How blockchain can mitigate supply chain fraud

(Photo: Shutterstock)

(Photo: Shutterstock)

Financial fraud usually gets the media attention. However, IBM reports supply chain fraud is just as bad. A recent Deloitte survey reveals companies in the United States increased spending in supply chain risk analytics by 35% in 2017. These efforts aim to mitigate fraud and waste. However, the Big Four consulting firms don’t see any reductions in supply chain fraud. In fact, it’s getting worse.  

Scale of Supply Chain Fraud

Supply Chain Management Review reports over the last 12 months, the consumer and industrial products industries experienced the highest level in fraudulent activity in their supply chains (39.1%). Only the healthcare and life sciences industries reported a decline (26.3% in 2017 from 36.9% in 2016). With the advancement and focus in analytics, one may wonder if these industries really are experiencing higher levels of fraud or if the reported increases can be attributed to better visibility and intelligence.

The leading form of fraud in supply chains is financial abuse. Larry Kivett of Deloitte recounts fraud instances in energy and resource supply chains as “rife with bribery, bid rigging, collusion, fraud and other schemes.” He suggests one of the ways supply chain professionals can prevent this is through proper and transparent invoicing. Billing suppliers should be done timely and accurately and require stringent internal approval processes.

Internal Fraud

Deloitte also warns companies that when investigating supply chain fraud, don’t restrict your analysis to third parties and vendors alone. Internal fraud also poses risk to global supply chains. Deloitte’s findings conclude that project managers, invoice approvers and procurement professionals rank among the highest employees at risk for committing supply chain fraud. In fact, internal employees pose the highest levels of risk (22.9%) compared to vendors (17.4%) and third parties (20.1%).

Fraud Mitigation through Blockchain

One of the leading factors contributing to supply chain fraud and abuse attributes restraints in compliance resources. However, at its core, fraud stems from a lack of transparency. More and more companies look to blockchain as a technology solution for increasing transparency. The peer-to-peer approval network of computing nodes can help prevent fraud in supply chains.

Global supply chains are extremely complex. They involve many people, companies, governments and moving parts across international borders. Lots of transactions and activity occurring simultaneously can leave blind spots where fraud can occur.

IBM promotes blockchain for supply chain fraud mitigation as it greatly enhances the traceability of products from end user all the way upstream to raw materials suppliers. As products and services are bought and sold throughout the supply chain, documents relating to transactions and the employees that approved them can be recorded in the ledger for compliance professionals to view and audit. Once a transaction is made and recorded as a block, it cannot be tampered with retroactively.  

While blockchain is not a silver bullet to end supply chain fraud all together, it certainly makes a dramatic improvement on paper tracking and antiquated transaction methods still used today. Blockchain implemented in supply chains will not only reduce the instances of fraud, but also improve the safety of the products we use on a daily basis.