It’s 2025, businesses are all online, their vendors are all online, and they are all connected. It makes working together much easier, which is great, but it also makes vendor fraud much easier.
In this type of scam, criminals impersonate trusted vendors or create fake ones to trick companies into making fraudulent payments. Whether through hijacked emails or fake invoices, this sophisticated fraud can cause severe financial damage if not detected early.
This blog explores what vendor impersonation fraud is, how to recognize it, and the steps you can take to protect your business from falling victim to this growing risk.
What is Vendor Impersonation Fraud?
Vendor impersonation fraud is a form of Business Email Compromise (BEC) fraud. This type of scam occurs when cybercriminals, or even disgruntled employees, trick an organization into making payments to fraudulent accounts.
The fraudster may gain access to a trusted vendor’s email account, use fake documents to modify payment details or impersonate a legitimate vendor to initiate invoice scams or other fraudulent activities.
Types of Vendor Impersonation Fraud:
Vendor impersonation fraud can take several forms, each with its unique method of operation. Below are the most common types:
- Ghost Vendor Fraud: Ghost vendors are fake vendors that are created in company records. Payments are made to these non-existent vendors, and the funds are typically siphoned off by an employee or an external fraudster. This type of fraud is particularly difficult to detect because the fraudulent vendor seems legitimate on paper.
- Check Manipulation: Fraudsters sometimes modify or forge a vendor’s check to redirect payments to their own personal bank account. This can happen when an employee or external fraudster gains access to vendor payment information and alters it before the funds are processed.
- Duplicate Payments: In this type of fraud, an employee uses a legitimate vendor’s account but manipulates the payment records to initiate multiple payments for a single invoice. The extra payment is then directed to the fraudster’s account. This type of fraud exploits weaknesses in accounts payable systems and is often discovered only after a significant amount of money has been transferred.
Who’s at Risk?
Vendor impersonation fraud can affect any business, but certain organizations and individuals are more vulnerable to these types of scams. Small businesses or organizations with limited resources and cybersecurity measures are often targeted due to their perceived vulnerability. Additionally, organizations that engage in frequent international transactions or have a high volume of vendor interactions are more exposed to fraud attempts.
Certain employees are also at higher risk of being targeted. According to studies, employees in accounting, operations, sales, customer service, and purchasing departments are most often involved in fraud incidents. These individuals often have the financial authority to approve payments and make vendor-related transactions, making them prime targets for fraudsters.
Red Flags to Watch Out For:
- Unusual Payment Requests: Be on the lookout for payment requests that deviate from normal procedures. These could include sudden changes in bank account details, requests for expedited payments, or payments to unfamiliar or unrelated third-party accounts. Fraudsters often pressure organizations to act quickly, hoping to bypass normal verification processes.
- Inconsistent Invoices or Documentation: Fake or altered invoices are a major indicator of vendor fraud. Look for inconsistencies such as misspelled vendor names, incorrect formatting, missing information, or discrepancies in the details on the invoice. Irregularities like these should raise red flags.
- Suspicious Communication Patterns: If a vendor suddenly uses a different email address, makes unusual phone calls, or requests to communicate outside of normal channels, it’s a potential sign of impersonation fraud. Fraudsters often attempt to manipulate communication to divert payments.
- Unexpected Price Increases: Fraudsters may attempt to overcharge for products or services, hoping that their request will slip through unnoticed. Watch out for vendors requesting sudden or unexplained price increases, especially when these increases deviate from normal contractual agreements.
- Poor Quality or Undelivered Goods/Services: A common warning sign of vendor fraud is the delivery of substandard goods or services. Fraudsters may intentionally send low-quality products, or the goods may go undelivered entirely. Always verify orders and deliveries to ensure they align with expectations.
- Unusual Vendor Behavior: Changes in a vendor’s behavior—such as evasiveness, unresponsiveness, or reluctance to provide documentation or clarification—should raise concerns. A sudden change in how a vendor operates is a common tactic used by fraudsters to avoid being caught.
How to Identify Vendor Impersonation Fraud
Here are some ways you can improve your ability to detect potential vendor fraud:
- Discrepancies in Vendor Information: Always review vendor details such as contact information, addresses, and tax identification numbers. If the information provided cannot be verified or seems inconsistent, it could be a sign of fraud.
- Inconsistencies in Payment Records: Scrutinize payment records for multiple payments to the same vendor invoice, irregular price hikes, or discrepancies in payment dates. Fraudulent payments may appear normal at first glance but will often have inconsistencies that can be caught with careful attention.
- Unusual Vendor Behavior: Pay attention to changes in the way your vendors communicate with you. Fraudsters often change their communication style, which may include using a new email address or requesting that you use a different communication channel. Always verify these changes before proceeding with any transactions.
- Unexpected Price Increases: Any unexpected price increases, especially when unsubstantiated, should be investigated. Fraudsters often exploit price changes to divert funds to their own accounts. Ensure that any price changes are legitimate and aligned with your contracts.
- Substandard or Undelivered Goods/Services: Poor-quality goods or services or orders that are consistently delayed or unfulfilled can indicate vendor fraud. Always verify orders and inspect deliveries to ensure the business is receiving what it paid for.
Measures to Detect and Prevent Vendor Impersonation Fraud
To help prevent fraud from occurring, here are several strategies to implement:
- Vendor Due Diligence: During the onboarding process, verify all vendor details, including their financial stability, reputation, and references. Always ensure that the information provided by vendors matches what is available through independent sources.
- Evaluate Internal Controls: Review the vendor’s internal controls and anti-fraud policies. Strong internal controls show that the vendor is committed to mitigating the risk of fraud, making them a more reliable partner.
- Run Thorough Background Checks: Conduct background checks on employees involved in vendor management and financial transactions. Ensure that their track record is trustworthy and that they have no history of misconduct.
- Split Responsibilities and Regular Rotation: To reduce the risk of employee fraud, split duties between multiple people. For example, the person responsible for inputting vendor information should not be the same person responsible for approving transactions. Regularly rotating responsibilities can further prevent fraud from being perpetrated over time.
- Employee Anti-Fraud Training: Providing comprehensive training to employees on fraud prevention is crucial. Make sure employees are aware of vendor impersonation fraud and know how to report suspicious activities. Encourage a culture of vigilance where employees feel comfortable raising concerns.
- Monitor and Audit Transactions: Regularly audit vendor-related transactions and monitor for any signs of suspicious activity. A well-maintained auditing process helps uncover any vulnerabilities that fraudsters might exploit.
- Invest in Vendor Management Software: Using centralized platforms to manage vendors and contracts can streamline the verification and management process. These tools often provide built-in fraud detection and tracking capabilities, making it easier to spot fraudulent activity.
- Educate Your Team: Educating your team about the risks and consequences of vendor impersonation fraud can enhance their vigilance. Conduct regular risk assessments and audits to identify vulnerabilities and close any gaps that fraudsters could exploit.
Responding to Vendor Fraud
If you suspect vendor impersonation fraud, swift action is crucial. Here’s what you should do:
Document and Preserve Evidence:
Gather and securely store all evidence related to the fraud, including emails, invoices, payment records, and communications with the fraudster. This is essential for investigations, insurance claims, and legal proceedings.Notify Authorities and Affected Parties:
Report the fraud to local law enforcement and provide all relevant details and evidence. Notify any financial institutions and individuals directly affected by the fraud.Seek Legal and Professional Advice:
Consult with legal advisors who specialize in fraud and cybersecurity matters. They can guide you through the legal implications and assist with recovery efforts.
Vendor impersonation fraud is a serious threat that can result in significant financial losses and long-term reputational damage. But with the right tools, strategies, and awareness, you can safeguard your business from falling victim to these scams. At edgefi, we specialize in helping businesses like yours implement robust cybersecurity measures, including proactive vendor fraud detection and prevention strategies.
Our team can work alongside you to strengthen your internal controls, educate your employees, and implement cutting-edge technology to protect against fraud.
Don’t wait for a fraud attempt to occur—take action now to protect your business.
