What is vendor fraud?

Vendor fraud is deception carried out through an organisation's relationships with its suppliers. The perpetrator may be an outside vendor acting alone, a fictitious vendor created by an employee, or a genuine supplier working in collusion with someone inside the buying organisation. In every variant, money leaves the business through the accounts payable cycle for goods or services that were never supplied, were overpriced, or were worth less than claimed.

This entry explains the concept. For practical red flags and tests, see procurement fraud red flags.

What forms does vendor fraud take?

The most common patterns are:

• Fictitious or ghost vendors. An employee registers a supplier that does not exist, or a shell company controlled by the employee or a relative, and pushes invoices through for payment.
• Inflated, duplicate or false invoices. A real supplier bills above the agreed rate, bills twice for the same delivery, or bills for work never done.
• Short or substandard delivery. Fewer units, or lower-grade material, are delivered than invoiced, often with goods receipt notes signed off by a complicit store or site employee.
• Kickbacks. A supplier pays a kickback to the person who approves the order or the payment, and recovers the cost through higher prices.
• Bank account and master-data changes. Vendor bank details are altered, by an insider or through impersonation, so that a legitimate payment is diverted.

Vendor schemes sit within the broader category of asset misappropriation when an insider is involved, and within corruption where bribes or conflicts of interest drive the decision. The ACFE's Occupational Fraud 2026 report found asset misappropriation in 90% of cases studied and corruption in 45%, and identified lack of internal controls as the main weakness in 33% of cases.

Why does vendor fraud persist?

Purchasing involves many hands and high transaction volumes, so a few false invoices can hide among thousands of genuine ones. Weak segregation of duties is the usual root cause: when the same person can create a vendor, raise a purchase order, confirm receipt and release payment, there is no independent check. Light onboarding checks, emergency purchases that bypass normal approval, and infrequent review of the vendor master all widen the gap.

What are the red flags?

• Vendors with no web presence, a residential or shared address, or a bank account matching an employee's.
• Invoices just below approval limits, in round sums, or in unusual sequences.
• Rapid growth in spend with one supplier without a matching rise in business need.
• A vendor whose GST registration, PAN or incorporation details do not match its invoices.
• Employees who resist rotation, insist on handling one supplier personally, or take no leave.
• Complaints from other suppliers that tenders are not fair, a pattern discussed in our guide to procurement fraud red flags.

How is vendor fraud investigated?

An investigation usually starts with data. Analysts extract the vendor master, purchase orders, goods receipts and payment history, then run tests for duplicates, matches between vendor and employee data, unusual pricing and Benford's Law anomalies, as described in our article on data analytics for fraud detection. Suspicious vendors are then examined through corporate registry records, physical site checks and public-record research to establish who owns and controls them.

Documentary review and interviews follow, and where employee–vendor relationships are suspected, the steps in investigating employee–vendor conflicts of interest apply. Evidence must be preserved so that it remains usable in disciplinary, civil or criminal proceedings.

What is the Indian legal context?

Depending on the facts, vendor fraud can amount to cheating (s. 318 of the Bharatiya Nyaya Sanhita 2023), criminal breach of trust by a clerk or servant (s. 316(4)), forgery for the purpose of cheating (s. 336(3)) and falsification of accounts (s. 344). For companies, s. 447 of the Companies Act 2013 defines and punishes fraud, and a statutory auditor who has reason to believe that officers or employees are committing fraud against the company has reporting duties under s. 143(12).

How does vendor fraud differ from related terms?

Procurement fraud covers the sourcing and award process as a whole, including bid rigging. Vendor due diligence is the preventive check carried out before and during a supplier relationship. Vendor fraud is the loss event itself: the false invoice, the ghost supplier or the diverted payment.

Spectra Forensics' forensic accounting and data analytics service covers vendor master reviews, payment analytics and supplier investigations.