Is Your Business Prepared To Fight Fraud In The Digital Age?

We are pleased to welcome this guest post from Laurence Cook, CEO, Maistro plc

Corporate fraud is a clear and present danger for every organisation: 49% of businesses were affected by fraud or economic crime during 2018, up from 36% in 2016, according to PwC’s Global Economic Crime and Fraud Survey. As the digital age continues to influence corporate buying behaviour, a new breed of corporate fraud is emerging. Organisations that are embedding digital strategies to buy or sell online need to be aware and equipped to mitigate potential risks within their online sourcing and delivery activity, yet many organisations are still finding their feet when it comes to accountability across their business.

Where lies the problem?

Businesses have always externally sourced and delivered services, of course. That in itself is not the issue. The issue lies quietly within a modern take on supplier fraud. Negligent supplier behaviour is now taking many shapes in an increasingly digital world, including fraudulent online company filing and falsifying companies associated with domestic company filings. This can present unique procurement risks and firms should be aware of the signs of this kind of inappropriate activity.

Fakes and Fraudsters

False company filing is one of the more common modern examples of fraud and it is surprisingly easy to do. In fact, in 2018, Kevin Brewer, a consultant who advises new businesses, was convicted of filing false company information after pleading guilty to creating fictitious businesses. Twice, in 2013 and 2016, Brewer had listed government ministers as directors and shareholders of fake companies – to prove how easy it was to do. The lack of due diligence he highlighted within the company filing process has not yet been resolved – it’s still possible in 2019 for suppliers to create fictitious businesses and file false company information.

In many countries, including the UK, it costs just a few pounds to register a company online. Conventional company filing processes do not routinely conduct identity, background or location checks. This means that credit reports based purely on company filing data will only be as accurate and trustworthy as the information submitted by the business owner. This introduces a new kind of online risk which government organisations are, of course, actively addressing, yet attempts to stop this kind of fraudulent company filing activity will continue to be increasingly difficult.

Fraud can also take place in something as simple as falsifying company names. Formal company names are not routinely checked, leaving fraudsters free to set up website domains for new companies with very similar names and/or logos to those of existing companies. Fraudsters can then use the reputation of an existing business as a cover for their activities. In one case we have seen, an individual set up 18 different company domains positioned as established suppliers, each featuring names and logos that were very similar to those of real companies.

The current limitations to protect buyers against this sort of activity are contributing to rising rates of corporate fraud and other crime. This exposure comes at a cost to all companies and is not mitigating their risk in the long-term. So, in the digital age, how can procurement teams help their companies prevent potential fraud within their supply chain?

Asking the right questions

In an ideal world, governments would increase the resources dedicated to policing company registration, making it harder for fraudsters to create fake companies. Although there are indeed efforts under way to modernise conventional practices and rectify this situation, the reality is, a complete procedural overhaul is unlikely to happen very soon. So, companies will unfortunately be exposed to fraud risk in their supply base if they rely solely on conventional methods that do not address digital procurement demands. Procurement teams can provide support to their businesses in the meantime. They can help mitigate risk by implementing stricter steps at both the onboarding of new suppliers and the ongoing review of existing suppliers.

By asking the right questions during the vetting stage, followed by comprehensive investigation, procurement teams can ensure that suppliers are legitimate. For example, in vetting suppliers, how often have you included requests for individual passports or formal employee identification as part of your supporting vetting evidence? These added measures are increasingly important as supplier vetting takes on a more virtual nature.

More detailed online searches in the vetting process will also reveal potential hidden issues within a supplier, like a company director or an accountant already associated with money laundering or fraud, for example. Similarly, doing an online search using Google Maps to locate an office address cited on a website may expose a falsely established business. These two examples are just touching the surface of new kinds of exposure. For lean procurement teams, there is no doubt that this increased level of supplier vigilance would appear to be daunting and time-consuming. Yet, it is unavoidable and something procurement teams must be mindful of as virtual buying becomes the corporate norm.

So, where do we get started?

Putting additional time and resources towards risk management is sensible, but most procurement teams don’t have the capacity to invest in vigorous investigations. To address this new demand, many enterprises are taking a practical, modern approach. One solution is to work with B2B marketplaces and other online procurement service providers with effective vetting processes in place that specifically address virtual and online digital procurement risks, help to avoid financial loss and reputational damage, and ensure compliance with legal and regulatory obligations.

The risk of modern fraud should not stop organisations of all kinds enjoying the significant business benefits available through digital practices. Companies should feel fully equipped and empowered to recognise the risks of modern fraud and take the action needed to address them. Online virtual procurement is in early days. Fortunately, corporate buying teams who are proactive in their approach, are in a very strong position to ensure safe procurement practices as this modern approach to procurement continues to transform corporate buying behaviour.

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