Four most common types of fraud, some tips to prevent them

Fraud activities continue to become a worrying point for SMEs with the increasing amount of information and business transactions that are completed electronically and online.

The Australian Institute of Criminology estimates that corporate fraud costs the Australian economy approximately $3.5 billion every year making it one of the most expensive categories of crime in the country.

The impact of fraud spreads beyond financial damage, with the reputation of many businesses also suffering as a result. Financial damage is easy to evaluate with a numerical figure, however the costly damage of a business's reputation is often a lot harder to determine. A damaged reputation can have a severe impact on future customers and business opportunities due to the perception of security risks.

The rise of corporate fraud has indirectly affected all businesses due to an increase in insurance premiums to account for the continually escalating risk. This in turn can have an adverse effect for customers as well because businesses have been known to hike their prices in an attempt to reduce the impact of bad debt loss on the bottom line.

The four most common types of fraud are:

  • Company identity fraud - This fraud occurs when your business details, such as your address and phone number, are changed and used to order goods. The fraudster is then capable of accepting delivery at the changed address.
  • Long firm fraud - This fraud arises when you receive a large order of goods from a long running business you determine to be legitimate. The fraudster then disappears without making payment and sells the goods from various trading locations.
  • Phoenix companies - These businesses are set up by a director or group of directors and are run to the point of owing a large sum of money. The director/s then moves on, creates another company and has no responsibility to repay the previous debts.
  • Company hijacking - This will involve a fraudster investing in a business. After the fraudster has made their investment they will slowly begin to replace board members with members from their crime syndicate until they have complete control of the board.

How to prevent fraud

Securing your business in the fight against fraud is a relatively simple process, especially for companies that already have systems in place to mitigate risk.

The best way to prevent corporate fraud is to start with the basics. Ongoing monitoring of your own business and the business of your clients is a great first step to employ. Combining this first measure with up to date credit checks conducted at the outset of every new customer relationship will ensure you have some protection against potential fraudulent activities.

Corporate fraud will usually come about from the customers you interact with. Some simple steps to employ in order to catch fraudsters early are:

New Customers

  • Investigate the trading record of the company and look for connections with companies that have failed.
  • Examine the individual credit histories of key personnel within the business.
  • Check previous directorships in order to determine if company executives have been on the board of failed companies.

Existing Customers

  • Always be mindful of your current customers ordering habits and question any sudden changes in ordering behaviour.
  • Make sure you always have up to date data on your clients. If an unusually large order comes in ensure there hasn't been any significant changes within the company.

It's important to note that customer changes will occur, and they won't always be an example of fraud. However, you should always be mindful of when a change does happen and evaluate that change in line with other circumstances to determine if it's a potential threat to your business.

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