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
Perhaps the most damaging sources of supply chain fraud are internal, especially collusion between an employee and a supplier. 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 the Association of Certified Fraud Examiners (ACFE).
Costs increase along with the number of perpetrators involved. Fraud involving two thieves had a median loss of US$200,000; fraud involving three people had a median loss of US$355,000; and fraud with four or more had a median loss of more than US$500,000, according to ACFE.
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 any supplier that has recently poached an employee.