What is supply chain fraud?
Supply chain fraud encompasses a range of practices from bribery and bid rigging to fraudulent billing. A 2018 report from the Association of Certified Fraud Examiners (ACFE) suggested that more than $7 billion is lost globally due to fraud.
With their extensive supplier networks, vast numbers of transactions and global operations, today's organizations are increasingly vulnerable to supply chain fraud.
Common types of fraud include:
- corruption and bribery,
- bid rigging,
- counterfeit goods,
- fraudulent billing,
- misappropriation of assets and
- cybercrime attacks on a company's suppliers and vendors to access data or disrupt the supply chain.
What are the risks to your business?
- Financial losses
- Higher insurance costs
- Reputation damage
- Investigation and prosecution costs
How to defend your business against supply chain fraud
- Conduct due diligence on third-party suppliers and vendors, including confirming their financial stability, compliance with anti-bribery legislation and their policies on the use of sub-contractors.
- Ensure proper oversight is in place for employees who are responsible for vendor maintenance, invoice processing and payments. Where possible, segregate these duties.
- Implement an ongoing risk assessment review to determine if your existing controls and processes are effective and identify potential vulnerabilities. Weak internal controls were responsible for nearly half of all frauds in 2017.
- Invest in training initiatives to make sure employees are aware of risks and able to identify fraudulent behaviour. A whistleblower program allows employees to anonymously report suspicions of fraud or inappropriate behaviour – this is important as tips are the most common way that fraud is detected.
- Commit to monitoring your suppliers – both through in-person visits and reviews of transactions. Consider including an audit clause, enabling you to audit suppliers and vendors for their compliance with your policies and procedures. The ACFE report found that "data monitoring and analysis and surprise audits were correlated with the largest reductions in fraud loss and duration."
- Employ your IT department to use data analysis to detect anomalies, such as sudden significant increases in payments to (or transactions with) a vendor or other high-risk transactions.