Fraud can feel like something that only happens to other people. You hear the horror stories and statistics, but you never think you’ll be the next victim. Unfortunately, fraud isn’t going anywhere, and running a small business places a target on your back.
Without the same resources and protections as big corporations, small businesses are ideal targets for fraudsters. According to PWC’s 2022 Global Economic Crime and Fraud Survey, 46% of organizations report that they experienced fraud, corruption, or another form of economic crime in the previous 24 months. In addition, data from the Association of Certified Fraud Examiners (ACFE) over the last 20 years shows the frequency of small business fraud outnumbers that of larger organizations.
Given almost half of organizations were the victims of economic crime in the last two years alone and it is easier to target small businesses, fraud prevention is something you need to be proactive about. You can’t just ignore the threat and hope you get lucky. Instead, you need to understand the different fraud risks out there and learn how best to protect your business.
Let’s start by discussing five common types of small business fraud.
- Payment fraud
Payment fraud covers fraudulent transactions where the perpetrator directly steals funds or property from the business or makes purchases using someone else’s funds. You can help protect yourself against payment fraud by partnering with a dedicated bill-paying service for businesses that securely tracks all the money coming in and out of your accounts.
Examples of payment fraud include:
- Identity theft: The fraudster makes purchases using stolen personal and banking information.
- Friendly fraud: Customers falsely ask for a refund after claiming not to receive the goods or services.
- Consumer credit fraud
Illegitimate vendors or clients regularly target small businesses through consumer credit fraud. By exploiting their smaller operations and less rigorous financial checks, bad actors can get away with goods and services without payment.
Consumer credit fraud typically occurs in one of two ways:
- Short firm fraud: A client buys goods and services on credit without payment.
- Long firm fraud: A client builds trust with your organization by repeatedly purchasing small quantities of goods or services over an extended period of time. Then they place a large order and vanish without payment.
- Phishing attacks
Phishing attacks are one of the most common examples of online fraud. A type of social engineering attack, phishing allows cybercriminals to access sensitive data such as login details and credit card information through a fake email or another form of messaging.
The email purports to be from a trusted entity and directs readers to click on a link. In reality, the link is malicious, leading to malware, the disclosure of sensitive information or company data becoming encrypted for a ransomware attack.
Phishing attacks typically lead to stealing funds, unauthorized payments, or identity theft.
Malware refers to malicious software that infects a network to perform unauthorized actions. Although fake phishing emails and messages can be the entry point for malware, there are other ways for hackers to get their harmful software into a company’s computer system.
Different types of malware include:
- Trojan Horse: A piece of software pretending to be a legitimate and useful application that is actually the delivery mechanism for malware. Trojan horse attacks trick users into downloading and running the software themselves.
- Virus: Self-propagating malware that spreads through a system making it extremely difficult to remove.
- Worm: Similar to a virus, except a worm also looks to spread across other systems.
Once inside a target system, malware can have devastating results, from exfiltrating sensitive information that enriches the fraudster to disrupting operations and demanding payment (ransomware, denial of service, etc.).
- Payroll fraud
Unlike many of the fraud examples listed above, payroll fraud is exclusively caused by internal perpetrators (employees). Payroll fraud involves employees looking to deceive a business and receive payments that they shouldn’t. This could be asking for an advance and then not returning to work, lying about their sales figures to receive bonuses, or getting a colleague to clock them in and out in order to receive wages for time that they didn’t work.
Keeping your business protected
When it comes to protecting your business from fraud, education is critical. This means learning where your small business is vulnerable to fraud and teaching staff to be wary of these threats. Domains that you should focus your efforts on and learn best practices around include:
- Operations: Introducing controls and processes that track your operations. This could be oversight with multiple people required to sign off sensitive activities, restricting access to only trusted individuals, and auditing trails for financial transactions.
- Finances: Implementing systems that comprehensively track your finances and look out for potential fraud indicators. These include missing checks, unusual payment receipts, or payments to unknown accounts.
- Cybersecurity: Protecting your business from fraud is now more important than ever before, and thankfully there are many tools out there to help. A lot of keeping your business’s network safe comes down to following best practices such as selecting appropriate antivirus/firewall solutions, encrypting transactions and any correspondence containing sensitive information, maintaining up-to-date software, regularly updating login credentials, and only opening emails from verified senders.
- Employees: Ensuring all hires have verified references and you get to know them well when they start working for you. To protect yourself from internal fraud, prevent employees from having unchecked responsibility, and provide some oversight on all tasks. For example, you don’t want a single employee responsible for all accounting and bookkeeping.
Keeping the fraudsters at bay
Unfortunately, fraud isn’t going anywhere. Operating a small business today means considering all the ways customers, vendors, and employees may look to defraud or exploit you. However, with the appropriate education, training, and practices in place, you can limit your exposure and reduce the risk of becoming the next victim of small business fraud.
Fraud protection primarily comes down to following best practices and doing your due diligence. Fraudsters are always looking for easy marks. However, you can keep them at a distance with proper precautions in place