Supply Chain Fraud: Pitfalls & Tips to Protect Your Business


Supply chain fraud has become an increasingly pervasive problem for North American companies.

It’s not hard to see why supply chain fraud is such a threat given the large global supply chains and vast numbers of transactions involved. According to KPMG’s 2022 Fraud Outlook Survey, 71% of the respondents said their companies have experienced fraud and more than half said their companies have paid regulatory fines or suffered financially due to unmitigated compliance risks.

In 2022, military contractor Envistacom LLC was indicted for a $7 million procurement fraud scheme. According to the indictment, the defendants and others conspired by preparing and procuring ‘competitive quotes’ from other companies, which were fraudulent quotes that were intentionally higher than the proposal prices and/or price quotes submitted by Envistacom.

The maximum penalty for conspiracy to defraud the United States is five years in prison and a fine of $250,000. The maximum penalty for major fraud is 10 years and a fine of $1 million, or, if the gross loss to the government or the gross gain to a defendant is $500,000 or greater, the fine is $5 million.

This example highlights the problem of supply chain fraud and the negative ripple effects that are felt on multiple levels. It’s a stark reminder that as a manufacturer, you need to be prepared to identify and prevent supply chain fraud.

According to our new study, ‘The Murky Waters of Overseas Manufacturing,’ 4 in 10 manufacturers are concerned about being ripped off by someone pretending to be a director from a legitimate company or sending money to a fake bank account. We aren’t trying to scare you with this information. The fact is that supply chain fraud happens and can lead to major financial losses, including government fines, legal fees and more. We can’t help but wonder if this fear of supply chain fraud comes from their own experience with international suppliers.

The good news is there’s plenty you can do to protect your business from supply chain fraud. We’ll dig into the different types of supply chain fraud that you should look out for and share practical tips so you can prevent unnecessary financial losses and compliance violations. 

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Product theft is one of the most common types of supply chain fraud. It brings to mind the cliche of a gang of robbers wearing black ski masks, stealing supplies from a truck. And cargo theft has become a major problem for manufacturers in recent years. In 2022, $223 million worth of goods were stolen across North America through cargo theft with household goods and electronics being the two most popular commodities. 

Then there’s the problem of theft happening inside a company. Employee fraud costs businesses 5% of their annual revenue. In 2020 alone, the average loss per case was $1,509,000. This might come from various departments, such as finance creating fake documents, or people in logistics taking goods straight from the production line. It may even be a two-person job, with an employee bringing in a partner from the outside.

Supply chain fraud
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Lookalike and director scams

This type of fraud involves scammers copying the details of well-known companies or posing as the director of an organization you work with regularly. They may pick a name that’s very close to an existing supplier and then invoice you for money to be sent to a fake bank account.

Another variant of this is setting up a fake website with a domain name that’s similar to the name of a legitimate company. Scammers are becoming increasingly sophisticated every year and they may ask you to pay through a ‘secure’ money platform that mimics all the capabilities of Apple or Google Pay as well.

Business scam
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Payment fraud

With so much physical and digital paperwork in a supply chain, people will inevitably try to take advantage. This has given rise to several types of payment scams, including authorized push payments, billing schemes, check payments, expense and Automated Clearing House (ACH) fraud. 

For an example of what this kind of fraud looks like, there’s a story about four brothers who defrauded Amazon for $32 million. The brothers took purchase orders from Amazon to supply various goods but then shipped, invoiced and received payment for products that Amazon hadn’t agreed to buy. 

Invoice fraud and any other kind of payment scam shouldn’t be taken lightly. They can cause millions of dollars in lost revenue and damage your reputation for not detecting the fraud quickly enough. 

Payment fraud
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Bribery and kickbacks

When we talk about bribery and kickbacks, it’s not just about a few individuals handing over discreet envelopes full of money. It’s much more sophisticated these days. For example, a director of a clothing manufacturer could offer a bribe to a foreign official to win a contract or enter a new market.

As such, we’ve seen legislation like the U.S. Foreign Corrupt Practices Act of 1977 (FCPA). The legislation prohibits U.S. citizens and companies from bribing foreign officials to assist in obtaining or retaining business. This can apply to prohibited conduct anywhere in the world and extends to publicly traded companies and their officers, directors, employees, stockholders and agents.

A recent case involved dietary supplement company Herbalife Nutrition paying $123 million in bribery charges. The organization pled guilty to bribing Chinese officials in media and government outlets to boost business in China. Plus, a further $56 million had to be paid in criminal fines and Herbalife agreed to return $67 million in ill-gotten profits. 

Combatting all these types of fraud requires a combination of factors. So, supplier due diligence should be at the heart of your strategy. So, let’s look at some tactics to keep in your tool kit.

Bribing suppliers
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Tip 1: Never rush to decisions

“If you want to determine the nature of anything, entrust it to time: when the sea is stormy, you can see nothing clearly.” This quote from the philosopher Seneca is a reminder that making snap decisions isn’t advised within your supply chain.

Don’t get us wrong. We understand there will be times when you need to find a supplier quickly. But your decision-making should always come from a place of clear thought. That means vetting a supplier before you choose to work with them.

Here are some tips to vet your international suppliers:

  • Run an international credit check to see a supplier’s financial history. Signs of cash flow and legal troubles can include a low credit score, a high percentage of past due payments, a high days beyond terms number and dozens of legal filings. All this data indicates deeper problems that go beyond what a supplier portrays in their branding and communications with you.
  • Get references. If you have a trusted network, ask around. Have they ever heard of the company? Do they know anyone on the team who you could talk with? Have they experienced issues when working with the supplier in the past that you should be aware of?
  • Confirm that the company exists and the directors are who they say they are. Search online sanction lists to check for violations of bribery, corruption, money laundering, forced labor and slave labor. 
  • Be aware of all the socioeconomic policies of the country that you’re doing business in. Make sure there’s evidence of the supplier adhering to those guidelines by consulting the right directories, government bodies, etc.
Verifying supplier
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Tip 2: Keep your suppliers and partners on their toes

To quote another philosopher Epictetus: “The key is to keep company only with people who uplift you, whose presence calls forth your best.” In the context of supply chain fraud prevention, this means holding your suppliers and partners to the same rigorous standards that you hold yourself accountable for. They need to be aware of any gaps in their fraud prevention systems. If they aren’t aware, it’s worth reminding them because their (and your) products and revenue could be in jeopardy. 

Scheduling audit appointments to check all fraud prevention processes is one way to make your suppliers accountable. The same attitude applies to foreign suppliers. If you can’t do an in-person audit, set up a video call and have them demonstrate the quality of all their products and their processes. 

But you shouldn’t always schedule your audits of your suppliers. A surprise audit will give you an authentic view of a supplier’s day-to-day operations – they can’t hide things because they don’t know you’re coming. 

Factory audits
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Tip 3: Create a culture of fraud prevention

Developing fraud protection policies and documents is one thing. Implementing them is another. You should embed that culture across all aspects of your business, getting senior leaders and new staff involved.

Here are some ideas for you to create a culture of fraud prevention in your supply chain:

  • Hire security staff for your warehouses and teach them how to look for signs of employee theft. Have items gone missing at certain times of day? Are certain employees refusing to take their annual leave days? Is merchandise being left in odd places?
  • Invest in asset and inventory management technology and run sessions on how to use these tools. These tools can keep track of barcodes, the correct number of items, where products are going and how they are being used within your supply chains. 
  • Automate as many of your processes as possible and divide duties between specific teams. When no single person can oversee a transaction or inventory control, this minimizes the risk of theft and fraud. 
  • Conduct regular workshops on fraud tactics. This will help teams spot fake websites, fraudulent invoices, phishing emails and more. 
Fraud training

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