Wed, May 20, 2020

COVID-19 Medical Supplies: How to Mitigate Fraud Risks

In the past few weeks, European governments have spent millions of euros on defective COVID-19 test kits and personal protective equipment (PPE). Unfortunately, dishonest vendors and middlemen are capitalizing on the crisis to defraud buyers of much needed medical supplies. Governments and private entities can minimize these risks by exercising due diligence on unknown vendors and unidentified third-party brokers facilitating these potentially life-saving deals.

Lax Supplier Vetting Due to Urgency: An Opportunity for Unscrupulous Vendors and Middlemen

Over the past few weeks, numerous European media outlets have reported on shipments of defective COVID-19 test kits and face masks arriving in their respective countries. The representative examples summarized below provide an unfortunate reminder of the negative consequences of lax supplier vetting due to urgency in the midst of a crisis.

In late March, at the height of Spain’s severe COVID-19 outbreak, it came to light that a Chinese manufacturer, Shenzhen Bioeasy Biotechnology Co. Ltd. (“Bioeasy”) had sold 659,000 poor quality test kits to the Spanish government for EUR 17 million (~USD 18.59 million).1 According to the reports, the tests had a sensitivity rate of 30%, well below the industry standard of 80%  to correctly identify positive cases. The Spanish Society of Infectious Diseases and Clinical Microbiology recommended against using Bioeasy’s test kits.2 As a result, the Spanish government returned the first batches of Bioeasy’s test kits, and asked the company to cancel the remaining shipments. Bioeasy agreed to replace the inaccurate test kits with a different type.3 However, the replacement tests’ sensitivity rate was also below industry standards. Therefore, Spain terminated its deal with Bioeasy,4 and the company issued a EUR 6.99 million (~USD 7.65 million) refund to Spanish authorities (equivalent to the payments up to that point).5

El Confidencial, a Spanish business publication, reported that no background checks were conducted on Bioeasy. Adequate due diligence would have uncovered several concerns about the trustworthiness of the company and its products. For example, an internet search would have revealed that in late 2019, online allegations surfaced in China that Bioeasy had massaged its financial statements prior to its public listing on the Shenzhen Stock Exchange.6 Furthermore, as the Chinese Embassy in Madrid later publicly stated, Bioeasy’s tests were not certified by the Chinese National Administration of Medical Products and  the company was not included in the Chinese Ministry of Commerce’s list of approved providers of medical supplies to fight COVID-19.7,8

In addition, individuals with criminal records have acted as intermediaries to source COVID-19 supplies, according to Spanish media reports. On April 13, 2020, El Confidencial reported that FCS Select Products, S.L. (“FCS”), a Spanish company with an office in Guangzhou, China, acted as an intermediary to source 10 million face masks from China for an undisclosed price. A background check would have revealed that, in 2015, one of FCS’s co-managers was sentenced to more than 10 months in prison and fined over EUR 66,980 (~USD 73,282) for aggravated financial fraud.9 Orchards Investment, S.L., another Spanish intermediary that negotiated the purchase of 100,000 face masks for EUR 235,950 (~USD 258,151) from an unidentified Chinese company, is managed by an individual with a criminal record for money laundering, fraud, forgery and embezzlement. The face mask deal did not go through because Spanish authorities refused to accept the Chinese manufacturer’s request for a 50% upfront payment, according to El Independiente, a Spanish publication focused on politics and economics.10

Across Europe, there are numerous other examples of the negative consequences of lax supplier vetting due to the urgent need to secure COVID-19 supplies. On April 1, 2020, Fortune reported that unidentified local middlemen sold  the Slovak government USD 16 million worth of COVID-19 test kits that were unable to detect the disease in early stage patients.11 On March 31, 2020, Belgian business newspaper De Tjid reported that an unidentified Chinese supplier sold  Belgium 100,000 face masks for an undisclosed price; however, the face masks were ineffective. An investigation uncovered that they were for industrial instead of medical use, and that they were sourced from Colombia, not China.12,13 On March 29, 2020 Deutsche Welle, a German public broadcaster, reported that an unidentified Chinese manufacturer had sold  The Netherlands 1.3 million face masks that did not meet quality standards (price not disclosed).14

COVID-19 Supply Chain Due Diligence: Basic Recommendations

In the short term, there will continue to be a high demand for PPE and COVID-19 testing kits, and no shortage of unscrupulous actors willing to capitalize on buyers’ urgent needs for supplies. An important tool to mitigate such risks is  adequate  due diligence on suppliers and agents. A few things to consider when assessing the legitimacy of a vendor or intermediary include:

Verify the Third Party’s Operating Status and Credentials

Check the website of the relevant government’s corporate registrar to corroborate vendor-provided information about its corporate structure, current standing, business address and management team. Verify that the third party complies with applicable regulatory requirements, such as required licenses and certifications. Due diligence checks can also help verify the professional backgrounds and credentials of the third party’s senior leadership team.

Assess the Third Party’s Background and Reputation

Ensure that the third party is who it says it is and has the capability to deliver what it promises it can. Online checks can often reveal information about operational issues or financial difficulties affecting a vendor, and uncover allegations or instances of fraud, bribery, embezzlement or other illicit behavior.

Check Compliance and Sanctions Databases

Be sure to minimize the risk of the third party being involved in any improper business practices or sanctioned activities. Criminal actors often take advantage of a crisis, and the current pandemic is no exception.

The above steps are just some examples of measures buyers can take to prevent and mitigate fraud risks, and protect the health and wellbeing of their communities during the COVID-19 crisis.  Kroll, a division of Duff & Phelps, can help clients manage their supply chain due diligence needs. For more information about Kroll’s supply chain and third-party due diligence services, please contact us.


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7 Ibid.
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