Every small business is aware that fraud is a major threat to operations. It’s why 59% of companies completed a fraud risk assessment in the last 12 months and another 12% plan to do so in the next year according to PWC’s 2024 Global Economic Crime Survey.
The transportation industry is no different than any other—prone to freight fraud and struggling to stomp out threats before they happen. However, the fraud landscape is always changing; not all types of fraud are on every business owners’ radar. Let’s define the most likely threats to a transportation and logistics company today and ways to curb them.
Common Types of Fraud and Scams
The main categories of frauds and scams to watch for as a trucking company owner include cargo theft, electronic check fraud, internal fraud, and cybersecurity threats.
Cargo Theft
One of the largest threats to a transportation and logistics business is cargo theft. Many bad actors study electronic load boards watching for shipments of high value items, such as precious metals, posted by dispatchers. These bad actors pose as legitimate carrier employees and call a plant for a pickup number. Having proper controls in place helps your business stay ahead of these scammers. (We have more on fraud prevention strategies in the next section).
Another common cargo theft tactic involves security procedure deviation. You might witness employees dropping shipments in a yard that is not secured leaving valuable merchandise open for fraudsters to grab and set off within just seconds to minutes. Be sure that security policies are in place and that your team knows to never drop shipments in any yards that are missing proper security protocols.
Electronic Check Fraud
Businesses in the logistics industry use electronic checks to keep operations running smoothly. You can’t exactly leave your employees broken down on the side of the road with a shipment. So, you send an electronic check to pay for truck repairs to get your shipment back enroute. Scammers know the urgency with which these repairs need to be done, so they use this vulnerability against you. Scammers often call into transportation companies just like yours and pose as a repair shop completing work on one of your trucks. You send an electronic check to pay for repairs without thinking because this is a routine occurrence. Later on, you find out that this wasn’t a legitimate company, and there wasn’t a truck needing repair.
Internal Fraud Threats
The Association of Certified Fraud Examiners (ACFE) estimates that organizations lose approximately 5% of their annual revenue to occupational (or internal) fraud. Occupational fraud is defined as using employment or occupation to commit fraud. Let’s dissect common internal fraud threats the freight industry experiences on a regular basis.
A common example is the misuse of a company credit card or unauthorized payments using checks or wires. Another example is an employee setting up fictious vendors. If a transportation company has no controls in place, an employee can set up a fictious vendor that looks legitimate, add their own bank account details, and send “payments” to this fictitious carrier. While you might place a lot of trust in your employees and believe that they are all of sound character, trust is a terrible internal control. It’s also important to remember that good people can make bad choices when faced with external pressure.
Cybersecurity Threats
The last major threat I’d like to cover is the good old phishing strategy. We all know how phishing works. A scammer poses as a legitimate company and sends you a link to a document or attaches a seemingly innocent PDF. This content could come from what appears to be a vendor asking for payment or a customer sending you a request.
However, PDFs and links can contain malicious code and programs that infect computer systems leading to loss of sensitive data. These malicious emails can also request sensitive information like bank account numbers that lead to the theft of cash.
Now that we know fraudulent threats that risk your business’s security, we need to cover prevention strategies.
Fraud Prevention Strategies
Validate, Validate, Validate
For threats like cargo theft, it’s important to have security protocols in place. Ensure that your team has documented procedures to validate the identity of carrier employees calling in for a pickup number.
If you are a carrier company, you should ensure that every truck and cargo container has GPS tracking devices onboard. Couple this with software used to track truck routes and alert you when a truck deviates off course, and you have an effective tracking system.
Yards should also be equipped with surveillance technology to detect when unauthorized individuals steal product or trailers. If funds allow, it’s also a great idea to install security personnel to validate individuals entering or exiting the yard. If this isn’t an option, you can also utilize access control technology to automate some of this process through the use of codes or keycards. When threats are detected, it’s important to work with local law enforcement promptly to address the situation.
For threats such as electronic check fraud and other accounting scams, your business should consider only allowing certain individuals with high levels of training to authorize sending funds outside the company. It’s common for less experienced employees to miss steps in the validation process and make costly mistakes. One example I see often is an accounts payable associate updating ACH details for a legitimate company after a scammer calls in pretending to be an employee at said company. In reality, the scammer submits their own banking details to the accounts payable associate.
Having just one person or a few well-trained individuals authorized to make these updates keeps these simple but catastrophic mistakes from happening.
Checks and Balances
In addition to the steps mentioned above, it can be beneficial for business owners to hire accounting or audit professionals to conduct a fraud risk assessment and assist with the establishment of effective internal controls, including segregation of duties. These internal controls should be tailored to the organization based on business needs and risk tolerance levels. At the very least, no single person should have the ability to authorize transactions, maintain custody over assets (whether electronic or physical), and maintain the books and records of the company.
Along these lines, I suggest businesses of any size limit (or, better yet, avoid giving) CFOs access to cash. It’s easier for a CFO to hide the fraud they commit themselves than it is for an employee at an associate level who has their work checked often. If a CFO does need to access petty cash to, for example, set up a wire, have a final approval by company owners or someone else on the team to validate authenticity of the business need.
I always say that I don’t trust anyone, including myself. Having an attitude of suspicion can help a business owner set up proper controls to prevent fraud or even small financial mistakes. While fraud is a legitimate threat, so is a busy or fatigued brain.
Reconcile Bank Accounts Daily
Reconciling bank accounts on a frequent, regular basis doesn’t necessarily prevent fraud. However, you’ll be able to quickly identify fraud and prevent additional fraudulent activity coming from the same source. Clay Kniepman, Forensic, Valuation, and Litigation Principal, has seen several missteps when it comes to bank reconciliations and encourages businesses to avoid one common mistake: “Companies don’t always carefully consider WHO is performing the bank reconciliations. The person who performs bank reconciliations should not be the same person responsible for bookkeeping or issuing payments, as this would be akin to checking your own homework.”
Once you notice fraudulent activity, immediately notify your bank to prevent additional fraudulent transactions from going through.
Using positive pay can also be a strong deterrent against fraudulent transactions. Positive pay is a service banks offer to business clients. Essentially, a business sends their bank a list of checks to expect. The check number, dollar amount on the checks, and the vendors are provided. If a check is presented to the bank that does not match the information on this list, the bank refuses the check, preventing fraudulent checks from negatively impacting your accounts.
Zero Trust Policies for Cybersecurity Threats
Zero trust policies have been adopted by a variety of industries – and transportation and logistics companies, from shippers to brokers, should be among them. What is a zero trust policy? It’s an approach to cybersecurity that requires technology users to be authenticated, authorized, and verified by company technology, and any users that are not authenticated are to be regarded with high suspicion. For example, any email sent from outside of an organization is regarded with suspicion and links or attachments added to such an email should only ever be opened if the source of the email is verified as trustworthy.
In this common scenario, if you or someone on your team receives a communication that can’t be immediately verified as legitimate, directly call the vendor or company the contact states they are from and verify their identity and request.
Review Processes Periodically
It’s important not only to set proper processes, policies, and fraud prevention procedures but also to review them periodically. Clay believes this should be done at least annually: “Companies should assess what is working, what is not, and what can be tweaked. This does not need to be a complete revamp of your operating procedures but think of it as an annual ‘well-visit’ to your doctor. An ounce of prevention is worth a pound of cure!”
Beyond performing fraud “well-visits,” keep in mind that technology changes on a regular basis – both protective and invasive. As you become aware of technology that may pose a fraud threat, you may need to put new measures into place to avoid new scams.
While the trucking industry is no stranger to fear surrounding fraud threats, I hope this blog post provides you with strategies to implement in your trucking company to combat these threats.
If you’re feeling overwhelmed by the prospect of creating a fraud prevention strategy or concerned that you may be the victim of a fraud scheme, reach out to our fraud and forensics team for support.
