Supply Chain Fraud is on the Rise

Recently, a press release hit the news wire from Kroll that summarized some of the results of their Global Fraud Report which found that supply chain fraud risks are increasing due to global growth and outsourcing.

According to Kroll, large companies have increasingly become “extended enterprises” as they have globalized, outsourced, re-engineered their business processes, brought business partners and vendors closer and specialised their functions. The result makes them more complex and leaves them vulnerable to an array of frauds ranging from simple theft, to the misrepresentation of inventory to fool investors, through to counterfeiting, grey market diversion and piracy.

This is because fraud thrives on complexity, and, these days, nothing is more complex than a company’s supply chain. And some sectors are being hit harder than others. For example, the volume of fraudulent drugs in the supply chain has increased fivefold between 2001 and 2007 with fraudulent e-pharmacies taking in up to six billion dollars per year. And in pharmaceuticals, the financial loss isn’t the worst problem … it’s the quality issues … we don’t want another heparin fiasco.

So what can you do about it? For starters, maintain a watchful eye and look for the following red flags which are often indicative of internal fraud that is within your realm of control:

  • Abnormal vendor selection
    Don’t leave vendor selection to a single individual. Anything can happen (even if you’re not in Vegas).
  • Payments outside the normal accounting system
    Generally speaking, although hand delivered payments, manual approvals, and lack of proof of delivery do have valid occurrences, if two or more of these conditions are met on the same transaction, that’s usually not a good thing.
  • Unusual payment patterns
    Falsified invoices rarely follow the same patterns that come from honest suppliers. Examples of potentially fraudulent payment patterns include an increase in payments, a high number of transactions just under audit thresholds, or multiple invoices in a short time period.
  • Rates are out of line with the company’s standing in the market
    Higher than expected charges could be for kickbacks or illicit payments.
  • Unexplained lifestyle improvement
    If Joe the clerk, who usually drives a beat up Intrepid, shows up to work in a brand new Beamer, there’s a chance that there could be something up. Now, maybe he did just inherit a windfall and blow it, but if he starts bragging about his recently acquired Viking 45 Convertible next month …
  • Complaints or tips
    Corrupt staff members will usually try to get rid of non-conformers, exclude them from the “in-crowd”, and marginalize complaints from coworkers.

Now, some of these flags are also signs of incompetence, but that’s just as bad as it could still be costing you millions. So what can you do? A recent article in Chief Executive, are you going gray, that I summarized over on Sourcing Innovation, had some good ideas.

Specifically, you can significantly reduce the possibility of leakage by extending discipline over your supply chain and attacking the major drivers of gray market leakage: network partners with poor or unstable financial health, substandard manufacturer operating practices, and sloppy business models. Make sure the network partners you choose are financially stable and that your partnership will help maintain that stability; insure that your distributors agree to appropriate levels of price protection and stock balancing; and make sure that the number of tiers and hand-offs in the supply chain is minimized.

Furthermore, be sure to implement and police company-initiated measures and process controls to minimize the possibility of supply chain leaks. Self-fund and enforce investigative measures and pursue remedies against all infringers through the courts. Build a reputation as a good corporate citizen – but one that should not be messed with nonetheless.

One Response to Supply Chain Fraud is on the Rise

  1. Great post. As a follow up, for those more academically inclined, there is a recent PhD dissertation from Sweden which elaborates on this topic. The dissertation combines theories from criminology with theories from logistics and supply chain management to examine cross-over points or antagonistic gateways between the legal and illegal logistics system from a supply chain perspective. Topics covered are:
    1) Differences in Black and White Logistics System Design,
    2) The role of temporary storage from a supply chain perspective
    3) Cargo theft from supply chains: Crime displacement in logistics
    The full dissertation is available online.

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