How To Stay Away From Vendor Scams
Vendor fraud can be defined in two significant ways. One is where a vendor or beneficiary information is fake or falsified, and a corporate unknowingly pays the party. The second one is when a legitimate vendor manipulates their goods or prices delivered unknowingly. Without proper prevention strategies put in place, vendor fraud can be pretty hard to detect and costly.
Vendor fraud typically occurs when internal employees are involved in changing recipients’ information to an external entity or their own. One employee with the proper approval status can do a lot of damage to your existing relationships with clients, finances, and reputation without adequate prevention strategies, even with a vendor agreement.
Hence, companies should begin to put measures in place for necessary workflows and tools to get ahead of this problem. This article looks at ten tips for vendor fraud prevention that you can implement in your company.
Vendor Fraud Examples
Before we jump to the prevention tips, let us look at the types of vendor fraud there is:
- Fraudulent payments. In this vendor fraud scheme, the fraudster and employee falsify information by manipulating vendors’ existing account information or creating fictitious vendor information.
- Market price fixing. This type of fraud is when vendors cooperate to change their prices, making them seem competitive. Therefore, your company pays a premium price regardless of which vendor they choose. Even though this vendor fraud may not include an internal employee, they can provide pricing and budgeting to fraudsters to help.
- Check alterations. This involves creating unauthorized checks or altering existing checks. In this case, an employee obtains checks for payments to vendors, changes the beneficiary accounts, forges the vendor’s signature, and deposits the funds to an account they choose.
- Over-billing. A vendor inflates prices in invoices by either adding goods or services sent to your company that are unnoticed, especially when dealing with large quantities.
- Bribery and kickbacks. This type of fraud will occur when your employee participates in a bribery scheme and accepts or asks for money from a vendor in exchange for a favor or advantage.
Vendor Fraud Prevention Tips
1. Conduct Background Checks On New Employees
Thorough background checks on your potential employees will help you identify any signs of fraudulent behavior with their past employers. This will help determine which employees are worth hiring and which ones to stay away from. Check out this USAID fraud prevention handbook for more on this.
2. Create Block Lists That Filter Vendors
Having approval lists helps visualize and segment high-risk vendors to require additional approval before clearance or blockage. With such lists in place, you can keep track of all your vendors and view any changes. This way, you can request audit trails for such changes.
3. Centralized Vendor Database
A centralized vendor database allows you to set preferences and manage all your beneficiaries. You can have a verification tool with a dashboard to manage the beneficiaries, put pre-defined automation rules in place, and make changes.
4. Manage Historic Purchase
Screen historical purchase orders made from past vendors that are still open. You can also establish automatic closure for such charges within 30, 60, or 90 days. You can also conduct random and frequent audits on your vendor files.
5. Multi-step Approval
Integrate your company with a two-step approval. This will ensure that any payment required is passed through two sets of eyes before it’s approved. This will help ensure that a single employee won’t facilitate fraud by themselves since there is a second participant involved. This step alone is enough to deter internal fraud. Ensure that the check preparer is different from the check signer. You can also ensure that employee duties in the procurement department are rotated frequently.
6. Compare Data
Compare your vendor addresses with those of your employees. If you find any overlapping data, your employee may be trying to funnel funds to their personal accounts. To counter this, you can use a detection tool to analyze and monitor vendors’ account details.
7. Detect Patterns
Patterns such as high-risk countries and addresses, small amount invoices, consecutive invoice number patterns, and private addresses may be indications of potential fraud. Automation tools and machine learning help detect such patterns and attributes, providing transparency and allowing you to act accordingly.
8. Conduct Diligence When Setting Up Vendors
When onboarding new vendors to your company, due diligence is critical. You can do so by ensuring you verify:
- Business name of the vendor
- Their Tax Identification Number (TIN)
- Phone number
- PO box and street address
- Bank account details
- Their contact person
9. Fraud awareness training
Awareness training for your employees can result in lower losses and a shorter duration for prospective fraudulent activities. Institutional-wide awareness is critical because it may turn your managers and employees into fraud detectors. Taking advantage of all those ears and eyes may turn into excellent results. In fact, according to the ACFE 2020 Report to the Nations, most tips come from employees. You can even set up a confidential hotline where employees feel safe to report fraudulent activities within your company.
10. Fraud Risk Assessment
Lastly, have someone in your company who looks at fraud issues regularly conduct risk assessment within the company annually or biannually. A periodic risk assessment will help you understand your company’s fraud risk areas, showing you where to focus your efforts.
With these ten fraud prevention tips, your company should be able to mitigate the risk that various companies are experiencing. However, fraudsters are creative with their schemes, and detecting and preventing vendor fraud schemes is a never-ending task.
When you utilize a centralized database, put in place vendor screening software, screen vendor information periodically, and integrate multiple levels of clearance with payments. In addition, conduct fraud awareness training within your company for your employees; you can ensure that your recipients are not fraudulent.
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How To Report Scammers
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How To Protect Yourself More
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