Fraud basics

Banish ‘comfortable inaction’

Knowing your vendors can prevent and deter fraud

Most organizations need vendors to conduct business, but they’re often lax in investigating firms before they use their services. Here are tips for vetting your vendors and avoiding serious fraud problems.

A few years ago, we worked on a case that may have been the perfect storm of vendor-related fraud with bid-rigging, kickbacks and collusion. It all started with our client assuming it had all requisite controls in place to prevent vendor fraud but really not knowing who they were doing business with. Of course, what you don’t know can and will return to haunt you.

Our client worked with what they thought was a group of distinct and separate vendors. In reality, all vendors were under the same ownership. However, some insiders in our client’s firm knew of the nefarious ownership structure and allowed the vendor to submit three separate bids to facilitate the fraud.

Once our client awarded bids ostensibly to one of the vendors, the crooked business that owned the vendors rewarded the conspiring insiders by padding the invoices with inflated costs for items provided or submitting invoices for unrendered services. We found all these crimes via data analytics, review of invoices and link analysis.

After a three-year investigation with the U.S. attorney, IRS and FBI, 12 people were sent to prison and six internal employees were fired. Our client also banned 25 vendors from any future business after investigators found they failed to meet certain risk thresholds. For instance, they may have had common ownership with other vendors (as in the above case) or had officers on sanction lists and/or criminal records.

Lesson learned — Know thy vendor!

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