How to implement effective fraud detection and prevention measures?

fraud detection and prevention

Last modified on October 31st, 2023

More than half of the companies experienced fraud in the past two years. Financial fraud can cause huge damage to your finances and your reputation. Fraud detection and prevention are therefore must-haves to effectively safeguard your organization.

With scammers becoming more and more creative, which prevention and detection strategies can you set up to fight effectively against fraud?

Trustpair is the ultimate fraud risk management tool. Our software blocks fraud by continuously controlling supplier data and payment campaigns before they are executed. Contact an expert to learn more.

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What is the difference between fraud detection and fraud prevention?

Your fraud risk assessment approach needs to include a mix of fraud detection and fraud prevention. An effective anti fraud strategy will prevent you from losing money, data, and assets.

Let’s take a closer look at the definition of both fraud detection and prevention:

Fraud detection, a definition

Fraud detection happens when a fraud attempt is already undergoing. If all else has failed (if your fraud prevention strategy hasn’t deterred the attempt), then your fraud detection system kicks in.

It’s a reactive system, like a warning bell when a thief is already in your house.

A good fraud detection strategy will catch a fraud attempt as it is happening, ideally early enough to give you time to react and safeguard your assets. That’s where tools like Trustpair that send live warnings in case of fraud attempts come into play.

 

Fraud prevention, a definition

On the other hand, fraud prevention is about preventing fraud before it even occurs. It’s a proactive approach to protect your organization against the risk of fraud.

Your fraud prevention strategy is composed of deterring measures, so scammers cannot go in undetected. It’s the equivalent of high walls with barbed wires, a guard dog, or even video surveillance. We’ll see how that translates concretely in the corporate world below.

You need both in order to be safe:

  • Preventative measures to reduce the risk of fraud happening.
  • Detection system to spot any fraud if it does occur.

 

The risks of poor fraud detection and prevention

What happens if you don’t have fraud prevention and measures set up? Well, fraud. With fraud on the rise, it’s not a matter of if, but of when it’ll happen.

When it does happen, fraud leads to direct and indirect financial loss:

  • The money you lost, as well as the monetary value of the data or assets that were stolen.
  • The reputational damage with your customers and/or suppliers.

The latter is harder to quantify but can be even more debilitating than the former. For example, if you’re a victim of vendor fraud, your supplier might not understand why you haven’t paid their invoices. They can decide to withhold their delivery of goods and services, putting your production to a stop.

 

What are the most common types of fraud?

Nowadays, the most common kind of fraud is linked to business email compromise (BEC). Fraudsters use emails to impersonate a supplier, or a top manager, or to gain access to your company’s data or funds.

In 2021, BEC attacks led to more than $2,4 billion in losses for US companies. According to the FBI, BEC is “one of the most financially damaging online crimes”.

Below are some examples of BEC commonly used by scammers.

 

Phishing attacks

Phishing attacks most often happen via email: scammers send too-good-to-be-true emails to lure their victims into conducting the action they want:

  • Clicking on a link that asks them for sensitive information,
  • Downloading attachment that turns out to be malware,
  • Forwarding personal information,
    Etc.

Fraudulent emails can be your “typical” scam of someone pretending to be a Nigerian prince – they have various degrees of credibility.

An astonishing 42% of employees self-reported having taken a dangerous action (like the ones above).

With business fraud, phishing attacks can also be a stepping stone to getting more information for fraudsters to build more advanced fraud – and more lucrative – schemes. For instance, they can get their victim to download spyware that’ll carry out data mining on all their devices. It can also help design social engineering attacks.

 

Wire transfer fraud

Wire transfer fraud is now a very common type of online fraud. Digitization of processes and remote work have made wire transfer fraud easier to carry out.

It’s a quick and simple way for fraudsters to get funds transferred to their bank accounts. They might email you pretending to be a supplier, or your CEO (like we’ll see next).

Regardless of their approach, their goal is to get your employees to wire some money to their bank accounts. It’s effective because wire transfers are almost always irretrievable: once the funds have been sent, they’re gone for good – especially in the case of instant payment.

By the time wire transfer fraud has been detected, scammers have usually transferred the money to another bank account and are nowhere to be found.

 

CEO fraud

In 2021 alone, CEO fraud caused $2.4 billion in losses to US businesses (a third of the total losses from fraud this year).

CEO fraud is when a fraudster impersonates the CEO or another high-level executive of your organization to commit fraud. It’s a type of spoofing, and it’s an open doorway to corporate fraud.

They usually target an employee from your finance, accounting, or purchasing department who has payment rights but is not too high up in your organization.

Communications can have varying degrees of urgency, threat, and tone of voice. Thanks to social engineering, the most convincing schemes even use the same wording and tone your CEO would.

Scammers usually ask for a “confidential transfer” to be made ASAP, but they can also demand to:

  • Access to payroll or bank account information,
  • Modify bank details on an invoice,
  • Purchase gift cards,
  • Dilvuge sensitive data for later use (like blackmail).

CEO fraud is very costly and dangerous.

 

Vendor fraud

Vendor fraud is when a cyber criminal impersonates one of your real suppliers to divert payment.

They’ll email you asking you to modify the bank account details you have in your vendor master file. Every time you’ll think you’re paying your supplier’s invoice, you’ll be in fact transferring funds to scammers’ bank accounts.

Because scammers worm their way into your already existing supplier relationship, it can be difficult to spot. If your supplier doesn’t send you late notice or suspends delivery, it may take a while before any of you notices.

Between 2013 and 2015, Google and Facebook sent $122 million to a man impersonating one of their common suppliers. On this occasion, most of their money was retrieved, but that’s not usually the case.

 

Invoice fraud

Invoice fraud is very similar to vendor fraud. Scammers impersonate your suppliers, but can also send bogus invoices on top of the legitimate ones you receive from your real supplier.

All the fraudsters need is an original invoice so they can copy it. They can get their hands on one by hacking into your supplier’s system, or through one of your employees (willingly or not).

That’s how the non-profit Save The Children lost one million dollars in 2018. A hacker got into one of their employee’s accounts to access intel on their current projects. The perpetrator then sent them countless invoices related to one of their projects, which the non-profit paid.

Learn more about payment fraud in our latest fraud report.

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What are the steps to fraud detection and prevention?

We’ve seen what types of fraud exist and the threat they pose. Now let’s have a look at how you can effectively block and detect B2B payment fraud.

Security measures and policies

Setting up preventative measures is key to a good fraud prevention strategy. We assume you already have a fair number set up in your organization, so it’s all about refining them.

The first step here is to review your processes and make sure everyone is on the same page. Criminals benefit from a lack of clarity in your process, so the clearer they are, the better. Make sure all your relevant employees know about your standards, and that they’re followed to the t.

It might also be time to review your workflow for payment approval. At Trustpair, we recommend using the 4 eye principle for your payment campaigns – and any other key operations. Having a minimum of two people verify your payments lowers your risk of falling into a trap laid by fraudsters.

Generally, following the segregation of duties principle will enhance your security. As authorizations are given to distinct people, and the chain of approval is clear, it’ll lower your risk for fraud to happen.

 

Effective internal control

Internal control ensures the policies set out are actually followed in your organization. Some companies have specific internal control departments, while others rely on the financial department to carry it out.

Either way, it’s important to allocate time and resources to this task. Internal control catches any anomalies and vulnerabilities in your processes.

Detective controls are crucial to fight fraud in your company. Here are a few measures you can set up:

  • Double-checking your financial reporting (including financial statements).
  • Making a manual inventory of your goods to spot any internal fraud.
  • Evaluating your employees’ expense reports.

All of these measures increase the safety of your company while sending a clear message to all: fraud will not be permitted – whether it’s money laundering or internal fraud attempt. They also leave an audit trail, handy in case of external controls.

 

Consistent training

More than blindly following the anti fraud measures set out, your employees need to understand the importance of them. On-going training opportunities will help sensibilize them to fraud risks.

It also ensures they are up-to-date with new fraud trends. As fraudsters regularly come up with new ideas, your employees need to be informed of the latest scams to better spot and deter fraud.

By consistently training your staff on cybersecurity issues, you also contribute to keeping the matter a priority in everybody’s mind. It’s harder to forget about the risk of scams when you’re reminded every month (or more) of their existence.

You can also do fraud drill tests to evaluate your employees’ knowledge and answer to fraud attempts (like sending fake phishing emails, creating a fake CEO fraud, etc.).

The goal is really to become a cyber-aware company. An organization where cyber security is taken seriously and a daily priority. The Association of certified fraud examiners provides good resources on this topic.

 

Due diligence and supplier audit

Last but not least: due diligence. Account validation is key in your supplier relationship management. It allows you to check who you’re doing business with, reducing the risk of fraud. Know Your Supplier (KYS) is also a legal obligation in the US and many other countries.

You need to check your third-party credentials when onboarding a new supplier – but also before any payment campaign. There are two elements you should specifically look out for:

  • The veracity of the information given,
  • The matching between the supplier’s info and the bank account.

We also recommend you treat any change in your third-party credentials as a potential fraud. Any modification request should trigger a verification approval workflow with your supplier.

While it might be hard and tedious to do manually, especially with oversea suppliers, it’s something an anti-fraud software like Trustpair can help you with.

Our solution automates third-party checks and provides ongoing verification against international sources. That eradicates the risks of fraud as you always know you’re paying the right supplier.

How can you optimize fraud detection and prevention?

The main challenges of effective detection and prevention

We can all agree that fraud prevention and detection measures are a must-have for your business. On a theoretical level, they’re a no-brainer. When it comes to their application though, it can become challenging.

Here are the main challenges our clients encounter with their antifraud strategy:

  • There isn’t a one-size-fits-all solution. As much as we’d like to tell you there is, it’s just not the case. Every organization is unique and therefore needs to have tailor-made fraud detection and prevention processes.

 

  • You need to make sure your anti-fraud strategy meets your needs across your departments and locations. Fortunately, Trustpair’s solution easily adapts to your business specificities.

 

  • False positives are also damaging. We all know the story of the boy who cried wolf. It’s the same for your prevention and detection of fraud. If your strategy is too strict, or your employees too cautious, fraud attempts won’t be taken seriously for long. You need to use the proper amount of caution and a balance of standards and common sense.

 

  • It complicates your processes. As you set up new processes in your company, there will be a learning curve for your employees. Even when your new processes are adopted, the added security can mean longer fulfillment times. This creates customer fiction and can even hinder your competitive advantage.

 

Fortunately, software like Trustpair streamlines your processes rather than complicates them. Using detection software makes your processes quicker and safer.

 

Automation software

The good news is: anti-fraud software can help you with all of the above! Trustpair helps hundreds of companies eradicate the risk of fraud by constantly auditing your third-party credentials.

We’re both a fraud detection software and a prevention tool:

  • Preventing fraud attempts with safer safety processes.
  • Detecting any attempts made and alerting you in real-time.

Thanks to a machine learning component, our software spots any suspicious activity and patterns. Our checks are more thorough and our connection to international sources means we’re able to access hard-to-reach data.

It also means your employees don’t have to manually check your third party’s details every time they make a payment. It frees their time for more strategic tasks, while also being more efficient. Contact an expert to learn more!

 

Key Takeaways:

  • Both fraud detection and prevention are needed to protect against fraud. Fraud detection spots any fraud attempts as it occurs, while fraud prevention means fewer attempts actually reach you.
  • Your strategy needs to include anti-fraud software like Trustpair to be more efficient.

FAQ

Fraud detection can be done through internal control. It also helps to use double verifications methods like the 4-eye principle. Using anti-fraud software remains one of the best ways to detect any fraud.

Fraud detection spots any fraud attempts as it is occurring. Fraud prevention focuses on preventing fraud from happening in the first place. Both are needed for an effective anti-fraud strategy.

The key to preventing fraud is to be proactive. It means setting up safety standards, doing your due diligence with your suppliers, and using anti-fraud software like Trustpair.

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