It’s easy to get caught up in what in hindsight are obvious scams in the logistics. With a recent increase in customers informing us about fraud courier companies taking money upfront for deliveries that never happen, we provide some guidelines you can take to minimise the risks of being caught out.
Customers have informed us about scams where goods are offered for free on customer trading portals, so long as the buyer transfers funds through what seem like respecatble means to pay for the courier. Of course- the funds dissappear and the goods never arrived.
So below are a few steps Mark Sullivan of risk consulting firm Kroll gave in the Global Fraud Report Issue 4, April 2008.
- Undocumented selection of vendors or service providers
When a single individual selects service providers, then related, controllable, or illicit players can be chosen. A more effective process requires competitive bids, the oversight of a company controller, and the establishment of a cross functional team to select carriers, third-party logistics providers, or warehouse facilities using predefined criteria.
- Rates paid are not in line with the company’s standing in the market
Benchmark the rates you pay to service providers. It is difficult for a carrier that earns a fair profit to distribute part of its revenues in kickbacks or illicit payments. Even criminal carriers have to pay their drivers, purchase gas, and provide equipment. One way to amass a slush fund is to charge slightly above market rates on every transaction, saving these small overcharges to make big payouts.
- Payments made outside of the normal account payable system
All payments to a vendor must first be matched to a purchase order and proof of delivery. Progressive companies will calculate freight movement costs, create a purchase order for the planned move, compare invoices, and insure that the delivery took place.
Be careful if payments to service providers are: not matched to a unique purchase order or load number; hand delivered; processed outside of the normal accounts payable system; not accompanied by proof of delivery; paid without an automated calculation of what the charges should be; or approved manually.
- Executives with unexplained lifestyle improvements or an extreme debt load
Some of the more common items to look for are luxury cars, trips or vacations with representatives of the supplier, and purchases of real estate.
- Business going to related parties
When a manager can choose a service provider with little scrutiny, he can take an ownership interest in a favored carrier. For example, in an instance where the logistics manager had sole responsibility for authorizing 100% of the moves, matching all of the rates and invoices, and demonstrating that rates paid were market competitive, we learned that he covertly owned part of the sole service provider. This carrier also artificially increased its invoices to the company by using sub-optimal equipment, raising the costs for our client by 20%.
- Unusual payment patterns
Use technology to mine your own data and create exception reports. When controls around payment matching and approvals are weak, service providers will learn that a company does not notice when they over bill, double bill, ghost bill, or bill for the wrong service. Falsified invoices, however, rarely follow the same patterns as those from honest suppliers.
Any of the following might indicate fraudulent activity: a dramatic increase in payments to one vendor; a high number of transactions under audit thresholds; consecutive invoice numbers or multiple invoices on the same day; or payments highlighted by exceptions to Benford’s law, which states that numbers that occur naturally in business follow some basic patterns. Perpetrators of fraud rarely have the knowledge or capability to fake these.
- Complaints or tips
While logistics managers or executives may wield the power to navigate weak controls to perpetrate fraud, they have a harder time fooling those working closely with them. Eventually, they try to get rid of nonconformers or exclude them from the “in crowd.” Paying close attention to the dynamics within a department and the comments or complaints lodged by coworkers can provide significant clues that things might not be what they seem.
