Procurement fraud is the act of deceiving a company during the purchasing process to gain financial advantage. It can involve false invoices, inflated contracts, or fake suppliers, which are all techniques designed to divert funds or secure unfair benefits.
Procurement teams manage thousands of supplier relationships, making them a prime target for fraudsters. They can slip through when manual checks are involved, which is where solutions like Trustpair come in. By securing every step of the process and automating supplier verification, businesses can protect their finances and vendor relationships.
Procurement Fraud key takeaways:
- Procurement fraud is the act of deceiving a company during the purchasing process
- Typically, procurement fraud is carried out by real vendors inflating bids, or fake vendors sending false invoices
- Procurement fraud happens when an organisation’s controls are weak, when their IT systems are not secure, and when internal staff aren’t expecting the attacks
- Protect against it with strong internal controls, good internal training and thorough auditing
What is procurement fraud?
Procurement fraud refers to deceit within the goods-purchasing process. It can occur at any stage of the process, from inflated finance figures – bid rigging – submitted during the Request For Proposal (RFP), or false invoice submission after goods were not received.
Procurement fraud can be performed by internal or external perpetrators, achieved through the misuse of access, by duping those who have the right credentials, or by hard-hacking techniques.
Thanks to the wide range of attack types, buyers, perpetrators, and opportunities, most companies are more vulnerable to procurement fraud than they realise.
What are the main types of procurement fraud?
There two common procurement fraud schemes types:
- Inflated bids or false proposals
- Fake invoicing for phantom goods
Inflated bids or false proposals
During the contract negotiation stage, suppliers may submit inflated bids or falsified figures to secure higher profits. Known as bid rigging, this often happens when cost estimates are exaggerated, or technical specifications are manipulated to justify raised prices.
In 2023, three US military contractors were sentenced in a bidding process fraud scheme relating to $7 million in government contracts. Each of the personnel abused their position as a favored contractor, preparing sham quotes and procurement documents. They were convicted of conspiring to defraud the United States and committing major fraud.
In some cases, collusion with internal employees and vendors happens to remove competition, leading to an unfair advantage. Internal staff could approve price fixing or bid rigging in exchange for personal gain. This corruption is known as internal fraud, and can sometimes lead to the selection of an inferior product.
Kickbacks due to personal relationships, for example, or even the personal use of products meant for the company are both examples of internal fraud. Because the work orders process often involves complex documentation, these manipulations can be difficult to detect without thorough due diligence and price benchmarking.
Fake invoicing for phantom goods
After contracts are committed, fraud can continue through false or duplicate invoicing. This occurs when a supplier submits an invoice for products or services never intended to be delivered, or when the invoice amount exceeds the agreed-upon price. Sometimes, unauthorized product substitution can occur, with the vendor swapping out the real product for one of inferior quality, at the same higher prices.
Sometimes, ‘ghost vendors’, fictitious companies created by insiders, are used to issue invoices to ‘sell’ completely nonexistent goods. While they meet the contract specifications on paper, nothing is ever delivered. The well-known example of this is at Google and Facebook in the mid 2010s, when one man was paid for invoices worth over $100 million, without actually supplying any services.
This form of fraud directly impacts a company’s finances, and highlights the importance of having two or three-way invoice matching in place for corruption and fraud prevention.
How does fraud happen in the procurement process?
Procurement schemes tend to happen in business due to three key reasons:
- Poor security systems
- Weak internal controls
- Colleagues that are duped by impersonators
Poor security systems
Outdated or poorly configured security systems can leave businesses exposed to manipulation.
When access controls are weak, both employees and external cyberattackers can create, alter, or delete supplier information without proper authorisation. What’s worse, in some cases, the procurement process is not integrated with financial systems at all. This makes it easy for fraudulent entries or duplicate payments to go unnoticed. Poor performance in this area puts the whole business at risk.
What do poor security systems look like?
- Lack of encryption or multi-factor authentication
- Lack of regular auditing
- Lack of spam filters on email systems
Weak internal controls
Internal control mechanisms are the backbone of procurement integrity, because they help ensure that roles and responsibilities are being met, and by the right people. So without strong internal controls, organisations are left vulnerable to those intentionally trying to scam.
Here are some examples of weak internal controls:
- Non-existent or poor approval hierarchies: allows a single, rogue employee to request, authorise and confirm payments without any form of oversight. Even in submitting their own expenses! This absence of essential split of duties in this position can be harmful, whether on behalf of themself or an external fraudster.
- Lack of invoice verification process: without verifying the information on invoices, firms targeted by false invoice procurement fraudsters will end up paying unauthorised, inflated or even completely false invoices.
- Lack of access controls: when requiring credentials, many firms perform two-factor authentication (2FA) in order to thwart fraudulent attackers. Without these trade and other access controls, a victim may inadvertently let unauthorized individuals into their systems.
Fraudsters often exploit these gaps gradually, testing boundaries before escalating their activities. Businesses that can enforce consistent checks are most likely to catch these threats early.
Colleagues duped by impersonators
Even the best systems can be compromised by social engineering. The last line of defence is often your employees and colleagues, and so without proper training, they too can inadvertently let procurement fraud happen.
Fraudsters often impersonate legitimate suppliers, senior executives, or procurement partners to trick employees into making payments or sharing sensitive data. A well-crafted email or urgent phone call can be enough to convince a colleague to override normal procedures ‘just this once’.
These scams, often involving phishing (through email), or smishing (SMS phishing) exploit human trust rather than technical weakness. Without regular fraud-awareness training and clear verification protocols, employees may unknowingly become enablers of procurement fraud.
How to detect and prevent procurement fraud?
Detecting and preventing procurement fraud corruption requires a balance of robust systems, vigilant processes, and an informed workforce. Since fraudsters exploit both technological and human weaknesses, businesses need a layered approach that combines data-driven oversight with important governance and staff awareness.
Strengthen internal controls and approval processes
The first line of defence is ensuring that no single employee has end-to-end control of the procurement cycle. Segregation of duties, also known as the four eyes principle, should be built into every stage.
From supplier selection to payment making, layers of approvals and oversight can reduce the risk of manipulation, or internal fraud. Companies can perform the following approvals to strengthen their procurement fraud detection and prevention:
- Dual sign-off for large purchases about a pre-decided value threshold
- Independent invoice verification
- Regular purchase order reconciliation with goods received and receipts
- Random spot checks and periodic internal audits
Identifying inconsistencies early and creating a transparent culture is likely to help discourage those with the intention to defraud.
Conduct thorough supplier due diligence
Before onboarding a new supplier, it’s in every company’s interest to verify their legitimacy. There are several ways to experience this, including:
- Thorough background checks
- Credit assessments
- Validation of business registration details (especially against financial accounts information, which is at the core of Trustpair’s services)
Being vigilant about red flags is key, because these must be investigated and addressed. Suspicious signals could include PO box addresses or ‘virtual’ addresses, bank accounts in unrelated countries, or overlapping account details with names that don’t match.
Here’s the thing: you can’t stop after an initial due diligence check. Suppliers that were legitimate at the start of the contract may change ownership or practices over time. Equally, there is a risk that fraudsters are successful in account takeover, contacting you from your genuine supplier’s accounts asking for payment or confidential information. Therefore, we recommend periodic reviews and re-verification to keep vendor lists clean.
Trustpair performs this automatically on an ongoing basis, so that your staff aren’t tangled up in the vendor database, attempting to manually verify the info. Before every payment is made, your financial accounts are locked until the third party’s details are verified. This helps secure your business, even if procurement fraudsters have been able to infiltrate.
Educate and empower employees
Fraud prevention can be a people issue. Employees across procurement, finance, and operations must be trained to recognise red flags such as fake invoices, urgent payment requests, or suppliers requesting changes to bank details.
Regular training sessions, phishing simulations, and clear reaction protocols can dramatically reduce the success rate of impersonation and social engineering scams. When employees feel confident questioning suspicious activity, they become an active line of defence rather than a point of vulnerability.
How can technology reduce procurement fraud risks?
The key to reducing procurement fraud risks is in implementing secure and integrated procurement systems. Modern platforms can provide powerful safeguards when configured currently, with role-based access controls, activity reporting and transaction-logging, for example.
But any procurement fraud investigation will reveal that the flow of information is key.
Firms must ensure their data is visible between procurement, finance and even stock systems to prevent the likes of duplicate or missed payments. Plus, this oversight makes it easier to detect anomalies such as random invoices, unapproved vendors, or sudden account changes. Automated alerts can flag unusual activity before it becomes a financial loss.
Vendor validation tools like Trustpair are integral to this process, working consistently to automatically validate accounts. We make account validation a native step in your vendor onboarding validation flow, effortlessly connecting cutting-edge native integrations and APIs. When your vendor data is always clean, it’s easy to spot suspicious activity.
Try out Trustpair’s vendor database monitoring to see the benefits of clean data.