3 Ways to Fight Fraud, Waste, and Abuse in the Supply Chain

Opportunities to suck money from the supply chain undetected abound. Fighting the losses means employing not just detectives but also data. Here’s how.


As companies rely on an increasingly global and complex network of business partners, the opportunities for fraud, waste, and abuse have multiplied – and nowhere are those risks more prevalent than in the supply chain.

The typical organization loses 5% of revenues each year to fraud, according to a 2014 report from the Association of Certified Fraud Examiners (ACFE).1  Applying that figure to the 2013 estimated gross world product, that’s a global loss of nearly US$3.7 trillion.2 A significant portion of that figure is leaked through the supply chain, likely one of the biggest sources of cash outflows for most companies, according to Mark Pearson, principal with Deloitte Financial Advisory Services and a certified fraud examiner.

Within a large corporation with international subsidiaries, joint venture partners, and thousands of suppliers, opportunities to suck money from the supply chain undetected abound (see The many flavors of supply chain fraud).

Just as costly are the reputational hits companies take when it’s discovered that their suppliers have abused workers or the environment. The U.S. Department of Labor’s 2013 list of goods produced by children or forced labor includes 134 different types of goods – from diamonds and iron to soccer balls and surgical instruments – sourced from 75 countries.3 A 2013 internal audit at Apple, for example, revealed that 106 children were employed at 11 factories that produced Apple products in the prior year and that more than 100 supplier facilities failed to properly dispose of hazardous waste.4

The many flavors of supply chain fraud

Supply chain fraud – whether perpetrated by suppliers, subcontractors, employees, or some combination of those – can take many forms. Among the most common are:

  • Falsified labor
  • Inflated bills or expense accounts
  • Bribery and corruption
  • Phantom vendor accounts or invoices
  • Bid rigging
  • Grey markets (counterfeit or knockoff  products)
  • Failure to meet specifications (resulting in substandard or dangerous goods)
  • Unauthorized disbursements

Three steps to recovering the money – and the safety

Despite the risks, a startlingly small percentage of companies are taking action to protect their supply chain. Just 43% said they intend to increase their partners’ and vendors’ due diligence over the next year, according to Kroll’s 2013/2014 Global Fraud Report, with 20% citing insufficient resources or budgets to fight fraud.10

There are few universal fraud, waste, and abuse patterns; those that exist are constantly changing. But companies today have the opportunity to use a growing arsenal of business and behavioral data and advanced analytics to fight back. Here are three steps companies can take not only to uncover more existing fraud but also to use that intelligence to prevent more fraud before it happens.



The life and death impact of supply chain fraud

Manufacturers and suppliers of food and drugs are under especially high pressure to prove that what they send off will reach the intended destination and will remain high quality. Lives literally depend on it. Yet the problems are only getting worse.

You can’t always watch what you eat

honeyIncidents of food fraud increased by 60% from 2010 to 2013, according to the U.S. Pharmacopeial Convention.5  Yet food ingredients can be difficult to monitor, especially when the food is coming from overseas.

Consider a high-value foodstuff such as honey. More than 60% of honey used in the United States is imported, making it particularly vulnerable to fraud. Fraudulent practices include diluting the honey, overfeeding the honey bees, using antibiotics without approval, and hiding the true country of origin, according to Food Protection Trends magazine.6  The magazine also cites a massive “honey laundering” scheme involving 11 individuals in 6 companies conspiring to illegally import more than US$40 million worth of Chinese-origin honey to skirt anti-dumping penalties that would have totaled nearly US$80million.7

Medication substitutes that kill
Healthcare fraud costs the United States billions of dollars a year, and the threat continues to rise, according to the U.S. Department of Justice (DOJ). The DOJ recovered a record-breaking US$4.3 billion worth of abuse in 2013, thanks in part to a new computer analytics system that detects and stops fraudulent Medicare billing.8

Yet even the highly regulated pharmaceutical and biotechnology sectors are using adulterated ingredients – whether they know it or not – as cost pressures have led them to source raw material supplies from cheaper, emerging market sources.

These decisions can have fatal results. For example, in 2008, anticoagulant heparin from Baxter International killed 81 people and seriously injured 785 more because the raw material processed from pigs’ intestines in China by a U.S. supplier was contaminated.9 

1. Start seeing evil

policemanWhen it comes to fraud, most companies take the “it can’t happen here” attitude. Fraud investigators like Pearson see potential for danger behind every new vendor, purchase, or deal. Most people don’t. “They’re high-fiving because they got the deal done,” Pearson says. “They think, ‘These are good people who wouldn’t do anything bad.’ It’s human nature to want to trust one another, and that’s especially true within the business context, but oftentimes we see that trust is misplaced.”

Even if that partner is on the up and up, there are downstream suppliers to consider as well. Vetting and monitoring up and down the chain to make sure companies are what they say they are, can deliver what they say they can, and do deliver what they said they would are critical.

Think like a detective

Supply chain leaders need to start thinking like supply chain detectives. Consider where the greatest temptation lies for suppliers and their suppliers. If you were a fraudster, how would you make the easiest or quickest buck? Would you focus on supplies that are bought at great scale? Think more critically about new and existing vendors, and develop custom processes to help evaluate the relative risk of all supplier relationships.

2. Look inside your own house

search houseJust as dangerous are internal sources of supply chain fraud and – most damaging – collusion between an employee and a supplier to deceive. Such partnerships help fraudsters evade independent checks and other controls, enabling them to steal larger amounts. The median loss from fraud committed by a single thief was US$80,000, according to ACFE.11  Costs increase along with the number of perpetrators involved. Those involving two thieves had a median loss of US$200,000; those involving three people had a median loss of US$355,000; and those with four or more had a median loss of more than US$500,000, according to ACFE.12

Most problems are discovered by accident

In 2013, United Technologies’ Pratt & Whitney unit uncovered a fraudulent product-testing scheme involving thousands of engine parts used in business jets purchased by airlines around the world, according to The Wall Street Journal (WSJ).13  Managers at a United Technologies unit in Israel allegedly altered or manipulated results to make it seem as though engine forgings met testing standards, WSJ reported. The misdoings were discovered only because of a tip from an employee in Israel.

Most fraud cases are reported by whistle-blowers or found by accident, not through any organized system or process. The average amount of time from the start of a fraud to its detection is 18 months, according to ACFE, with passive detection methods (for example, confession and external audit) taking longer to come to light, enabling related losses to grow.14

Build a culture to fight fraud

The most effective method to fight internal supply chain theft is to create a culture dedicated to fighting it. Here are a few ways to do it:

  • Make sure the board and C-level executives understand the critical nature of the supply chain and the risk of fraud throughout the procurement lifecycle.
  • Market the organization’s supply chain policies internally and among contractors.
  • Institute policies that prohibit conflicts of interest, and cross-check employee and supplier data to uncover potential conflicts.
  • Define the rules for accepting gifts from suppliers and insist that all gifts be documented.
  • Require two employees to sign off on any proposed changes to suppliers.
  • Watch for staff defections to suppliers, and pay close attention to suppliers that have recently poached an employee.

3. Build a smarter supply chain

light bulbHow do companies typically try to fight fraud today? They employ third parties to do on-site visits of their suppliers to, say, make sure that what’s in the crate being loaded into a container and onto a ship is actually what the company ordered. But such physical supply chain verification is a manual, human-driven process that takes time and money. Similarly, periodic audits of the supply chain for fraud – quarterly at best, annually at worst – are necessary but hardly sufficient.

Combine data and forensics

With the rise of Big Data and advanced analytics, companies can combine data mining and forensic accounting practices (the use of accounting skills to investigate fraud or embezzlement) to more proactively manage the risk of fraud, waste, and abuse among their suppliers. Enterprises today can create a smarter supply chain, one that is capable of automatically and remotely monitoring the supply chain in real time to uncover and prevent fraud.

A tremendous amount of data is generated about a company’s products, about who it sources from, and about who it does not source from. Over time, that data can help companies make better decisions about supplier selection and about management and employee hiring and monitoring.

Decide what data to gather and when

In fact, supply chain leaders should set up clear agreements with suppliers about what data should be provided and how often. Thanks to advanced data collection and analytical tools, companies can expand the scope of inquiry to a broader population of transactions rather that data samples.

Fraud investigators are getting smarter about fraud schemes, too. Companies can correlate data-disparate systems, and third-party data sources can provide greater visibility into the supply chain by looking for gaps in supplier performance, behavioral trends, missed deadlines, and other red flags. This data can create a fully transparent supply chain with a real-time fraud, waste, and abuse detection and prevention system. A smarter supply chain can enable more frequent audits so that companies aren’t left fighting old tactics while new ones have arisen in their place.

H&M and Walmart look deeper

In 2012, clothing retailer H&M came under fire when human rights groups said that its suppliers sourced cotton from Uzbekistan, which uses child labor for harvesting.15  Today, H&M is delving deeper into its supply chain to monitor labor practices, reduce environmental impact, and prevent future waste and abuse.16

Walmart recently said it would increase its focus on food safety in China to boost profits at its more than 400 stores there. The world’s biggest retailer also unveiled a five-year compliance plan that will use new technology to capture and analyze data. The plan will enable Walmart to focus on anti-corruption, anti-money laundering, antitrust, consumer protection, environment, food safety, health and wellness, labor and employment, product safety, and responsible sourcing and trade.17

Getting smart is hard

Building a smarter supply chain takes work; there’s no off-the-shelf product that can do it all. And managers and executives need to put a proper context around such fraud detection and prevention systems. That can be overwhelming.

One step companies can take is to use remote monitoring tools for supply chain risk assessment and management. These tools often cost the same or less than current risk management programs, according to Subhashis Nath, senior partner at Axis Risk Consulting, in an IndustryWeek article.  He points to one US$20 billion company that performs reviews for its 50 sites around the world using a remote team. The result is that it needs to travel to those sites in less than 10% of cases.

The best way to prevent fraud is to eliminate the bad apples, both inside and outside the company, before they can access the supply chain. By combining monitoring tools with predictive analytics, that becomes possible. If a US$10 billion company were to shave a 5% revenue loss from fraud in half, that’s US$250 million back on the table every year, not to mention the savings provided by a more automated, intelligent supply chain.

Use a smart supply chain to differentiate and predict

witch hatCompanies that begin to think like supply chain detectives create a culture that shines a spotlight on the problem. And companies that use monitoring and analytics to create a smarter supply chain increase the chances of fraud detection and prevention and cut risk management costs. Maybe just as important, they’ll also gain greater insight into how their supply chains work. “A smart supply chain can serve to differentiate a company from its peers,” Pearson says. “Fighting fraud within the supply chain is not only smart business, but if done correctly it can help add to the bottom line.” In fact, the deeper companies can delve into their supply chain, the more predictable their entire business will become.

Those companies that don’t will be at a competitive disadvantage. And, says Pearson, they “are exposing themselves to potential scrutiny, not just from regulators or shareholders but from the board and others with fiscal or oversight responsibilities, like certain members of management.”

What’s more, real-time fraud monitoring will always return the investment. Companies that employ the right people, systems, and processes should at the very least see net-zero costs. Fraud monitoring more than pays for itself in risk prevention while preventing supply disruption, improving supply chain resilience, and cementing the supply chain as the revenue engine it ought to be.

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1. Report to the Nation on Occupational Fraud and Abuse (Association of Certified Fraud Examiners, 2014), http://www.acfe.com/rttn/docs/2014- report-to-nations.pdf
2. Report to the Nation on Occupational Fraud and Abuse.
3. “2013 List of Goods Produced by Child Labor or Forced Labor,” U.S. Department of Labor, accessed November 25, 2014, http://www.dol. gov/ilab/reports/xls/2013TVPRA.xls
4. Apple Sustainability Report: 2013 Progress Report (Apple, 2013), http:// images.apple.com/supplier-responsibility/pdf/Apple_SR_2013_Progress_ Report.pdf
5. U.S. Pharmacopeial, “New Additions Increase Number of Records in USP Food Fraud Database by 60 Percent, Add Seafood, Clouding Agents and Lemon Juice as Foods Vulnerable to Fraud,” PR Newswire, January 23, 2013, http://www.prnewswire.com/news-releases/newadditions-increase-number-of-records-in-usp-food-fraud-database-by- 60-percent-add-seafood-clouding-agents-and-lemon-juice-as-foodsvulnerable-to-fraud-188025561.html
6. Sarah Easter Strayer, Karen Everstine, and Shaun Kennedy, “Economically Motivated Adulteration of Honey: Quality Control Vulnerabilities in the International Honey Market,” Food Protection Trends (January/February 2014), http://www.foodprotection.org/files/ food-protection-trends/Jan-Feb-14-everstine.pdf
7. Sarah Easter Strayer, “Economically Motivated Adulteration of Honey.”
8. “Departments of Justice and Health and Human Services Announce Record-Breaking Recoveries Resulting from Joint Efforts to Combat Health Care Fraud” (news release), HHS.gov, February 26, 2014, http://www.hhs.gov/news/press/2014pres/02/20140226a.html
9. Bill Powell, “Heparin’s Deadly Side Effects,” Time, November 13, 2008, http://content.time.com/time/magazine/article/0,9171,1858870,00.html
10. 2013/2014 Global Fraud Report (Kroll/Economist Intelligence Unit, 2014), http://fraud.kroll.com/wp-content/uploads/2013/10/ GlobalFraudReport_2013-14_WEB.pdf
11. Report to the Nation on Occupational Fraud and Abuse.
12. Report to the Nation on Occupational Fraud and Abuse.
13. Andy Pasztor, “Pratt Reveals Faulty Testing,” The Wall Street Journal, March 4, 2013, http://online.wsj.com/articles/SB10001424127887324539 404578338574132970026
14. Report to the Nation on Occupational Fraud and Abuse.
15. Jamie Doward, “H&M Comes under Pressure to Act on Child-Labour Cotton,” The Guardian, December 15, 2012, http://www.theguardian.com/ business/2012/dec/15/cotton-child-labour-uzbekistan-fashion
16. Lynda C. Corpuz, “H&M Makes Fashion ‘Sustainable,’” The Rappler, October 19, 2014, http://www.rappler.com/business/features/72124- hnm-makes-fashion-sustainable
17. Sue Reisinger, “Wal-Mart Compliance Chief Looking Beyond the Scandals,” Corporate Counsel, October 21, 2014, http://www.corpcounsel. com/id=1202673998279/WalMart-Compliance-Chief-Looking-Beyondthe-Scandals#ixzz3IiGVt3lg


About the author:

Marcus Puschke is a principal consultant with SAP.

Lilliana Grbic is an Engagement Architect with SAP.

Stephanie Overby is an independent writer and editor focused on the intersection of business and technology.


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