Paying the Price: Invoice Fraud

SBT highlights the growing issue of invoice fraud for SMEs and how it can be prevented.

Invoice fraud is an increasing problem and whilst any business can be affected, it’s something that small and medium sized businesses are hit particularly hard by. New research has suggested that invoice fraud alone is costing UK SMEs up to £9 billion per year, amounting to some £1,658 per business. The research conducted by 3GEM Research and published by invoice financing and analytics company Tungsten Network, also found that of those affected, one in six businesses believe the fraud has cost them more than £5,000 in the last year alone.

Invoice fraud most often involves criminals duping companies into changing the payment details of their suppliers. Making contact with the finance teams within organisations and posing convincingly as suppliers, the criminals request that payee bank account details are changed to that of their own. Payments are then repeatedly made to them, with the fraud often only discovered when the legitimate supplier chases for non-payment of invoice.

Invoice fraud can also take the form of employees using false invoices to defraud their employers, working alone or sometimes in collusion with a third party. Most instances are opportunistic and simple but some are a little more advanced, such as a ‘pass-through’ fraud, where an employee inserts their own intermediary company between a supplier of legitimate services and their employer. Payments are made for services but the employee’s intermediary company skims a percentage of the transactions.

Of the 1,000 companies surveyed, nearly half of all businesses (47%) have received a fraudulent or suspicious invoice in the last year. Perpetrators most often catch businesses out with viruses embedded in attachments, unknown invoices attached to an email or sent by post, and by sending duplicate invoices.

Unfortunately the scale of this fraud is accelerating and there are still those who are unaware of the threat. The research found that over half of businesses (54%) are concerned about the rise in invoice fraud, viewing it as their single biggest threat. However, worryingly 8% of businesses said they would take no action if they received a suspicious invoice, and 13% of micro businesses wouldn’t know what to do if they received one. Only 44% of businesses would contact the police or a reporting service like Action Fraud (the national fraud and cyber-crime reporting centre) showing that there is still a strong need for education.

Commenting on the findings of the research, Tungsten CEO Richard Hurwitz, said: “UK SMEs face all manner of challenges, and it’s telling that cyber crime looms as one of the biggest. What’s most troubling is that it needn’t be like this as there are steps companies can take to protect themselves. Technology such as electronic invoicing can help battle invoice fraud as only confirmed suppliers can upload their invoices and then these are validated before they are paid, potentially saving firms thousands of pounds.”

The research makes clear the need to crack down on fraud in the UK and is backed up by the Government, which last February launched a new taskforce to combat fraud of all types. The Joint Fraud Taskforce will consist of representatives from the City of London Police, National Crime Agency, Financial Fraud Action UK, the Bank of England, and Chief Executives of the major banks. While primarily focused on consumer fraud, the launch nevertheless shows the scale and seriousness of the situation and the Government’s desire to identify and remove weak links in the UK’s financial systems and processes.

On raising awareness of invoice fraud Pauline Smith, Head of Action Fraud, the UK’s national centre for reporting fraud and internet crime, said: “It is important that employees are made aware of invoice scams and are ready to recognise the signs of fraud. Incidents of invoice fraud are underreported and therefore it is difficult to know the true scale of this fraud type. However what we do know is that this type of fraud prevails across all types of business and no one type of industry is immune.”

Battle-based accountants MVL Business Services point out that while many large businesses have the resources to implement what they hope are effective systems of internal control to prevent fraud, SMEs often have to rely on a small team of people, who they trust, but will inevitably be working on more than one task at once. This makes them more vulnerable. SMEs should try to segregate duties as much as possible – a technique that’s proven to limit the possibilities of fraud.

Advice from Financial Fraud Action UK to help prevent invoice fraud:

• Ensure all accounts department staff are vigilant: checking for irregularities on invoices
• Ensure changes to supplier financial arrangements are always verified with that supplier using their established on-file details
• Inform suppliers of the payment details made after an invoice is received
• Check company or organisation bank statements carefully and report all suspicious debits to your bank immediately
• Use on-file contact details to call a contact back if you are suspicious about a request before going through with a payment
• Consider removing online supplier information from public view
• Never leave sensitive material such as invoices unattended on your desk
• Establish a designated point of contact with suppliers to whom your company or organisation makes regular payments
• Consider a more vigilant/direct strategy for larger invoices. E.G a meeting with the supplier involved
• Scrutinise every invoice
• Look out for blurred logos on counterfeit invoices
• Be vigilant for amendments to contact numbers and email addresses on company invoices

For more information please visit www.actionfraud.police.uk or call online fraud reporting tool 0300 123 2040 to report a fraud.