How to Identify High-Risk Customers in Online Lending

by Nikoleta Dimitriou
Despite the conveniences going digital has brought, the more commerce and professional operations take place online, the more opportunities fraudsters have to do harm.
Today, 68% of companies around the world are concerned about fraud originating from suppliers, vendors and business partners – to the point of ranking it as a high or significant priority issue for their risk teams, according to Coupa.
Indeed, vendor fraud is on the rise, and especially so in the online world. Let’s look into its indicators, types and prevention.
The term vendor fraud describes fraudulent activity by a vendor, or someone pretending to be a vendor, that targets a business. It almost always relates to convincing the victim to make improper payments of some description – as a result of invoice manipulation, extortion or check-tampering, among others.
Vendor fraud seeks to extract money from the target company but it can also be a way to obtain sensitive information or even commit sabotage.
Supplier fraud, billing schemes, fake vendor scams, and all other vendor misconduct and misrepresentation constitute types of B2B fraud, as they threaten businesses and are perpetrated by other companies, be they legitimate or not.
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Vendors and fake vendors can use many different methods to scam a company into paying them money they are not owed. Typically, however, this involves four steps:
Sometimes, vendor fraud can be opportunistic, when an existing vendor whose moral standards may be questionable identifies a chance to scam the company – and takes it.
In other cases, however, these schemes can be the result of weeks or even months’ worth of planning.
Vendor fraud can affect any company, as they all deal with suppliers, to some extent. SMEs have a lot to lose to vendor fraud, but schemes equally target every organization, including some of the biggest names in tech.
A case in point comes from March of 2019, when a Lithuanian man pleaded guilty to wire fraud against both Facebook and Google. Evaldas Rimasauskas posed as a representative of a Taiwan-based hardware company that was owed money from the two business leaders. The scam had made him and his associates more than $100 million.
Accounts payable is almost always the department targeted by vendor fraud. Procurement is also high risk. Employees with these two specializations are the most likely to commit vendor fraud as well, out of every member of staff, because they have the most opportunity.
Of course, a company that procures goods and services on a more regular basis may be more open to it, due to dealing with vendors more often. However, vendor fraud is a particular pain point for small to medium-sized firms, for two reasons in particular:
Frequent targets depend on the subtype of vendor fraud as well. For instance, billing fraud is the type of vendor fraud that most commonly affects small businesses, at 29% according to GrowthForce.
That said, the main reason the average enterprise may feel less of an impact is that they are more likely to have mitigation in place as part of their fraud risk assessment strategy.
A fraud-conscious larger organization may have even trained their staff on vendor fraud detection and mitigation specifically, considering enterprises tend to have in place structured training and development.
Vendor fraud can take on several guises, because as a term it simply refers to who is attacking a business, rather than how. When it comes to common types, there are plenty to consider:
Naturally, any given case of vendor fraud can belong to more than one of the above categories. For example, an employee who sets up a fake company to file a falsified invoice is committing invoice fraud, and is simultaneously a fake vendor and an insider threat.
Red flags for vendor fraud that will allow you to identify and thwart it before it harms your company involve deviations from guidelines and workflows normally observed by accounts payable and procurement, as well as suspicious staff conduct:
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To protect from vendor fraud, companies ought to look into identifying unusual behavior coming from vendors and employees, as well as unusual payment patterns. Staff should be encouraged to observe guidelines and best practices, as well as enabled to blow the whistle on suspicious activity.
Do your due diligence on your partners. Know your business (KYB) verification for new vendors can help ensure they are who they claim to be. These background checks can take on many forms, such as OSINT tools that conduct digital footprint analysis for new contacts.
SEON’s data enrichment module, which you can try below, will give you in-depth insight into any email address or phone number, to help you gauge the real identity – and intentions – of their owner:
Pick up the phone and contact the vendor themselves, using a known phone number, to confirm any important changes to their records they may request over email. This will thwart the ambitions of any fraudsters who took over or spoofed your vendors’ email accounts.
Implement 3-way or 4-way invoice matching to decrease the risk of oversight. Employees in accounts payable ought to compare supplier invoices to separately received documents, such as POs, internal records or goods received notes.
Deploy sophisticated vendor management and accounting software, which could alert you to any suspicious activity – e.g. when payment details don’t match previously verified payments for that vendor.
Put in place multi-level approvals for large payments. In high-risk industries and organizations, an efficient measure could be requiring the approval of more than one or two people, to minimize the risk of insider vendor fraud.
Conduct frequent audits, including tracking invoice activity, testing for duplicate payments and other strict internal controls.
Ensure your employees know the risks by signing them up for fraud prevention training and distributing awareness material.
Learn from past incidents to become more resilient. Some types of fraud investigation software will allow for internal investigations and learnings from them, too – so they can assist in cases of external collusion with employees.
Set up a fraud hotline available for your employees to tip you off about any signs of internal threats as well as to access support in dealing with external vendor fraud.
Finally, keep on top of sector fraud trends. By being aware of new vendor fraud and other fraudulent schemes attacking your industry, you will be able to prevent losses, rather than having to mitigate the consequences.
Online merchants are affected by fraud on many fronts, coming from consumers as well as other vendors. One of the key protections is to put in place a fraud prevention tool or solution stack that corresponds to your particular needs and attack surface.
To protect against fraud originating with fake vendors, do your due diligence in the form of know-your-business (KYB) checks and ensure all your employees are aware of this risk.
If you realize have fallen victim to a vendor scam, speak to the bank that processed your payment as soon as possible. They might be able to help resolve the issue, depending on the timing.
Sources
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