Controlling supply chain fraud

The cases of fraud have been rising since the emergence of the Covid-19 pandemic. Law enforcement agencies and regulatory bodies worldwide are grappling with financial crimes. In this situation, there is also a need to be cautious and think of possible fraud risks associated with supply chain disruption, which has surrounded the global economy for the last three years. It has become important for the government and agencies concerned to pay attention to the unforeseen consequences of such crimes with the right set of priorities for supply chain and resource control. Past lessons on business resilience have shown that supply chains need to be planned tactfully to stay effective within the current business context, but there is also a need to effectively manage the risks. It is important to understand handling the challenges in order to avoid significant financial impacts as well as hassles due to supply chain disputes. Nepal has a very unique transit mechanism and proper trading terms set by the International Chamber of Commerce (ICC) are not followed here. Further, the custodian right of goods produced in Nepal is in the hands of Indian clearing agents authorized by exporters and importers with the power of attorney by the importers' respective banks, be it for letters of credit (LC) or the Telegraphic Transfer (TT) based exports and imports. More importantly, there is no liability transfer law nor there is a provision to cover multimodal insurance. Random LC terms are used which are beyond normal practice in international trade and the provision of control of import and export at Kolkata are for Nepalis only. The chances of goods being diverted within India and only documents arriving at the border could be one of the cases. All formalities at border points are carried out with the arrival and exit of trucks recorded and taxes paid, but there are some cases of goods being diverted elsewhere than the destinations that we have been hearing recently. Supply chains are inherently susceptible to fraud due to several factors mentioned below:

1. There are several actors and several activities within and beyond borders with different legal provisions. Various means of transport are used, and each has different responsibilities, liabilities, and standards that need to be complied with.
2. The complexity of the operating environment, including the mandatory involvement of third-party logistics service providers, is beyond control due to provisions set in the bilateral agreements and treaty between Nepal and India.
3. The volume and scale of transactions vary from less than a container to huge volumes in containerized or bulk and break-bulk movements and rotating L/C are in use. Additionally, the present volatility in supply and demand for goods and services arising from the Covid-19 pandemic are constraints in mobility. The situation pushes for scaling back costs as businesses are faced with unprecedented challenges of shipment delays with a monopoly in the hands of shipping liners.

We need to be aware that links in the supply chain create chances for financial fraud and foster corruption leading to disruption in the risk management system.

There have been rampant cases of uncontrollable fraud attempts related to Covid-19 trade disruptions and this trend is expected to rise even if the situation is back to normal. While preparing the business community to respond to such risks, one needs to closely see the fraud, bribery, and corruption risks within the trade processes and documentation provisions. The fraud losses could cost organizations more in the long run. Past instances show that seemingly small supply chain frauds will go on while controls are weakened and can grow to a significant amount of losses over time.

A majority of supply chain fraud cases involve unlawful behavior of indoor sources and frequent involvement or collusion with a third party. Such practices stem from the current supply shortages, reduced morale of labor, weak supervision, sluggish approval processes and low economic productivity. Therefore, supply Chain fraud requires a deeper understanding of the flow of goods, information and money along with the documentation processes. The transfer of cost, liability and responsibility of each stakeholder along the chain needs to be worked out carefully. Only a very effective digitized and automated system can help overcome this problem. Some measures like inspection of all connections of the supply chain including suppliers, subcontractors, dealers, distribution companies, agents, and brokers alongside regular risk assessment could help to check the fraud. Without internal assistance, supply chain theft often fails. Therefore, it is important to manage the risk posed by the low morale of staff of companies involved in trade and transportation. There needs to be a good level of cooperation with the sourcing and management teams to identify the threats and find ways to eliminate them. There are some techniques such as the temporary fraud risk assessment to identify weaknesses in the existing control framework and seek ways to strengthen the controls. Similarly, understanding the vendor risk management (VRM) plans, vendors' honesty and accountability are also some factors to be considered in this regard. To reduce the risk of supply chain fraud, it is a must to check the end-to-end supplier network to ensure that the company's supply chain stays intact. This can be possible only with an integrated tracking and tracing automated digitalization system. Leveraging digitalization to optimize and reduce costs while improving processes and customer service has become necessary. It has become important to work closely with national logistic service providers and enable them full control over supply chain activities and hold them liable with legal provisions based on international best practices. Equally important is to be able to settle disputes within the country as per the legal arrangements rather than taking disputes across borders. The author is a logistics expert and a consultant