Home U.S. Proper Vetting Is Mandatory to Avoid Vendor Fraud

Proper Vetting Is Mandatory to Avoid Vendor Fraud


By Kim Miller, Ph.D., CFE
Faculty Member, Criminal Justice, American Military University

When you are considering contracting with a vendor for your business, it is important to do your due diligence rather than simply take the vendor’s word for good performance. Whether you are considering a new vendor or you have questions regarding a current vendor’s behavior, vetting is mandatory to avoid potential vendor fraud.

A few hours of investigation helps you avoid many hours of headaches and costly mistakes. Here are some red flags to watch for.

Company Has No Legitimate Address

Let’s imagine that you’re using a startup company called ABC as your vendor. At first glance, your vendor’s street address appears to be valid.

However, a search of the vendor address finds that it is a residence owned by someone other than the vendor. A further search of state databases finds that ABC is registered at another address.

Red Flag: The actual street address of ABC is a closed warehouse.

Company Has No Legitimate Phone Number

Good vendor management consists of verifying the vendor’s phone number. Does someone answer when you call?

Red Flag: If you repeatedly receive voice mail messages to leave your contact information and the return calls come from a blocked number, the company is probably not legitimate.

High-Level Executives and Websites with Little Credibility

Vetting the principals of any organization is important. Who are they? Do they have assets? Do their social media profiles match their business profiles?

Red Flags: Why is ABC’s name missing on a principal’s business profile while it is clearly noted on the principal’s social media profile? In a recent case, the principal of a company spelled her name differently on her social media profile to avoid detection of her fraud.

Also, does your vendor’s site make unrealistic claims? For example, ABC’s website reports net sales of $2.3 million over six months. This is interesting and worrisome information at the same time.

Red Flag: ABC was in business for only six months, yet already had done $2.3 million in business? That’s an unlikely claim.

Vendor Reports Financial Actions before It Opened

Another sign of a fraudulent vendor is in the actions an alleged company took in the past. For instance, the Internal Revenue Service requires businesses to fill out Form 5500 in regard to welfare benefit plans and the reporting of financial condition, investments and operations.

ABC reported $400,000 in assets in 2014 and a political donation of $25,000 in 2013.

Red Flag: ABC opened in 2016, so any reports of financial actions before 2016 are false.

Vendor’s Other Information Doesn’t Withstand Investigation

Other types of information can also help you detect a fraudulent vendor, such as:

  1. A search of patents and trademarks locates an entry under one principal.

Red Flag: This entry is not noted on the business profile or social media profile, which indicates the company is hiding income.

  1. A search finds 10 liens and judgments against the vendor’s company.

Red Flag: The vendor has financial issues.

  1. A search of residential property noted a deed with a vendor principal’s signature.

Red Flag: The signature did not match the document provided by the principal of your vendor. If the principal’s signature doesn’t match the same signature on other documents, that is a sign of fraud.

  1. The principal states that he is a licensed electrician.

Red Flag: The license has expired.

  1. The principal’s spouse is listed on the Federal Bureau of Prisons website.

Red Flag: The principal’s loyalty might be to the spouse regarding any financial or former business transactions.

Don’t ignore the waving red flags if you want to avoid vendor fraud. Instead, be proactive:

  • Vet a vendor before you hire him or her, which will save your company dollars.
  • Contact a fraud investigator to vet the vendor and review any potential fraudulent documents. The fraud investigator is the ideal person to hire for this type of research.
  • Hire the right kind of employees. Managers should select people who are less likely to rationalize illegal or unethical actions as acceptable.

By creating an honesty-driven culture, your management can help you develop a positive work environment. Fraud occurs less frequently when employees have feelings of ownership toward their organization than when they feel abused, threatened or ignored.

About the Author

Dr. Kim Miller is an adjunct professor of criminal justice in the School of Security and Global Studies at AMU. Her academic credentials include a B.S. in Criminal Justice and an M.S. in Criminal Justice from Kaplan University, as well as a Ph.D. in Public Safety-Criminal Justice from Capella University. She is also a Certified Fraud Examiner, a New Jersey Licensed Private Detective and an investigative analyst.



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