What is Business Fraud?

Business fraud is any illegal or dishonest activity intended to deceive, conceal, or mislead a government body, company, financial institution, or individuals, often for the purpose of financial gain. It can also sometimes be known as corporate fraud.

Business fraud schemes can have severe repercussions for the companies that fall victim to it, including financial losses, legal risks, and critical public relations damage.

Types of business fraud

Business fraud can refer to a wide variety of different crimes, which can be committed by customers, suppliers, partners, or even a company’s own employees. Common types of business fraud may include:

  • Inventory theft or misappropriation: Employees, contractors, or partners can use company assets, resources, or inventory for their own personal and financial purposes, or they can steal the supplies outright and falsify company records to cover up the loss.
  • Cybersecurity fraud: Businesses are prime targets for online hacking, data breaches, phishing, and other types of cybersecurity attacks designed to trick or blackmail companies into releasing sensitive information or customer data.
  • Identity and account theft: Hackers can bypass direct cybersecurity approaches and instead impersonate and assume the identity of existing customers (identity theft), take control of existing accounts, and make unauthorized purchases or financial transfers.
  • Financial misrepresentation and tax fraud: Businesses and business owners can manipulate company and financial records to inflate revenues, hide debts or losses, or otherwise obscure damaging information. These records can then be used to make the company appear more attractive to potential partners, clients, and investors, or to avoid paying certain fees and taxes.

Preventing business fraud

While fraud is an ever-present threat to company security, businesses can take numerous steps to protect themselves and help prevent or detect any illegal activities, whether internal or external. Proven best practices include:

Employee education and awareness

Employees are one of a business’ best defenses against fraud. All company workers should be trained annually on recognizing fraudulent activities and flagging any suspicious activity they observe, whether from partners, clients, or even their colleagues. These policies should also include strong whistleblower protections, to encourage employees who might fear punishment or reprisal.

Internal controls

In addition to employee education, businesses can also implement specific processes and safeguards when conducting financial transactions, such as requiring signatures, sign-offs, and clear documentation for certain types of orders or transfers. Moreover, companies should routinely audit these controls and update them as needed.

KYB and KYB verification

To prevent partners and clients from possibly defrauding the company, businesses should invest in strong know your business (KYB) and know your customer (KYC) verification practices so they can clearly confirm the financial health and status of any other organization or person they conduct business with.

Technological Safeguards

Manually trying to prevent fraud can be a difficult, time-consuming, and likely an unsuccessful effort, given how sophisticated fraud actors can be. But with the right systems and digital safeguards in place, companies can more effectively monitor transactions and the flow of information and catch potential fraud activity. By setting up additional safety requirements, such as two-step verification, and automatically flag any transactions that seem suspicious, businesses can protect sensitive information and assets.