Is Your Business Partnering with Dishonest Vendors?

Almost all (98%) of respondents to a recent survey conducted by Creditsafe expressed concern about being victimized by vendor fraud. Unfortunately, most business owners and managers aren’t well informed about the signs of this type of scam. However, familiarizing yourself with criminal methods, training employees to spot suspicious activities and working with your financial advisors can help prevent losses.

Price fixing and bid rigging

Vendor fraud can take several forms:

1. Price fixing is an agreement among competitors to set the same price for goods or services. It also refers to competitors jointly establishing a price range or minimum price. Such agreements violate the Sherman Antitrust Act, regardless of whether the prices are unreasonable.
2. A similar scheme is bid rigging, where two or more vendors agree to steer a company’s purchase of goods or services. Bid-rigging schemes might include:

• Bid rotation, where dishonest vendors take turns as the low bidder,
• Bid suppression, where two or more vendors illegally agree that at least one of them will withdraw a previously submitted bid (or not bid at all), and
• Complementary bidding, where participants submit token bids with a high price or special terms that will make them unacceptable to the company.

3. Another way vendors might cheat is through market division. This occurs when competitors agree not to compete in a specific segment of a market. For example, if bids are solicited by a customer in a certain geographic region, the competitors either won’t bid or will submit complementary bids. This drives up the price for the soliciting company.

Bribery and invoice shenanigans

You’ve almost certainly heard of kickbacks, where suppliers bribe employees. Generally, these individuals or businesses pay for workers to submit or authorize payment of fraudulent invoices. They typically incorporate kickback payments in the invoice, thus compounding the amount companies are overbilled.

Vendors might also submit inflated invoices in more subtle ways. For instance, the price charged may exceed prices agreed upon in the contract or an invoice might reflect charges for more goods than the customer actually received. In other cases, a vendor could alter the date on a genuine invoice and submit it for duplicate payment.

Minimize fraud risk

It’s probably impossible to avoid every rogue vendor, but there are ways to minimize risk. Carefully screen new vendors to ensure they’re who they say they are and have good references. Also, watch employees who have regular contact with vendors. If their relationships seem unusually close or something doesn’t look right, investigate further. Contact us for help. We can conduct a vendor audit.

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