic). In particular, any amendments to existing contracts or framework agreements must comply with regulation 72 Public Contracts Regulations 2015 where this applies.[7] Particular care should be taken around amendments to payment provisions, which may alter the allocation of risk in favour of the contractor.

The procurement regime also provides a form of deterrent to fraud and 'undue advantage'. Regulation 58(7) of the Public Contracts Regulations 2015 gives contracting authorities the discretion to exclude bidders from participating in a procurement process where the contracting authority can demonstrate that the bidder is guilty of grave professional misconduct, which renders its integrity questionable. The concept of professional misconduct is not limited to the standards of the profession to which the operator belongs, and can include other wrongful conduct (see Consorzio Nazionale Servizi Società Cooperativa (CNS) v Gruppo Torinese Trasporti Gtt SpA, Case C-425/18). In the context of coronavirus, the FAQs on PPN 02/20 include a warning that suppliers who make fraudulent claims under the Coronavirus Job Retention Scheme or other support schemes may be excluded from future procurement (see Q13).[8] Establishing grave misconduct may well be difficult for a public authority – especially in circumstances where there is only a suspicion of wrongdoing and so it is not clear how helpful this particular provision will be in practice.

(d) Comprehensive record-keeping:

The need to keep comprehensive records in this period cannot be over-emphasised. Public authorities undoubtedly face considerable time and resource constraints. Yet, creating and maintaining full and contemporaneous records of issues with suppliers, relief requests, variation terms and payments will prove vital down the line. Such records will enable future reconciliation and guard against suppliers taking 'undue advantage'.

(e) Time-limited arrangements:

Given the continued operation of procurement rules, as clarified in PPN 01/20,[9] where public authorities are looking to fulfil immediate needs, care should be taken before committing to longer term arrangements. Beyond short-term adjustments to payment models and information-sharing, it is advisable to seek detailed legal advice before agreeing to new or varied supply arrangements or to termination.

(3) Contractual mechanisms for recovery:

Careful and tailored drafting of terms in any variation or new agreement will be of vital importance. Contractual clawback clauses are the main tool available to public authorities. Both sets of model interim payment terms are a useful starting point.

Model clause 7 in the Model Interim Payment Terms includes an express power for the Authority to take "all action necessary" to recover any payments made. This includes a widely framed right to retain or set-off "payment of any amount it owes to the Supplier at any time under this Contract or any other contract". That contractual right is triggered by one of four specified events in sub-paragraphs 7.1-7.4:

1. Failing to "meet any obligation set out in this Variation".
2. Receiving "any payment" and failing to "apply it to meet any proposal in the relevant Interim Payment Proposal".
3. Taking "undue advantage of any relief".
4. Failing to "act transparently and with integrity".

We have already commented above on the meaning of 'undue advantage', transparency and integrity in this context. Overall, while the specified trigger events are broad, it is prudent to treat these model terms as a starting point only, to be supplemented by more specific provision where possible. For example, it may assist to expressly provide for contractual clawback in other circumstances, such as for failing to comply with specific revised KPIs, SLRs, milestones or timescales. Similarly, the time of accrual of recovery rights and the interplay between such rights and dispute resolution mechanisms, both in and out of court, are areas that are likely to warrant attention, especially in higher value or longer term contracts.

More detailed draft terms have been made available for construction contracts, in the form of model deeds of variation for NEC3 and JCT standard form contracts.[10] They deal thoroughly with the implementation of relief options, including the scope of the 'open book' approach (see NEC3 model clause Z2.1 and JCT model clause 10.1). There is also fuller provision for recovery of payments, including recovery as a contractual debt (see NEC3 model clause Z2.3.3 and JCT model clause 10.3.4).

For completeness, remedies under the general law of unjust enrichment are not available where the payment was made pursuant to a contract that remains enforceable: see e.g. Fairfield Sentry Ltd v Migani [2014] UKPC 9; [2014] 1 CLC 611 at [18]. It plays a residual role, applying in cases where there is a contractual vitiating factor (such as mistake, frustration or misrepresentation) that would allow the public authority to challenge the validity of the supply or construction contract and then avoid the contract, or where there was no contractual basis for payment in the first place.

(4) Conclusion:

Overall, public authorities face a considerable challenge in continuing their vital activities and support for affected suppliers and contractors, while mitigating and preparing for heightened fraud risks. Prevention is better than cure and this can be achieved through a combination of targeted auditing practices, working with trusted suppliers, time-limited variations, warnings to suppliers and comprehensive record-keeping. As for remedies, drafting of contractual clawback clauses should be high up on the agenda and public authorities should consider going beyond the model contract terms made available. Costly and uncertain evidential and legal disputes are best avoided.

 

Key materials:

'Guidance notes on Model Interim Payment Terms – PPN 02/20' (Cabinet Office) (06.04.2020):

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/877260/PPN02_20_Model_Interim_Payment_Terms_v1.pdf

'Guidance Notes for Construction Contracts - PPN 02/20' (Cabinet Office) (06.04.2020, updated 19.05.2020):

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878338/PPN_02_20._Additional_guidance__FAQS_and_model_terms_for_construction.pdf

'Fraud Control in Emergency Management' (Cabinet Office) (26.03.2020):

https://www.gov.uk/government/publications/fraud-control-in-emergency-management-covid-19-uk-government-guide?utm_source=30f87e98-c1e1-40b9-a90a-d49a421420ef&utm_medium=email&utm_campaign=govuk-notifications&utm_content=daily

'Procurement Policy Note 02/20' (Cabinet Office) (20.03.2020):

https://www.gov.uk/government/publications/procurement-policy-note-0220-supplier-relief-due-to-covid-19

'Procurement Policy Note 01/20' (Cabinet Office) (18.03.2020):

https://www.gov.uk/government/publications/procurement-policy-note-0120-responding-to-covid-19

 

Previous articles:

'Important updates to PPN 02/20: Procurement guidance for contracting authorities' (09.04.2020):

https://www.39essex.com/important-updates-to-ppn-02-20-procurement-guidance-for-contracting-authorities/

'Fraud Control in Emergency Management: Covid-19 Guidance' (27.03.2020):

https://www.39essex.com/fraud-control-in-emergency-management-covid-19-guidance/

'Local Authority Commercial Contracts and Procurement in a Covid-19 World' (25.03.2020):

https://www.39essex.com/local-authority-commercial-contracts-and-procurement-in-a-covid-19-world/

[1] See https://www.gov.uk/government/publications/procurement-policy-note-0220-supplier-relief-due-to-covid-19.

[2] We have discussed these more fully in a series of articles (see the links below).

 

[3] See https://www.gov.uk/government/publications/fraud-control-in-emergency-management-covid-19-uk-government-guide?utm_source=30f87e98-c1e1-40b9-a90a-d49a421420ef&utm_medium=email&utm_campaign=govuk-notifications&utm_content=daily.

[4] For more detail see: https://www.39essex.com/important-updates-to-ppn-02-20-procurement-guidance-for-contracting-authorities/.

[5] See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/877260/PPN02_20_Model_Interim_Payment_Terms_v1.pdf.

[6] See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878338/PPN_02_20._Additional_guidance__FAQS_and_model_terms_for_construction.pdf.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/877260/PPN02_20_Model_Interim_Payment_Terms_v1.pdf.

[7] Contracts and framework agreements may be modified without a new procurement process if the modifications meet certain criteria set out in Regulation 72(1)(a)-(f).

[8] See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/876498/PPN_02_20_FAQs_27_03_20__1_.pdf.

[9] See https://www.gov.uk/government/publications/procurement-policy-note-0120-responding-to-covid-19.

[10] See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878338/PPN_02_20._Additional_guidance__FAQS_and_model_terms_for_construction.pdf.