3 effective strategies for mitigating fraud in business-to-business trade credit transactions
“Fraud is a pervasive business-to-business problem, with numerous different methods being employed by fraudsters,” says Ann Buitendag, chief operations officer of credit management services company, Debtsource. Debtsource processes approximately 7 000 credit applications a month, amounting to a value of about R91 billion.
During the six-month period from January to June, 316 credit applications were suspected of fraudulent activity. In the last six months of the previous year, 352 credit applications raised concerns, and in the first half of this year, 395 applications were deemed suspicious. Within a three-month period from July to September, 243 applications were flagged. This points to a sharply increasing trend – and, notably, the value of fraudulent applications increased significantly over time.
Similar to the occurrence of cash-in-transit heists increasing during the end of the year, there is a marked increase in fraud toward year-end. “This pattern can be attributed to economic challenges and the desire of fraudsters to benefit from the holiday season,” says Buitendag.
More broadly, according to a survey by PwC, 46% of organisations worldwide reported being affected by fraud in 2022. Buitendag cautions that in South Africa, this percentage may be even higher.
According to the PwC statistics, fraud is mainly dominated by hacking and cybersecurity breaches. “However, customer fraud is rapidly becoming a major concern, ranking second on the list of most perpetrated fraud. This type of fraud encompasses various fraudulent activities such as false event details and credit application fraud. The accessibility and ease of perpetrating customer fraud in the digital age makes it an attractive option for fraudsters, compared to traditional forms of robbery – leading to an increase in data fraud and credit application fraud cases,” explains Buitendag.
While certain forms of fraud, such as employee fraud, may be covered by commercial fraud policies or even cyber policies, trade credit application fraud is not insurable. This means companies’ policies and procedures need to be robust enough to prevent and respond to this type of fraud promptly.
There are two categories of fraud in business-to-business trade credit transactions that are on the rise, and Buitendag urges companies to be particularly wary thereof.
Falling into the general category of ‘scams’, she says: “Fraudsters register a seemingly legitimate company and plan for credit acquisition. Over several years, they create a facade of authenticity by presenting all necessary documents, publications and records. The physical premises used for receiving deliveries are typically rented and frequently relocated, making it difficult to track them. Moreover, these scammers provide trade references that appear reputable and claim to have been trading for more than two years, which is usually part of the deception.”
The second category involves impersonation fraud, whereby fraudsters use the identity of well-established companies to deceive suppliers. Unsuspecting suppliers are often excited by the prospect of acquiring a large order from such a reputable company. However, the fraudsters may insist on collecting the goods or provide a delivery address that falls outside the coverage of credit insurance policies.
There are three proven effective strategies for identifying fraud, preventing losses, and protecting businesses from the increasingly sophisticated tactics employed by fraudsters:
1. Strengthen due diligence processes: The first line of defence against fraud is conducting thorough due diligence on potential customers. This includes verifying their identity, checking their financial stability, and assessing their reputation in the industry.
2. Implement internal controls and monitoring systems: It is essential for businesses to establish robust internal controls and monitoring systems to detect and prevent fraudulent activities. This includes segregating duties, implementing dual approval processes for high-risk transactions, training employees on fraud awareness, and regularly reviewing and monitoring financial records.
3. Develop strong relationships with trade credit insurance providers: Having a strong relationship with trade credit insurance providers can offer businesses an added layer of protection against potential losses. It mitigates the risk of non-payment and default, particularly in cases where customers turn out to be fraudulent.
Confirming fraudulent applications is a challenging task due to the high volume of applications. It is not feasible to conduct a thorough investigation for each potential fraud case. Therefore, identification is often based on anecdotal evidence and careful examination of applications with suspicious features.
To combat fraud effectively, adopting a fraud mindset is crucial. Such a mindset assumes that fraudsters are constantly seeking ways to defraud them and assess their policies and procedures accordingly. Additionally, businesses must adapt to the increasing sophistication and savvy of fraudsters who are well-versed in credit assessment processes. The methodologies necessitate the adoption of advanced technologies such as artificial intelligence.
Buitendag explains that detecting fraud requires a combination of specific behaviours, attention to small errors and inconsistencies in the information provided. “Often, investigations reveal instances where an individual noticed something suspicious, but failed to communicate it to others. By facilitating effective communication, potential fraud attempts can be detected early on.”
She says that by implementing these strategies, businesses can significantly reduce the risk of fraud in their trade credit transactions. Through collaboration, education and advanced technologies, organisations can stay one step ahead of fraudsters and protect their assets and reputation in the business-to-business trade credit landscape.