Supply Chain Fraud: Pitfalls & Tips to Protect Your Business

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.

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. 

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.

“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.

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. 

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.