How to prevent frauds in business: Important cases for small business

Small and medium-sized enterprises (SMEs) are especially vulnerable to fraud due to limited resources and fewer internal controls. From financial scams to cyber threats, fraudulent activities happen on many different levels and cause significant damage. We take a close look at common small business frauds cases and unravel strategies of how to prevent frauds in business.

Why small businesses are more susceptible to fraud

The Association of Certified Fraud Examiners (ACFE)¹ reports that U.S. businesses lose an average of 5% of their gross revenues to fraud every year. Comparably, studies indicate that fraud impacts European businesses in a similar manner as those in the U.S. The European Commission estimates that fraud costs EU businesses and governments billions of euros annually, particularly in sectors like finance, procurement, and VAT fraud.

What most people are not aware of: Smaller businesses with fewer than 100 employees are especially vulnerable to fraud compared to larger firms. In fact, SMEs lose up to twice the amount compared to bigger companies.

While the reasons are manifold, a lack of internal controls and inadequate safeguards are among the main factors. This is why appropriate security measures are as important as KPIs for startups.

Common types of fraud affecting small businesses

Small business frauds cases can be broken down into 3 main categories: Employee fraud, external fraud and supplier fraud.

Employee fraud

Employee frauds happen more often than most people are aware of and cost U.S. businesses approximately 50 billion US-Dollars each year. 57% of fraud is committed by company insiders or at least a combination of insiders and outsiders and often involve theft, falsified expenses, or payroll scams.²

Similar to the U.S., research indicates that employee frauds contribute significantly to financial losses in Europe. According to a PwC Global Economic Crime and Fraud Survey, 50% of European businesses reported experiencing fraud, with a substantial share involving employee-related fraud.³

Examples of employee fraud include:

• Theft can include stealing cash, inventory, or intellectual property.
• Falsified expenses occur when employees exaggerate or create fake claims for reimbursement, inflating costs for personal gain.
• Payroll scams involve ghost employees, unauthorised salary increases, or falsified working hours.

To prevent such fraud, businesses should implement strict internal controls, conduct regular audits, and use automated payroll systems. Encouraging whistleblowing and fostering a culture of transparency can help deter fraudulent behavior while ensuring that employees feel safe reporting misconduct without fear of retaliation.

External fraud

External fraud is a growing concern for small businesses, with common schemes including phishing, invoice fraud, and cyberattacks. With AI on the rise, AI-powered fraud and deepfake attacks are becoming an increasing concern.

• Phishing involves attackers using deceptive emails or websites to steal sensitive information, such as login credentials or financial details. Website spoofing is a common tactic, where fraudsters create fake banking or payment websites that closely resemble real ones to trick users into entering their login credentials.
• Invoice fraud occurs when criminals send fake invoices, often to companies with established payment patterns. In 2023 alone, 80% of organisations were victims of payments fraud attacks/attempts⁴, a 15% increase over the previous year.
• Cyberattacks, such as ransomware and malware, target businesses’ networks and demand hefty ransoms for their release.
• Fraudsters are now using AI-generated voices, images, and videos to impersonate executives, manipulate financial transactions, and deceive employees or customers. These sophisticated scams make it even harder to distinguish between legitimate and fraudulent communications.

E-Commerce businesses are especially targeted. North America makes up more than 42% of global ecommerce fraud, while France and Germany are Europe’s major targets.⁵

Supplier fraud

Supplier fraud (also called vendor fraud) occurs when businesses are deceived by suppliers through practices such as overcharging or non-delivery of goods. Overcharging can involve billing for goods or services that were not provided or inflating prices beyond agreed-upon terms.

Non-delivery fraud occurs when a supplier fails to deliver the ordered goods or services but still demands payment. This type of fraud often takes advantage of weak procurement processes or lack of oversight.

Small business frauds cases

The following cases can affect businesses of all sizes, while SMEs are typically more vulnerable.

Case 1: Social engineering, phishing, and ransomware

Cyber scammers can deceive employees into transferring money or divulging sensitive information such as passwords or bank details. These scams often begin with a phishing email, a fraudulent text message (SMS), a message via social media, or a phone call that appears to come from a trusted source like a supervisor or senior colleague, creating a sense of urgency or fear.

Organisations observed millions of phishing attacks in 2024, which often included elaborate schemes, such as personalised emails with Google Street View images or Smishing, i.e. phishing through SMS and text messages. Some scams may look like routine password update requests or automated notifications, but they are actually attempts to steal information.

Case 2: Credit card processing scams

Some scammers lure business owners with promises of lower credit card processing rates or better B2B payment services on equipment leasing. They use fine print, half-truths, and outright lies to get business owners to sign contracts.

Other scammers may even go one step further and pretend to be from well-known credit card institutions. They offer seemingly legitimate contracts with low fees but later charge hidden fees or siphon off customer data.

To prevent this from happening to your business, always ask the salesperson to provide copies of all documents on the spot. If they refuse or delay by promising to send them later, it’s likely a red flag that you’re dealing with a scammer. Additionally, verify the company’s legitimacy, read the fine print carefully, and be wary of high-pressure sales tactics. When in doubt, consult a legal or financial professional before signing any contracts.

Case 3: Fake invoices and unordered merchandise

Scammers sometimes target small businesses with fake invoices for products or services that were never ordered or delivered. These invoices typically look official and often mimic legitimate companies or suppliers.

In some cases, a scammer might even call the company to confirm an “existing” order or to verify an address. If SMEs agree, unordered merchandise will soon show up at their doorstep, followed by aggressive demands for payment.

To prevent fake invoice and unordered merchandise scams, always verify invoices against purchase records before making payments. Train employees to recognise fraudulent tactics, such as vague product descriptions or urgent payment requests. Establish a strict approval process for new vendors and unexpected charges. If you receive unordered goods, know your rights – in most jurisdictions, you are not legally obligated to pay for or return them.

How to prevent frauds in business: Understanding the Fraud Triangle

Before we dive deeper into prevention strategies, it is worthwhile to understand the situations in which fraud can occur – this is where the Fraud Triangle comes into play.

The Fraud Triangle is a framework that explains the three key factors that often lead to fraudulent behaviour in business: Motivation, opportunity, and rationalisation.

• Motivation: The incentive an individual feels to commit fraud. It could be financial stress, personal issues, or unrealistic performance expectations. Employees may be tempted to steal or falsify information as a way to meet these pressures.
• Opportunity: Fraud is more likely to occur when there are weak control measures, or in other words: “An open door may tempt a saint”. If employees can exploit gaps in the system or bypass security measures, they may see an opportunity to commit fraud without getting caught.
• Rationalisation: This is the mindset that allows individuals to justify their actions. They may convince themselves that they “deserve” the money, or that their actions are not harmful, even though they are breaking the rules.

Understanding the Fraud Triangle provides a strong framework to check and rethink your current security measures and develop key strategies.

How to prevent frauds in business: Key strategies

The following passages describe security measures every business should implement in order to increase their safety standards.

Due diligence

Whether new employees, vendors or business partners, due diligence is crucial before entering into any kind of agreement.

This involves conducting background checks, verifying references, and reviewing financial records in order to identify potential risks and reduce the likelihood of fraud. Additionally, regularly reassessing relationships and conducting ongoing monitoring can help catch fraudulent activities early.

Make sure to develop and use standardised processes when entering any kind of new agreement. This helps you decrease external and supplier fraud by a huge percentage.

Training and awareness

Another key strategy in preventing fraud is training and awareness. Regular training sessions should cover topics like identifying phishing attempts, understanding company policies, and recognising fraudulent behaviour. Regular security audits and penetration testing should also be conducted to identify vulnerabilities and strengthen defenses before attackers can exploit them.

Encouraging an open culture where employees feel comfortable reporting suspicious activity without fear of retaliation is also important. By raising awareness and providing the right tools and knowledge helps reduce the chances of fraudulent activities going unnoticed.

Technological measures

Businesses should invest in advanced software tools that offer real-time monitoring, detect suspicious activities, and provide robust encryption for sensitive data.

This includes multi-factor authentication (MFA) for access to systems and financial accounts and secure payment processing systems, anti-virus programs, as well as firewalls, which all safeguard against cyber fraud.

Further, automated fraud detection systems can flag unusual transactions and provide immediate alerts to prevent losses. Keeping your software updated is also crucial – regular updates patch vulnerabilities that cybercriminals could exploit, ensuring your devices and security systems remain protected.

Verify invoices

The accounting department should establish a system to thoroughly review and validate every invoice before processing payment. This includes ensuring the invoice matches the corresponding purchase order, verifying that the goods or services were actually received, and cross-checking the vendor’s details for accuracy.

It’s also important to confirm that the pricing, terms, and quantities listed are correct. Further, make sure to add an extra layer of oversight by setting up internal controls such as approval workflows where multiple people review invoices.

Internal controls

Internal controls are essential for preventing fraud by establishing checks and balances within a business. These controls include segregating duties so that no single employee has control over all aspects of a financial transaction.

When it comes to debit cards, businesses should set spending limits, monitor transactions, separate users from administrators and use secure, authorised payment gateways. Additionally, implementing real-time transaction alerts, requiring multi-factor authentication (MFA) for high-value payments, and regularly reviewing account activity can further enhance security. These practices not only help prevent fraud but also ensure financial accountability for each card user.

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When choosing a provider for international banking, security should be a top priority. With amnis, you gain access to a secure and cost-effective financial ecosystem for international money transfer and foreign currency exchange, backed by Swiss-quality protection. Our security measures are designed to keep your account and cards safe while giving you full control over your transactions.

Here are some key ways amnis helps protect your funds:

• Card & payment controls: Limit usage to specific countries, disable online or in-store payments, and set spending limits for extra protection.
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• Robust infrastructure: SSL encryption, regular IT audits, and penetration tests ensure your account and transactions are always safeguarded.

Set up your free demo account with amnis to increase your safety standards.

Sources:
¹ ACFE Report to the Nations: Organizations Lost an Average of More Than $1.5M Per Fraud Case
² 49 Employee Theft Statistics (2024)
³ PwC Global Economic Crime and Fraud Survey
⁴ 2024 AFP Payments Fraud and Control Survey Report
⁵ Ecommerce fraud trends and statistics merchants need to know in 2024