Fraud and Theft Risks in Global Supply Chains Are Everywhere

A new Kroll report sheds light on the complex and overlooked risks in today's international and heavily outsourced supply chains. And while software can help spot supply chain fraud, IT systems are also making enterprises more vulnerable.

By Thomas Wailgum
Wed, April 30, 2008

CIO — The world may be flat, as Thomas Friedman posits in his book, but this complex and interconnected planet of commerce can be one scary and risky place to conduct business. Enterprises have discovered that their businesses are ripe for fraud and theft as they rely more and more on global outsourcing relationships, complex networks of suppliers and vast computer networks to conduct business.

A recent report from Kroll, a risk consulting company that provides investigative, security and technology services, outlines the risks companies face with their global supply chains and the amount of fraud, product tampering and theft taking place today. And while IT can help detect and prevent fraud and supply chain nightmares, the report suggests that it can also be a huge threat to a company's operations, reputation and future business prospects.

"At every step along the supply chain," notes the Kroll report, "businesses are vulnerable to an array of frauds ranging from simple theft, through disguising the poor quality of materials, to the misrepresentation of inventory assets."

The scale of supply chain fraud is difficult to measure and "too broad to estimate meaningfully," the Kroll report states. However, two pieces of Kroll survey data from its 2007/2008 "Global Fraud Report," which surveyed 892 global executives, show just how large an issue it can be: 42 percent of companies worldwide had suffered from at least one incident of supplier fraud or the theft of physical assets. And while those are just two of the many ways to abuse supply chains, 9 percent of companies had suffered both types.

So, can infosecurity systems and software come to the rescue? Not so fast, say Kroll's senior managers. "IT is part of the problem and is part of the solution," notes Stefano Demichelis, a senior director at Kroll, in the report.

"The enhancement of IT has increased a thousandfold the likelihood of fraud because of the increase in the sheer number of records," Demichelis points out. "There is a risk of having so much information that it can't be managed for proper fraud detection."

However, the seriousness and scope of the problem as outlined in the Kroll report doesn't mean that all hope is lost. "Companies can do much to mitigate the growing risk of supply chain fraud," the report states, "but only if they take fraud prevention seriously."

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