As foreign tariffs begin to take effect, your company’s supply chain could become vulnerable to supply chain fraud. During the COVID-19 pandemic, due to supply shortages and an abrupt switch to remote working, dishonest employees and vendors took advantage of their companies. The new tariff disruptions bring about a similar opportunity for fraud perpetrators to strike again.

Considering the new foreign tariffs, companies everywhere are reassessing their supply chain. This reassessment includes switching to domestic vendors, implementing policies to address increasing costs, customs delays, and looking at the logistical challenges of importing goods. An important issue that may be overlooked is fraud risk. If your company is in the process of reviewing their supply chain, it’s important to add this to your list of urgent issues to address.

Change Equals Risk

Any change in how your business operates can create risk of supply chain fraud, especially if it occurs quickly and there’s some uncertainty about the timing and effects of the changes. For example, you may be struggling to ascertain what tariffs apply and where all your goods or production components originated. It’s important to get these details right because the U.S. Department of Justice has indicated it will vigorously prosecute customs evasion under the U.S. False Claims Act.

According to the Association of Certified Fraud Examiners, businesses should look out for several common tariff evasion schemes, including:

• Routing shipments through a third country to hide their origin
• Lying about shipments’ declared values
• Falsely classifying the contents of shipments
• “Structuring” or splitting orders into multiple shipments to lower the overall assessed tariff

 
A newer scam, “delivered duty paid,” has emerged recently and is gaining popularity. In such schemes, suppliers charge slightly higher prices and deliver products duty-free. They tell their U.S. customers they’ve already paid the tariffs, but they haven’t — and don’t intend to. Customers often recognize that cheating may be involved, but the vendors provide them with plausible deniability.

Protecting Your Company

You can help protect your business from tariff evasion risk and supply chain fraud by carefully documenting all purchases, payments, and shipments and requiring copies of documents from vendors. If you don’t have adequate in-house expertise, consider outsourcing work to international trade experts. These specialists can provide a framework and policies that will enable you to import goods cost-effectively and legally.

And if you’ve decided to replace cross-border suppliers with domestic alternatives, be sure to follow your usual screening methods. These should include reviewing references from legitimate organizations and performing background checks of vendors’ principals. Don’t rush the due diligence process. Some stateside criminals may be lying in wait to take advantage of the situation.

Additional Resources

Finally, don’t overlook your workers. When it comes to supply chain fraud, rank-and-file employees often are the first to spot or hear about suspicious activities. Consider establishing an anonymous whistleblower hotline or online reporting mechanism, if you don’t already have one. Contact us for additional fraud prevention suggestions or help assessing your supply chain risk.