Fighting Fraud Requires a Multi-Step Approach

Cargo theft and other types of fraud in the supply chain appear to be on the rise. And that may be true. Or we just may be better at catching it.

Wherever the truth lies, fraud remains a major concern for businesses. Much of the focus this year has been on retail theft. In retailer earnings reports this year, shrinkage has been cited often as a reason for lower earnings results. Target has said it expects profits to be as much as $1 billion lower this year due to shrink. A 2021 study by the National Retail Federation found that retailers lost $94.5 billion that year due to shrink, including shoplifting and organized crime.

“Loss prevention is a big deal now, and that’s just a part of fraud,” explained Steve Beda, executive vice president of customer success for Trax, a transportation spend management platform.

In the supply chain, there are other kinds that are equally concerned, although they don’t receive the same kind of public inspection. These include cargo theft and financial fraud. Preventing these, especially financial fraud, is proving a challenge.

Beda explained that Trax uses its technology to help root out fraud at the transaction stage, but it can be difficult. It ties back to the problem so many businesses are dealing with today – data.

Trax matches a “source record to make sure the billing ties to a shipment event,” he said. However, if the underlying data only says Company X is supposed to send an invoice, there is nothing to confirm that Company X is not a fraudulent company.

“We see both intentional and unintentional mistakes,” Beda said. “Our customers are interested in putting controls in place [to verify payment is going to the right place].”

That doesn’t stop a thief from creating a fraudulent Company X account, which can be difficult to discern if you were supposed to receive an invoice from Company X. Beda said more detailed and accurate data can help mitigate some of this risk, but so too can algorithms that put guardrails in place. For instance, an invoice that is $10 off the expected amount may not trigger a concern, but the algorithm may catch the fact that all of the invoices from this company are off. That may warrant a closer look.

Beda said the use of third-party accounts is when much of the fraud occurs – a 3PL is paying a broker who is paying a carrier. The 3PL may never know if the carrier got paid, or if that broker is actually the correct one.

Mitigating the risk of fraud today takes a partnership. Beda noted Trax’s close relationship with Triumph Bank that works to help manage the risk through the payment side of the business.

“You have a lot of payment rigor to make sure the money is put into the right account,” he said. Cyber events “have become more prevalent.”

That financial component is also one that Redwood Logistics’ Brad Stewart must deal with. Steward, co-founder of Rockfarm Supply Chain Solutions and Global Distribution and Logistics, which was acquired by Redwood this summer, and now chief logistics officer for Redwood, said as a non-asset-based 3PL, dealing with both the financial aspects of fraud as well as the issues vetting carriers is a challenge.

“The financial piece is where you have to marry a load record,” he said. “Every TMS should have a very native, robust process in it [to manage the end-of-payment cycles].”

Redwood, though, must onboard hundreds of carriers in a very short period of time, and that vetting process has become an area of concern. Stewart said they use a double verification process to help weed out potentially fraudulent carriers. That process helps ensure the carrier is legitimate, and also that its financials are accurate.

“The carrier piece is the most visible because your shipper’s product doesn’t arrive,” he said. “The one that is less visible is the one where you do a wire transfer to the wrong company.”

Load matching to documents is one way to help fight fraud, but Stewart said the best way is to implement multiple steps in the verification process. For instance, he advises not to use a single entity or person for the verification process. Have one party due the carrier vetting and another handle the financial verification.

“As we get more complex in our vetting process, the criminal gets more complex in the ways that they steal,” he said.

Unfortunately, Beda said the industry is not where it needs to be to root out fraud.

“People are striving to get there … some people have solved some of it,” he said. “Tying event data together with financial data … once you start tying those silos together, now you have a story [to verify and stop fraud].”

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