A strong know your vendor process is key to avoiding supplier fraud.
It is no secret that as the business and digital worlds increase in complexity, companies will need to diversify their working models. As businesses grow, they may need to outsource to vendors to replace or enhance internal capacities. Vendors often offer deeper expertise or more efficient solutions for critical services. However, shifting to a third-party partner’s model is not without risk. Lack of vendor due diligence can expose your business to downtime, interruptions, revenue loss, costly fines, legal issues, and reputational damage.
Businesses must plan for and deploy vendor management best practices like Know Your Vendor (KYV). This process reduces risk exposure by having insights into every player within their internal and external networks and supply chains.
What is Vendor Management and Why is it Important for Success?
Vendor Management manages and maintains all the different vendors a company employs. It assesses and reports on a vendors’ compliance against regulatory standards and ethical rules. Finding reliable information about a vendor’s compliance status can be challenging because a company may be doing everything right within its internal practices. However, unvetted vendors may not, and unscrupulous vendors can act as sources for fraud.
The more visibility a business has into its vendors, the easier it can assess risks before these vendors cause fines and economic problems. Worse, they could cause unsurpassable damage like legal repercussions, brand impairment, and total financial loss.
Common Types of Vendor Fraud
“Must pay now” Fraud/Fake Invoice Scams
Fake invoice scams happen when fraudsters send a company a bill for goods or services. A false invoice shows a past-due payment. The fraudster threatens account closure, service disruption, or adverse consequences to credit ratings to convince the employees to pay.
Advance Fee Fraud
Fraudsters target victims and demand advance or upfront payments for non-existent goods and services or financial gains. Common advance fee fraud scams include career opportunities, dating or romance, fraud recovery, inheritance hoaxes. Additionally, masquerading as relatives or family friends needing help in foreign countries.
Computer or Software Support Fraud
Fraudsters send fake emails or call as Computer or Software Tech Support from a reputable company like Microsoft or Apple. Then, they inform the receiver of a problem with their device and ask for upfront credit card information to fix the non-existent problem. These frauds often use very sophisticated fake branding and spoofing to convince victims.
Procurement/Purchasing Fraud
Often associated with bid-rigging or payment claims for goods or services that were never delivered or delivered as counterfeit/low quality, this fraud occurs when a company purchases goods, services, or commissions projects from third parties for profit.
Fraudulent Trading (Bankrupt Suppliers)
Fraudulent companies make purchases immediately before going bankrupt. Once that company has gone bankrupt, a new company sprouts up overnight with the same leadership, essentially replacing the old company and retaining what was purchased. As a result, the new company is not liable to pay any losses the previous business accrued because they are different entities.
Business Directory Fraud
Fraudsters bill businesses without their knowledge after they accept free marketing, directory listings, or advertising. This phishing-based fraud often asks for a returned form even if the business refuses the offer. Unfortunately, the fine print stipulates that a returned form means committing to the offer.
Office Supply Scams
Fake telemarketers trick employees into ordering or paying for office supplies like stationery or copy paper. Emails or calls mislead staff to believe that an order for office supplies has already been placed, and needs to be paid for. The victim only needs to help complete the order by providing financial details for unwanted, overpriced stationery and office supplies.
Risks of Working with Unvetted Vendors
Unvetted vendors can pose non-financial risks as well. Vendors who do not comply with regulatory standards can lead to you having to pay fines, undergo penalties, and perhaps face legal prosecution.
Additionally, the vendors you choose are ultimately extensions of your company. Any reputational risks from unvetted vendors will pass on to you. Your customers will not know that your vendor, not you, used terrible business practices. Any negative news or false information could spread before you have a chance to do damage control.
Fortunately, a KYV based compliance policy allows for a continued presence in some sectors that necessitate adherence to regulations, such as finance and insurance. It also helps avoid costly errors through better vendor engagement and communication to help ensure your vendors operate at the highest standard.
Furthermore, Know Your Vendor-based monitoring should be a continuous and ongoing practice for companies. Any interruptions caused by a vendor to a company’s day-to-day operations can cause breaks in supply and support chains that can negatively affect profit margins and the bottom line.
Best Ways to Vet Suppliers
Successful vendor management can be challenging. Companies need proper methodologies and the right tools to find and conduct reliable vendor compliance status assessments and execute action plans as needed.
1. Assign Vendors a Risk Rating
Gather all your vendors together, place each of them under the microscope, and assign them an initial risk rating. Based on this risk rating, determine which vendor needs to be removed or which needs further risk assessments performed. Some vendors may not realize they pose a risk and will appreciate the feedback and want to work with you.
2. Get Financial Information
Ask for, and monitor a vendor’s financial practices, transactions, operations, and marketing collateral and campaigns. Find third-party data sources or solutions like Fraud.net to correlate and present the information you need.
3. Check IT Security and Privacy Policies
Any reputable company will have no problem disclosing its IT and security policies. If they don’t, then that is a red flag. Aligning your IT and privacy helps ensure data safety, security, and coherence with your standards.
4. Automate Processes
Vendor researching, identifying, rating, tracking, and implementing action plans are all time- and effort-intensive activities. A company’s time is best-spent planning and aligning strategy then acting upon it, instead of wasting manual resources. Use Fraud.net’s AI-powered fraud detection platform to do the work for you, so you can keep your company safe without compromising on efficiency.
5. Conduct Enhanced Due Diligence (EDD)
Businesses can conduct Enhanced Due Diligence (EDD) for complex and higher-risk vendors. EDD provides a much deeper and refined understanding of vendors. Smaller private companies can more easily appear legitimate, so normal vetting processes relying on self-disclosure may not suffice. Running an EDD reveals the whole story by surfacing the business owners’ public records.
6. Implement a Know Your Vendor (KYV) Solution
Set policies and bring together proprietary data, 3rd party vendor data, and artificial intelligence solutions to let you and your team better manage risk. Fraud.net’s proprietary Application AI for vendor onboarding allows you to screen new vendors against a variety of parameters. It also provides accurate risk scoring and automated rules to shorten the time needed to review potential fraud. Implementing Application AI for KYV allows you to run multiple checks against incoming vendors to ensure that you are doing business with a legitimate, trustworthy entity.
With Application AI for KYV, screen for:
- Tax identification number (TIN): Check if your vendor is using a legitimate TIN, or if they are using a stolen, forged, or outdated number.
- Terror watch lists: Screen the vendor for linkages with terrorist watch lists along with domestic and international watch lists.
- Bank verification and proof of address: Verify the commercial address provided by a vendor and their bank information for invoices.
- Sanctions: Check if the vendor’s TIN or bank account currently has sanctions placed on it.
How Fraud.net Can Help
Supply chain management growth and complexity are only increasing. So, companies must ensure they innovate and manage every risk and vulnerability to the best of their ability to stay one step ahead of cybercriminals.
Using Fraud.net’s proprietary Know Your Vendor (KYV) solution to identify and halt fraudulent and high-risk vendors will allow you to focus on growing your company. As a result, you can invest more time in attracting high-trust vendors and customers to boost profitability.
Streamline your vendor verification process today, with our unified fraud management platform. To learn more about our AI products and how our solution can best fit your needs, contact us today to schedule a demo.