Thirty percent of surveyed businesses reported that they have experienced some sort of supply chain fraud. So why do only 13% monitor supply chain fraud on an annual basis and only 12% on a quarterly basis? Supply chain fraud comes in a variety of forms, but the two most common types are corruption and conflict of interest. Both types lead to the ‘unlawful loss’ or ‘unlawful advantage’ that establishes supply chain fraud. These types of fraud are typically achieved through direct theft of assets, false reporting and the falsification of performance reports, and technological abuse. Supply chain fraud is a rising concern due to the growing complexity of the supply chain as a whole. While data is now much more available through top technologies such as ERP and WMS, many of the executives surveyed are not deploying data analytics tools that can help in identifying instances of fraud. The industries suffering most from supply chain fraud are life sciences/healthcare and energy/resources. Both of these industries saw significant fraud increases between 2014 and 2016. These operations, among all others, would benefit from a regularly scheduled audit program. This has proven to be the most effective method in identifying, eliminating and preventing fraud. Record and communicate these procedures to every team member to establish clear expectations and standards. To learn more about solutions available to prevent supply chain fraud contact Datex experts today at marketing@datexcorp.com or 800.933.2839 ext 243.

1. Supply Chain
Management Basics:
Preventing Supply Chain Fraud
By Angela Carver

2. Supply Chain Fraud
• In the recent Deloitte Financial Advisory Services poll, respondents
reported that a mere 12% monitor their 3rd party partners for fraud,
waste and abuse quarterly while only 13% monitor this on an annual
basis.
• This is shockingly low considering of those same respondents, 30%
say they experienced some sort of supply chain fraud, waste or
abuse in the preceding year.
• Trusting employees to report any indiscretions has proven to be an
unsuccessful strategy for preventing instances of supply chain fraud.

3. What is Supply Chain Fraud?
• The Chartered Institute of Procurement and Supply (CIPS) defines
fraud as “the obtaining of financial advantage or causing loss by
deception; the mechanism through which the fraudster gains an
unlawful advantage or causes unlawful loss” in their whitepaper
• In this paper, they outline the most common types of fraud which
include:
– Corruption: the payment or receipt of any unauthorized benefit to or by an agent
for doing, or not doing, anything in relation to his work
– Conflicts of Interest: in which agents have private, undisclosed interests that
could interfere with their work and fiduciary obligations to their principles.

4. What is Supply Chain Fraud?
– Theft of assets: the unauthorized removal of intellectual capital and information
such as theft, embezzlement, false accounting, etc.
– False reporting and falsifying performance: both the creation of false reports and
suppression of material information
– Technological abuse: unauthorized access to computer systems, implanting
viruses or other malicious code, and sabotage

5. Why is Fraud a Rising Concern?
• Supply chain fraud is a rising concern as identifying these
discrepancies are becoming more complex than ever.
• With the introduction of Big Data, the quantity of information and
analytics available for analysis is overwhelming.
• Of the 2,600 executives polled in the Deloitte study, fewer than 1/3
are deploying data analytics tools designed to specifically identify
fraud or waste by vendors. Even less, at 13%, have tools and are
learning to use them while 22% have no kind of analytics tools to
identify fraud at all.

6. Fraud Prevention Legislation
• Some countries are developing legislation to stomp out rising supply
chain fraud.
• The United Kingdom, for example, has developed the Fraud Act of
2006 that was signed into law January 15, 2007.
• U.S. lawmakers have also installed many anti-fraud policies through
the .

7. Common Fraud Sources
• Supply chain fraud originates from both internal and external sources
and sometimes even both working together. Internal employment
groups with the highest fraud rates include project managers/invoice
approvers and procurement professionals.
• Financial fraud among vendors and subcontractors is also very
common. The top three sources from vendors include:
– Collusion between employee and vendor for kickbacks
– Employees creating false vendors and submitting invoices for payment
– Falsified or inflated bills from vendors

8. Industries Suffering Most from Fraud
• While some industries have experienced notable drops in fraud
occurrences, others have not been so lucky. The life sciences/health
care and energy/resources experienced significant fraud increases
between 2014 and 2016:
31
35
27
34
20
22
24
26
28
30
32
34
36
2014 2016
Fraud by Industry
Life Sciences Energy
http://www2.deloitte.com/us/en/pages/about-deloitte/articles/press-releases/supply-chain-fraud-levels-unchanged-for-third-consecutive-year.html

9. Supply Chain Fraud Warning Signs
experts identified some of the top warning signs for supply
chain fraud, waste and abuse which include:
– Bidding/procurement processes that are not robust or independent
– Lack of sufficient clarity in third-party invoice details
– Poor or strained relationships with certain third parties
– Infrequent or non-existent “right-to-audit” assessments of suppliers and licensees’
practices
– Little-to-no oversight into proper administration of agreements with third parties
– Use of third party agreements that are sole-sourced without a clear explanation or
are constructed as cost-plus agreements without clear definitions of cost or other
terms.

10. Best Practices for Preventing Fraud
• Supply chain management experts have identified best practices for
mitigating and preventing supply chain fraud.
• Of these best practices, the one that has proven most effective for
operations managers are regularly scheduled audits and inventory
counts. This helps to monitor and confirm compliance.
• Effectively recording and communicating these procedures to both
management and staff helps to establish expectations and
standards for dealing with internal and external resources.

11. Impact of Supply Chain Fraud
• Supply chain fraud can impact all aspects of your operation. In the
CIPS study experts identified corporate level issues including:
– impacts on bottom line, cost, asset valuation and utilization, corporate asset
acquisition and disposal
– impacts on customer/client/stakeholder records and support
– relates to all aspects of business and commerce
– effects shareholder confidence and share values
– brings loss of operational integrity
– adds to litigation and insurance costs
– impacts on staff morale
– reduces credibility of management
– diverts management resources
– subverts organization’s strategic objectives and policies

12. Impact of Supply Chain Fraud
– impairs brand value/image and lessens the balance-sheet value of goodwill
– increases reputational risk
– impacts on corporate standards
– must be seen in the wider context of managing all risks
– must identify the processes or activities at risk of fraud
– risk to product and service outputs/deliverables
– risk to operational areas/locations • risk to revenue generation/profitability
– risk to cash flow
– risk of unbudgeted increases in expenditure.

13. Conclusion
• Do not leave your supply chain at risk. With increasing complexity
due to globalization and Big Data fraud, waste and abuse have
become increasingly more common.
• Clearly identify risk areas, establish and communicate protocol and
remain diligent in order to mitigate supply chain fraud from both
internal and external sources. This will help to improve customer
satisfaction, reduce costs and improve the overall efficiency of your
supply chain operation.
• Consider utilizing data analysis tools in order to take advantage of
Big Data. This added insight could prove useful in reducing the risk
of fraud.

14. Contact Datex to get a FREE business
assessment to identify potential areas of risk
in your operation.
Get My Free
Assessment