By: Paul Emanuelli
This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In a February 2020 report stemming from a fraud hotline investigation, the City of Portland’s Auditor’s Office uncovered contract-splitting and conflict of interest at the City Water Bureau. As the report detailed, the “Auditor’s Office found evidence of procurement and ethics violations in an investigation prompted by a tip alleging purchasing improprieties by the Water Bureau” and while the “Water Bureau determined that employee discipline was not warranted”, it “agreed to implement other Auditor’s Office recommendations.”
As the Auditor detailed, City staff engaged in multiple instances of contract-splitting (or “fragmenting” as it was referred to in the report) and circumvented open tendering rules by awarding 18 contracts valued at below $10,000 to the same vendor for a total of over $180,000 of untendered equipment purchases:
INVESTIGATION FINDINGS
Evidence indicated Water Bureau purchases violated State Law and City Code.
Purchasing records over an 18-month period ending June 2019 show that two Water Bureau programs frequently purchased water meter equipment from one vendor without a competitive contract. Purchases totaled $182,382. City and State procurement rules prohibit breaking purchases into smaller amounts to circumvent competitive procedures, which is known as “fragmenting.” Purchases exceeding $10,000 must be made through a more complex competitive procedure, according to State Law and City Code. Evidence showed Bureau staff made water meter equipment purchases just under the $10,000 threshold 18 times from January 2018 to June 2019, amounting to more than $160,000.
The Auditor also raised concerns over potential ethics violations since the Water Bureau supervisor who purchased the equipment did so from a company that employed his manager’s spouse and that spouse (who was a former Bureau employee) received commissions on the sales. The manager in question failed to declare any conflicts, despite being aware of those issues from her prior conflict disclosures:
Relationships among two Water Bureau employees and a salesperson may be violating ethics and procurement rules.
A Water Bureau supervisor purchased the equipment from a company that employed his manager’s spouse. The manager oversaw and approved some of the transactions. For some of the purchases, the manager’s spouse was the salesperson interacting with the Water Bureau. The manager’s spouse receives commissions based on sales volume. City rules require employees to withdraw from participating in decisions that affect their financial or personal interests and to disclose potential and actual conflicts of interest, in writing, to their supervisor and Bureau Director. The rules also require the supervisor or Bureau Director to acknowledge the conflict in writing, determine whether the conflict can be resolved, and approve action by the employee. We found no evidence the manager disclosed in writing the potential conflict-of-interest and her financial interest in her spouse’s sales to the Water Bureau. Evidence suggests the manager knew of disclosure requirements and complied with them five years ago when her spouse worked for a different company, because the City’s outside financial auditors called attention to the issue in 2013. The Bureau did not subsequently put procedures in place to disclose conflicts. The manager’s spouse is a former Water Bureau employee, and the supervisor reported knowing the spouse for decades. On at least two occasions, the supervisor and the spouse shared information related to Bureau procurement decisions. The supervisor acknowledged informally sharing purchasing information with other vendors, which may have given selected vendors unfair access to the City’s purchasing power.
The Auditor recommended that the Water Bureau “develop and enforce clear procurement procedures that meet the needs of Water Bureau staff and its customers and comply with State Law and City Code.” The Auditor also recommended the implementation of a “conflict-of-interest disclosure system” that requires “that all employees disclose all potential and actual conflicts-of-interest” and that the City “provide updated, regular procurement training for employees involved in purchasing.” As the report notes, the Water Bureau agreed to implement all the recommendations stemming from the report but determined that employee discipline was not warranted. This case study serves as an important reminder to all institutions of the need to guard against improper contract-splitting and implement effective conflict procedures that include regular staff training to better ensure compliance with applicable procurement rules.
