Detecting Collusion Fraud: Red Flags and Warning Signs

What is Collusion Fraud?

Collusion occurs when at least two persons (often more) collaborate to deceive another, typically for financial or commercial advantage. Links might be difficult to find and remove due to their secret nature. This is a significant issue because noncompliance frequently has negative ramifications for the organization.

When two companies are tied to fraudulent behavior within the same organization or environment, This is called collusion fraud. Collusion is common in the workplace, insurance firms, and markets where two or more companies agree to collaborate to fix pricing or eliminate competition.

The Securities and Exchange Commission (SEC), plays a vital role in combating fraud by focusing on investor protection, fair market operations, and financial regulation. The SEC is active in contract enforcement, including antitrust violations and fraud, in collaboration with the Department of Justice (DOJ).

• The Libor scandal centered on several financial organizations’ manipulation of the London interbank offered rate (Libor). The collusion between these institutions was intended to manipulate the benchmark interest rate. The Department of Justice (DOJ) and international organizations imposed fines on the banks involved, and the SEC pursued regulatory action against corporations and persons engaged in the scam.
•  Major global bank traders colluded to manipulate currency values, endangering the integrity of the foreign exchange market (Forex market). The DOJ filed criminal charges against several of the traders involved, while the banks reached an agreement that included substantial financial penalties.

Also Read: Detecting and Preventing Collusion Fraud in Modern Businesses

Red Flags of Collusion Fraud

However, there are some “red flags” that may indicate the collusion fraud:

Pricing Patterns

If participants in a specific company demonstrate consistent price patterns that do not support a defined aim, this may indicate collusion among them to determine the price level. Many car manufacturers price their vehicles at nearly the same price, even though their products have varied characteristics and target consumers indicating warning signs of collusion fraud.

Market Segmentation

When a corporation avoids entering a geographic or demographic area irrationally, this may suggest a clear agreement to prevent competition. Although there are two huge grocery shops in the same city they avoid opening stores in the same location. The lack of competition in some locations is possibly a red flag of collusion fraud

Sudden Alteration in Bid Patterns

During the sales or bidding process, the normal seller suddenly stops participating without cause or starts making non-competitive bidding which may suggest a desire to help others is a sign of collusion. Construction bids are typically solicited from a group of contractors. However, one of them suddenly began to offer quite higher bids making it easier for the other group to secure the contract.

The Lowest Bidders are not Rewarded

Assume that the contract is always given to a vendor who is not the lowest bidder. If this is the case, further inquiry may be required because most contracts are ‘low rate’ and will be reasonably awarded to the lowest tenant. Furthermore, if there is more than the average or a discrepancy between the vendors, it can be an indication of collusion fraud

Common Errors in Documents

Evidence of collusion emerged through various telltale indicators in a case involving three businesses in the acquisition of medical equipment for Safdarjung Hospital in New Delhi. Shared typographical errors, same spelling problems, consistent errors in bidding calendars, usage of the same typeface in bidding documents, and comparable bidding patterns utilized in related contract work were all examples. These data strongly show that corporations worked together to rig the bidding process.

Frequent Meetings

The presence of collusion might be indicated by regular meetings or contacts between competitors that do not have a clear and distinct aim. Competing pharmaceutical businesses meet regularly and claim to be in a corporate meeting. These frequent encounters without a clear business goal indicate potential collusion fraud.

Joint Ventures without Business Rationale

Companies that form various non-commercial alliances or partnerships might be used to conceal collusion fraud. Although both companies are successful in manufacturing separate products, two significant technological corporations are collaborating. This joint venture could be a front for their joint efforts to control market prices.

Confidential Sharing

Without justification, telecom corporations exchange client data and pricing strategies, indicating potential warning signs of collusion fraud. Competitors who trade sensitive and confidential commercial information without sufficient verification may be indicating collusion.

Standardized Contracts

A potential red flag of collusion fraud is specific, extremely similar, unique, or varied contract terms across several suppliers may suggest that these concerns are being discussed or negotiated.

Rotating Winners

The predictable pattern of rotating winners in the bidding process among a set of selected providers could suggest an undisclosed agreement between them. Even if numerous contractors bid, things might grow complicated if one vendor obtains multiple contracts for the same product or service. This is especially true if the seller has any issues or complaints, such as poor products or services, delays in fulfilling the contract, and so on.

Late Bid

Early bids might indicate an agreement if the seller or a representative of the purchasing business provides information about the bid, such as the highest price in the intervention process. This is especially true if the winning bidder is often the last to bid. You should understand why sellers are supporting the late bidders- a warning sign of collusion fraud.

Unconventional Payment Patterns

Supplier groups are frequently compensated financially, but the source of this money is unknown, generating suspicions of bribery as part of the collusion.

Unauthorized Acts

The actions of numerous competitors engaged in market behavior at the same time, without evident external recoveries, such as organizational changes, can imply a link to collusion fraud. Many insurance companies across the sector boost their premiums at the same time for no apparent reason, implying a probable arrangement to increase profits.

Whistleblower Reports

When employees or insiders come forward to expose questionable behavior or conversations, whistleblower reports can be a crucial signal. An employee for a supplier company claims that he was instructed to adjust his rates to promote one of his companies in a joint venture, giving light to the fraudulent conduct.

Resistance to Auditing

If a person or company opposes or attempts to audit or monitor its activity without justification, that person or company may be concealing ties. The technology firm restricts access to its financial data and hinders third-party audits, leading investigators to infer that the company is concealing collusion fraud.

Economic Indicators

If certain organizations outperform their competitors in a competitive market for no apparent reason, it stands to reason that they can gain from contractual arrangements like collusion fraud.

Rebates/Discounts

Offering rebates or discounts in the absence of a legal business transaction or to specific clients may constitute a violation of the contract. A software corporation frequently offers money to some clients for no apparent business reason, prompting worries about the practice of hidden collusive activities.

Similar Bidding Data

Bidders share or have the same names, addresses, and other related information. This is an obvious red flag of collusion fraud. In rare circumstances, two distinct contractors’ bids are received on the same fax! This demonstrates that the group’s plans are contradictory, and more research is required.

Warning Signs of Collusion Fraud

Detecting Collusion Fraud

The Department of Justice and law enforcement authorities in other countries have shown a readiness to seek, investigate, and punish collusion. The following approaches can be used to search internal and external databases for indicators of corruption, collusion fraud, collusive bidding, and bid rigging. You can detect the ripples before they become waves if you pay attention to the red flags of collusion fraud.

• Identify high-risk areas, particularly those where such offenses have already been found or where controls are weak.
• Review records, surveys, and past audit reports to identify potential patterns in high-risk areas.
• Recognize warning signs and red flags of an electronically traceable plan, such as distinct billing patterns.
• Establishing and searching an electronic database for targeted Collusion Fraud Red Flags and Warning Signs
• Check for other red flags of fraud and match any early warning signs you see to your probable scam(s).
• Conducting due diligence background checks on suspect companies and persons to find common or corporate links, unreported assets of individuals, or background information
• Identify third-party (businesses and individuals) involvement in the business and transactions
• Conduct KYC and investigative processes on any suspect system i.e. documentation review, transaction monitoring 

Efforts to meet industry pain points such as customer onboarding, have been ongoing for a long time. For example, it is a legal process that compels banks to do KYC checks and bank records with business customers – this plays a significant role in lowering the risk of onboarding customers with illegal activities examples include money laundering, fraud, and terrorism financing.

Also Read: KYC Onboarding Process: A Smart Approach for Efficient Customer Onboarding

KYC AML guide can offer expert advice on recognizing red flags, adopting control measures, and maintaining regulatory compliance to protect against collusive fraud.