What is vendor fraud and how to protect your business from vendor fraud
Table of Contents
- Published: Mar 24, 2025
- Last Updated: Mar 27, 2025
Vendor fraud is a type of financial abuse that occurs when fraudsters pose as legitimate businesses to trick companies and individuals into paying for services they’ll never receive. These schemes exploit organizations, putting their victims at risk for financial and reputational losses. Moreover, the occurrence of vendor fraud has been rising in the last few years. Some reports even rank fake vendors and invoice fraud at the top of the list for the country’s most devastating Business-to-Business schemes.
Any consumer could fall victim to buying something from a fake vendor, just as scammers could trick any company into paying invoices for services it will never receive. In either case, the consequences of being targeted by scammers can be significant. However, by learning about the threat, how to identify it, and how to prevent it, consumers and business owners can help overcome the dangers of vendor fraudsters.
What Is Vendor Fraud?
As mentioned above, vendor fraud comes in many forms. Consumer vendor fraud generally refers to fraud committed by consumers against vendors, such as when someone obtains a service and requests a refund without intending to return their product. In contrast, fraudsters also pose as vendors, typically to receive financial or operational information, such as when a company receives duplicate invoices and is coerced into paying both.
Vendor fraud of the latter type can affect businesses of all sizes, from individual contractors to mega conglomerates like Google. Even worse, vendor fraud can include business-on-business crimes—where vendors, suppliers, or service providers overstep to gain something from their ‘client.’ Fraudulent schemes can occur within any organization, but some types (below) would put any bookkeeper on edge.
Common Types of Vendor Fraud
Learn to identify the handwriting of vendor fraudsters; here’s how they usually act:
False Billing or Inflated Invoices
Falsified invoices and bills are a prevalent form of vendor fraud where one company attempts to overcharge or inflate service costs for another. False billing scams can be challenging to predict and are often discovered following itemized bills. To avoid inflation costs from fraud, stay current on the costs of the company’s products and ask for itemized bills whenever possible.
Kickback Schemes
Other times, malicious employees can victimize vendors. These insider schemes can harm a vendor’s reputation, including service, monetary, or personal bribes in exchange for specialized treatment. Kickback schemes can be avoided by routinely checking the performance of employees at all levels.
Substandard or Short Delivery
Of course, some vendors are fraudsters and schemers. In cases like this, these vendors may low-quality goods or services, or goods in smaller quantities than were initially ordered. These vendors profit when their ‘clients’ accept low-quality goods, as they pocket the extra funds rather than make their consumers whole.
Duplicate Invoices
Organizations with automated or weak accounting systems are also at risk for vendor fraud. Falsified invoices sent to a weak accounting system may result in significant losses for the victim company, particularly when an impostor or fraudulent service duplicates those invoices. Implementing stronger accounting defenses, like verifying payment requests through multiple identifying channels, can help reduce these risks.
Shell Companies or Fake Vendors
Some fraudsters conduct their affairs through consumer accounts, which are taken over with stolen login details. Other fraudsters create entire ghost companies to siphon funds out of a business’s financial accounts. These shell companies ‘pass’ as a verified organization, so it may be challenging for a system to identify them as corrupt. The best way to avoid these scammers is to verify who is receiving goods and payments before any releases.
How To Identify Vendor Fraud
Looking for some red flags to understand you’re dealing with vendor fraud? Here are the most common of them:
Conduct Regular Audits
Routine financial and operational audits are critical for identifying threats within a company’s processes. Not only do they assist in recognizing potential cybersecurity vulnerabilities, but routine checks can also expose potential future challenges. For example, vendor fraud often goes unnoticed because the transactions were not large enough to trigger red flags within an account.
Monitor Vendor Relationships
Everyone knows better than to sign a contract without reading it. Service contracts from vendors are no different. Organizations should take special care to read all the fine print before accepting or agreeing to services from another vendor; if there are signs of preferential treatment or collusion between parties, it may be time to speak with legal advisors about receiving the proper services.
Use Data Analytics
Authentic vendors can further protect themselves (and their consumers) by using data analytics to review their business account histories. Analytics goes beyond routine checks of account details—the correct analytic tool can identify patterns or track potential anomalies when particular transactions occur. That can prevent fraud because officials can immediately take precautionary steps rather than wait for an active scheme.
Implement a Whistleblower Program
Relying on their employees would best serve companies, but others—like those in an industry with a kickback culture—may find trusting their counterparts challenging. Organizations that can establish anonymous reporting processes can reap rewards through volunteer whistleblowing. Cautious employees are more likely to flag suspicious activities, which can assist in keeping kickbacks controlled and discourage future scams.
How To Prevent Vendor Fraud
Is there a way to secure yourself from fraudulent activities? While there is no 100% recipe, the below steps will significantly increase your chances of staying safe.
Vet Vendors Thoroughly
Vendor fraud prevention begins with companies verifying every party they interact with; this may include conducting background checks with law enforcement, verifying the credentials of official accounts with institutions, and ensuring vendors are legitimate sources for the products they provide.
Set Clear Contract Terms
Vendors can also prevent fraud by establishing defined terms for each transaction. Highly detailed contracts should include what both vendors agree to supply each other and outline consequences for non-compliance. If one vendor violates the agreement, the contract can be legally valuable.
Segregate Duties
Organizations are also better protected from fraud when they separate deposits and billing responsibilities. Segregating these responsibilities reduces fraud risks because additional authentications are necessary to manipulate either’s access. The same notion can be applied to role-specific authentications, building walls in front of a threat.
Monitor Payments Closely
Financial fraud is best detected through consistent account monitoring, as in the consumer world. Monitoring an account involves more than verifying transactions and delivery schedules; it also involves up-to-date histories with required approvals at checkstations. The closer an account is watched, the faster account owners can stop suspicious activity before it becomes an issue.
Use Vendor Management Systems
Some organizations may consider themselves “too small” to be targeted by vendor fraud. These officials may also think fraudsters only target corporations because their insurance would likely cover the costs of any fraudulent losses. However, these are incorrect assumptions. Scammers can target any company for vendor fraud, and small businesses are being victimized more often these days than their conglomerate counterparts.
The Role of Technology in Preventing Vendor Fraud
As contradicting as it is, technology, on the one hand, gives more tools to fraudsters, but on the other hand, it allows people to protect themselves from that.
Vendor Management Software
As we all know, technology is the future for any vendor. How they use the tools available to them at that status will determine how well they are protected from vendor fraud. Many industries offer automated vendor verification services, while others monitor all account transactions. Either way, vendor management software is critical in preventing vendor fraud.
Data Analytics and AI
Advanced analytics are another way technology is preventing vendor fraud. Professionals can build AI services to flag patterns or anomalies in vendor behavior by collecting and analyzing the activities within a system. These statistics are also valuable if there are ever data breaches within a neighboring organization; vendors must report data breach incidents to their clients and partners, but they may have up to a year to avoid telling the impacted parties.
Blockchain for Transparent Transactions
“Blockchain” is the name given to a type of transaction transparency tactic. These systems offer a list of all projects within a network and traceable information about each project before it moves to its next production phase. Due to their many layers of authentication, blockchains are designed to be tamper-proof; they streamline production, improve collaboration, enhance security, and play a significant role in preventing vendor fraud.
Vendor fraud is a financial abuse class that damages companies more than consumers. Organizations often fall victim to these fraudsters when partnered companies suffer employee email takeovers; however, consumers are also at risk from vendor fraud, particularly if they order goods or services from a fake provider.
Waiting for vendor fraud isn’t a solution—by then, a small business may be forced to close its doors. Instead, organizations and consumers must take preventative measures to protect themselves and each other. Moreover, consumers and employees should consider vigilance when interacting online or verifying purchases; it can go far in preventing fraud.