Steps to Include in Your Vendor Verification Process

Wire fraud is becoming a growing concern in the finance industry, especially among banks and credit unions. In some cases, companies never suspect the employee inside their building is responsible for fraud because of trust and the idea that someone on their payroll would never do anything to hurt the company. But trust can only go so far and this is why it is important to establish a vendor verification process.

The FBI has reported that wire fraud claims from title companies, for example, spiked 480% in 2016. While this is an alarming number, banks can do something about this by protecting themselves financially with bank crime insurance and by taking generous steps to keep fraud at bay. Vendor fraud is one important area to keep on the radar. Here’s what to watch for:

What is Vendor Fraud?

Vendor fraud occurs when someone manipulates a company’s accounts payable and payment systems for personal financial gain. It usually settles under three categories:

  1. Billing schemes
  2. Check tampering
  3. Bribery or extortion

Even with business protection strategies in place, like dual confirmation of wire transfers, vendor verification, scrutiny of email requests, and others, cyber criminals are finding sophisticated ways to work a system for illegal gain. Wire fraud coverage should be part of a financial institution’s cyber insurance policy. This can be added up to a certain amount, depending on your carrier. Some policies offer coverage by endorsement to address losses from the transfer of funds as a result of fraudulent instructions from a person pretending to be a vendor.

What to Consider in Vendor Verification

Banks can limit vendor fraud risks by identifying the people responsible for managing the relationship with the vendor and the people within the vendor organization managing the relationship with your bank. Usually these are department heads within a larger financial institution or possibly legal executives. Identifying the individuals clears up communication and manages the tasks involved in looking into any issues with the vendor.

Risk of vendor fraud is also related to relationship length. If a short-term project of a few months is on the docket, the risk of vendor fraud may be low. But this isn’t always the case. Long-term contracts and short-term contracts share the same risk as each other in terms of overall damage that can occur.

How to Avoid Vendor Fraud

A service level agreement can be the most effective way to minimize risk around vendor information security. To protect your organization the best way possible, you should utilize the following IT and legal steps:

  • Verify that the vendor has professional liability insurance or bank crime insurance
  • Request recent financial statements or talk with their bank to ensure they are a financial solvent organization
  • Verify any additional licensing or regulatory compliance needed related to government security or financial regulatory compliance
  • Require a security policy that focuses on system management and data protection
  • Establish defect tolerances such as metrics around incomplete backups and errors in coding


About Financial Guaranty Insurance Brokers

Since 1983, Financial Guaranty Insurance Brokers has distinguished itself as a provider of Professional Liability, Cyber Liability, and Crime insurance products for entities of all types. To receive timely, personalized service from a knowledgeable and experienced staff, call us today at (626) 793-3330 to speak with one of our professionals.