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The Fraud Files: Identifying fraud in your supply chain

06 November 2020

Could your supply chain be putting your reputation at risk? Do you really know who you are doing business with? Find out how you can unknowingly be linked to fraudulent activity, and how to avoid potential risks and reputational damage.

As is often the case when the economy takes a downturn, fraud is rising. We are preparing our clients for more and more instances of fraud happening to them (or their supply chains) and the grave reputational consequences that can follow.

You may have seen recently that the BBC investigated and reported on systemic fraud in Leicester, in relation to the garment trade. They illustrated how clothing retailers including Boohoo.com have suffered from not only significant reputational damage but also a fall in their share price as a result of links to sweatshop practices and VAT fraud within their supply chain. 

Leicester's garment district is an area reliant upon the rag trade with around 20,000 employees involved within the fabric supply chain, across some 1,500 factory units. However, fraud is quite common here, an example scenario is outlined below.

Take a corrupt wholesaler (let's say "ABC Limited") and a legitimate customer that services a demand for fast fashion (meaning cheap, usually street style clothing). The following steps show how the fraud is committed:

  1. ABC 's owner (Mr X) sources goods from a supplier in a dark factory (a managed workforce of sweatshop slaves, often immigrants operating outside of the system, earning about £2.50 an hour in cash) where he can pay hugely knockdown prices for goods that he'll sell on (at a substantially inflated price).  
  2. The cash that pays for these dark factory goods was withdrawn from the bank account of a separate entity, which is part of the scam.  We'll call that entity 'Corrupt 1 Limited'. Mr X and his colleagues in the rag trade set it up to help them with the fraud, but all it actually does (as far as the supply chain goes) is generate substantially inflated sales invoices (plus VAT) addressed to ABC for goods it didn’t even sell in the first place (because Mr X bought them at very low cost from a dark factory) and maintain a legitimate bank account.
  3. ABC settles the false sales invoice via a payment into Corrupt 1's bank account (so on the face of it, it looks like Corrupt 1 is the bonafide supplier).  That money is later withdrawn by Mr X and his colleagues in cash (some of which will be spent on more goods from the dark factory, the rest they will pocket) in return for some false purchase invoices and other fake paperwork, to help offset Corrupt 1's VAT position.
  4. ABC provides the dark factory goods with its labels sewn in, to the legitimate fast fashion retailer and gets paid.  
  5. Repeat.  At least until Corrupt 1's VAT payment is due and then declare Corrupt 1 bankrupt.  
  6. Set up Corrupt 2.  Repeat.

DWF Forensic

DWF's Forensic team can provide corporate intelligence on your business partners or supply chain in order to identify any potential risks and avoid reputational damage. We obtain and analyse relevant intelligence from a wide range of data sources, as well as our own proprietary database, dcypher, and present this information in a concise report. 

To find out more please contact Chris Wheeler or visit our Corporate Intelligence webpage.

Further Reading

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