3 Ways to Prevent B2B Fraud

By Sarah Faatz

The scam started simply: Someone took the information of a Canadian company that had been inactive for several years, renamed it, and began placing orders with building supply companies. But whoever placed the orders never intended to pay for them. Before anyone realized what was going on, the scammer had ordered from more than 180 suppliers and run off with $9 million worth of products.   This sort of fraud isn’t as unusual as you might think. According to a recent survey, 19% of all online B2B inquiries are fraud attempts, and 77% of businesses have lost money due to fraud. B2B fraud can take many forms, including account takeovers, business identity theft, and even shell companies set up for the sole purpose of committing fraud.   Fortunately, with a combination of deep risk expertise and the right technological tools, B2B companies can protect themselves from rising levels of fraud.

1. Put Automation to Work on Fraud

Automating customer transactions can be a powerful step in the fight against fraud. On the one hand, electronic applications and payments introduce new opportunities for fraud, as potential scammers don’t have to face the scrutiny that comes with human interaction. On the other hand, with automation comes a set of powerful new tools that can detect possible fraud attempts.

B2B businesses with an automated credit approval process should strongly consider adding fraud indicators to their decision engines. These indicators can take the form of home-grown algorithms, external software, or a combination of the two. Many providers partner with a specialized vendor to implement this type of technology, which can give the green light to trustworthy businesses and flag potentially fraudulent accounts. Rules can be built to spot anomalies that would be missed by human review, such as mismatches between an IP address and the physical address of the business or a well-established business with a five-day-old email domain.

If your automated system trips one of your rules, it can kick the application out for manual review. Then your credit professionals can investigate the suspicious elements and determine whether they’re innocent aberrations or indicators of fraud.

2. Look Out for Common Red Flags

Whether you do it in-house or rely on a technology partner, be sure your fraud indicators take into account the unique factors of the building supply industry. That said, there are some common red flags your automated system should be programmed to watch out for. For example:
The application comes from an unusual (outside your delivery area) or high-risk zip code.
The company claims sizable revenue or lengthy history, but doesn’t show up in commercial credit bureaus.
The shipping address doesn’t match the company’s office location and can’t be found as an additional location on their website. This may indicate that the delivery is going to a jobsite, but you’ll want to verify this with a trusted contact at the office.
The first order is for high-risk products that can easily be resold.
Financial statements include mistakes or inconsistencies.
Company ownership is unclear.  By themselves, none of these items guarantee that an applicant is a fraudster. Your credit analysts will need to consider the whole picture when deciding whether or not to extend credit to the business.

3. Monitor Fraud on an Ongoing Basis

The initial application isn’t the only point of contact at which your business should be alerted to the possibility of fraud; sometimes fraudulent activity doesn’t become apparent for a while. Account takeover is on the rise. Fraudsters may target established accounts that haven’t made a purchase in a while. They use your customer’s history with you to gain credibility, but then “update” contact information—addresses, phone numbers, email addresses—to redirect all calls and correspondence away from the legitimate business. 

Detective controls should be put in place to alert you to this sort of activity as part of a comprehensive monitoring system. It is also a good practice to suspend accounts that have not purchased in some time and give them a higher level of scrutiny when they return.

As for the fraudulent Canadian company, BlueTarp was working with five suppliers that were contacted by it. Luckily, we saw a few red flags right away. For one thing, the company had no credit activity for more than a decade. Its phone numbers were all 800 numbers. Its address was in Quebec, but its website was English-language only, even though all Quebec company websites are legally required to be in English and French. Finally, when we checked its reported U.S. office location, we saw that it was in the middle of an empty field. We helped the companies we were working with to cut ties with the scammer and avoid the costly consequences of falling victim to fraud. 

1 Kitmondo, “19% of Online B2B Enquiries are Fraud Attempts,” July 2014 
(https://www.kitmondo.com/blog/2014-kitmondo-small-business-fraud-
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Sarah Faatz is director of credit at BlueTarp Financial, a leading provider of B2B credit management services to the building supply industry.