The scam started simply: Someone took the information of a Canadian company that had been inactive for several years, renamed it and began placing orders with building supply companies. But whoever placed the orders never intended to pay for them. Before anyone realized what was going on, the scammer had ordered from more than 180 suppliers and run off with $9 million worth of products.
This sort of fraud isn't as unusual as you might think. According to a recent survey, 19% of all online B2B inquiries are fraud attempts, and 77% of businesses have lost money due to fraud. B2B fraud can take many forms, including account takeovers, business identity theft and even shell companies set up for the sole purpose of committing fraud.
Fortunately, with a combination of deep risk expertise and the right technological tools, B2B companies can protect themselves from rising levels of fraud.
Put automation to work on fraud
Automating customer transactions can be a powerful step in the fight against fraud. On the one hand, electronic applications and payments introduce new opportunities for fraud, as potential scammers don't have to face the scrutiny that comes with human interaction. On the other hand, with automation comes a set of powerful new tools that can detect possible fraud attempts.
B2B businesses with an automated e-commerce platform should strongly consider adding fraud indicators to their credit decision engines. These indicators can take the form of home-grown algorithms, external software or a combination of the two. Many providers partner with businesses to build this type of technology, which can give the green light to trustworthy businesses and flag potentially fraudulent accounts.
Look out for common red flags
Whether you do it in-house or rely on a technology partner, be sure your fraud indicators take into account the unique factors of your industry, since different businesses are exposed to different types of fraud. That said, there are some common red flags your automated system should be programmed to watch out for. For example:
- An application comes from an unusual or high-risk zip code.
- A shipping address doesn't match the company's office location.
- A new customer's first order is for high-risk products.
- A company doesn't have a significant credit history.
- A company's financial statements include mistakes.
- A company's ownership has undergone suspicious changes.
- A company claims sizable revenue but doesn't show up in commercial credit bureau reports.
If your automated system catches one or more of these red flags in an applicant or customer, it can kick the application out for manual review. Then your credit professionals can investigate the suspicious elements and determine whether they're innocent aberrations or indicators of fraud.
Monitor fraud on an ongoing basis
The initial application isn't the only point of contact at which your business should be alerted to the possibility of fraud; sometimes fraudulent activity doesn't become apparent for a while. For example, say a new customer keeps exceeding its credit limit. This could be a great new customer for your company, or it could be someone trying to pull one over on you. An automated credit system can flag this customer for review before you extent additional credit.
Just as your automated credit system can be set up to regularly monitor customer risk, so too can it be programmed to watch out for fraud. Detective controls should be put in place as part of a comprehensive monitoring system.
As for the fraudulent Canadian company, BlueTarp was working with five suppliers that were contacted by it. Luckily, we saw a few red flags right away. For one thing, the company had no credit activity for more than a decade. Its phone numbers were all 800 numbers. Its address was in Quebec, but its website was English-language only, even though all Quebec company websites are legally required to be in English and French. Finally, when we checked its reported office location, we saw that it was in the middle of an empty field. We helped the companies we were working with cut ties with the scammer, and avoid the costly consequences of falling victim to fraud.
Written by Sarah Faatz, Director of Credit Risk Management
Interested in learning more?
Check out Ten Insider Tips: How to Judge Creditworthiness