Angela Lee
Director of National Claims Operations
In recent years, claims related to fraudulent vendors have surged. This increase could be attributed to the growing sophistication of fraudsters who exploit vulnerabilities in supply chains. If your business relies on suppliers or vendors, whether in retail, manufacturing, or e-commerce, you could be at risk.
Fraudulent vendor claims can take many forms, each with different implications for coverage. To safeguard against vendor fraud, you may implement proactive measures to ensure that your goods aren’t misdirected to unintended parties. Just as you establish safeguards against wire transfer fraud, it’s essential to create controls to prevent the misdirection of products.
Common fraud scenarios
Here are a few examples of how fraudsters may deceive you:
- Fictitious vendor fraud
You receive a purchase order from what seems to be a legitimate vendor. They provide all necessary documentation and have a reputable online presence. However, the vendor is fictitious, and you unknowingly send goods to a non-existent address or one controlled by fraudsters. - Identity theft
A fraudster impersonates a legitimate vendor by hacking their email or creating a similar fake address. They send you fraudulent instructions, requesting goods be shipped to a different address. Believing the instructions are genuine, you send the goods to a fraudulent location. - Counterfeit purchase order
A fraudster gains access to your systems and creates a counterfeit purchase order from a legitimate vendor. The order instructs you to ship goods to an unauthorized location, which you do, unaware of the fraud. - Non-delivery scam
A fraudulent vendor convinces you to send goods with the promise of payment upon delivery. After shipping, the vendor disappears, leaving you with a loss. - Account takeover
A fraudster gains unauthorized access to a legitimate vendor’s account and alters payment and delivery instructions. You, believing you’re communicating with the real vendor, follow these fraudulent instructions. - Changing the delivery address
A fraudster contacts the shipper, convincing them to change the delivery address to a fraudulent one, either by phone or through an app. - Fraudulent bill of lading
A fraudster provides an altered bill of lading to redirect a shipment to a fraudulent address.
Importance of coverage
Coverage for these types of vendor fraud schemes may be limited. It’s crucial to implement controls and strengthen risk management to mitigate losses. The specific coverage and policies triggered will depend on the nature of the claim and the insurance policies you have in place. Always review your policy terms and consult with an insurance professional for guidance. Additionally, filing a police report is essential, as some policies may require it for coverage.
Safeguards against vendor fraud
To protect against misdirected goods, consider implementing the following measures:
- Vendor verification
Establish a robust vendor verification process to ensure legitimacy. This includes background checks, verifying business credentials, and reviewing reputations. - Strong contractual agreements
Create clear agreements with vendors outlining terms, conditions, and responsibilities regarding the handling and delivery of goods. - Secure communication channels
Use secure methods for sharing sensitive information with vendors, such as encrypted emails or secure file-sharing platforms. - Two-factor authentication
Implement two-factor authentication for systems involved in procurement and delivery, adding an extra layer of security. - Internal controls and approval processes
Establish internal controls to verify and authorize changes related to the delivery of goods, requiring multiple levels of approval for significant changes. - Regular vendor audits
Conduct audits to ensure compliance with contractual obligations and identify potential red flags. - Employee training and awareness
Train your employees on the risks of misdirected goods and the importance of following established protocols. Educate them on common fraud schemes and how to report suspicious activities. - Monitoring and tracking
Implement systems to monitor the movement of goods throughout the supply chain, such as GPS tracking or RFID tags. - Incident response plan
Develop a plan outlining steps to take in the event of a misdirected goods incident, including reporting procedures and investigations. - Shipper verification procedures
Establish strong verification measures for shippers before changing delivery addresses or accepting new bills of lading.
By implementing these safeguards, you may reduce the risk of misdirected goods. Regularly review and update these measures to adapt to evolving threats and best practices.
Marsh McLennan Agency’s experienced claims professionals are here to help protect your organization from fraudulent vendor claims. Meet with one of our specialists to navigate the claims process and learn more about safeguarding your business.
