Supply Chain Fraud 101
Supply chain disruptions are continuing to occur for a variety of reasons. Weather delays can affect shipping lanes, manufacturers face product shortages, demand continues to spike for certain products, containers are difficult to acquire, and the trucking industry faces a driver and capacity shortage, just to name a few. One issue that does not get talked about as much, however, is supply chain fraud.
What exactly do I mean by supply chain fraud? Well, there are a number of different types of supply chain fraud that impact global supply chains, from the procurement of materials to the end delivery of a product. I read a great description of supply chain fraud from BDO, which described a “fraud triangle.” The framework consists of three sides: motive, opportunity, and rationalization.
- Motive: An individual’s reasons for committing fraud—this can span from the desire for financial gain to increased power and influence.
- Opportunity: The means by which an individual commits fraud—this can occur when an organization’s internal controls may be insufficient or weak, or the organization lets down its guard in risk monitoring and evaluation.
- Rationalization: The individual committing fraud justifies his or her behavior so that it aligns with their values.
When we think of fraud in the supply chains, often we think about organized cargo theft. According to Travelers Insurance, there are five main cargo theft tactics to watch out for. The first is straight cargo theft, where cargo is physically stolen from a location. Second is strategic cargo theft, which uses deceptive means to commit theft, including the use of fraud and deceptive information to trick brokers into giving up a load. Third is the use of technology, such as GPS blockers to hide the location of a stolen container or truck. Fourth is the use of cyber-attacks, such as phishing scams and malware used to access sensitive data. And fifth is pilferage, which is the theft of small quantities of items that are often overlooked until a trailer or container is unloaded.
But fraud goes well beyond theft and can occur at any point in the supply chain. This can include bribery during supplier selection, forged checks during financing, money laundering, and fraudulent payments or promises of payment. There is also the risk of corruption within organizations that can lead to fraud. One way to mitigate this risk is to examine the chain of command within an organization, ensuring that there is a system of checks and balances.
Supply Chain Game Changer highlighted a partial, but in no way complete list of areas that are vulnerable to supply chain fraud. These include:
- The Procurement bidding process and business awards
- Supplier legitimacy
- Supplier selection
- False commitments
- Stock rooms, warehouses and any inventory holding points
- High value goods
- High market demand goods
- Trucking, shipping and goods falling off the truck
- Freight forwarding
- Systems access
- Counterfeit goods
- Accounts Payable
- Accounts Receivable
- Invoicing and billing
- 3rd parties and middle men
- Conflicts of interest
- Insurance claims
- Cultural/geographic norms of acceptable behavior
- Inventory records integrity
From a technology standpoint, blockchain can be used to fight and prevent fraud in a business network. The value of blockchain is its ability to share data in a fast and very secured way without any one entity having to take responsibility for safeguarding the data. Blockchain provides one mechanism for sharing information between supply chain trading partners. Because of the IT security, unchangeable records, and decentralized governance, the technology is getting a lot of attention. Transactions recorded on blockchain are immutable because they cannot be deleted or changed. Before a “block” of transactions can be appended to the blockchain, network participants must agree the transaction is valid through a process called consensus.
Another way to prevent, or at least minimize the impact of supply chain fraud is to perform thorough internal risk assessments of processes and employees. This can be rolled into periodic reviews of business processes and employee functions.
In a global economy, where supply chain disruptions are constantly occurring, supply chain fraud is often an afterthought. However, the vulnerabilities are real, and fraud is a big concern. While fraud will always be a risk when it comes to global supply chain, having processes and technology in place can go a long way towards earlier detection, which can minimize the long-term impact of supply chain fraud.