Supply Chain Fraud: How To Protect Your Business From The $3.7 Trillion Threat From Within

Shelly Dutton

Man loading boxes into delivery truck --- Image by © Ocean/CorbisLike many people, I receive dozens of phone calls a day. Sometimes, it’s easy to tell which callers are legitimate and which ones are phishing for information. One day, my caller ID made one attempt all too obvious by displaying “Illegal Scam.” Don’t we all wish that fraud is this easy to detect?

When it comes to the workplace, fraud attempts are cloaked under the guise of legitimate everyday activities. Consequently, incidences of all corporate fraud are increasing. However, what’s more troubling is the vulnerability of vendor, supplier, and procurement processes – the top three areas experiencing the greatest growth in fraud, according to Kroll’s 2013/2014 Global Fraud Report.

The supply chain: Where corporate fraud quietly lives

Falsified labor. Inflated bills, or expense accounts. Phantom vendor accounts or invoices. Unauthorized disbursements and bid rigging. Counterfeit, noncompliant, or knockoff products. Whether perpetrated by suppliers, subcontractors, employees, or a combination of them, these fraud events can spell disaster for every organization.

Although 5% of corporate revenues are wasted each year (amounting to US$3.7 trillion globally), the stakes are higher for brands and consumers alike. For example, collusion between an employee and supplier puts the business at risk for a median loss of US $80,000 annually from a single fraudster when independent checks and other controls are evaded, according to the Association of Certified Fraud Examiners (ACFE). And more damaging, supply chain fraud in industries – especially food, drugs, and aerospace – can kill.

Two ways to make your supply chain fraud-free

Even though the impact of corporate fraud is significant, a 2014 survey conducted by Deloitte revealed that nearly half (47%) of executives and managers are not aware of any fraud, waste, or abuse in their supply chain happening within a single year. Unfortunately, most fraud cases are reported by whistle-blowers or discovered by accident 18 months after it started, according to ACFE.

Because fraud is so incremental and covert, it is impossible to detect – but not nearly as impossible to block. As Mark Pearson, a principal with Deloitte Financial Advisory Services, noted in the Center for Business Intelligence Q&A “Supply Chain Fraud: Theft That’s Hidden in Plain Sight, “It’s pay and chase: You pay an invoice and you realize a year later during an audit that there was fraud, waste, or abuse and you try to get the money back. Instead of doing that, which is incredibly inefficient, companies can use the data and information they’re already getting from those audits and get smarter about the invoices that they haven’t paid.”

According to the SAP Center for Business Insight report “3 Ways to Fight Fraud, Waste, and Abuse in the Supply Chain,” there are two actions every organization should take to safeguard itself from corporate fraud.

1. Create a culture of fraud detectives

Stop thinking that “it can’t happen here.” It can – and it will. The key is to realize that every new partnership, vendor, purchase, or deal has the potential for fraud. Even if that partner came with great references and proven itself a market leader, their downstream suppliers may not be as credible.

When you vet and monitor new vendors, partners, or customers, you have to take a look at your supply chain as well as theirs to evaluate the risk of all relationships. Here are some ideas that can help the C-suite, as well as employees of all levels, become a better fraud detective:

  • Make sure board and C-level executives understand the critical nature of the supply chain and the risk of fraud throughout the procurement lifecycle.
  • Advertise 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.

2. Combine data science with forensics

The world is full of Big Data and advanced analytics. In addition to helping companies grow, these technologies are also a great way to manage the risk of fraud, waste, and abuse among their suppliers.

Every day, businesses collect a tremendous amount of data about their products, their sources, and intermediaries, and customers. With this information on hand, organizations can make better decisions about supplier selection, management trustworthiness, and employee hiring and monitoring. Plus, greater visibility into the entire supply chain can spotlight gaps in supplier performance, behavioral trends, missed deadlines, and other red flags.

By creating a fully transparent supply chain fueled by real-time data, organizations have exactly what they need to keep themselves safe: a real-time fraud, waste, and abuse detection and prevention system.

Fraud detection is not just protection – it’s opportunity for business growth, too

The universal truth about analytics is that everything is predictable if you dig deep – and this is certainly true when it comes to corporate fraud. The trick is spotlighting trends and keeping an eye on potential exposure. But, there is even a bigger benefit to creating a culture of vigilant fraud fighter: Business growth.

“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.”

Want more on security best practices? See How To Attack Supply Chain Fraud, Waste, And Abuse: The Quick Guide.