Supply Chain Fraud: Risk Management for Retail Companies

In today’s retail landscape, it’s all about the customer. Not only do they want a seamless shopping experience—but they expect it. As retail and consumer products companies evolve to meet increasing consumer demand, their supply chain operations must do so in tandem. But with the opportunity to optimize supply chains also comes risk.

Enter: Supply chain fraud. Given the sheer complexity and scale of supply chains today, it’s no surprise that fraud poses a larger threat to organizations than ever before. Often encompassing an expansive network of third parties across the globe including agents, intermediaries, resellers, distributors and partners, the systems are particularly at risk of misconduct committed in communities that are less strict in white collar law enforcement or do not avidly monitor for misconduct. To further the complexity, a range of differing business policies and procedures, ethical codes and IT systems used by each external party are interwoven into the supply chain—creating a prime environment for fraud to take place.

Why Does Supply Chain Fraud Happen?  
Ever heard of the “fraud triangle?” The framework consists of three sides: motive, opportunity and rationalization.

  • Motive: An individual’s reasons for committing fraud—this can span from the desire for financial gain to increased power and influence.

  • Opportunity: The means by which an individual commits fraud—this can occur when an organization’s internal controls may be insufficient or weak, or the organization lets down its guard in risk monitoring and evaluation.

  • Rationalization: The individual committing fraud justifies his or her behavior so that it aligns with their values.

What Does This Mean for My Business?
You may have heard the expression, “an organization is only as strong as its weakest link.” To put it simply, even the smallest exploited vulnerability can have massive repercussions on your business. Immediate consequences may include financial loss stemming from the fraud itself, as well as those associated with ongoing litigation and audit requirements. Longer-term repercussions may include business loss, reputational harm and potentially a lost of market share.
Common Types of Supply Chain Fraud
Supply chain fraud affects retail and consumer product companies of all sizes and can include bribery, money laundering, intellectual property (IP) theft and more. Fraud can also occur at any step in the supply chain—ranging from bribes during supplier selection, to forged checks during financing and fraudulent payments or payment guarantees.
Here are a few common examples:

  • Financial Fraud

  • Misrepresentation of goods or services

  • Bribery, including Foreign Corrupt Practices Act (FCPA) violations and kickbacks

  • Sanctions violations

Another factor in corruption? Collusion and collaboration between multiple employees or suppliers. In some instances, multiple employees—situated in either vertical or lateral reporting structures—conspire together to bypass or override certain business protocols and transactions to achieve their goal. Collusion may also include external third parties. Without regular monitoring, this type of collusion can slip under the radar for months or even years.
5 Best Practices for Supply Chain Mitigation
Outside of taking steps to diversify your supply chain, here are five best practices for organizations to mitigate the risk of supply chain fraud:

  1. Conduct risk-based due diligence of agents, distributors, business partners and employees.

  2. Examine your company’s hierarchy and chain of approvals.

  3. Enhance fraud and corruption controls based on risk assessments, including accounting controls, training, policies and procedures.

  4. Test transactions and controls in a timely manner using independent and objective sources familiar with your industry, local culture, business practices and applicable regulations where you are operating.

  5. Conduct, re-evaluate and refresh your Fraud and Corruption Risk Assessment regularly and consider remediation accordingly.

Supply chain fraud remains a threat, but that doesn’t mean all companies will fall victim. Active vigilance and strong internal controls will allow companies to proactively decrease the likelihood of fraud by identifying red flags early on, so that they can be stopped before they occur. Third-party risk can also be mitigated by conducting due diligence of your partners and supplies prior to onboarding and during the partnership.
The frequency and ramifications of supply chain fraud are increasing. Retail and consumer products companies must take the appropriate steps to mitigate the risks involved before they become a concrete business threat.
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