Top Fraud Risks Facing Manufacturers
Top Fraud Risks Facing Manufacturers (and How to Prevent Them)
Fraud in manufacturing has become a major pain point for businesses, cutting into revenue and reputations. High transaction volumes, tracking challenges, and operational urgency combine to make manufacturers a top target for fraud. Bad actors exploit a variety of vulnerabilities, from insecure payment methods to insider access. Here we’ll look at why fraud perpetrators are targeting manufacturers, how they target businesses, and what you can do to reduce your risk.
Why Manufacturers Are Prime Targets for Fraud
Manufacturing suffers more fraud incidents than any other industry outside banking and financial services, findings from the Association of Certified Fraud Examiners show. Researchers identified 175 cases between January 2022 and September 2023, with median losses of $267,000 per incident. Corruption, billing schemes, and noncash asset theft were the leading attack methods.
Various common vulnerabilities expose manufacturers to exceptional levels of fraud risk. High payment volumes and large wire and ACH transfer amounts offer opportunities for thieves to divert transactions. Transfers can be difficult to trace due to decentralized operations across plants, teams, and systems, and complex vendor networks that often involve global suppliers. Operational pressure from time-sensitive schedules increases the temptation to prioritize production over security, making vulnerabilities easier to exploit.
The Most Common Fraud Risks in Manufacturing
Manufacturing fraud scams employ a range of methods to exploit vulnerabilities in victim companies. Some of the most common attack vectors include:
- Payment fraud: wire fraud, ACH fraud, and fake invoice schemes typically involve impersonating legitimate payment recipients and diverting funds to phony accounts.
- Vendor fraud: compromised suppliers, duplicate payments, and account takeovers can divert vendor payments to unintended recipients.
- Cyber-enabled fraud: phishing emails can trick finance and procurement teams into authorizing fraudulent payments.
- Internal fraud: bad actors with inside access can divert assets through payroll manipulation, inventory theft, and expense account abuse.
To illustrate, consider a scenario in which a fraudster has used a phishing email to impersonate a legitimate manufacturing supplier. The perpetrator may convince a procurement manager to authorize a payment to a fraudulent account, diverting production cash flow.
Practical Steps to Reduce Fraud Exposure
What can you do to protect your manufacturing business against fraud? Here are four of the most important best practices to implement:
- Strengthen payment controls with dual approvals and segregation of duties, making it harder for fraudulent transactions to get approved or go unnoticed.
- Verify vendor changes and payment requests through secondary channels, increasing your ability to catch impersonators before you authorize payments to them.
- Train staff to spot phishing and social engineering attempts, making them less vulnerable to falling for common scams.
- Use bank-provided fraud monitoring and alerts for early detection, improving your ability to intercept and mitigate suspicious activity.
Following these guidelines will significantly reduce your risk of falling victim to fraud.