Executive Briefings

Watch for These Red Flags Warning of Supply Chain Fraud in Outsourcing

Global expansion brings a host of benefits to companies looking to cut costs and broaden markets. But it also heightens risk. Chief among concerns is the possibility of supply chain fraud. A new report by Kroll Inc., a global risk consulting company, identifies some of the dangers to global business. Large companies have come to depend on a network of partners to create "extended enterprises," the report notes. In the process, they become more vulnerable to fraud, ranging from simple theft to misstatement of inventory levels, counterfeiting, gray market diversion and piracy. "Fraud thrives on complexity and companies are facing fraud from the very beginning, on every single factor: raw materials, production and delivery," says Richard Abbey, a managing director of Kroll in London. The pharmaceutical industry is especially vulnerable, with an increasingly complex network of production, distribution and sales. According to the U.S. Food and Drug Administration, the number of fraudulent drugs in the supply chain increased fivefold between 2001 and 2007. The World Health Organization estimates that some 10 percent of drugs on the market worldwide are counterfeit. As for cargo theft, it represents a $12bn problem in the U.S. alone, Kroll says. The firm recommends that companies trying to avoid fraud be on the lookout for the following red flags: abnormal selection of vendors, where a single individual might be picking key service providers; payments outside the normal accounts system, especially those that are hand-delivered, approved manually or not accompanied by a proof of delivery; unusual payment patterns, with a surge in payments to one vendor or multiple invoices on the same day; rates paid out of line with the company's standing in the market, which might indicate kickbacks or illicit payments; unexplained lifestyle improvements among buyers of services; and complaints or tips from workers, who might be excluded or marginalized by corrupt staff members.

Visit www.kroll.com

Global expansion brings a host of benefits to companies looking to cut costs and broaden markets. But it also heightens risk. Chief among concerns is the possibility of supply chain fraud. A new report by Kroll Inc., a global risk consulting company, identifies some of the dangers to global business. Large companies have come to depend on a network of partners to create "extended enterprises," the report notes. In the process, they become more vulnerable to fraud, ranging from simple theft to misstatement of inventory levels, counterfeiting, gray market diversion and piracy. "Fraud thrives on complexity and companies are facing fraud from the very beginning, on every single factor: raw materials, production and delivery," says Richard Abbey, a managing director of Kroll in London. The pharmaceutical industry is especially vulnerable, with an increasingly complex network of production, distribution and sales. According to the U.S. Food and Drug Administration, the number of fraudulent drugs in the supply chain increased fivefold between 2001 and 2007. The World Health Organization estimates that some 10 percent of drugs on the market worldwide are counterfeit. As for cargo theft, it represents a $12bn problem in the U.S. alone, Kroll says. The firm recommends that companies trying to avoid fraud be on the lookout for the following red flags: abnormal selection of vendors, where a single individual might be picking key service providers; payments outside the normal accounts system, especially those that are hand-delivered, approved manually or not accompanied by a proof of delivery; unusual payment patterns, with a surge in payments to one vendor or multiple invoices on the same day; rates paid out of line with the company's standing in the market, which might indicate kickbacks or illicit payments; unexplained lifestyle improvements among buyers of services; and complaints or tips from workers, who might be excluded or marginalized by corrupt staff members.

Visit www.kroll.com