Billing & Invoice Fraud: Tactics Used & How to Avoid Them

Billing and invoice fraud is a serious financial crime that can drain businesses of their resources and threaten their financial stability. Fraudsters—both internal employees and external scammers—exploit weaknesses in financial controls to manipulate invoices, overcharge for goods or services, or create fake vendor accounts. Understanding the common tactics used in billing and invoice fraud and implementing effective preventive measures is crucial for protecting your business.

Common Tactics Used in Billing & Invoice Fraud

1. Fake Invoices

One of the most common fraud schemes involves submitting invoices for goods or services that were never provided. Fraudsters create fake supplier accounts or pose as legitimate vendors to get payments approved.

• Example: An employee creates a fictitious vendor account and submits fraudulent invoices, diverting company funds to a personal bank account.

2. Inflated Invoices

In this scheme, a supplier or an internal fraudster inflates the price of goods or services on an invoice, charging the company more than the agreed amount.

• Example: A vendor charges $10,000 for services that should have cost $7,000, pocketing the extra $3,000.

3. Duplicate Invoicing

Fraudsters submit the same invoice multiple times, hoping that busy finance departments will approve duplicate payments.

• Example: A supplier submits an invoice for a service rendered and then resends it months later with minor alterations to avoid detection.

4. Kickback Schemes

This type of fraud occurs when an employee colludes with a vendor to approve fraudulent invoices in exchange for personal financial benefits.

• Example: An accounts payable employee ensures that an overinflated invoice is paid on time, receiving a portion of the extra funds as a bribe.

5. Phishing & Business Email Compromise (BEC) Fraud

Cybercriminals use email scams to impersonate vendors or executives, instructing finance teams to process fraudulent payments.

• Example: A scammer sends an email appearing to be from the CEO, instructing the finance department to urgently pay a fraudulent invoice.

How to Avoid Billing & Invoice Fraud

1. Implement Strong Internal Controls

• Require multiple levels of approval for invoice payments, especially for large transactions.
• Conduct regular audits of vendor transactions and invoice payments.
• Enforce segregation of duties by ensuring that the person approving invoices is not the same person processing payments.

2. Verify Vendors & Suppliers

• Conduct background checks before adding new vendors to your payment system.
• Regularly review vendor lists for suspicious or duplicate accounts.
• Verify invoice details directly with vendors using known contact details before processing payments.

3. Train Employees on Fraud Prevention

• Educate finance and procurement staff on common fraud schemes and how to spot red flags.
• Train employees to recognize phishing emails and suspicious invoice requests.
• Encourage employees to report any suspicious activity through a whistleblower policy.

4. Use Automated Invoice Matching

• Implement invoice-matching software to automatically cross-check invoices with purchase orders and receipts.
• Set up alerts for duplicate invoices or suspicious payment patterns.
• Require unique invoice numbers to prevent duplicate payments.

5. Monitor Financial Transactions in Real-Time

• Use fraud detection software to flag unusual invoice amounts or payment requests.
• Regularly review financial statements to identify discrepancies.
• Conduct surprise audits to deter internal fraud.

6. Establish a Secure Payment Process

• Use electronic payments with built-in fraud controls instead of manual check payments.
• Restrict access to financial systems and ensure strong password protections.
• Implement two-factor authentication for payment approvals.