Watch Out for These 4 Vendor Fraud Red Flags

To guard your business against fraud, it is essential to be aware of risks coming from outside your organization, including your vendors. Understanding vendor fraud warning signs could be the first step in protecting your business from fraud and other threats.

A recent crime and fraud survey found that nearly half of 5,000 respondents had experienced at least one fraud, with an average of six per company. In addition, there was roughly an even split between frauds committed by external and internal perpetrators, with the remainder being collusion between the two.

Your purchasing department likely processes a large volume of transactions every month, making it possible for vendor fraud to slip through the cracks. Today we’ll go over four vendor fraud red flags that you should be aware of:

1. Phony vendors
2. Real vendors, phony invoices
3. Undefined retainers
4. Missing purchase orders

1. Phony Vendors

One of the most common types of vendor fraud schemes involves phony vendors. This happens when someone creates a fictitious vendor profile in your accounting system and sets up payments that go into the perpetrator’s personal account instead. Sometimes, fraudulent vendors use a legitimate vendor’s name, but account details don’t match up.

In Vendor Email Compromise (VEC), a cybercriminal takes over a recognized vendor’s legitimate email account to fool your company into making payment information changes that ultimately benefit the criminal.

Warning signs of phony vendors include duplicated invoices from legitimate vendors with different addresses, like a post office box or an employee’s home address.

2. Real Vendors, Phony Invoices

A legitimate vendor might submit fake invoices, while a colluding employee approves the invoices and deposits payments into their personal account or splits duplicate payments with their partner in crime. Because the vendor has already established a trusted relationship with your organization, your purchasing department is much less likely to question these invoices, particularly if the colluding employee oversees that account.

Some vendor fraud warning signs include connections between your purchasing department and suppliers. For example, is one of your employees related to or somehow associated with someone who works for your supplier? You should ensure that this employee doesn’t oversee any invoices or other purchasing decisions involving that vendor to be extra careful.

Below are some specific ways that this type of vendor fraud might happen.

Duplicate Invoices

If one of your employees is actively colluding with a vendor to commit fraud, they might duplicate legitimate invoices to seem less suspicious. It can be easy for your purchasing department to write this off as an accounting error if they discover duplicate payments. This reduces the risk of being caught for both the vendor and the colluding employee.

Overcharged Invoices

A vendor might offer kickbacks to your employees as a reward for a new contract. The employee could receive the additional payment as promised, with no idea that those funds came from their own company. However, to cover the cost of the kickback, the vendor usually charges higher prices for some goods or services on their next invoice.

Other red flags include vendors who consistently win bids with no clear competitive advantage over other suppliers, or if the cost of a product or service changes after the supplier gets the contract.

False Invoices

Sometimes vendor fraud involves false invoices from legitimate vendors colluding with one of your employees to carry out a scheme. These invoices might look very real, making it difficult to identify them at first.

Still, some red flags include:

• Multiple payments to a vendor for the same or similar amounts
• Invoices with identical or consecutive numbers
• Photocopied invoices
• A lack of supporting documentation

Sometimes false invoices total up to just under the amount that requires approval for payment to avoid detection. Even dollar amounts (e.g., $100.00) are common vendor fraud red flags, as it is unusual to see even amounts after adding taxes and other fees to an invoice.

3. Undefined Retainers

During a quarterly review of your financials, you might discover that you’re paying a monthly retainer for “consulting services” or other vague charges to a vendor. If your organization does not regularly retain any vendors or suppliers, this could be a vendor fraud warning sign.

However, if you pay retainers to some of your vendors, it is essential to ensure these invoices are legitimate. All retainer invoices should have a clear purpose, outline the services provided, and undergo regular review to ensure these services are occurring to combat vendor fraud effectively.

4. Missing Purchase Orders

A vendor might try to trick your purchasing department into paying an invoice by sending you goods or services you did not order. Legitimate invoices should include a corresponding purchase order from your organization, which proves that your business intended to pay for goods or services from that vendor.

According to the Federal Trade Commission (FTC), if you receive merchandise that you did not order, you are not required to return these items or pay any invoices for them. In addition, it is illegal for a vendor or supplier to send you unsolicited merchandise and then demand payment afterward.

In this case, vendor fraud red flags include:

• Unexpected web domain renewals
• Fake regulatory compliance charges
• Phony membership dues to associations you don’t belong to

Protect Against Vendor Fraud With Armorblox

Protecting your organization from fraud can be challenging, so having the right tools and processes can make a huge difference in preserving your reputation and minimizing the financial impact. Armorblox provides deep insights into your organization’s vendor relationships, it bolsters your security posture by using AI and ML to analyze all email communications with the suppliers.

To learn more about how Armorblox can help you prevent vendor fraud, take a 5-minute product tour below.