7 Vendor Fraud Schemes: How to Identify and Prevent It

Vendor fraud is no longer a rare risk; it’s a growing financial threat. According to the ACFE’s Occupational Fraud 2024 report, organizations lose an estimated 5% of annual revenue to fraud, with vendor-related schemes among the most damaging. 

Meanwhile, a 2025 Trustpair survey found that 69% of companies were targeted by vendor fraud in 2024, up from 47% the year before, marking a staggering 47% year-over-year increase. 

From fake invoices to collusion schemes, businesses need stronger detection systems and controls to spot red flags early and stop fraud before it escalates.

What is vendor fraud?

Vendor fraud is fraudulent activity involving a vendor or supplier relationship. It can involve external parties submitting fake invoices or misrepresenting services, as well as internal employees colluding with vendors, creating fictitious suppliers, or manipulating procurement records for personal gain. 

These schemes can happen at multiple stages of the procurement cycle, including vendor onboarding, purchase requests and approvals, invoice submission, and payment processing.

Vendor fraud is not limited to large enterprises. Organizations of all sizes and industries can become targets, and the impact is often severe because these schemes may go undetected for months or even years. 

According to the ACFE’s Occupational Fraud 2024 report, the median fraud scheme takes 12 months to uncover, with an average monthly loss of $9,900. This means the longer vendor fraud goes unnoticed, the more costly it becomes.

Read more: Procurement Fraud: How to Spot Signs and Prevent Schemes

7 common types of vendor fraud schemes (with real examples)

Vendor fraud can happen at different stages of the procurement and payment process. Here are some of the most common schemes businesses should watch for:

• Phantom vendor / fictitious supplier fraud: A fraudster creates a fake vendor and submits invoices for non-existent goods or services. Red flags include missing business details, no tax registration, or vendor contacts linked to employees.
• Invoice fraud: Vendors submit duplicate invoices, inflated charges, or invoices for undelivered goods. Red flags include duplicate invoice numbers, missing PO references, or amounts just below approval limits.
• Bid rigging: Procurement processes are manipulated so a preferred vendor unfairly wins a contract. Red flags include repeated single-source procurement or suspiciously similar bids.
• Kickback schemes: Employees receive personal benefits in exchange for awarding contracts to certain vendors. Red flags include unusually close vendor relationships or employee lifestyles inconsistent with salary.
• Shell company fraud: A legitimate-looking company is created solely to receive fraudulent payments. Red flags include recently registered vendors, residential addresses, or ownership overlaps with employees.
• Payment diversion / bank account manipulation: Fraudsters change vendor banking details to redirect payments into fraudulent accounts. Red flags include last-minute banking changes or requests that bypass verification procedures.
• Overbilling fraud: Vendors intentionally inflate prices or bill for quantities never delivered. Red flags include invoice totals exceeding PO values or repeated delivery discrepancies.

How to identify vendor fraud: red flags to watch for

Vendor fraud often leaves patterns behind. By monitoring vendor data, invoice activity, payment behavior, and employee conduct, businesses can detect suspicious activity earlier before financial losses escalate.

Vendor data red flags

Suspicious vendor information is often one of the earliest warning signs of fraud. Watch for:

• Vendor address matches an employee’s home address or a known shell company registrar
• Invalid, duplicated, or unverifiable tax IDs and registration numbers
• Multiple vendors sharing the same bank account or contact details
• New vendors approved and paid unusually quickly
• Vendors with no website, references, or digital footprint

Invoice & PO red flags

Unusual invoice and procurement activity can indicate billing manipulation or fake transactions. Common warning signs include:

• Invoice amounts consistently just below approval thresholds
• Duplicate invoice numbers or slightly modified invoice amounts
• Invoices tied to missing or invalid purchase orders
• Missing supporting documents such as contracts or delivery receipts
• Unusual spikes in invoice volume from one vendor

Payment anomalies

Fraudsters often target payment workflows because they are harder to detect once funds are transferred. Pay attention to:

• Payments processed without approved invoices or matching POs
• Last-minute vendor bank account changes before payment runs
• Payments sent to accounts in unusual jurisdictions
• Payments approved outside working hours or by a single approver

Behavioral signals (insider threats)

Employee behavior can also reveal potential collusion or insider fraud. Some common signs include:

• Employees refusing to share vendor access or take leave
• Lifestyle patterns inconsistent with salary levels
• Resistance toward audits or internal control reviews
• One employee maintaining exclusive control over a vendor relationship

Read more: How to Detect Accounts Payable Fraud Before $125K Losses

How to prevent vendor fraud: a step-by-step framework

Preventing vendor fraud requires more than manual checks or occasional audits. Businesses need a structured framework that combines strong internal controls, approval workflows, continuous monitoring, and employee awareness. 

1. Establish a vendor verification process

A strong vendor verification process is the foundation of fraud prevention. Before any transaction is recorded, vendors should complete a formal onboarding process that verifies critical business information, including:

• Legal entity name and business registration
• Tax ID and bank account details
• Key company contacts and supporting documents

Businesses should also implement a tiered vendor status system, such as unverified, pending, and verified, to prevent purchase orders from being issued to unverified suppliers.

2. Enforce segregation of duties

One of the most effective ways to reduce internal fraud risk is by separating responsibilities across different employees or teams. No single person should control the entire procurement and payment process. Responsibilities should be divided across:

• Vendor creation
• Purchase order approval
• Payment authorization

According to Trustpair’s 2025 research, only 45% of surveyed companies had proper segregation of duties across payment-related functions.

3. Implement multi-level approval workflows

Approval workflows help businesses maintain tighter control over procurement and payment activities. Companies should define approval hierarchies based on transaction value, vendor type, and spending category so higher-risk transactions receive additional review. Every approval should also leave a digital audit trail that records who approved the transaction, when it was approved, and what changes were made.

4. Conduct regular vendor master file audits

Vendor master files should be reviewed regularly to detect suspicious or outdated records before fraud escalates. Businesses should monitor for:

• Duplicate or inactive vendors
• Missing verification documents
• Vendor bank accounts or addresses linked to employees
• Incomplete vendor profiles

Routine audits help uncover phantom vendors and hidden conflicts of interest that may otherwise remain undetected for long periods.

5. Deploy three-way matching

Three-way matching helps ensure businesses only pay for goods or services that were properly ordered and received. Before payment approval, finance teams should verify consistency between:

• Purchase orders (POs)
• Goods receipt notes (GRNs)
• Vendor invoices

Any mismatch should be automatically flagged for review before payment is released.

6. Set up anomaly detection alerts

Automated monitoring systems can identify suspicious activity faster than manual reviews alone. Businesses should configure alerts for:

• Duplicate invoices
• Invoice splitting below approval thresholds
• Rapid payments to newly created vendors
• Sudden vendor bank account changes

These alerts help finance teams focus on high-risk transactions before fraudulent payments are processed.

7. Create a confidential reporting mechanism

Many fraud cases are uncovered through employee tips rather than audits. According to the ACFE Occupational Fraud 2024 report, 43% of occupational fraud cases were detected through tips. Businesses should provide anonymous reporting channels and clear whistleblower protections so employees, vendors, and customers can safely report suspicious activity without fear of retaliation.

8. Conduct regular training and awareness programs

Fraud prevention becomes significantly more effective when employees understand common fraud schemes and internal controls. Regular training should cover:

• Common vendor fraud tactics
• Internal approval and verification procedures
• Escalation and reporting protocols

ACFE data also shows that organizations with fraud awareness training and formal reporting mechanisms detect fraud faster and reduce financial losses.

Vendor fraud detection software: top tools

As vendor fraud becomes more sophisticated, businesses are increasingly relying on automation and AI-powered monitoring tools to strengthen procurement and payment controls. Below are some of the leading vendor fraud detection solutions in 2026, from integrated spend management platforms to specialized payment fraud prevention tools.

1. Mekari Expense (best for Indonesian businesses)

An all-in-one spend management and procurement platform built specifically for Indonesian businesses, with built-in fraud prevention controls across the entire procurement-to-payment lifecycle.

Mekari Expense provides several AI-driven fraud detection capabilities designed to identify suspicious vendor and transaction activity automatically, including:

• Unusual amount detection using Robust Z-Score analysis to identify abnormal transaction values
• Unusual vendor detection based on vendor legitimacy, bank account status, and expense category alignment
• Duplicate transaction detection using fuzzy matching logic for near-identical submissions within 7 days

Additional supporting features include: 

• AI-powered OCR for invoice capture and validation
• Automated three-way matching
• Multi-level approval workflows with audit trails
• Real-time anomaly monitoring
• Centralized procurement compliance dashboards

Best for:
Mid-to-large Indonesian companies looking for an integrated, locally compliant procurement and spend management platform with embedded vendor fraud controls.

2. BILL

A cloud-based accounts payable automation platform designed to simplify invoice processing, approvals, and vendor payments for SMBs.

Key features:

• Vendor verification workflows
• Duplicate invoice detection
• Approval routing and payment authorization controls
• Automated invoice and payment processing
• Cloud-based AP management

Best for:
Small-to-mid-sized businesses seeking an accessible and easy-to-deploy AP fraud prevention solution.

3. Coupa

A business spend management platform that combines procurement, supplier management, and AI-driven spend intelligence in one system.

Key features:

• AI-powered supplier risk scoring
• Invoice fraud detection
• Policy compliance enforcement
• Spend analytics and monitoring
• Procure-to-pay automation

Best for:
Mid-to-large enterprises prioritizing AI-driven spend visibility, procurement governance, and compliance monitoring.

4. Trustpair

A specialized vendor fraud prevention platform focused on supplier verification and payment security.

Key features:

• Third-party bank account validation
• Supplier onboarding controls
• Payment fraud detection
• Vendor verification workflows
• Protection against payment diversion schemes

Best for:
Finance and treasury teams focused specifically on preventing payment fraud and vendor impersonation attacks.

5. Tipalti

An accounts payable automation platform designed for businesses managing large-scale domestic and international supplier payments.

Key features:

• Supplier onboarding automation
• Sanctions screening and tax validation
• Payment approval workflows
• Cross-border payment support
• Fraud prevention and compliance controls

Best for:
Finance teams handling high volumes of cross-border vendor payments and complex compliance requirements.

Key selection criteria to consider

When evaluating vendor fraud detection software, businesses should prioritize solutions that offer:

• Vendor verification workflows before PO creation
• Automated three-way matching (PO, GRN, and invoice)
• Real-time duplicate invoice detection
• Multi-level approvals with segregation of duties
• Complete and tamper-resistant audit trails
• ERP and accounting system integrations
• Local compliance support such as NPWP validation and Indonesian payment methods

Read more: Top 9 Fraud Detection Software to Reduce 50% Fraud Losses

Mekari Expense: fraud detection for Indonesian businesses

As vendor fraud becomes more sophisticated, businesses need more than manual reviews to protect procurement and payment processes. 

Mekari Expense, Indonesia’s #1 spend management platform, helps companies prevent fraud with end-to-end controls embedded directly into the vendor transaction lifecycle, from onboarding and invoice validation to approvals and payments.

Rather than treating fraud detection as a separate module, Mekari Expense integrates AI-powered monitoring and automated controls throughout the procurement workflow to help businesses:

• Mitigate fraud risks before transactions are approved
• Reduce reliance on manual reviews by finance and admin teams
• Improve data quality and standardize expense reporting
• Strengthen AI-driven fraud monitoring through Airene AI integration

Learn more about Mekari Expense’sprocurement management system and vendor fraud detection capabilities.