Risk Management · July 20, 2020

Common Sources of Business Fraud and How to Prevent Them

Business fraud can cause significant financial loss, but it can also expose the targeted company to reputation damage and regulatory risk. Keeping your business protected involves remaining vigilant, establishing strong internal controls and abiding by best practices for fraud prevention.

The first step is to understand the most common types of business fraud, so you know what to look out for. Then, establish clear protocols that help you prevent, identify and respond to these threats.

Business identity theft 

Just like individuals, businesses have valuable identity information. Many common frauds involve—or begin with—business identity theft. 

Any type or size of organization can become targets of theft. This extends to all legal structures as well, including sole proprietorships, partnerships, LLCs and corporations. 

Cybercriminals can use the stolen information to impersonate the business or the people who carry its authority, such as owners, executives or accountants. They might try to get money or goods from a supplier, for example. They could also falsify transactions, business filings or publicly distributed records. An impersonator may even file fraudulent tax returns with the IRS or local tax agencies to receive refundable business credits. 


In today's tech-centric world, the theft of digital information is among the most commonly reported types of fraud. Cyberattacks aren't limited to thieves hacking company systems to steal proprietary data and intellectual property. They can also involve automated clearing house and wire transfer fraud, as well as check fraud, account takeover and theft of business banking credentials.

Some cybercriminals use these attacks to compromise companies in ways other than monetary theft. Hackers may take over a website to send a message tied to some ideology they want to spread. Or they may infect a website with a virus simply to destroy customer confidence and weaken sales.

Payment fraud

Payment activities continue to be a common avenue for business fraud. Because invoicing and purchasing are normal business activities, companies may overlook operational vulnerabilities. In most cases, fraudsters set up ways to divert goods and services or actual funds. 

Duplicate invoicing, for example, may cause a double payment of an invoice, and the funds may be diverted into a third-party account. Meanwhile, non-payment scams involve the delivery of goods or services for which the company never receives payment, often achieved by manipulating invoice or purchase order data. 

In a common version of what's known as an overpayment scam, a vendor or customer receives a payment higher than the amount owed, and the fraudster arranges to have any surplus money refunded to a third party instead of the originating business account. 

Proactively managing fraud risk

Companies can use best practices and practical strategies to manage the risk of business fraud. The first line of defense is training and communication with employees and trusted external business partners. 

Formulate clear plans for recognizing and responding to suspected risks. Also, educate employees on how to spot potential fraud and keep company information secure in their day-to-day tasks.

Maintaining regulatory compliance is another key component of preventing and mitigating. Laws and industry regulations typically require monitoring, auditing, collecting and reporting information. This framework can help your business identify and prevent threats. For example, verifying a vendor's assigned tax ID number and contact information and then searching for any overlaps with employee data can go a long way toward preventing payment fraud.

Finally, you can invest in a robust cybersecurity strategy to protect your own business as well as your customers and suppliers. Install anti-malware tools and firewalls. Implement basic practices for strong, secure passwords. Consider creating a mobile device action plan, especially if this equipment might hold sensitive information or access the company's networks. Frequently backing up critical business data can also help you quickly recover systems and information if an attack ever compromises them.


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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.