The Global Fraud Report, released in April by Kroll, cited a 2007 survey that found 42 percent of firms worldwide suffered from at least one incidence of either supplier fraud or theft of physical assets -- just two of the many ways to abuse supply chains -- and 9 percent had suffered both. Today, those numbers are suspected to be much higher.
Kroll, an investigative, accounting forensics and computer forensics services company, suggests that as supply chains become more and more complex, they also become more vulnerable to fraud. Large-scale shipments can help theft go undetected. Global supply chains are not only easy victims, but it can also be difficult to pursue legal actions in foreign countries, especially China. The rise of technology in the supply chain can also hide theft as the shear amount of data generated can be laborious to sort through.
“Whether you have a large or small supply chain, everybody is at risk. Particularly if you have a supply chain that is not completely visible to your company,” says Mark Sullivan, head of loss prevention and managing director in Kroll’s Chicago office.
Vendor fraud
If your company is not very well organized, fraud can occur when vendors recognize poor internal controls. For instance, a vendor might bill you for shipments that never took place, and with no controls in place it may be long after you’ve paid the bill that you realize what has happened.
Generally, manufacturers are well aware of their own suppliers, but they often are unaware of their own suppliers’ vendors.
“Supply vendors may sub-contract out some of their work which can put your own company at risk if you are unaware of other suppliers. It is important that manufacturers be aware of all parties, including the suppliers’ own vendors,” explains Sullivan.
Sullivan also suggests manufacturers in the food industry be extremely careful with their supply chain vendors.
“Contamination in the food supply chain most likely is not fraud going on, but it could be. Most times it’s a controls issue or a vendor trying to take a shortcut that turns into a problem,” he says.
“We recommend that companies do their absolute best to know who all the suppliers are, understand the people behind those businesses and hold them accountable to your company’s policies,” advises Sullivan.
Cargo theft
Cargo theft has been on the rise and is a very serious issue for companies and law enforcement. The rise in cargo theft is partially due to current laws that do not properly label this type of fraud as cargo theft. If a trailer load is stolen it is typically categorized as vehicle theft and will usually not cover the millions of dollars lost in stolen goods.
According to the FBI, cargo theft is estimated to cost the U.S. $15-30 billion a year, though that number may be even higher, since some businesses are reluctant to report thefts out of concern for their reputations or their insurance premiums.
Criminals consider cargo theft low risk and easy to do -- trucks filled with goods can be found anywhere, are often unmonitored and can be moved in a matter of minutes. When criminals do get caught, the risk of serious jail time is low.
“Florida and other states are trying to introduce legislation to make cargo theft penalties more severe. But right now you can go steal a load of electronics worth millions of dollars and you’d be prosecuted under vehicle theft. Your risk as a criminal is much lower than if you tried to walk into a retail store with a gun and steal product,” conveys Sullivan.
Sullivan notes that organized crime is often behind most cases of cargo theft and certain gangs from other countries are even involved. These organizations focus on areas with the easiest point of entrance, where cargo is moved frequently and missing goods easily go unnoticed.
Miami and other parts of the southeast U.S. has been a hub for cargo theft activity due to easy access to South America and Latin America.
To combat this, FBI and local law enforcement have set up task forces in major cities where cargo theft runs rampant.
“Florida has set up a task force to deal with cargo theft and it has had a huge impact in moving cargo theft problems out of that area,” says Sullivan. “Their efforts have resulted in numerous arrests and seizures, but they haven’t even tipped the iceberg,” he adds.
“When one area increases its enforcement, the crime moves to another area -- like squeezing a balloon -- so these criminals are continually moving to other parts of the southeast as well as other parts of the country,” he says.
Are you an easy target?
In order for companies to determine their risk for fraud, they first need to understand their organization’s vulnerability and risks. Manufacturers should evaluate what areas of the organization are at risk and what controls have been put in place to mitigate those risks.
“I often see a companies put in security cameras or a security guard, screen employees coming and going from the facility, install a security fence or access controls. But sometimes these controls can present a false sense of security if those companies really haven’t understood where they’re vulnerable,” says Sullivan.
Internal theft is a common fraud occurrence faced by all companies. Poor internal controls and poor physical security controls allow employees to take advantage of a company.
“A company can have the greatest physical security, yet if I can use internal systems to move product out of a facility and do that undetected, then all that security would never catch me in the act until probably much later in the process when you’ve already paid for it in other ways,” he continues.
As a result, companies should look at not only their physical security systems, but also look at ways in which a customer, vendor or employee might take advantage if they could. Sullivan suggests looking at those opportunities to brainstorm ways to make sure that it didn’t happen -- or if it did happen, what procedures would be in place to immediately handle the situation.
“When a company does that, it becomes a true loss prevention program,” says Sullivan.
Fraud suspicions
If manufacturers suspect fraud in their supply chain, they should first gather information and document it. There are a lot of investigative tools available to companies that can help them document what is taking place.
“If you have a suspicion that fraud has occurred or is occurring, you want to keep that information closely guarded, because if you do have fraud, you don’t want to tip anyone off that may be involved in it as they’ll cover their tracks to make it more difficult for you to detect it,” Sullivan advises.
“The first thing is to gather as much information as quietly as possible. Work with your in-house or outside counsel to be sure that you have proper guidance on conducting an internal investigation because you can do things that can really ruin your chances for litigation or prosecution if you have a big fraud,” he says.
Sullivan advises that companies work under the guidance of skilled investigators or lawyers, or both. The important thing is to gather as much information as possible quietly with professionals that understand how to conduct such an investigation.
Mark Sullivan is head of Loss Prevention and Managing Director in Kroll’s Chicago office. For more than 20 years, Mark has worked with companies worldwide to develop and implement anti-fraud programs, inventory control, detection of internal and external theft and awareness enhancement for staff. For more information visit www.kroll.com
