Category Archives: Fraud

Protecting Your Brand From Counterfeiting

A few months ago in Does Trouble-Free Mean Fraud-Free, I pointed you to a recent study by Kroll that found that, in some sectors, fraud in the supply chain has increased five-fold in the last six years. Even though these numbers include fixed asset fraud, inventory fraud, distribution fraud, and return fraud, a lot of this fraud, especially in certain sectors (like pharmaceuticals and CPG) is manufacturing — and counterfeiting — fraud. This is because, as a recent Industry Week article points out, counterfeiting is one of the largest and most profitable businesses in the world.

The article quotes YottaMark, a SaaS-based innovator in security coding, who estimates the direct loss due to counterfeiting of technology products alone at over $100 Billion a year, as 1 out of every 10 technology products sold in the world is counterfeited. For example, even before the iPhone 3G was released on July 11, hundreds of iPhone counterfeits were available overseas, for less than half of Apple’s suggested retail price, as reported in the Irish Times.

So what can you do to protect your brand? The article suggests turning to a trusted partner that specializes in brand protection solutions, like YottaMark or Brady Corporation that offer a combination of overt, covert, and semi-covert technologies that uniquely identify your products.

Overt technologies, like holograms or color-shifting ink, include a clearly visible mark of authenticity on the product; covert technologies, that include hidden bar codes and images, allow the product to be authenticated by a trusted party using a specific tool or knowledge of what to look for; and semi-covert technologies blend overt and covert features into a multi-faceted security solution that can be used to instill trust in the consumer and in trusted supply chain participants.

I think the article is on to something here. Sure you could follow the lead of big corporations and create brand protection teams and do your own research into overt and covert technologies to protect your solutions, but how well are you going to do on your own when there are a number of disreputable organizations out there that dedicate all of their resources to cracking the latest security technology? Not well. In comparison, a partner company that is 100% dedicated to creating the best security and anti-counterfeiting technology possible will be years, if not decades, ahead of you and using their solutions will make your products much more secure than you could make them on their own. It’s sensible outsourcing — do what you do well, and outsource the rest to a partner that can do it better, faster, and, most importantly, more cost-effective.

Some Examples of Supply Chain Fraud

Today’s guest post is courtesy of Norman Katz, Certified Fraud Examiner, of Katzscan, Inc. and maintainer of the Supply Chain Fraud website as well as the Supply Chain Sarbanes-Oxley website. Both of these supply chain sites are worth checking out. After all, you don’t want to join Fox in SOX!

In accepting the holistic view that the supply chain extends beyond the walls of the company, can encompass raw materials, finished goods, monies, and services, and can be in fact more internal than external, the types of supply chain frauds become more numerous and in some cases, more severe.

One of the most glaring examples of supply chain fraud is the tainted product scandals that have surfaced over the past year. However, not all of the problems were associated with lead-tainted paint; some product recalls of toys were due to small parts breaking loose that a child could put in their mouth and choke on. If the toy was not being designed overseas, but just manufactured overseas, than the toy designer should be faulted for a poor – if not dangerous – design. Was the overseas manufacturer given any guidelines in regards to stress tests to gauge whether a child could pull off a small piece?

In this example, the fraud itself would have started with a poor design and would have occurred early in product lifecycle management (PLM). Was there a quality assurance (QA) review during PLM to cover aspects such as this? Was there QA testing of prototypes and products after go-live production to ensure quality standards – if established in the beginning – were being adhered to?

Similarly, in terms of the tainted food products, what tests were performed by the product company to ensure the manufacturer was adhering to standards and not introducing unsafe ingredients? This is especially true in the pet food scandal, were an unsafe ingredient was added by the overseas raw material supplier and/or overseas manufacturer to (artificially) boost protein levels during product testing. Why was there no testing for foreign substances?

In the above examples, if the QA department’s ability to function as needed was reduced due to unnecessary or unwise cost cutting by executives, especially if the goal was to increase executive bonuses or inflate stock prices by reducing costs, the executives themselves can be considered the perpetrators of the fraud and may be civilly and/or criminally liable for the results.

In another case that was caught before the supply chain fraud occurred, a military contractor was prevented from outsourcing the manufacturing of night vision goggles to a company in China. The US military is quite particular about who can manufacture their technologically advanced equipment, and rightfully so! The reason the company executives stated they were looking to outsource the production was greed, pure and simple: they wanted to lower costs to gain more profits, and were willing to do so at the real risk of giving away US military secrets to a country known for producing pirated software, videos, music, and merchandise imitations!

Internal thefts of raw materials and finished goods are an obvious supply chain fraud. How about when machinery and equipment are not maintained according to schedule, even though the maintenance supervisor swears they are? Abuse of equipment is most certainly a type of fraud, but when the abused equipment produces less-than-first-quality finished goods, the fraud has now become more widespread. Further, if the less-than-first-quality finished goods can cause injury or death, then the impact of the fraud just became much more serious.

Internal thefts can also include monies when fraud happens in the account department. Also, a person with the right authority may be able to set up a fraudulent services-only vendor for the purposes of stealing money via the submission of fake invoices paid to a fictional vendor who is really the fraud perpetrator themselves.

Thanks, Norman!

For more examples of where fraud can occur in the supply chain, check out the new Supply Chain Fraud wiki-paper over on the e-Sourcing Wiki.

Stop Fraud Before It Stops You!

Hopefully after Tuesday’s post that asked does trouble-free mean fraud-free you realize that it doesn’t and that if you’re not watching, there’s a very good chance that fraud is occurring somewhere in your supply chain. It might not be in your four walls, but it still affects you – because every dollar lost by your supplier, or your supplier’s supplier, results in increased costs to you. However, knowing that, more often than not, a deep dive into a large corporation’s spend data by an expert will, at the very least, result in the identification of spend that violates policy, if not spend that is outright fraudulent, and knowing the statistics on just how many products have hit North America in recent years that violate safety requirements and pose serious health hazards, I’d be willing to bet that if you’re international, and you’re a mid-size business or larger, there’s fraud somewhere in your supply chain. Relatively speaking, it might not be on the scale where entire truckloads of product go missing or where fraudulent employees are siphoning millions of dollars out of your operations, but even minor frauds that result in a loss of only a few thousand dollars will add up.

So what can you do? How can you stop something you don’t know about – especially when you can’t monitor everyone in your supply chain every minute of every hour of every day? When you can’t afford to secure everything? When fraud is only one risk that you have to deal with on a daily basis?

The answer is simple – visibility and oversight. If you monitor your supply chain, it’s going to be a lot harder for fraud to occur without you knowing about it. And if you implement mechanisms that insure that the actions of each individual with authority are monitored and reviewed, they’ll know that if they commit fraud, they’ll likely be caught, the risk will outweigh the reward, and they’ll take their illicit schemes elsewhere. (Unless they’re really dumb, in which case you’ll catch them.)

So how do you get that visibility? The first step is to map out your supply chain. Steven Belli provided a good description of this process over on The Strategic Sourceror in his recent post that asked how much are you betting and what are the chances of losing. Once you have the map, the next step is to identify potential areas where fraud may be occurring. Start by identifying areas where:

  • there are pain points such as quality issues, frequent re-orders, serious delays, etc.
  • your proprietary technologies or expensive fixed assets are used
  • tasks that should probably be separate overlap
    such as the same individual or team being responsible for vendor selection and quality control

Then, and this is the key step, perform a supply chain audit. This starts by identifying what should be happening at each stage of the supply chain, how tasks should be separated, how much responsibility is required for each task, and who has ultimate responsibility for each task and hand-off. Then, audit your people, information, technology, and, most importantly, processes. Make sure that your people don’t have more authority or access to your systems or bank accounts than they need. Make sure your information is complete and accurate. Make sure your technology is doing what you need it to do. And make sure you have processes that are appropriate. They should insure visibility and accountability. If your processes don’t, then that’s fraud just waiting to happen.

If you’re wondering how to start, or wondering where you can get outside help on a fraud audit (and you should bring in an expert, and possibly someone with a Certified Fraud Examiner or equivalent designation, because you’re not likely to catch what you’re already overlooking – and consultants are cheap), one company you can look to is Katzscan and their Supply Chain Fraud services. (And, at the very least, check out the supply chain fraud site. It’s a good resource.)

Does Trouble-Free Mean Fraud-Free?

In a recent post on e-Sourcing Forum, I alerted you to a recent press release from Kroll that summarized the results of their “Global Fraud Report” which found that in some sectors, fraud in the supply chain has increased five-fold in the last six years – and that’s something to be worried about because, if you think you’re trouble free, there’s a good chance you’re not!

In my last post, I described some of the red-flags that indicate your supply chain could be at risk, which included:

  • Abnormal Vendor Selection
  • Payments Outside the Normal Accounting System
  • Unusual Payment Patterns
  • Rates Out of Line with Your Company’s Standing in the Market
  • Unexplained Lifestyle Improvement
  • Complaints or Tips

But the following can also indicate fraud:

  • automatic order triggers in a VMI system
    a vendor can manipulate stock levels to indicate a re-order prematurely to increase their revenue
  • more purchase orders than usual
    although it looks like your team is doing a good job by getting more purchases through the system, this could represent collusion between your buyer and a seller to inflate either the sales person commission or the buyer’s bonus by submitting false orders that will just be cancelled or returned at a later date
  • an unusual number of returns
    your buyer could be colluding with an individual at a shipper’s facility to create orders for unwanted goods which will be filled incorrectly; the buyer will then demand a refund and the goods will get lost during the return process
  • more defective returns than usual
    your quality assurance personnel might be accepting inferior products for bribes

The reality is that the supply chain is ripe with opportunities for fraud. These include:

  • Fixed Asset Fraud
    Fixed assets might be used for purposes other than what they are designated for, or used more than they are supposed to be. This misuse can damage the asset or reduce its useful life-cycle.
  • Inventory Fraud
    Your employees help themselves to your inventory and falsify records so that you don’t notice the loss until weeks or months later. They might even falsify good receipts to indicate less was received than actually was.
  • Manufacturing Fraud
    Your supplier might send you a high quality product (from another supplier) during the evaluation process for testing, but then send you inferior products made from inferior materials after the contract is signed that look the exact same – and you don’t notice the problem until you get an extraordinary number of returns due to defects or inferior quality.
  • Picking and Return Frauds
    Your order pickers in your warehouse might be picking extra items during shipment preparation and pocketing them for private off-the-books sales.
  • Distribution Fraud
    One or more boxes of your shipment will not be loaded by the shipper who will falsify records and blame the third party carrier for the loss.

And this is just the tip of the iceberg. So, in a follow-up post later this week or early next week, I’ll address what you can do about it. Stay tuned!