Supplier fraud: phantom vendors, invoice fraud and the counterparty that does not exist

Supplier fraud is the most common financial crime inside mid sized businesses and the least often detected, because it looks like ordinary commerce. Invoices arrive, approvals happen, payments go out. The fraud is in what the invoices are for and who owns the account they are paid to.

The common schemes

• Phantom vendor. An employee with purchasing or payment authority creates a supplier that exists only on paper, often in a relative's name, and approves its invoices for goods or services never delivered.
• Inflated or duplicate invoicing. A real supplier, with an inside accomplice, bills for more than delivered or bills twice; the excess is shared.
• Business email compromise. A supplier's or executive's email is impersonated to redirect a legitimate payment to a new bank account.
• Substitution. A supplier delivers cheaper or non compliant goods, or subcontracts to a facility that was never audited, while invoicing for the specified product.
• Kickbacks. Contracts are awarded to a supplier in exchange for payments to the person awarding them.

The signals

A supplier with a post office box and no web presence. Invoices that are round numbers, sequential, or just under an approval threshold. A vendor set up and paid within days. Bank details changed by email without a call back. One employee who handles onboarding, approval and payment for the same vendor. Deliveries that nobody in operations can remember receiving.

Establishing whether the vendor is real

This is the core of the investigation and it is mostly records work: company registry extracts, the registered address checked against a real location, the directors and shareholders identified and compared against your staff and their relatives, the bank account matched to the entity, and the vendor's own footprint in the market. Where the supplier is overseas, a site visit by a local partner answers the question in an afternoon: is there a factory, a warehouse, an office, or a laundromat with a mailbox.

Following the money

Once the vendor is shown to be controlled by an insider or an accomplice, the payment records give the amount, and asset tracing shows what it became. Employees rarely hide the proceeds well: a new property, a car, a company in a spouse's name.

Controls that actually work

• Separate vendor onboarding, approval and payment across different people.
• Verify new vendors and bank detail changes by an independent phone call to a known number.
• Periodic screening of the vendor master file against employee and relative details.
• Physical verification of new overseas suppliers above a threshold.
• A whistleblower channel that people trust.

When you find it

Preserve the records before anyone is confronted, involve your lawyers on privilege and employment steps, and decide early whether recovery and reporting to police are goals. A well documented investigation makes all three easier.

Valitros investigates supplier and counterparty fraud, including verification of overseas vendors and tracing of proceeds. See the service or book a confidential call.