How to Handle Procurement Fraud

Procurement fraud has become more common with technological advancements. More and more unreliable vendors enter the market and commit fraud, resulting in financial losses and supply chain disruptions. Thus, it is vital to know the procurement fraud mitigation strategies. 

In this article, we will cover everything regarding procurement fraud, from what it is to its types, consequences, and efficient strategies to handle fraud. So, if you are ready, let’s start! 

What is Procurement Fraud? 

Procurement fraud is the manipulation of the procurement process with the target aim of illegally benefiting financially. It can have severe consequences on the organization as fraud results not only in financial losses but also in supply chain disruptions (low-quality products, deleted deliveries/no deliveries) which lead to business reputation damage and lost sales. 

The severity of the consequences is the main factor why businesses set up highly secure procurement processes with a variety of approval stages. 

Types of Procurement Fraud 

To be able to deal with procurement fraud and mitigate risks, you must be well aware of the main types. So, let’s briefly overview these. 

Employee or Supplier Collusion 

One of the most common procurement fraud types is employee/supplier collusion. In this case, the employee responsible for purchasing collaborates with the supplier to get the product for a higher cost for his financial benefit. Or the employee compromises the quality of the products by getting cheaper options. 

Conflict of Interest 

Conflict of interest is a typical situation when the professional responsibilities of an individual do not align with personal interests. For instance, a person responsible for the purchasing decisions or making contracts favors personal relations with the vendor and bases his choice on those relations. 

Product Substitution 

This type of fraud is also quite common, and one of the hardest ones to prevent. An eligible company that won the contract, will simply swap the products with other ones. The other products are usually of worse quality, falsely certified, and faulty. 

Product substitution is quite a costly fraud practice. If you fail to notice such fraud on time, then your end-customer will get a worse quality product, resulting in lost sales. 

Fake Companies 

In this scenario, scammers simply create fake companies. Some are quite advanced as they do not fail to register an address and establish some sort of online presence. When the contracts are won, these fake companies never deliver anything. 

This is one of the worst kinds of fraud types out there, as it can disrupt your supply chain, resulting in stockouts, bad business reputation, and capital loss.

Consequences of Procurement Fraud 

Procurement fraud can have severe consequences on your business, from supply chain disruptions to damaged business reputation. 

First of all, your company can face legal and financial implications. Fraud can result in lost trust among stakeholders, damaging business in the long run and resulting in fewer business opportunities. 

Procurement fraud also can have severe consequences on your business reputation and sales. For instance, if a fake company tricks your procurement team and fails to deliver materials, then you will run out of supply. A stockout results in lost sales. If the situation repeats itself, then it also has a bad effect on the business’s reputation. 

Finally, procurement fraud causes financial damage to the organization. The goods that are paid for never get delivered. Thus, it is not an investment but an expense. Also, overcharges and duplicate invoices result in lost capital. 

How to Know if You Are Getting Scammed? 

There are certain red flags to look out for during the procurement process. These will help you mitigate consequences and identify potential risks of fraud to prevent it. 

Duplicate Invoices and Overcharges

Duplicate invoices can be sent by accident, but watch out for the frequency of such accidents, and check the previous history of invoices to make sure you did not get scammed before. 

Duplicate invoices and slight overcharges occur oftentimes, especially in bigger corporations, where it is increasingly difficult to manage all documentation involved in the procurement process. 

Extremely Low Bids 

Let’s break down a simple example with a low price range to illustrate the point. 

In this scenario, the average market price for X goods is $100. Well, after research, the team found out that the prices of different vendors offering the same good ranged from $80 up to $120. The lowest bid here is not the issue. The red flag would be if you find the “same” good for $50-60. Then, you are most likely getting scammed. 

Extremely High Prices

In contrast to externally low bids, there are also unusually high prices. Some vendors aim to benefit from the organization as much as possible by setting up a price much higher than in the market. This can go unnoticed if the organization does not conduct research and price comparisons across different vendors. 

Upfront Payments 

While not in all cases, in some, requesting large upfront payments or deposits is a common tactic of unverified vendors. A common red flag is when the vendors pressure you to make quick decisions regarding contracts and payments. Also, unverified vendors/scammers request unusual payment ways such as cryptocurrency or wire transfers. 

These vendors fail to show records of past clients or provide you with suspicious documentation.

Strategies to Effectively Prevent Procurement Fraud 

Well, finally, let’s take a look at the best strategies to effectively prevent procurement fraud. 

Monitor Process Compliance 

Monitoring process compliance daily is vital to prevent fraudulent activities. To efficiently monitor procurement processes, you need a centralized system that will allow you to gain transparency and greater visibility, such as Tradogram. 

Train Employees on the Procurement Process 

To efficiently address and prevent procurement fraud, make sure to properly train your employees properly. Make sure everyone knows their responsibilities. In fact, you can also incorporate a software solution and assign user roles and permissions to enhance the transparency of the processes and improve process management. 

Also, educate employees on how to identify procurement fraud, such as suspicious contracts, fake companies, and other types. Make sure employees are well aware of potential risks and know how to properly assess suppliers before signing new contracts. 

Implement Measures of Control 

For instance, all employees within the procurement team must log each action taken for greater transparency. 

Conduct Regular Audits 

One of the best ways to prevent fraud is to conduct regular audits. Audits will help you ensure compliance with the procurement processes to the set standards and requirements. 

Any suspicious activities can be easily addressed promptly if you make sure to conduct regular audits. 

Incorporate Technology 

If you are looking for the best way to mitigate risks associated with procurement fraud, then you need to incorporate the right software solutions. 

Tradogram is an all-in-one procurement software that comes in handy with potent tools to successfully manage procurement and mitigate risks. Let’s briefly overview how this platform can help you successfully manage procurement and mitigate risks associated with procurement fraud. 

Centralized Database 

First of all, it offers a centralized database to store all the contracts, POs, invoices, and other documentation. It allows you to easily access any documents necessary while making sure the processes are transparent. 

Multi-Level Management 

With multi-level management features such as assigning user roles and permissions, you will be able to efficiently manage procurement teams. This will allow you to monitor activities and make sure everyone is committed to quality. 

Inventory Management Tools

Tradogram offers a variety of tools for successful inventory management. With these tools, your procurement team can easily organize and manage stock while making sure that the quality and quantity stay at high levels. 

Supplier Management Tools 

Tradogram also offers tools for supplier management, including real-time collaboration tools and supplier performance tracking. With these built-in features, you can stay in touch with the suppliers to collaborate and mitigate risks. Also, you can monitor supplier performance over time to address suspicious activities and continue partnerships with the top-performing vendors. 

Reports and Analytics 

For successful procurement process optimization, prevention of fraud, and risk mitigation, it is vital to choose a platform that offers robust analytics functionality. Accurate data will allow you to gain insights regarding all the aspects of procurement to ensure the quality and safety of the process. 

Prevent Procurement Fraud with Tradogram 

To handle procurement fraud efficiently or prevent it altogether you need a centralized procurement system. Tradogram is an all-in-one procurement software that comes in handy with all the necessary features for centralized procurement management. 

Tradogram’s features range from tracking and analytics to workflows and automation. Contact us and learn how we can help you mitigate procurement risks and increase your ROI rate.