From kickbacks to counterfeit products\, mitigating the COVID-19 threat in modern supply chains

By Jagvinder Brar and Mustafa Surka

The supply chain space has witnessed rapid transformation and growth in the past couple of decades in terms of technology and global outreach. Modern supply chains have become complex owing to the extensive depth of supplier networks and the sheer volume of transactions, making them more vulnerable to fraud.

The COVID-19 pandemic has brought the entire world to a standstill - restricting people to their homes and causing severe disruptions for various organisations. Given that supply chains are inherently prone to disruption, the impact of COVID-19 on the supply chain operations of organisations has been catastrophic and the same has been summarised as below.

• Restrictions on domestic transportation and imports have choked the procurement channels of organisations, which has led to disruption in supply of raw materials and packing materials. Suppliers based in hotspots had to remain shut, even though suppliers in other areas had been allowed to operate with sufficient precautionary measures. The transportation of goods is still a looming challenge due to closure or travel restrictions on various routes.
• Significant operational challenges due to shortage of manpower, as various labourers and workers have moved to their hometowns.
• The unforeseen increase in demand of essential products might not be reciprocated by the last-mile connectivity system, including transportation and delivery partners, leading to challenges in delivery of products to channel partners and consumers.
• Limited demand of non-essential products during the lockdown period causing unanticipated increase in stock lying in warehouses, which could be prone to damage.
• Significant liquidity issues for certain organisations due to closure of their operations and an abrupt dip in demand.

It is difficult to fathom the long-term impact of COVID-19, however, its detrimental effects are expected to disrupt supply chain operations of organisations in the near future. These disruptions open up multiple avenues for fraudsters to prey upon susceptible organisations, its employees and consumers. New vulnerabilities may emerge, and existing vulnerabilities may be at a greater risk of exploitation by fraudsters, as a result of supply chain disruptions in the current environment. Organisational supply chains could face the threat of below frauds and wrongdoings in the COVID-19 scenario.

• Kickbacks, bribes and conflict of interest scenarios – Organisations need to identify alternative procurement channels urgently to resolve raw material and packing material disruptions. Third parties and vendors appointed due to the urgency with limited or no due diligence could lead to vendor favouritism, as a result of collusion between employees and vendors.
• Irregularities in procurement – Procurement of excess material/services or procurement at higher than market rates due to primary focus on maintaining operations and limited compliance in the remote-working environment.
• Counterfeit products could be put into circulation in the market to meet the increased demand and perceived shortage of essential products.
• Expired and damaged products could be sold in the market by tampering their manufacturing dates or product packing, due to severe liquidity issues and pressure to clear old stock lying with channel partners.
• Hoarding of essential products to create a perceived sense of shortage in supply amongst consumers, leading to unwarranted increase in prices.
• Warehouse leakages – Pilferage of products from the warehouse or during loading and unloading of goods due to shortage of manpower.
• Pilferage of goods in transit due to shortage/unavailability of truck drivers or manpower to ensure adequate security of the goods during transit, and due to collusion between unethical transporters and employees.
• Theft of goods by delivery personnel – Pilferage of original products by delivery personnel and delivery of fake products to consumers, leading to refund or replacement claims on organisations.

During these difficult times, organisations have rightly diverted their focus towards more pressing matters, such as ensuring optimum production, liquidity challenges, reducing costs, business continuity issues and managing other disruptions. However, it is recommended that organisations should also take proactive steps to effectively mitigate the fraud vulnerabilities caused due to disrupted supply chains and guard themselves from resultant financial and reputational losses by adopting the following measures:

1. Root cause investigation of suspicions or complaints regarding wrongdoings.
2. Fraud risk assessment of key business processes to identify and mitigate key fraud vulnerabilities.
3. Proactive data analytics that provide early warning signals of potential fraud and wrongdoings.
4. Due diligence checks for new and/or existing vendors and third parties.
5. Employee background checks to screen prospective and/or existing employees.
6. Training and awareness sessions for employees to be better prepared and motivated for preventing fraud and wrongdoings.

As COVID-19 continues to cause further devastation across the globe, modern supply chain operations are becoming increasingly prone to fraud and wrongdoings. In such situations, it is imperative for organisations to reinforce their defence mechanisms to keep prying fraudsters at bay and shield themselves from significant losses.

(Jagvinder Brar is Co-Head – Forensic Services, KPMG in India and Mustafa Surka, is Partner – Forensic Services, KPMG in India.)