Detecting and Preventing Fraud During Vendor Onboarding

• Post author By Ady
• Post date October 7, 2022
• Category Business

As businesses globally are understanding the importance of employing additional fraud prevention methods, it has led to a dramatic fall in fraud rates. Handling the aftermath of fraud is becoming super expensive for businesses. This is why the adoption rate of new technologies and compliance rate is improving.

Unfortunately, even after several significant changes in the industry, vendor fraud is a major issue. Fraudsters who aren’t able to break into financial institutions and banks move on to vendor fraud. The reason why vendor fraud is one of the most growing categories is that businesses are highly vulnerable to attacks.

For businesses to identify and prevent vendor fraud, proper knowledge is needed. The more knowledge a business has, the better it can protect itself.

What is Vendor Fraud?

Vendor fraud is basically fraudsters manipulating a business’s payment system. This is done to steal goods and money. In almost all cases, vendor fraud is done with the intent of stealing money.

Any business can be a victim of vendor fraud, but it differs from business to business. Vendor fraud can happen through collisions with third parties. It can also happen because of untrained employees within the organization.

The most common examples of Vendor fraud include:

• A hacker manipulates a business’s payment systems to generate fraudulent vendor payouts.
• A vendor that fails to falsify receipts or documents slowly steals money from a business through its ongoing transactions.
• A group of employees wants to steal money from the organization.
• An employee steals company checks and deposits them into a personal account.

Which Businesses are at a Risk of Vendor Fraud?

Businesses that don’t have the right level of security and scrutiny are at the most risk of vendor fraud. Businesses that are small and mid-sized often fall prey to vendor onboarding fraud.

It makes a lot of sense for fraudsters to target small-scale businesses. More than often,  small businesses rely on small teams to handle a variety of tasks. This can easily lead to mistakes. A lack of robust checks and no adoption of technology can lead to vendor fraud.

As businesses scale up and comply according to laws and regulation, it helps in preventing fraud. Companies that follow all the compliance guidelines tend to be less open to fraudulent activities due to mistakes. To combat the sophisticated methods used by businesses, fraudsters are also developing new methods.

Types of Vendor Fraud

Vendor fraud is different for every organization. There are multiple categories, that include:

• Billing Fraud: Billing fraud refers to payment-related fraud, it can be done in 2 ways by employees. Sometimes, fraudsters make up a fake vendor, or sometimes the employees make up duplicate payments by using actual vendor details.
• Fictitious Vendor: An employee with adequate information about a vendor can make up a fake vendor. Or, they can register as a new vendor and get regular payments on this account.
• Duplicate Payments: An employee can use actual vendor information to make fake information and generate fake payouts. The same payments and extra payments can be transferred to employees’ accounts.
• Check Fraud: This vendor fraud involves an employee engaging in forging or modifying information available on the check of a vendor. They do this to get payments into their own accounts.
• Accepting Bribes: There’s another type of vendor fraud that’s quite common. A vendor pays some kind of commission to employees for helping them get additional sales or benefits.
• Excess Bills: Whenever vendors issue an invoice for bill payment, and if it’s more than the desired amount, it’s called over-billing. This is also considered a type of vendor fraud.
• Price Fixing: This fraud happens when 2 or more vendors make a deal together and fix the price of a product at a higher value. The buyer has no option other than to pay higher prices to the vendors.
• Cyber Fraud: This is the most complex type of fraud to detect. Hackers can act as a vendor even when they don’t have any relation to the company. They operate completely from the shadows and they are able to create a fake vendor profile. They try to trick businesses into making payouts for goods and services. Needless to say, all the records and bills are fake and fabricated. This is what makes it one of the most challenging types of fraud to detect.

Detecting and Preventing Vendor Fraud

There are some basic rules and regulations every business needs to put in place to prevent vendor fraud.

1. Vendor Controls

Businesses need to set up a checklist outlining all the guidelines for vendor onboarding. Here are some common things you can keep in mind:

• Businesses need to follow all the due diligence procedures. There should be extra attention to verifying information provided by the vendors. Online document and online vendor bank account verification technologies can help in streamlining this process.
• There should be a centralized vendor database with your preferences. There should also be a list of high-risk vendors.
• Businesses need to conduct thorough checks of all the vendors. Using technologies to do so can save both time and cost.
• Checking bills issued by vendors is a good practice to make sure you’re paying for things that you don’t have to.

2. Employee Measures

A lot of times employees help vendors orchestrate the fraud. To prevent this, businesses should have some guidelines for their employees:

• Doing thorough background checks during employee onboarding can uncover hidden red flags.
• Keeping financial information limited only to high-level employees. 
• Larger businesses should separate the duties of employees for better accountability and control.
• A person that’s in charge of handling vendor information should be different than those who approve these vendors into the organization. 
• Smaller businesses should rotate the duties of employees in vendor/AP/purchase departments. Or to make processes easier, businesses can hire managers for different tasks.

3. Set up Due Diligence Processes

Before you onboard vendors, you need to have a proper due diligence checklist. Having a proper guideline can help newer employees onboard vendors that are legit. As a business, you need to conduct thorough vendor verification. You need to make sure that the mailing addresses are correct. Check if the bank account is legit. Verify if the information and document submitted by them are original and not tampered with.

Conclusion: Vendor Fraud Prevention Guidelines

Vendor fraud can impact your business in a lot of ways. Prevention of vendor fraud requires proper planning and sticking to the plan. Preventive measures should be a priority for most businesses, and they should also focus on technologies that can help make the process easier.

4 Best Ways to Protect Your Vendors’ from Being Attacked by a Cybercriminal

• Post author By Ady
• Post date August 5, 2022
• Category Business

In the public landscape, vendor bank account fraud is growing at an alarming rate. A vendor contacts the accounts team to tell them they haven’t received the payment. The accounts team then checks the data and finds out that they’ve paid the invoices. So, when more due diligence is done, it is found out that the money wasn’t sent to the Vendor’s account but to some other account altogether. What happened was that a fraudster got into the systems and changed the Vendor’s bank account information.

This situation has happened a lot in recent times. Most recently it happened with Scott County Schools where they lost $3.7M. Eventually, they were able to recover the funds. And they decided to put some safeguards to prevent something like this from happening again.

Another similar situation happened in the “City of El Paso, TX” where they uncovered $2.9M, and $300K payments were sent to a fraudster. Unfortunately, they were only able to recover $1.6M and $292K from the payments. To prevent this from happening again, they decided to verify vendor information before every single payment.

Regardless of the fact your company has been in a similar situation or not, there are 4 basic steps you can follow to prevent fraudsters from changing banking information.

Prevent Vendor Bank Account Fraud

1. Build Custom Vendor Banking Forms

The first and foremost thing you should do is to build a banking form for all the vendors. The reason for doing so are:

• Don’t accept banking information in an email body. An email with banking details doesn’t provide authentication so that’s why you build the form.
• Change the form every year. This way your team can distinguish between fake and real forms. If they receive an old form, they can ask the vendor if there’s a mistake.
• Add vendor authentication on the form. Existing vendors will have to add some kind of information that’s unique to them. No one except the vendor should have that information as it helps in reducing the risk of fraud
• Your form should require a digital signature. Be careful while building a PDF form with a digital signature built into the form. To avoid emails and calls from vendors saying they’re facing errors, let the vendors use their own digital signature tool.

2. Verify Bank Information

This is a vital step in preventing vendor bank account fraud. As you confirm a vendor’s Legal Name and Tax ID to match IRS records, you should also confirm the bank account information to match them against your records. Moreover, you can use DIRO’s bank account verification service to make sure the documents provided by your vendor are true.

3. Contact Vendor to Confirm Information Change

Once you’ve received the updated form, and confirmed all the data against your records, it’s time to contact the vendor. Call the vendor to verify the changes if there are any. This may seem cumbersome to both parties at first, but the benefits outweigh the pain. There won’t be any payment delays, and you won’t have to try to recover lost money.

While verifying the information, keep in mind that the vendors may not respond right away, so you need to find a way to keep track. If the Vendors don’t respond in time, don’t process the payment.

4. Send Notification to Vendor After Information Change

If there are any changes in the vendor banking information, you should build a system that sends an automatic notification system. Whenever the information is changed, the vendor will receive a notification.

How to Make This Process Efficient?

Building and setting up this process takes up a lot of time. But the process is crucial as it helps vendors and yourself be safe from fraudsters. Implement a vendor self-registration portal for vendors to authenticate themselves and prevent fraud. On the portal, vendors can authenticate themselves and also update their banking information as per their preference.

Best Practices to Follow For Merchant Onboarding and Monitoring

• Post author By admin
• Post date August 30, 2021
• Category Business

Merchant onboarding is the key to growth for any kind of business, regardless of the fact if you’re a merchant acquirer, a payment service provider, or anyone else. As a business, you would want to have as many merchants to support more transactions. But, onboarding more merchants without proper due diligence can cause more losses than benefits. Businesses need to follow the best practices in merchant onboarding and monitoring practices.

As a business, how can you balance trade-offs, ensuring that you can quickly and seamlessly onboard merchants that can be trusted? While good merchants can improve your business operations, bad merchants can put you in heaps of trouble. 

The global payment market is growing rapidly and changing quickly as the sophistication of both technological and fraudulent attacks is advancing. There are numerous ways businesses can utilize to improve the risk assessment, monitoring, management, and onboarding of merchants. 

Before we jump into the methods of merchant onboarding, businesses need to be aware of risk management processes.

Risk Management for Merchants

The risk management approach for merchant onboarding is vital for learning how to onboard merchants:

• What is the transaction level of the merchant and their network?
• What is the industry type your business operates in?
• What is the transaction amount and range?
• What payment channels are they going to use?
• What countries do the merchants operate in?
• What resources are necessary to properly onboard and monitor the merchant?

As not all merchants are the same, the level of risk and the due diligence checks that you need to do are also different.

It’s true that there are different levels of due diligence for each merchant, but there is a standard that must be met across all the due diligence checks. There are some legal compliances that have to be followed, such as KYC & AML. There are some standard rules of the card networks, they demand that there are specific legal contracts with all merchants that control all the relationships. Other rules regarding credit underwriting, as the merchants have to be in effect by offering unsecured loans.

How does Merchant Onboarding work?

Onboarding the right merchant can be tough, but with the right steps you can successfully onboard a merchant:

• Pre-screening
• Merchant KYC procedure
• Merchant history checks
• Business and operational model analysis
• Web content analysis
• Information security compliance
• Credit risk underwriting

One major factor for creating a more successful onboarding process is blending automation with human effort. Most of the industry runs around manual work such as data entry, which has to be done multiple times. Manual work takes up a lot of time and it has a lot of room for human error. This is why a blend of human error and automation is necessary for detecting and preventing merchant onboarding fraud. Combining human and machine efforts can be considered one of the best practices in merchant onboarding and monitoring.

Automation allows businesses to have a smoother integration between the merchant onboarding steps. With the right technologies, you can make the whole merchant onboarding process automated. Businesses need to understand the importance of best merchant onboarding practices.

What is Merchant Monitoring?

Payment service providers and other businesses shouldn’t stop their risk management after they’ve onboarded merchants. What happens when a merchant changes the nature of their business? A change in the risk criteria requires reevaluating the risk profile of the merchant. When a merchant changes their business model, they can be doing damage, so it’s better to reassess the merchant profile:

Here are some of the best merchant monitoring best practices:

• Spikes in activities
• Exceeding thresholds
• Out of area or cross country transactions
• Changing website products or links
• Including people from the sanction lists
• Adverse media mentions

For monitoring the merchants, automation has seen some efficiency. The industry is getting tougher to survive in. There’s a lot of competition, encouraging growth in high-risk segments and markets. There is a huge rise in CNP fraud, as counterfeit fraud becomes more difficult.

How to Verify Bank Accounts For Merchants?

• Post author By admin
• Post date May 31, 2021
• Category Business

The finance industry is full of fraud every step of the way, and merchants’ bank account verification and customers are important. Businesses use some common practices to collect and verify bank account details. The method for verification for merchants’ bank accounts differs from business to business. There are multiple ways to verify bank accounts for merchants, here’s how to verify bank accounts for merchants.

Verification of Merchants Bank Account

Banks & businesses go through countless transactions every day and being able to verify bank information instantly can mitigate the risk of fraud. Each method helps in the merchant funds verification. 

1. Manual Account Collection

One of the simplest methods to collect and complete merchants bank account verification

is to ask the customers or vendors for their bank account information. Without verifying bank information, you are putting your business at unnecessary risk.

You can work without verifying bank account information with trusted identities like law firms. If huge transactions are being made, the ideal choice would be to collect their account information and verify the information. 

2. Voided Checks

Before the rise of digital banking technologies and online services, banks used to verify account details by using a voided check. This method of verification for merchants bank accounts used to work in the old days, but not today. 

A check has all the information needed to make a payment, such as the “account number, the routing number, and the account holder’s name”. This method used to be very efficient in the old days, but with the rise of new technologies, it has become tedious. A merchant requires you to void a check and scan it. Although with sophisticated image doctoring technologies, the scanned image of the check can be changed. In comparison to that, using micro-deposits for bank verification is a much better solution. 

3. Micro Deposit Verification

Micro deposit verification is used by multiple banks and businesses to verify a merchant’s or customer’s bank account information. The process of Micro Deposit verification came into existence with the rise of digital banking. This process requires the bank or businesses to be on hold of a customer’s account information.

The businesses will tell the merchants that they’ll send two different transactions to the bank. The accounts will be verified if the merchant can tell the exact figure that was deposited in their accounts. The most common method is to send two different transactions from two different accounts to the merchant’s bank account for double-checking. Micro deposit is a well-known merchant fund verification method. 

4. Instant Account Verification

The newest and the smoothest process is instant account verification for merchants bank account verification. These solutions enable a direct link into the bank and collect and verify bank account ownership.

The benefit of this method of account verification is that it can be done instantly and offers better fraud detection and prevention. This solution is not widely available as the provider doesn’t offer full coverage across all the banks. While IAV is a better solution to verify merchant bank account information, it is not available everywhere and that’s why Micro Deposit verification is still available in the market. 

Merchants Bank Account Verification with DIRO

Merchant bank account verification is crucial to reducing financial fraud. Although not all the solutions offer fast, secure, and error-free bank account verification. With technological solutions like DIRO online document verification, verifying bank account holder information can be done in an instant. With secure and innovative technology, DIRO provides 100% proof of authentication that can be used as court-admissible documents with forensic data. Businesses can employ DIRO’s online document verification technology to make the workflow streamlined and eliminate the risk of fraud.