6 Vendor Fraud Prevention Tips (Infographic)
Mitigate fraud to prevent risk and financial losses
In the post-digital age we currently live in, corporates are constantly at risk of fraud attempts from a multitude of sources and types. One topic we wanted to discuss is vendor fraud prevention. Firstly, what is vendor fraud?
Vendor fraud can be a type of payment scam in which a “vendor” or beneficiary’s information is falsified or fake and your corporate unknowingly pays that party. Vendor fraud can also be in the form of an actual legitimate vendor manipulating their pricing or goods delivered unknowingly.
This type of fraud can occur in many ways typically, an internal employee is involved in changing the recipient information to their own or to an external entity.
Without proper prevention strategies, one employee with the right approval status can do considerable damage to your finances, reputation, and existing relationships.
The Global Fraud and Risk Report, “Mapping the New Risk Landscape“, published by Kroll in tandem with Forrester Consulting in 2019 highlights the biggest risks that global corporations face.
The study involved 588 senior executives across the globe who have significant involvement in determining their organization’s risk management strategies.
Fraud by external parties (suppliers, vendors, business partnerships) was 28% globally, a 10% increase from last year.
(68%) of global companies feel fraud by an external party (suppliers, vendors, business partnerships) is a high or significant priority.
Additionally, according to the Global Banking Fraud Survey conducted by KPMG, released in May 2019:
Over half of the survey respondents stated fraud recoveries were less than 25% of fraud losses. This low rate demonstrates the importance of prediction and prevention efforts.
As we see vendor fraud growing as a prevalent threat to many corporations, companies should begin to consider implementing a tool and necessary workflows to get ahead of the problem.
Vendor fraud examples
False payments – In a payment scheme, the fraudster and employee can generate false payments to themselves by creating a fictitious vendor (shell company) or by manipulating the account of an existing vendor to reflect their information.
Check alterations – This involves the altering of existing checks or creating unauthorized checks. An employee obtains checks for payment to a vendor and changes the beneficiary or forges the vendor’s signature so those funds get deposited into an account of their choosing.
Over-billing – A vendor inflates invoices by adding additional goods or services to invoices sent to your company, oftentimes unnoticed when dealing with large quantities.
Market price fixing – This type of fraud involves vendors coordinating between each other to alter their prices to seem competitive, ensuring your company will pay a premium price regardless of which vendor is chosen. While this may not include an employee or internal source, they can provide budgeting and pricing information to fraudsters to help.
Vendor fraud prevention tips
Centralized vendor database
Use a centralized vendor database to manage all of your beneficiaries and set preferences. In tm5, our vendor verification tool includes a dashboard to manage all of your beneficiaries, make changes, institute predefined automation rules, and much more.
Create blacklists and whitelists to filter vendors
Having exemption and approval lists helps visualize and segment high-risk vendors to require additional approval or blockage if needed. With such lists, you can easily manage and view any changes and obtain audit trails of such changes.
Manage historic POs
Screen historic purchase orders from past vendors that may still be open. Establish automated inactivity closure for such accounts on 30-, 60-, and 90-day increments if you wish.
Integrate multi-level payment approvals so that all payments require two sets of eyes before being processed. This helps prevent a single employee being able to facilitate fraud by themselves. Oftentimes, this step alone is enough of a deterrent to such internal fraud because it requires a second participant.
Compare vendor information to employee records. Any overlapping data may indicate that an employee is attempting to funnel funds into their personal accounts. A detection tool that provides data monitoring and analysis averages a 60% drop in fraud losses, according to data from ACFE’s Report to the Nation.
Detect common fraud patterns and attributes. Characteristics like high-risk addresses and countries, consecutive invoice number patterns, small amount invoices, private addresses, etc. are all indications of potential fraud. Machine learning and automation tools can help detect such patterns and provide transparency that allows you to act accordingly.
With these 6 vendor fraud prevention tips, you should be able to mitigate the risk that many companies are experiencing. By utilizing a centralized database, screening vendor information periodically, and integrating multiple approval levels with payments, you can ensure your recipients are not fraudulent.
Here at BELLIN, our award-winning treasury management system has a newly integrated vendor verification tool that allows treasurers to create centralized directories of verified or unverified vendors, suppliers, and payees that help streamline approvals associated with payments.
Users have the option of manually investigating and approving payments, viewing vendor information at any time, and updating validation statuses.