CoCredo and credit risk industry news

What is Invoice Fraud and how to prevent it

• 24/05/2023
• Paul Atkinson

The annual fraud report by UK Finance showed that over £1.2 billion was stolen through invoice fraud in 2022, and businesses continue to encounter a high level of this type of fraud, losing millions of pounds year-on-year. The impact of fraud is often more dramatic for SMEs who simply cannot absorb the losses that may arise, which could result in their business failing.

What is invoice fraud?

Fake invoice scams are a type of fraud where scammers send deceptive invoices or bills to individuals or companies, typically posing as legitimate suppliers or service providers. The invoices appear genuine and often include company logos, names, and addresses, and even reference actual transactions or ongoing business relationships to enhance credibility. 

The fake invoices often mimic the format and design of legitimate invoices, making it difficult to identify them as fraudulent at first glance. The scammers rely on the recipient's willingness to pay invoices promptly and exploit their trust in established business relationships.

These fake invoices may claim payment for goods or services never ordered or received. The scammers often manipulate the amounts and use tactics to pressure the recipient into paying quickly, such as stating that the payment is overdue or threatening legal action. They may provide bank account details for the amount to be made, redirecting the funds into their own accounts.

Once the payment is made, it becomes challenging to recover the funds, as scammers typically take steps to make it difficult to trace or reverse the transaction. Fake invoice scams can result in significant financial losses for individuals and businesses, and they continue to be a prevalent form of fraud.

There are several variations of fake invoice fraud. Some of the more common methods used by scammers include:

1. Phantom Invoices: Scammers send invoices for products or services that were never ordered or delivered.
2. Manipulated Invoices: Scammers alter legitimate invoices by modifying payment details, increasing the amounts, or changing the bank account information. These alterations trick the recipient into making payments to the fraudster's account instead of the intended recipient.
3. Overdue Payment Scams: Scammers send invoices claiming payment is overdue or outstanding, pressuring the recipient to make immediate payments to avoid penalties or legal consequences. These invoices may be for fictional debts or inflated amounts.
4. Vendor Impersonation: Scammers pose as known suppliers or service providers and send invoices requesting payment. They exploit existing business relationships or impersonate legitimate contacts within the recipient's organisation to increase their chances of success.

How to prevent invoice fraud

Establishing protocols and policies to deal with fraud can aid in identifying it and reducing the likelihood of falling victim to fake invoice fraud:

1. Verifying Invoices: Scrutinise invoices carefully, checking for any discrepancies or irregularities, such as changes in bank account details or unusual payment terms.
2. Confirming with Known Contacts: Independently verify payment instructions by contacting known individuals within the organisation or supplier through verified channels, such as their website (not using contact details provided on the invoice).
3. Educating Employees: Provide training and awareness programs, highlighting the risks of fake invoice fraud and teaching them how to identify and report suspicious invoices.
4. Implementing Payment Approval Processes: Establish robust payment authorisation procedures to ensure that multiple individuals review and approve payments before they are made.
5. Verify bank account details: Before paying to a new bank account, always check if the bank account details provided belong to your genuine supplier. You can verify the account number and sort code belonging to a supplier using a business bank verification service.

 

What to do if you suspect invoice fraud

If you have already paid the invoice, contacting your bank immediately is essential. By doing so promptly, you increase the likelihood of recovering the funds. 

Additionally, it is recommended that you report the incident to ActionFraud, which is the police's national fraud and cybercrime reporting centre. Even if you have not experienced financial loss, saying the incident can help the police analyse trends and prevent fraudsters from targeting other businesses.

To protect against such scams, it's essential to exercise caution when handling invoices. Verifying the legitimacy of invoices, double-checking order details, and independently confirming payment instructions with known contacts can help detect and prevent falling victim to fake invoice scams.

By adopting these practices, individuals and businesses can avoid falling victim to fake invoice fraud and protect their financial resources.

How can credit scores help prevent business fraud?

Credit scores can help prevent business fraud by providing insights into potential business partners' or clients' financial stability and trustworthiness.

Carrying out a business credit check can determine their financial health before engaging in a business transaction or extending credit to a company.  It also allows you to verify company details, such as contacts, addresses, ownership, and business history. A low credit score or a history of late payments, defaults, or bankruptcies may raise concerns about the company's ability to fulfil its financial obligations. It can serve as a warning sign and prompt further due diligence before entering a business relationship.

Why not subscribe to our daily or weekly UK and International monitoring services that will provide regular updates on changes to the credit profiles of your suppliers or clients? Our service alerts businesses to significant changes in financial performance, changes to directorships, or county court judgements against the company. Such alerts can help small business enterprises proactively identify potential fraud risks and take appropriate action to mitigate them.

While company credit checks can provide valuable information to prevent business fraud, they should not be the sole basis for decision-making. Other factors, such as reputation, industry track record, references, and additional due diligence, should be considered with credit scores to form a comprehensive assessment of a business's trustworthiness and potential fraud risks.

To learn more about our company credit score services, please call 01494 790600. 

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