Protecting your business against fraud is like making wine. It takes years to grow the grapes, harvest, crush, press, ferment, and clarify. Then the wine must age (sometimes for years ) before you finally get to taste whether it’s any good. The result might be awful – acidic or sharp – and yet, now, you won’t get the grapes back. Likewise, when vendor fraud occurs, you only find out you’re doing a bad job after you realize the money is gone.
But it doesn’t have to be this way, because you can actively fight against vendor fraudsters in business. In this piece, we’ll show you how to identify the signs of vendor fraud and implement the best strategies to prevent it altogether. All in a way where your grapes don’t sour in the process.
Do you want to learn more about the different types of corporate fraud and how to fight them effectively? Check out our latest report about B2B payment fraud in the US.
What’s Vendor Fraud?
Vendor fraud refers to supplier impersonation. It involves a cybercriminal pretending to be one of your real vendors in order to fake an invoice and divert the payment.
Fraudsters can send emails using an email address similar to your supplier’s actual email address (phishing) or can hack into your supplier’s systems and send an email directly from there. In this last case, fraud is almost impossible to detect.
Sometimes, vendor fraud is committed by an insider, an employee from the payee company. In others, fraudsters steal a real invoice from a real supplier. The perpetrator can defraud both you and the real vendor by changing the payment details to their own.
Huge Japanese multinational, Toshiba, reported falling victim to a years-long accounting scandal, including vendor fraud, in 2015. Ultimately, senior management set unrealistic profit expectations, which led to those in the accounting team systematically editing invoices and other financial documents. It was one of the biggest fraud cases of the decade.
Therefore, organizations should put in measures to identify internal vendor fraud as well as prevent external cybersecurity attacks.
Why does it matter?
The effects of vendor fraud can be damaging.
The biggest threat is that vendor fraud can go undiscovered, for years sometimes. In fact, the median length of time of vendor fraud is 18 months – and the consequences only get worse over time.
An investigation into vendor fraud is likely to cause a huge delay in the work you can do, and therefore bring down the finance function’s operational efficiency. It can basically render the entire department to a stop as systems must be examined, risk assessed, and overhauled.
During this time, of course, it’s your real suppliers who miss out on owed payments. Growing frustrations on their part may lead to a relationship breakdown as they wait for payment and new orders. Eventually, the procurement team may be forced to invest in finding new vendors all over again.
Not to mention the financial effects of vendor fraud. On average, American businesses lose $300,000 to fake invoice fraud every single year. Most of the time, law enforcement struggles to get this back. That’s money that could have been reinvested into business growth, scaling, and generating higher profits.
Overall, the impact of vendor fraud goes further than immediate financial loss. There’s also big reputational damage with customers and suppliers, sometimes legal action and a drop in productivity.
How can you identify vendor fraud?
There are three main ways to identify vendor fraud:
- checking invoice details against the real supplier bank details
- tracking changes to invoices
- flagging spoof emails
Supplier account validation to identify vendor fraud
Identifying vendor fraud goes hand in hand with account validation. When you pay a supplier, you need to make sure that the following steps have been followed:
- Validation of the supplier credentials: social security number of persons with significant control, legal data, localization, etc.
- Validation of supplier banking information: bank account details, bank address, etc.
- Validation of the correlation between supplier identity and supplier banking information.
Following these steps by using international databases is the most concrete method of identifying vendor fraud. Verifying the details of your supplier against the payment details listed on the invoice will help you check for financial fraud.
The good news is, Trustpair can help you with account validation. Our platform automatically screens vendor data and flags any anomaly, blocking the risk of fraud. What’s more, we can automatically detect errors and begin the clean-up operation – saving your people 70% in time, on average.
How does it work?
We start by auditing your existing Vendor Master File to detect anomalies and help you correct them. We base our audit on a combination of smart technology and AI, as well as a unique risk scoring algorithm.
Based on historic decision-making and data enrichment, we analyze payment risk on a case-by-case basis to rule out false negatives. This way, you get notified of an anomaly as soon as it happens and can prevent the funds from leaving your account to a suspicious third party. Contact one of our experts to learn more!
When you have the ability to track changes to an invoice, it becomes easy to spot vendor fraud from a mile away.
Changes to a real vendor’s invoice can happen at two different points in the procurement journey:
- If cybercriminals hack into the email system, intercept the invoice, and change the bank details to their own
- If an internal member of the finance department tampers with the invoice in an unauthorized way
Fortunately, there are platforms that exist to monitor changes at either stage. Moreover, using a program to track these changes not only notifies you when something changes – it also provides accountability. This ensures that you can identify not only when vendor fraud occurs, but who the perpetrator is, too.
Smart spoofing discovery to block vendor fraud attempts
One of the biggest myths out there today: “We have a firewall, so we’re protected against spam emails.”
Email firewalls are necessary but not enough for fraud, especially at preventing phishing attacks. They are still the number #1 way that internet fraud happens, and in each of our inboxes, approximately 4% of emails contain malware.
Upgrading your email spam filter is one of the first steps you should take if you’re working in a business that wants to take its confidential information seriously. It enables the entire business to be better protected against scammers and can help your IT team identify targeted attacks on the company.
Securing third-party platforms goes hand-in-hand with this upgrade. Fraudsters, by nature, will find your most vulnerable weaknesses to exploit and if they can get to you through third parties with their scam, such as a payment platform, they will.
Fortunately – you can avoid deception and secure your entire payment chain with Trustpair which can integrate with each of your business tools. Not only will this significantly reduce the risk of fraud across your entire operation, but you’ll save time without disrupting workflow efficiency.
Preventing vendor fraud: what are the best strategies?
Securing your business is now more important than ever. In the last year alone, 56% of American companies were targeted at least once, according to our most recent report. Not to mention that new types of fraud are constantly being invented.
But while vendor fraudsters could commit fraud at any time, you can put some measures in place to prevent their success.
Ensuring data quality throughout the whole supplier lifecycle
Firstly, it’s important to get the right information from potential new suppliers. This might refer to the likes of third-party identification data, bank detail checks, or procure-to-pay information. Of course, it’s one of the biggest red flags if your contacts refuse to provide this and want to jump straight into the orders.
It’s also crucial to control supplier data along the whole supplier lifecycle and not only during the onboarding phase. Our most recent study about fraud in the US revealed that if 74% of companies check vendor data during onboarding, this proportion drops dramatically (to 20%) when it comes to controlling information before payment campaigns.
Keys Asset Management felt that their vendor data was unreliable since the finance team didn’t have the ability to check or clean it. Because the accounting process was totally outsourced, the team needed to find a way to secure this compromised data while still receiving the reduced workload benefits of outsourcing.
Fortunately, Keys Asset Management worked with Trustpair to build a custom ‘connector’- a seamless integration between payments and third-party vendor data. This has significantly increased the reliability of supplier data and identified both duplicate and missing data in the master file. Now, the finance department can initiate payments with complete peace of mind against fraudulent activity.
Using letters of credit to limit vendor fraud
Letters of credit refer to a bank contract. They help guarantee you’ll get your product, and your vendor will receive their payment.
Letters of credit allow companies to delay paying their suppliers until the product is received, for more peace of mind. At the same time, the bank guarantees payment to the vendor in case the business doesn’t pay up within the agreed time frame. It’s a guaranteed way to prevent scams!
The major benefit to using letters of credit is that you can guarantee you’ll receive the product instead of paying in advance for what essentially becomes theft (preventing the risk of vendor fraud). Plus, your supplier also gets an advantage – they will definitely receive payment, even if their new customer refuses to pay up.
If you’d like to learn more about letters of credit, it’s something we discussed in more depth in this article about due diligence for international suppliers.
Setting up a trial order
There’s also the risk of starting a supplier relationship with an unauthorized or unscrupulous supplier. In that case, it’s hard to know in advance if the supplier might commit fraud.
You could set up a ‘trial order’ with a potential new supplier to prevent fraud. One with low minimum order quantities (MOQs) means that your company isn’t committing to a huge payment. This helps in case the vendor details turn out to be fraudulently obtained or counterfeit.
Using an automated platform to block vendor fraud
With purpose-built anti-fraud software, vendors become 100% verified. This provides a bulletproof safety net against fraudsters in all forms – from bank account fraud to phishing.
The benefits of working with an anti-fraud platform include:
- Using AI to make the right decision, faster
- Systematically validating third parties all the way up your supply chain
- Centralizing your data into one single dashboard
- Automating finance controls to eliminate the risk of identity theft
- Digitizing your payments process
And what better choice than Trustpair’s market-leading anti-fraud platform?
With 96% client satisfaction and 100% success in blocking fraud, it’s the right choice for enterprises that want to prioritize their payment security. Try out Trustpair with a free demo to see if it’s the right program for you.
To sum it up…
Vendor fraud is when a scammer impersonates one of your suppliers and sends a fake invoice using their personal information. To avoid it, it’s crucial to continuously verify supplier credentials and information. This will help detect anomalies and block fraud before it happens.
The most effective way to lead account validation effectively is by having an automated solution like Trustpair to do it for you. This helps you gain time and efficiency an eradicate all frauds and human errors.