In 2016, Morgan Stanley commissioned a new vendor to close two of their data centers properly by securely decommissioning the hard drives. Unfortunately, vendor due diligence wasn’t properly performed, and the vendor did the unthinkable: sold the hard drives on eBay, leading to financial penalties of over $100 million from regulators.
Vendor verification and continuous monitoring are both essential. Learn how to verify vendors in this article, including validating banking and payment information with Trustpair.
What is vendor verification?
Vendor verification is the process of checking the identity and legitimacy of company data within your supply chain.
Many organizations find it useful to perform vendor verification since it helps prevent the likes of mistakes, fraud, and compliance errors.
Typically, companies get the details of their vendors during onboarding and rarely go back to verify that these details are in fact correct. This leaves businesses at risk of:
- Sending money to the wrong account
- Working with vendors who are blacklisted
- Processing invoices with outdated payment information
- Paying for products or services you never received
Therefore, vendor verification decreases, and in some cases, eliminates that risk.
Why is vendor verification important?
Vendor verification is important for a number of reasons:
- Preventing fraud and errors
- Complying with standards and regulations
- Maintaining good supplier relationships
Preventing fraud and errors
Did you know that 96% of companies were targeted by payment fraudsters last year?
While organizations believe they’re talking to the real suppliers, the conversations have actually been hijacked by fraudsters who’ll replace invoices with their own account details and make off with the money.
Ongoing vendor validation can completely eliminate the risk of payment fraud, and solutions like Trustpair exist to do just that. Our automated account validation for vendors works to check vendor legitimacy within seconds, across 190 countries worldwide. This includes checking the business address, contact name, bank account information, and risk factors through a number of online documents and databases.
Consistent management of vendor data should also prevent duplicate payments, spelling errors and missed payments.
Complying with standards and regulations
Anti-money laundering regulations like Ultimate Beneficial Ownership checks are highly relevant to enterprise-level companies, and compliance with these regulations is often enforced by law.
Plus, many companies have internal controls enforced by policies and rules. For example, Save the Children now enforces the ‘four eyes’ principle to include two separate individuals in the invoice approval process. This comes after they fell victim to a fake supplier, who made off with $1M in false invoices billed directly to the company for work that was completely made up.
By completing vendor verification, you’ll ensure that you’re following company protocols and can avoid negative repercussions.
Maintaining good supplier relationships
Maintaining good supplier relationships isn’t about casual chats with your vendor point of contact, it’s about the finance department paying on time, to the right account, consistently.
Vendor verification is associated with an organized and efficient month-end process and should help you keep suppliers happy. Thankfully, an up-to-date vendor management system should help your company reduce time-to-payment through the support of automation.
What are the consequences of poor vendor verification?
Poor vendor verification can lead to some very concerning consequences, including:
- Missing or duplicate payments: failing to keep track of vendors, invoices, and receipts may lead to errors in the payment process, or leave you in credit without knowing. Paying suppliers incorrectly could put a strain on vendor relationships
- Inactive vendors: without consistent and ongoing checks on vendors, you’ll be unaware if merchants go out of business or into liquidation, leading to potential inventory and stock problems as you’ll have to find an alternative supplier at the last minute, which may also increase costs
- Fraudulent vendors: working without vendor verification leaves you at risk of interacting with fraudsters, which leads to reputational damage, and even getting scammed yourself, creating potential financial problems
- Poor efficiency: without centralized databases and processes, teams may struggle with constant clarification and back-and-forth communications which can waste precious time and resources
- Missing documentation: this can lead to non-compliance penalties with regulators if found via auditors
What is a good vendor verification process?
We recommend the following process to verify your business vendors properly:
- Determine your business needs and search for vendors
- Compare potential vendors and select your choice
- Gather documentation for compliance with external regulations and internal policies (Know Your Supplier)
- Complete due diligence through risk assessments and checks such as international blacklist searches
- Validate bank account data
- Negotiate supplier contract
- Integrate the supplier into your systems, setting up secure communication channels
- Ongoing compliance checks and vendor monitoring
Thankfully, most of this process can be automated. This means that enterprise-level operators who work with thousands of vendors at once will be able to manage their vendors just as well as small businesses with only one or two suppliers.
How can effective vendor verification safeguard against fraud?
Effective vendor verification is a fraud prevention mechanism because it empowers you with real data, which is hard to argue with.
These days, many fraudsters are familiar with social engineering and manipulation techniques, which involve convincing your employees to provide access or make payments. One of the most famous examples involved both Google and Facebook falling for false invoices from an unverified and non-existent vendor, costing the businesses more than $100 million combined.
However effective vendor verification adds a mandatory secondary step into the payments process. If the data doesn’t match up or vendors are deemed suspicious, businesses can automatically block funds from leaving their account. This is incredibly useful since it provides an extra barrier even when team members do fall victim to payment fraudsters.
Prioritize vendor verification for best business practice
Vendor verification is the process of checking the details of your suppliers and without it, your business could fall victim to payment fraud. Verifying vendors involves gathering documentation, completing your due diligence, and performing a risk assessment. Finally, validating the bank account information is possible through a platform like Trustpair.
