Governments, public health and safety agencies, and private companies are scrambling for equipment, medicine and supplies during the COVID-19 pandemic. Widely reported shortages on critical items, like personal protective equipment (PPE), sanitizing products and ventilators, have been met with unprecedented cooperation and philanthropy. And fraud.

The massive and sudden demand has created an opportunity for predatory business and trade practices by some individuals and entities who hope to leverage organizations’ immediate need for supplies for their own gain. To avoid becoming a victim of their fraud, leaders should look to due diligence.

4 Reasons COVID-19 Has Increased Fraud

During COVID-19, we’ve seen everything from selling defective, secondhand equipment and counterfeit, contaminated and expired medicine and products to price gouging, corruption, bribery and kickbacks, tax evasion and money laundering.

But why is a pandemic such a breeding ground for fraud?

  1. Fake experts asking for information or selling phony medical supplies. The Federal Bureau of Investigation (FBI), Food and Drug Administration (FDA) and Centers for Disease Control (CDC) have warned healthcare professionals of the increased potential for fraudulent sales of medical equipment and medicines. We have seen an increase in phony emails, calls and visits from people purporting to be from the World Health Organization (WHO), U.S. Department of Health and Human Services (HHS) and CDC who are asking for personal information. Our own experts have warned of phishing scams that attempt to defraud Americans of their stimulus package aid.
  2. Unfamiliar business partners. In crises, organizations are more likely to be contacted by vendors and third-party brokers with whom they have never worked. State and local governments are reporting that unfamiliar vendors are soliciting relationships by promising essential medical supplies. In this high-pressure environment, engaging with entities with whom one has no prior relationship is risky.
  3. Thinner workforces. The COVID-19 pandemic has forced millions of layoffs and furloughs, and in the worst-case scenarios, employees are sick or caring for the sick and cannot work. Shelter-in-place orders and other self-quarantine measures have also limited how much someone can get done. This means hundreds of fraud examiners, auditors and analysis are not working at full capacity. With reduced workforces, many organizations cannot continue due diligence operations, if they had such a function in the first place.
  4. Urgent need to expedite supplies. Given the severity of the situation and acute need for supplies, some organizations have circumvented normal due process procedures to get what they need. Decision-makers are rightfully worried about waiting too long to attain rare and limited supplies, and they may be deciding to save lives versus waiting out for a full due diligence investigation.

How to Tackle Due Diligence In the Middle of a Pandemic

Get to Know Your Vendor

To be most effective and efficient, due diligence should begin with extensive communication with the potential vendor. The entire process should promote informed decision-making and protect the organization from the unnecessary risk exposure of doing business with malicious actors. The five-step process of due diligence should include the following tasks:

  1. Collect vendor and supplier information
  2. Ask the difficult questions at the start, and require a questionnaire that includes background information, licenses, regulatory compliance, and contract terms under consideration
  3. Conduct baseline due diligence work, which we’ll discuss further below
  4. Identify red flags
  5. Assess the risk and determine whether to accept, mitigate, transfer or avoid it

Focus on Baseline Due Diligence

The dangers of doing business with fraudulent vendors and suppliers include putting the health of employees and the public at risk, inviting fines and sanctions from regulators, and incurring irreparable reputational harm. To protect the organization, baseline due diligence should at a minimum include:

  1. Confirming the company’s status (i.e., if the company is active)
  2. Regulatory and licensing checks
  3. Criminal and civil history checks
  4. Global compliance watchlist screening
  5. Politically exposed persons screening
  6. Adverse press coverage search
  7. Adverse social media posts and mentions search

Prepare Your Workforce

The COVID-19 pandemic can and should be the catalyst for fortifying this essential investigative work. As mentioned above, companies may have few or no in-house due diligence resources available to them, Several perhaps did not have any due diligence function at all. To change that, we recommend:

  1. Consulting with professionals to review or develop your due diligence policies, procedures and program.
  2. Conducting training with your personnel on using appropriate due diligence resources and procedures.
  3. Teaming up with a trusted, reliable partner to outsource or temporarily supplement your due diligence needs during times of heightened fraud risk.

At Hillard Heintze, this is what we do every day. If we can assist you, please contact us directly.