How to Avoid Becoming a Victim of Illegitimate Vendors

Invoices constantly flow in and out of businesses, with larger companies sometimes receiving hundreds daily. Fraudsters are aware of the chaos, seeking opportunities to infiltrate a business without suspicion. Accounts payable (AP) and accounts receivable (AR) teams can easily fall victim to illegitimate vendors, as the tactics fraudsters use are constantly evolving.

According to a recent study, companies lose 5% of revenue to vendor fraud, presenting an expensive risk.

In this blog, we dive deeper into the fake vendors’ methods and offer tips for identification and prevention.

What is an illegitimate vendor?

Illegitimate vendors are bad actors who pose as real vendors in an attempt to funnel funds to themselves. Fake vendors can be:

• Internal employees
• External parties
• Employees and third parties colluding together

How Fake Vendors Use Fraudulent Payments

Fraudulent payments occur when a payment is sent to a fake vendor who has established a phony company and real bank account to receive these payments. In these instances, the vendor has not actually provided any goods or services and is just out to steal money.

Pymnts.com reports that vendors and suppliers wait an average of 43 days to get paid. Because of this long process, bad actors have plenty of time to steal funds undetected.

Additionally, they often make the payments in small dollar amounts. Lower transaction amounts are generally not reviewed as closely as higher dollar-value transactions and do not require the same approvals.

How to Identify Illegitimate Vendors

Fraudsters have gotten very good at disguising themselves, making it increasingly difficult to identify them before damage is done.

While a vendor may appear legitimate, basic research can assist businesses with identifying them and is recommended before paying invoices.

• Use the IRS online tax identification lookup tool to verify the tax ID number (TIN)
• Research identifying information on the invoice. Are the mailing address and phone numbers real?
• Carefully review the invoice itself. Only 3 of 10 respondents in a recent study reported being able to spot a fraudulent invoice. Red flags can include:
  • Use of an Excel spreadsheet
  • Inaccuracies from previous invoices
  • Whole-dollar amounts or numerous small dollar amounts
  • Different payment and delivery addresses
  • Amounts outside of approved parameters

Here are a few additional tips businesses can employ to prevent phony vendors.

• Perform a thorough background check before partnering with a vendor
• Regularly clean and monitor your vendor database – only 16% of companies do so on a regular basis!
• Establish transaction limits and approval hierarchies
• Review every invoice, no matter the amount

Resources for Prevention and Mitigation

There are a number of steps a business should take to stop fake vendors. However, these steps can be cumbersome and expensive. Additionally, since bad actors utilize a multitude of different fraud tactics, businesses can quickly become overwhelmed.

REPAY offers payment security solutions to stop illegitimate vendors, lessening risk the burden and taking on security responsibilities so you don’t have to. Featuring positive pay, vendor verification, invoice reviews, ACH validation, secure payment data storage, and more, we protect every payment, no matter how each is made.

Give payment protection to REPAY to pay vendors more quickly and more securely. View our video!