“Identity theft has been around for such a long time now, surely people aren’t still falling for it?” It’s true that we all think we know the tricks and how to protect ourselves from identity fraud. But the most recent reports coming out of last year tell us that third-party fraud is growing. Maybe those that should be the most concerned are enterprise-level organizations. Indeed, they tend to be the most susceptible to financial losses of over $150,000 or more.
However, businesses should also be aware of the hidden consequences resulting from third-party fraud – the harmful effects other than obvious financial loss. When you fall victim to fraudsters, your senior leaders might be investigated- historically leading to penalties, imprisonments, and fines.
Failing to protect your business against third-party fraudsters, also affects the wider community. It creates reputational damage to your business, fostering a culture of mistrust with established and potential customers. Ultimately, this can knock you out of the race against competitors, and leave you sprinting for last place.
Clearly, performing a risk assessment for third-party fraud should be a priority for companies operating at the top. So, how can you identify, detect and prevent cases of third-party fraud in your business?
Trustpair can help you block third-party fraud by performing an automatic identity verification for every single payment, ensuring 100% accuracy. So when things don’t match up, you’ll be the first to know. Contact our experts now!
Understanding third-party fraud in business
Third-party fraud is also known as identity theft. Fraudsters infiltrate the data security of an organization to steal sensitive information without their knowledge. Of course, this is all for the purpose of fraudulent activity. Most commonly, criminals will open fake accounts or buy products or services under the fake details.
Third-party fraud is the most common type of fraud that happens, making up 38% of all crimes in 2022. It works so effectively due to the criminals applying pressure tactics: they work fast and get out before they can get caught.
In a business sense, most of the fraud examples would fit into the third-party category. For example, one of the most common types of third-party fraud is invoice fraud. Without proper supply chain management, your team could fall victim in two different ways:
- Fraudsters intercept a real invoice from one of your suppliers, most often by hacking into the email system. The criminals then change the bank account information to their own details without your knowledge. As such, you think you’ve paid your vendor, but your supplier never receives the payment and everybody is left feeling frustrated.
- Fraudsters find out about one of your known suppliers, buy a similar domain name and send a realistic-looking invoice to a junior finance employee. They claim to need immediate payment or that payment is overdue in the hopes that your employee is pressured into sending the payment before proper checks are done.
It’s clear in the example above that fraudulent activities rely on pressure tactics, exploiting the vulnerabilities of fast-moving businesses that don’t rely on using a chain of approval for payments.
On one hand, approval requests can become a bottleneck in business operations. Indeed, it takes time to go through the appropriate channels and might take some time to get the attention of busy executives. But on the other, setting up rules for payment approval can save your business from falling victim to fraudsters.
Moreover, third-party fraudsters are successful when businesses don’t have proper fraud detection and prevention measures in place. Therefore, it’s important to implement the right combination of tools. Not only to protect your business from current threats but future-proof it from third-party fraudsters, too.
Fraud prevention platforms can detect and block the attempt of invoice fraudsters by making sure that the bank account information actually matches that of your supplier. That’s what we do at Trustpair!
The most common types of third-party fraud
Although cases of fraud are growing, the most common types of third-party fraud remain as classic as ever. These include invoice fraud, phishing scams (click to learn how to recognize phishing emails), new account fraud, and bank transfer or wire transfer fraud.
Invoice fraud
You’re already familiar with invoice fraud from the examples above. You might have also heard about the case of Olympus, which was found to have internally produced false invoices to bolster its financial position and seem more attractive to investors.
The scheme went undetected because the company used a complex accounting system that made it hard for auditors to trace payments. Moreover, poor internal controls made it easy for fraudsters to expose weaknesses in third-party risks.
Phishing scams
Phishing scams are a more direct form of identity theft – one example is CEO fraud.
Here’s how it works:
Criminals will spoof the email address of a senior member of your organization, such as the CEO, and send a demanding request to a more junior employee. Most of the time, the criminal asks either for direct payment to an account or for sensitive company details that might later be used to gain access elsewhere.
The fraudster will place a huge sense of urgency on their request in order to get their victim to move quickly, without thinking logically or checking with colleagues. Once the fraud has been realized, it’s usually too late as the funds are already stolen.
More experienced or organized fraudsters will opt for spear phishing. They gain access to your systems to learn about how the CEO operates and speaks before building a more convincing and realistic impersonation case.
That’s what happened to the US Democratic Congressional Campaign Committee (DCCC) in 2016. Employees were emailed from a source that looked legitimate, but the emails contained harmful links from a cybersecurity hacker. Once clicked, hackers had access to the system, stealing personal information and donations from the site.
New account fraud
New account fraud (also credit card fraud) refers to the process of criminals opening a new account with your business by using stolen information. This can affect your business in two ways:
- The criminal can open up subscriptions and purchase products or services using someone else’s details. You might be liable to refund the victim without receiving your own compensation from the fraudster
- The criminal can leverage one account to open up another, maxing them out and continuing on a spiral of financial carnage
Of course, neither case is ideal. Especially for Capital One, who fell victim to this type of third-party fraud in 2019. A hacker was able to gain access to their system, and use the stolen data to open new credit card accounts.
Bank or wire transfer fraud
Finally, wire transfer fraud made up 32% of all business fraud cases in 2021.
These days, most banking is done digitally. It means that we all access our accounts through mobile apps or online programs, which can increase vulnerability to third-party fraudsters.
One of the most common instances of bank transfer fraud happens through a push payment notification. The criminal impersonates your bank and is able to send a notification through your phone (or sometimes send a link through text or email) in order to get your attention. Since push notifications are largely implemented as a security measure, most employees are confident that they are genuine. But once the payment is made, it’s likely that your business will never see the money again.
Do you want to learn more about wire transfer fraud? Check out our free report.
Protecting your business from third-party fraud
It’s important to know how to identify financial fraud to stop criminals in the act. Here are some questions to ask your finance team in the fight against the most common types of third-party fraud:
| Invoice fraud | CEO fraud | New account fraud | Bank/wire transfer fraud |
| Does the invoice come from an email address that you recognize? | Are your people empowered to ask questions and create a pressure-free working environment? (ie one where demanding language is out of place) | Have you implemented software tools to flag suspicious or unusual financial transactions? | Are your employees made aware of this type of fraud, and continually trained against emerging fraud techniques? |
| Have the bank account details been verified and continually monitored for changes? | Are your employees trained to spot CEO fraud tactics so that phishing attempts cause suspicion? | Do you have e-commerce fraud prevention tools to check personal details such as addresses alongside bank account information to verify the customer? | Is your team sharing passwords? Even if not, are the passwords you use strong and secure? |
| Does your e-commerce fraud prevention software have the ability to show and track changes as part of vendor management? | Does your CEO follow proper compliance protocols in regard to payments? | Are customers required to undergo two-factor authentication (2FA) before they can sign into an account at your business? | Are your accounts monitored consistently either through manual means or fraud-detection software? |
| Are payments sent through an approval process before they can leave your company accounts? | Does your finance function maintain proper audit records instead of messy paper trails that external auditors would struggle to access with ease? | Do you have an established due diligence process to verify new customers? | Is your team sanctioned to question payments that they don’t recognize? |
Each of these questions will help your employees identify cracks in their fraud detection and prevention strategy, and apply best practices in the fight against fraud. But more on that later!
Tools to detect and prevent third-party fraud
Fraud detection is all about providing your people with constant monitoring tools, and being able to spot abnormalities in the patterns. But relying on manual work to manage the load is impossible; it’s hard to find the right data on public databases and get eyes on things at all times.
Online fraud prevention tools are perfect for large-scale businesses, or those that want to grow fast.
Two-factor authentication (2FA) is one tool that financial institutions use to verify their customers. But businesses in other industries could also benefit from using this tool when working with new suppliers. For example, even in the case where a phishing attacker provides the right password, 2FA would require a physical confirmation of payment before it leaves your accounts.
Real-time account monitoring software lets companies establish a ‘normal’ pattern for payments and transactions. In fact, outsourcing to specialized online fraud prevention companies like Trustpair exists to automatically trigger a notification when unusual activity occurs. This alerts your team in the fastest way possible, allowing you to prevent suspicious payments as an organization.
Lastly, payment security tools help to protect your organization against external threats. B2B payment fraud is a real threat, but it’s made less alarming when you can protect the payment chain from beginning to end. In fact, Trustpair’s payment security tool controls each and every transaction that comes out of your organization, securing even third party p2p tools in the payment chain.
Online fraud prevention best practices
Companies that operate the very best practices in preventing and detecting third-party fraud rely on risk mitigation in two factors:
- Their internal frameworks
- External software
Internally, it’s important to build a strong data governance policy and equip your team to follow the rules you make. For example, you could require payment approval by a VP if a vendor charges more than $10,000. Developing these internal resources and then empowering your finance team to follow them – and speak out when problems occur – is one of the best practices for preventing third-party fraud.
Choosing the right external software will also improve your operational resilience against third-party fraudsters. Imagine being able to access an all-in-one tool that covers supplier verification, and continual account monitoring, and provides a secure payment chain.
With Trustpair, you can. We help large companies by offering a traceable and secure payment system, combined with real-time alerts, correction reports, and industry-leading integration technology.Contact our experts now!
In summary:
- The best type of fraud prevention and detection strategy combines tools and technologies as well as risk management factors.
- There are a multitude of tools to help businesses fight back, even in the case of blockchain fraud prevention which has traditionally been harder to defend against.
- You can protect information security by making sure your online systems are secure. You can also encourage employees to create strong passwords.
- If your business works with credit or debit cards, it’s important to put payment security measures in place . It will prevent physical card theft and a virtual data breach to your credit card information.
