COVID-19 has created previously unthinkable consequences for businesses and society in our lifetime. Organized crime has been quick to respond, mounting large scale orchestrated campaigns to defraud businesses, preying on fear and anxiety related to the pandemic.

While businesses are severely disrupted and in many cases their very continuity hangs in the balance, those that are able to contain cash have shifted up gears to maintain operational resilience. During this time companies that scrambled to mobilize their critical home working arrangements need to ask a fundamental question - who is keeping an eye on the inherent fraud risks associated with supply chain disruption? Is this the unforeseen pandemic which could cripple your organization?

Board and senior leadership attention is rightly diverted to address immediate priorities such as liquidity and capital management in the current environment. This provides fraudsters with a head-start to exploit any new or enhanced vulnerabilities in your supply chain. Business resilience lessons have demonstrated that supply chains need to be agile in order to remain effective in the current climate, but they also need to continue to effectively manage risk.

This blog, the first in a series, examines reasons why your supply chain is so highly vulnerable to fraud in light of the COVID-19 pandemic. It’s imperative for you to understand how to navigate through these unprecedented challenges and make informed decisions now in order to avoid significant financial impact in the future.

Why supply chain fraud?

Supply chains are inherently vulnerable to fraud due to:

  • their global reach
  • the complexity of the operating environment including the involvement of third parties
  • the sheer volume and scale of transactions.

Additionally, the current volatility in supply and demand for goods and services arising from the COVID-19 pandemic, constraints in mobility and traditional business operations, falling share prices and unforeseen business failures, as well as intense pressure to reduce costs, means that businesses on every continent are faced with an extraordinary challenge.

Unfortunately, every link of a supply chain presents opportunity for ‘bad acts’ including fraud, bribery and corruption. I’ve seen an upsurge globally in reported fraud attempts related to COVID-19 and expect this trend to continue to rise.

In preparing business continuity responses, you need to look at the fraud, bribery and corruption risks very closely for cost optimization within the supply chain. The fraud losses could cost your organization more in the long run as experience shows that seemingly small supply chain fraud events, perpetrated while controls are weakened, can snowball to a significant losses over time.

Supply chain fraud is typically opportunistic and in the majority of cases involves complicit behavior from an internal source and frequent collusion with a third party. COVID-19 has presented ample opportunities for criminals to exploit; taking advantage of current supply shortages, reduced or immobile workforces, poor oversight and weakened approval processes, low productivity or staff morale, and instilling fear in a public that has become desperate from a situation as unprecedented as this one.

How to detect supply chain fraud

Experience shows that less than half of instances of supply chain fraud is identified by fraud risk management controls, most were accidental discoveries. This is a stark contrast from traditional fraud schemes which can be relatively easily detected through, for example, automated fraud rules and alerts or identity and access management controls. Supply chain fraud therefore requires a deeper understanding of scenarios and schemes that bad actors can perpetrate against organizations.

Supply Chain fraud action plan

You need to ensure that your organization is able to understand and take the necessary steps to navigate supply chain fraud. Questions and considerations to ask yourself…

  • Analyze your supply chain
    • Examine all links in your chain – manufacturers, sub-manufacturers, distributors, logistics providers, agents, brokers and so on. Who produces your materials and products and who are your supplier’s suppliers? Can you identify all the tiers of your supply chain? Indirect exposure to fraud is often overlooked.
    • What components of your supply chain are critical to your organization? Has any form of risk segmentation been conducted?
    • What is the global reach of your supply chain? Map this to the current levels of impact, border restrictions etc.  
  • Identify your risks
    • How is your employee sentiment currently?
    • How robust are your vendor risk management controls in a remote working environment?
    • Do you have any critical suppliers in countries which have been worst hit by COVID-19? Could this lead to exploitation / anti-competitive behavior?
    • Do you rely on materials which could be scarce within the short or medium-term?
    • Do you really ’know’ your suppliers and vendors? What is their background and reputation?
  • Define your solutions
    • Have you performed an interim fraud risk assessment to identify any weaknesses in the existing control framework and sought opportunities to enhance controls to meet the heightened risk? The more you know about the risks you’re facing, the greater the chance of effective risk management and fraud prevention.
    • Perform a ‘pulse-check’ on employee wellbeing. Supply chain fraud often fails without a complicit internal aide. Take measures to foster a cooperative and compliant culture and manage the risk of low morale and increased motivation and rationalization to commit fraud.
    • Liaise with your procurement and operational risk teams to identify areas where risks can be mitigated through. Managing inherent operational risks will have a positive impact on lowering your exposure to fraud risk, as it minimizes the opportunity for exploitation by suppliers and fraudulent vendors.   

To minimize the opportunity for supply chain fraud, you need to examine your end-to-end supplier ecosystem, and ensure your business supply chains remain agile to order to effectively reduce exposure to fraud.

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