How to Detect and Prevent Procurement Fraud

When you think about the problems your procurement processes face, what comes to mind? 

Maybe, it’s a never-ending workload, maybe it’s the manual effort your team has to still make to keep things running, or perhaps it’s something related to your company’s supply chain, like issues with suppliers, but do you ever think about fraud?

Yes, you read the right: fraud, or more precisely procurement fraud, is a serious threat to every single company out there. 

In the worst scenario, it can make you lose money, in the best one…you’ll still end up losing resources.

But, wait, there are some steps you can take to protect your business and your brand’s reputation from procurement fraud.

‍

Let’s learn more about that 

‍

‍

What’s Procurement Fraud?

Simply put, procurement fraud is the alteration of the procurement process

The purpose?

Obtain gains illicitly. 

Procurement fraud can happen at any point in your operation. These fraudulent activities undermine fair business practices and often lead to significant financial losses. No company is immune to procurement fraud, so it’s absolutely important to know what can you do to prevent and detect possible risks. 

33% of companies aren't fully aware of how much they are losing to procurement fraud, so why we don't try to fix that.

‍

‍

Warning Signs of Procurement Fraud

Unusual vendor relationships

Imagine that you find a supplier that despite having high prices and offering poor quality, they are still being selected to work with your company. Wouldn’t that raise suspicions?

The keyword here could be collusion

No transparency

Another potential problem when searching for new suppliers is the lack of transparency that undergoes during the process. Contracts awarded without visible honesty signal potential manipulation.

Duplicate payments

Won’t you worry if you discover that you are paying more than you should? Receiving multiple invoices for the same service or paying more than the agreed price is a telltale sign that something fishy is happening. 

Missing documentation

Incomplete records, missing approvals, or vague contract terms are signs of poor oversight or intentional fraud.

Procurement fraud can hurt you beyond financial losses

• Reputational Damage: Think about it, if your company falls victim to a fraud scheme and word goes out you could lose the trust of not only your clients but also your stakeholders. Pretty scary, right? 
• Legal Risks: And speaking about scaring stuff. Organizations found complicit in fraud may face penalties, lawsuits, or sanctions.

‍

‍

‍

Common Types of Procurement Fraud 

Collusion 

We mentioned before, and unfortunately it's one of the most common schemes, you'll see, in this situation we have someone from your own company working with a supplier to manipulate the procurement process. For example, this person  might favor a specific supplier, ignoring competitors or accepting dubious terms. This creates unfair advantages and can lead to inflated costs. Two things that can bring a long list of problems to your company.

Alterations in the bidding process

You define what you need to buy as a business and gather a list of potential suppliers you'd like to work with. The next step is to invite them to a bidding process. 

Everything is going as it should 

Until it doesn't 

Criminals can manipulate the bidding processes in several ways, including:

• Bid Rigging: Predetermining the contract winner.
• Bid Suppression: Discouraging legitimate vendors from submitting bids.
• Bid Rotation: Competitors agree to take turns winning contracts.

Fake Suppliers 

Yep, sometimes that wonderful shining new supplier you've just signed a contract with, is…well, 100% fake.  Weird as it sounds, there are situations where companies find that they've literally been paying fictitious invoices for nothing.

Payments are then funneled into personal accounts, leaving your business without anything to show for the expense.

Inflated invoices 

These ones seem real, and in theory, they're, until you notice one tiny detail. That amount at the bottom of the invoice you just paid for? Is exaggerated. 

Employees or so-called suppliers may submit invoices that overstate the amount of goods or services provided. For instance, billing for 1,000 units when only 800 were delivered. This fraud often goes unnoticed without proper verification.

Split purchases 

In most companies, there's an approval process that must be followed when someone purchases goods in large quantities or acquires something of high value. But what happens when those purchases are small? Almost insignificant? 

A member of your team can divide large purchases into smaller ones that don’t require additional approvals.

Kickbacks 

Kickbacks occur when someone in your procurement department receives personal benefits, such as cash or gifts. The reason? In exchange, they agree to award contracts to specific suppliers. Something that can undermine the integrity of the procurement process and often results in higher prices or lower-quality services.

‍

‍

Best Practices to Prevent Procurement Fraud 

Strengthen internal controls

It might sound simple but the truth is that good internal controls are the backbone of fraud prevention. Here’s what you can do:

Segregate Duties: Avoid giving one person complete control over procurement tasks like selecting vendors, approving invoices, and making payments. For companies that are only starting, it might be tempting to rely on a single person for everything but you must consider the risks you could be facing . 

Use Multi-Level Approvals: Require at least two levels of approval for high-value transactions or new vendor contracts. Remember to work with a digital system so each request and transaction is recorded. 

Conduct Regular Audits: Don't wait until the problem explodes in your face. Perform routine audits of procurement activities to identify irregularities and fix issues before they escalate. 

‍

Increase transparency

You probably already have noticed that transparency is one of the principal values that can help you to prevent fraud. In the procurement process being transparent can greatly reduce the opportunities for fraud. 

Okay, but what transparency is about?

Publish Procurement Policies:

You have written somewhere all your procurement policies, that's great but have you shared it with the relevant people in your team? Ensure your processes and criteria for supplier selection are clearly documented and accessible.

Maintain Vendor Records: Keep detailed records of vendor history, including performance reviews, contract terms, and payment data.

‍

Train employees

Employees are a critical part of your efforts against fraud. So it definitely makes sense to offer them training on fraud awareness and prevention. They are the ones who'll be directly dealing with any fraudulent attempt, after all.

• Fraud Awareness Workshops: This is useful to teach employees to recognize common fraud schemes and red flags.
• Establish Reporting Channels: When something goes wrong you'll want to create a safe and anonymous way for employees to report suspicious activity.
• Tracking Software: To improve fraud detection and prevention, integrating remote employee tracking software like Intelogos software, for example, can provide valuable insights into employee activity, helping identify any potential red flags. The software can further support your fraud awareness initiatives by monitoring employee behavior, thus ensuring greater transparency.

Combining training workshops and software creates a comprehensive approach to fraud protection within your organization.

‍

How Technology Can Help You with Fraud Prevention 

At Control Hub we strongly believe that when it comes to improving your procurement processes, there's nothing better than choosing to work with procurement software. 

Why? 

Technology can help you monitor and analyze procurement activities effectively. But let's see that in more detail:

• Data Analytics: Tools like predictive analytics and machine learning can detect anomalies in bidding, invoicing, and payment processes.

• Vendor Management Software: Centralized vendor systems reduce the risk of phantom vendors by verifying identities and tracking performance.

• Automated Auditing Tools: Automation reduces human error and flags irregularities faster than manual reviews.

• Blockchain Technology: Using blockchain for procurement ensures transparency and traceability, making it nearly impossible for fraudsters to alter records.

‍

‍

‍

The Future of Procurement Fraud Prevention

Nothing remains the same so it's no wonder that at some point you'll have to change the way you fight against procurement fraud. The future of fraud prevention will rely heavily on technological advancements, innovative strategies, and a proactive approach to risk management.

‍

Artificial Intelligence and machine learning

If you want to see the future with accuracy you only have to bet that AI is going to be somehow involved. AI and machine learning are poised to really change procurement fraud prevention. And it's kind of natural, after all these technologies can analyze vast amounts of data in real-time, detecting patterns and anomalies that may signal fraudulent activities. With AI, your company can move from reactive to predictive fraud prevention, identifying risks before they materialize.

‍

Blockchain for procurement transparency

Remember how we highlighted the importance of transparency before? Well, blockchain technology offers a secure, tamper-proof way to manage procurement records. Using decentralized ledgers gives businesses the opportunity to ensure that all transactions are transparent and traceable, making it nearly impossible for fraudsters to manipulate data or conceal activities. 

Talk about protection!

‍

Advanced analytics and data integration

Future procurement systems will integrate advanced analytics tools capable of consolidating data from multiple sources. These tools will provide a comprehensive view of procurement activities, enabling organizations to uncover hidden risks and inefficiencies while ensuring compliance.

‍

Risk management

As supply chains grow more complex, proactive vendor risk management will become essential. Organizations will adopt more sophisticated tools for vendor verification, performance monitoring, and ongoing risk assessments, ensuring that only trusted suppliers are part of their networks.

‍

Employee training programs

Fraud prevention efforts will increasingly focus on people. Advanced training programs, including interactive simulations and AI-driven learning platforms, will help employees stay ahead of emerging fraud tactics and feel more confident in identifying and reporting suspicious activities.

‍

Collaboration

In the future, organizations, governments, and industry groups will collaborate more to combat procurement fraud. Shared databases of known fraud schemes, vendors flagged for suspicious activities, and best practices will enable collective action against fraudsters.

‍

Stronger regulations 

Governments worldwide are expected to introduce stricter regulations and standards for procurement processes, particularly in public sectors. Compliance with these frameworks will drive organizations to adopt more robust fraud prevention measures.

‍

Final Thoughts 

Procurement fraud can pose significant risks, but you don’t have to let it take hold in your organization. By recognizing warning signs, using technology, and fostering a culture of accountability, you can reduce vulnerabilities and protect your resources

‍

‍