Despite technical advancements in fraud protection, vendor fraud remains a persistent challenge for merchants. It costs businesses more than just lost cash – it incurs legal fees and damages your reputation. That’s why it’s vital that your business becomes more vigilant.
On this page, you’ll learn what vendor fraud is, how it works, and how to identify and prevent vendor fraud schemes. We’ll also explain how Checkout.com can help your business thrive in the ever-changing world of payment fraud.
Vendor fraud describes fraudulent activity carried out by genuine or fake vendors that targets a business. It normally relates to someone tricking a company's accounts payable and payment processes for personal gain, using tactics like bribes, invoice manipulation or check tampering.
It can range from relatively straightforward attacks to highly sophisticated schemes, and may involve collaboration between external parties and employees, or even a collective effort from a group of employees within the target business.
Vendor fraud schemes can be broadly classified into three main categories:
Vendor fraud takes on many different forms because it refers to who’s done it rather than how it's done. The most common types of vendor fraud schemes include:
It’s worth noting that the Government Finance Officers Association (GFOA) in the US has published an electronic vendor fraud advisory to safeguard authorities from falling victim to electronic payment fraud, outlining how fraudsters employ fake documentation for electronic vendor payment deposits.
Smaller to medium-sized private companies, often referred to as "soft targets," tend to be at higher risk of falling victim to vendor fraud schemes. These businesses usually have less comprehensive internal controls or fraud analytics in place.
SMBs often heavily depend on a small number of employees to handle vendor transactions and payments, without implementing a careful separation of responsibilities. This situation creates a greater chance for a small group of individuals to manipulate payments and records without detection.
On the other hand, executing vendor fraud — be it digital, involving employee collusion, or aided by external scammers — becomes more challenging when businesses scale and put stronger anti-fraud measures in place.
It’s crucial to bear in mind that fraudsters continually evolve their tactics, which means orchestrating a complex fraud scheme against a large business remains a possibility.
Most vendor fraud schemes show specific characteristics. While meeting one of these criteria doesn't necessarily indicate vendor fraud, finding several in your business may warrant an investigation:
If you see suspicious activity by a known, trusted vendor, then take the time to investigate the discrepancy and work with the vendor to find a resolution.
In cases where fraud happens on a corporate card or other corporate account and can’t be resolved directly with the vendor, seek guidance from the card issuer or your bank for further steps.
When it comes to vendor fraud prevention, here are six best practices to follow:
Regular audits of your vendors serve as a powerful defense against significant financial losses resulting from fraudulent activities. Start with a thorough examination of vendor master files and go from there.
When done correctly, invoice matching is a potent tool in minimizing instances of vendor fraud. This method involves comparing vendor-submitted invoices with financial documents such as purchase orders, payment receipts, and inspection records. You can choose a one-to-one comparison or perform a comprehensive three-way match, as the situation demands.
To combat vendor fraud effectively, it's crucial to have a robust vendor management system in place. This system streamlines vendor risk management, significantly reducing the likelihood of fraud.
To fight vendor fraud, it's essential to avoid a scenario where a single employee is solely responsible for vetting vendor invoices. Instead, ensure that invoices undergo scrutiny from two or more employees across different departments and management levels.
If an employee has a personal connection to a vendor, it creates an opportunity for fraud. To counter this, it's important to routinely conduct background checks on employees in relation to your vendors, especially in cases where they're related or married.
Fraudulent schemes often need the cooperation of one or more employees to go undetected. Typically, employees in procurement and accounting are more susceptible to involvement in such schemes. To mitigate this risk, consider rotating your employees, potentially transferring them to different departments or even different branches.
Vendor fraud comes in various forms, ranging from low-profile cases of overbilling vendors to major cases of wire fraud that can incur up to 30 years in prison.
This means it's crucial for your business to get support from a comprehensive fraud detection toolkit that can adapt to the evolving world of payment fraud, rather than relying on one method.
That’s where Checkout.com comes in. With our Fraud Detection Pro solution, you’ll get anti-fraud protection that’s tailored to your specific risk profile. With features like machine learning, robust reporting and testing capabilities, you’ll have all the tools you need to protect your business and minimize false positives.
Contact our team today to learn more or visit our website to explore the details of Checkout.com's Fraud Detection Pro and how its powerful anti-fraud features can minimize the impact of fraud on your business.