In today’s world vendor fraud schemes are on the rise and criminal elements become ever more sophisticated, resulting in cost inflation and worse. The overall pecuniary loss to the company can be staggering when legal and investigative fees, changes to systems and processes etc are factored in. Then there are the non-monetary factors such as time and stress that also need to be considered.
What are the Common types of Vendor Fraud?
Historically many types of vendor fraud exist and are still as prevalent as they always have been. These include:
- Invoice Fraud
- Unit Price Inflation: If a product or service usually costs $2, inflate the quote $3.20. During negotiation process, can always give discount, and still come out on top. If buyer does not question price, then even better, and best part is it legal and good business.
- Double and Overbilling Billing: This is usually sending a duplicate invoice for goods or services received, quantities increased on invoice over actual quantities delivered, or invoicing for hours not worked. It often can be overlooked, and covered by the usual adequate excuses, apologies, and reversals etc and best part is it often cannot often be conclusively proven as a fraud attempt.
It is also fair to point out that variations of Invoice Fraud may be perpetrated as easily by relevant internal elements of your buying team and other colleagues in your own company as by any vendor.
- Fictious or Fake Vendor Fraud
- Fake or fictitious vendor fraud:Most often occurs when non-existent vendors are created to obtain fraudulent payments from a “mark company,” often involving manipulation of invoices or accounts payable processes. In certain parts of the world this is a quite common type of fraud where the “mark” is usually government agencies. Often in these scenarios, internal collusion is common with agency staff members working in collusion with external actors. which can involve very elaborate schemes. It is also common for only internal staff member or members are involved.
- Impersonation: Whereby lone operators or more often, sophisticated syndicates impersonate legitimate vendors, submitting counterfeit invoices or altering genuine ones to inflate payments. Once again collusion often plays a key role in this type of fraud scheme, and once often target government agencies or large projects.
- Discrepancies in Documentation or Missing Details: Vagueness or inconsistencies with other previous documentation, misspelling of names, differences in logos and layout etc are often good telltale signs of not “all being well in the Kingdom”.
- Company Ownership irregularities: Where it is difficult to trace actual ownership of a vendor can often be indicative of some form of legal irregularity or dubious intent. Often shell and front companies are used like the rings of an onion to hide true identity and avoid detection, which is as old as defrauding itself.
Be careful where ownership leads to high-risk countries known for such scams and regulations are less strict.
- Cyber related changes
- Banking Detail Changes: Sudden verbal or electronic notifications of banking account changes are always a giveaway sign that all may not be well and should be verified with the appropriate management member of the vendor in question.
- Vendor E-mail Compromise: In this era of cybersecurity, any sudden changes in known e-mail addresses should be appropriately verified ASAP. It is quite probable that the vendor’s cybersecurity has been compromised, often without the vendor even been aware that it has even occurred.
- Odd Payment Requests: Any form of payment request for a change in the standard protocol for payment, needs to be raised immediately with the appropriate management representative. Should such a representative confirm it, then it is usually an indicator of financial instability or other issues and requires further investigation.
- Pressure requests/Over eagerness: Should you receive any e-mail from a vendor that employs any form of pressure or over eagerness that is out of character and tune, once again verify it with the appropriate management representative.
- Bid Rigging and Price Fixing
- Bid Rigging: This scheme involves ensuring a supply contract is secured by knowing what the competition’s prices and sensitive specifics are and undercutting them. This usually works best by offering monetary compensation to an internal employee. Nepotism and variations thereof can also prove compelling motivation for both internal and external actors.
- Price Fixing: As the name implies this involves two or more vendors working in concert to fix the cost of goods, services or contracts at a price higher than normal. Works well where there are several limited vendor options for a particular category, and therefore the customer is forced to with an over inflated budget.
Tips for Vendor Fraud Prevention
Identifying a vendor fraud scheme, after it has occurred is like”” closing the stable door after the horse has bolted”!
Prevention of fraudulent schemes” is better than a cure”, and that can be achieved thru establishing a Procurement (and Supply Chain) Intelligence Process that include the following cornerstones:
- Effective Due Diligence and Vendor Management
- Audit Your Vendors Regularly
- Employ a Multi-Level Payment Approval Process
- Use the Invoice Matching Technique
- Rotate Employees
- Run Regular Background Checks on Your Employees and Vendors
- Using a tiered or multi sourcing category supplier approach (which is a key component to good Procurement Governance anyway)
In Conclusion
Unfortunately, you cannot eliminate vendor fraud. However, there are many actionable ways to reduce your risk of vendor fraud, some of which are briefly outlined above.
You may also choose to go the professional route. There are certified fraud examiners that conduct quarterly or annual vendor audits, which can save you some real time and money.
You may also choose to go the professional route. Karl Furrutter is a Procurement Specialist that can assist you personally with establishing a tailored Procurement Intelligence Process, or through his Practice, Furrutter & Associates, who are certified specialists in such matters can conduct specialised quarterly or annual vendor audits, which go a long way to saving you time and money, leaving your staff free to concentrate on their primary responsibilities, therefore focusing on efficiency, growth and success.
Contact details:enquiries@furrutterandassociates.co.za