Tips for identifying and preventing vendor fraud

Tips for identifying and preventing vendor fraud

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Fraud can come from anywhere—including your company's suppliers. Vendor fraud can cost your business thousands, in addition to destabilizing your supply chain. The good news is that now that businesses are taking steps to mitigate fraud, rates dropped by 22.6% in 2022.

What can your business do to protect against vendor fraud? While exact processes can vary by region, you can start by learning more about your risks, then take steps to prevent fraud and keep your business running smoothly.

What is vendor fraud?

Vendor fraud (or "procurement fraud") refers to fraud committed by a vendor or supplier.

This is typically done by manipulating the price of goods or services or altering an invoice to pressure or coerce another company into making improper payments. Vendor fraud can also be used to manipulate a business into revealing sensitive data or customer information.

The average U.S. company loses $300,000 each year due to fraudulent invoices. That's why it's essential to take proactive steps to prevent and mitigate this type of fraud before it happens.

Examples of vendor fraud

How does vendor fraud work? Vendor fraud schemes come in various forms, though they all relate to the procurement process. Here are some of the most common types of vendor fraud schemes.

Altering invoices

The simplest form of vendor fraud is altering invoices.

Here, a vendor deliberately alters the price of goods or services on the invoice itself. The vendor may inflate the price of goods or services it provided or charge for items you never received.

Fictitious vendor payments

In this scheme, a third-party agent (either an individual or group of individuals) will create a fictitious company, often called a "shell company."

This shell company will then create fraudulent invoices and submit them to your company, where you or one of your internal employees will push the invoice through the payment process—rendering payment to a company that doesn't exist for goods or services you never received.

Vendor impersonation

Vendor impersonation aims to mislead companies, organizations, and government agencies into making payments to fraudulent accounts via seemingly legitimate invoices. They typically appear as email phishing scams, and fraudsters are often very skilled in impersonating vendors, so it’s essential to be vigilant.

In these cases, scammers usually impersonate smaller vendors that work with larger companies. Scammers rely on invoice payment approvers not noticing minor errors in the email or vendor website domain name. Once invoice payments are sent and clear to these fraudulent accounts, finding the imposter can be virtually impossible.

Check tampering

Check tampering—or simply "check fraud"—is a common vendor fraud scheme since it's so simple.

To pull it off, one of your employees steals company checks usually used for vendor payments. Once they have the checks, they either (1) change the beneficiary or (2) forge a vendor's signature to send funds into their own account.

Price fixing and bid rigging

Price fixing occurs when two or more vendors work together to raise their prices in a combined effort. Bid rigging is similar: Multiple vendors conspire to raise prices to secure a contract.

These schemes cause vendor prices to appear competitive even when your company is being overcharged for goods and services. The Federal Trade Commission (FTC) prohibits price fixing, but it can still occur in highly competitive markets or industries.

How do you identify vendor fraud?

What are some of the most common vendor fraud red flags? The following signs strongly indicate that you could be on the receiving end of a supplier fraud scheme:

  • The vendor's billing and mailing addresses are from different parts of the world.
  • The vendor's address is only a P.O. box.
  • The vendor lacks a tax identification number.
  • Invoice numbers don't follow a standard, sequential numbering convention.
  • Multiple invoices appear from the same vendor and don't follow the usual payment process.
  • There are sudden changes in vendor addresses or other contact information.
  • An unusual number of mistakes occur during your payment process.
  • Vendors contact you with a sense of urgency about a late or missed payment.

Remember that some forms of vendor fraud are independent acts committed by the vendor's employees and aren't necessarily a reflection of the company itself.

If you suspect you're the target of vendor fraud, contact your existing vendor to determine the issue, then proceed accordingly.

Am I at risk for vendor fraud?

No business in America is immune to this type of crime. In fact, the more transactions your company conducts, the harder it is to notice fraudulent activity or a fake vendor account.

The risk is also high for small businesses that rely on only a few internal employees to handle their financial processes. Without internal controls to prevent vendor fraud, your business could be at risk.

How do you prevent vendor fraud?

Preventing vendor fraud can be challenging regardless of your accounting process. But the following vendor fraud detection tips can protect you from fake vendors and mitigate your company's fraud risks.

Employ vendor management software

While no software system will be foolproof, vendor management software provides a centralized hub for conducting regular transactions. As a result, you'll have total visibility into your company's finances, making it even easier to identify fraudulent activity and manage your vendor data.

Screen vendors carefully

Vendor fraud prevention starts with a thorough onboarding process. Perform due diligence and evaluate new vendors carefully. Your vendor verification process should include questions like:

  • Does the vendor have a verifiable taxpayer identification number?
  • Does the business name match the taxpayer ID?
  • What is the vendor's prior track record?

When possible, create a dual review process to be better equipped to review vendor information and establish a positive working relationship with a legitimate vendor. You can also use background checks to verify a vendor's information before entering a business contract.

Create checks and balances in your approval workflow

The criminals who devise billing schemes are hoping that you never notice that you're paying the same vendor twice or that you're paying a fake company for goods or services you didn't receive. But you can put internal controls in place to catch these issues.

For instance, your approval process can involve checking purchase orders (POs) against the bill of lading or invoices to protect you from inaccurate (or fictitious) invoices.

Conduct anti-fraud training with your staff

Many small and medium-sized businesses rely on employees to handle their finances or accounts payable (AP) processes. Teaching your staff to perform due diligence on vendor transactions and to watch for the warning signs of vendor fraud can be an important safeguard against future schemes.

This training can augment your electronic processes. By centralizing your vendor and payment data, your employees can provide another layer of protection against various types of vendor fraud.

Rely on multiple employees

Some forms of vendor fraud occur when one of your own employees diverts funds to external bank accounts. You might rotate employee duties regularly so that you have multiple sets of eyes monitoring your vendor payments and your company bank accounts.

This practice prevents fraud by limiting the opportunity for a disgruntled employee to take unscrupulous actions.

Automate your accounts payable processes

It's easier than ever to automate your AP processes. Electronic vendor payment deposits are fast and easy, and a three-way matching solution can also help combat vendor fraud.

Additionally, an automated AP system will help you retain vendor information, payment records, and other data so that you are fully equipped to identify fraud schemes as they occur and prevent your business from becoming the next victim.

Audit your vendors regularly

Digitizing and centralizing your vendor master files will make ensuring you're conducting business with legitimate vendors easier. Once a year, run through the vendor information and note any changes or red flags that might indicate vendor fraud.

For example, if vendors' payment addresses have changed to P.O. boxes or no longer match the original addresses, verify this data to ensure you're not dealing with a fake vendor or an employee committing fraud.

Set up a fraud hotline

Make your workplace safe for whistleblowers. Set up an anonymous hotline where employees can notify you about suspicious activity. The great thing about this approach is that it works even if no one ever picks up the phone. The mere suggestion of surveillance deters many from attempting to defraud your company.

What to do if you're the victim of vendor fraud

Billing schemes can cost your company thousands, so it's crucial to develop a system to prevent fraud from happening in your business. But it won't always be possible to prevent or avoid vendor fraud altogether.

What to do if you notice suspicious activity

Check your company bank statements regularly. Many business owners make regular payments to the same vendor to purchase supplies or inventory. If the price has changed drastically, it could be that you've made false payments to the vendor or you've been the victim of fraud.

The first thing you should do is contact the vendor directly. There may be other reasons for the discrepancy — perhaps you forgot about a pricing change, or an employee simply made an error. A legitimate vendor will be willing to work with you to resolve the issue and maintain a healthy working relationship.

If you can't contact the actual vendor, you could be dealing with a fake vendor or some other type of scam. Make sure to pause any future payments to that vendor, then take the next steps.

What to do if you experience internal vendor fraud

What do you do if you believe that one of your own employees is committing vendor fraud? Remember, this type of fraud happens when an employee finds a way to divert company funds to their personal accounts. Make sure to do the following:

  • Collect all available evidence.
  • Identify possible witnesses.
  • Do not allow the employee further access to your company information.
  • Consult an attorney about your next steps.

If you have documented evidence of fraud, you have grounds to terminate the employee. You might also press charges against the perpetrator. Your legal counsel will advise you on the best and most profitable course of action.

What to do if you experience vendor fraud from an outside source

What if you believe you're the victim of a fake vendor or some other type of fraud? Again, gather whatever documentation you have, then contact the Federal Trade Commission as well as your state consumer protection office.

How AP automation keeps you safe

Fraud prevention is serious business. That’s why BILL provides state-of-the-art tools that assist with AP automation and more. BILL offers a three-way matching solution that ensures that the invoice, purchase order, and goods receipt match up––and only then does the vendor receive payment.

Additionally, BILL's security solutions are compliant with both HIPAA and the SOC 2 compliance standard of the American Institute of Certified Public Accountants (AICPA).

With these advanced tools, your business will be faster and more agile—all while staying safe from vendor fraud thanks to two- and three-way invoice matching.

To learn more, visit BILL's information page for security software, and learn how to protect your business by minimizing risk.

The information provided on this page does not, and is not intended to constitute legal or financial advice and is for general informational purposes only. The content is provided "as-is"; no representations are made that the content is error free.