Typical Signs of Fraud for Small BusinessesFraud is a big source of loss to small businesses. The Association of Certified Fraud Examiners found that, in 2014, the typical business lost a median of 5% of its revenues just due to internal fraud, to say nothing of the money lost because of external criminal activity. Knowing how to spot fraud is the first step to stopping it, which is why we’ve detailed some of the most common types of fraud, along with telltale signs you can use to uncover it.

Signs of external Fraud

With deeper coffers than the average person and a willingness to bend over backwards for customers, businesses are prime targets for swindlers and scammers. These kinds of criminals may be hard to detect because they aren’t doing anything obviously illegal, but if you know what to look for, you can save your business from a lot of pain.

Card fraud

Whether they’ve physically taken a card, or created a copy of a card from details they’ve skimmed, sometimes criminals may try to use a stolen credit or debit card at your business. This can create headaches down the road, as when the transactions on those cards get flagged as unauthorized and charged back, your business may have to bear the costs. According to Visa, some indicators of card fraud include a customer buying large quantities of an item with no regard for specifics like size or color, trying to rush through the transaction or distract the clerk ringing them up and making purchases either right when the store opens or right before it closes to catch employees off guard. A card thief may also use a card that is physically damaged as a pretext to avoid using the EMV chip to pay, asking the cashier to swipe the much less secure magnetic stripe instead. Remember that the name on a card must match the name of the person using it, even if the user claims to be a family member or brings a letter of authorization. If you believe you’re dealing with a customer who is trying to commit card fraud, you can call your card processor and ask for a Code 10 authorization, which is a subtle way to alert your processor of suspicious activity.

Return fraud

The National Retail Federation estimates that, in 2017, 11% of all merchandise returns in the U.S. were fraudulent, with the most popular method of return fraud being attempts to return stolen merchandise. The easiest way to avoid this is to require a receipt for all returns, and to check the details of each receipt for incorrect dates, misspellings and other inconsistencies just in case the receipt is forged. Additionally, you should check the merchandise being returned to make sure it matches the product originally sold, as sometimes people will attempt to return an old, broken product in place of the one they actually bought. Finally, a customer demanding a refund in cash, despite paying with a card, is suspicious, and may be a criminal attempting to launder money through your business.

Supplier Scams

Not all attempts at fraud come from the consumer side. Unfortunately, some come from scammers claiming to be prospective suppliers or lenders, offering a helpful service or a fast loan before taking your money and disappearing. Be wary of any unsolicited offers from businesses that ask you to pay up front, particularly ones that claim to increase your business’ exposure or prestige. Some offers may not even request money, but instead are phishing scams that just want you to click on an infected link or attachment, so in all cases, it’s safer to just not interact with seemingly random messages. Phishers may also attempt to trick you by sending messages that look like they’re from people or businesses you know. These messages tend to be short and vague, and may request personal or financial information that the other party should already have or not need. When you receive a message like this, you can verify it by calling or texting the supposed sender to make sure that the request is legitimate.

Signs of internal fraud

While no one wants to believe the people they work with are also stealing from their business, sadly, it’s all too common. Internal fraud happens quite a bit, especially in small businesses, and many of the people who commit it come off as trustworthy employees who don’t fit the typical profile of a career criminal. Common warning signs of an employee committing fraud include the employee clearly living beyond their means, suffering through challenging situations like divorce, family issues or repeated financial difficulties and demonstrating a persistent lack of self-control.

Cash theft

One of the simplest forms of internal fraud, employees stealing cash from the business, can also be one of the hardest to detect because there are so many different ways to do it. Employees can swipe cash from the time it gets handed to a cashier up until it gets deposited in the bank, and on each step in the chain of custody, there is a different way to tell that money is missing. Some general indicators of cash fraud include frequently altered or missing records for the amount of cash an employee was handling, as well as missing inventory due to cashiers pocketing money from unrecorded sales. Keep in mind that front of house staff aren’t the only employees who steal cash, as management also commonly has easy access to business funds, and may have greater authority to manipulate records and cover their tracks.

Payroll fraud

With fewer employees and less oversight, small companies are especially vulnerable to this kind of internal fraud. Payroll fraud is when an employee engineers pay records to divert more money into their own accounts, and it’s especially difficult to find if you rely on just one person for your payroll. This can take the form of the payroll accountant inflating their own hours, or even creating fake “ghost” employees and taking their checks. Regular audits of pay records can uncover payroll fraud, but you can find other signs in the behavior of your payroll accountant. Normally, an employee refusing to take any days off and handling all the work themselves is seen as a positive, but a payroll accountant may be doing that to make sure no one catches their crime. It’s also very suspicious if the payroll accountant objects to an audit or insists on performing an audit themselves, and if they get easily annoyed or flustered at reasonable questions regarding their work, they may be worth looking into.

False invoicing

Employees who handle invoices also have the potential to execute sophisticated fraud schemes similar to payroll accountants, and do so by manipulating invoice records while keeping other people from checking their work. False invoicing can take the form of re-submitting a legitimate vendor’s invoice and changing the receiving bank account to one under the employee’s control, or creating a new invoice for goods or services that were never delivered and collecting the payment. Symptoms of a falsified invoice include no listed physical address for the business, an invalid telephone number, brief and vague descriptions for why the business is being paid and no tax invoice details.

By training your workforce to notice fraudulent activity, and establishing an internal system of checks to keep everyone honest, you can reduce your vulnerability to fraud and give your business its best chance at success. To find more tips on building a successful enterprise, visit our small business blog.