6 Different Types of Payout Fraud
Fraud is a genuine concern that no business should ever ignore. A recent survey showed that 83 percent of U.S. companies saw increased cyber fraud attempts in 2023. With widely available technology like artificial intelligence, many experts believe that fraud will become increasingly more challenging to combat. Criminals are getting smarter, increasing risks for businesses of all sizes.
While there are many different types of fraud you need to worry about, one of the most impactful is payout fraud. As a business that accepts payments, sends payouts and onboards new recipients, you're vulnerable to attacks that threaten your bottom line and reputation.
In this blog, we'll explore six types of payout fraud and how they might impact your company. Then, we'll dive into how payout solutions like Dots can keep your business safe.
What Is It?
Payout fraud happens when a criminal accesses a company's payout processes and uses that access to steal funds, redirect payments to a fraudulent account, and even steal user data. This crime takes many forms, and there are several ways that nefarious individuals can steal from your business.
Hackers and cybercriminals can exploit vulnerabilities in your payout processes, manipulating systems and stealing funds while going unnoticed. Not only does this fraud harm your bottom line, but it could also impact users and payout recipients. Becoming a victim of fraud can be disastrous. It harms your reputation and exposes your business to legal and regulatory nightmares.
There's no single way criminals commit payout fraud; their tactics are ever-evolving. However, you should be aware of six primary forms of payout fraud.
Payroll Fraud
Payroll fraud is, perhaps, one of the more egregious forms of payout fraud. While most businesses focus on outside threats, fraudulent activity from within can also cause trouble. Payroll fraud happens when an individual or group steals money using an organization's payroll processing system.
While outside fraudsters can commit payroll fraud, the most common culprits are internal employees. As a result, it often occurs without raising any red flags, and this fraudulent activity can sometimes continue for months or years before someone notices.
So, how does it happen? This form of payout fraud involves gaining illicit funds using normal payroll processes. Bad actors create a non-existent employee for the sole purpose of stealing money from the company. Alternatively, they can misrepresent the hours worked, alter their pay rate in the system, create false expenses, claim bonuses they're not entitled to, etc.
Fake Vendor Invoices
Here's another form of payout fraud that's often successful due to misplaced trust. Fake vendor fraud, or supplier invoice fraud, occurs when a bad actor poses as a legitimate vendor for the company. Traditionally, businesses have several vendors they work with, and each will send an invoice to receive payment. Criminals take advantage of that fact and try to steal money by posing as one of those many vendors, hoping that fake invoices will simply process automatically.
Fraudsters can do more damage than you think. Sometimes, attempts are transparent and easy to spot. However, other times, criminals go above and beyond to convince companies they should receive payment. Some will create fake websites, use stolen identities, or engage in phishing scams to obtain real vendor credentials. Skilled fraudsters can create convincing facades that fool employees and decision-makers, convincing them to process fake invoices as they steal thousands from right under you.
Business Email Compromise (BEC)
Business email compromise is a serious cybercrime that many companies fall victim to. Like many other forms of payout fraud, BEC is a master class in social engineering and deception. Scammers create fake business emails that are convincing enough to convince recipients. They use these emails to manipulate employees to perform specific actions, such as transferring funds to a fraudulent bank account, giving up sensitive data, handing over passwords, etc.
What's concerning about BEC is how meticulously planned it is. Cybercriminals gather intelligence using readily available information and choose a target they think is most vulnerable to the scam, such as individuals who oversee payout processes. Once they complete the planning phase, they use emails to pose as a trusted leader, vendor, or colleague. Because the criminals do so much research and preparation, emails often look legitimate.
Account Takeover (ATO)
Account takeover is among the most damaging forms of payout fraud. ATO occurs when a criminal gains full access and control of a company's account. ATO can apply to business emails and internal accounts, including bank accounts and those controlling payout processes.
ATO fraud can impact businesses and users alike. Cybercriminals can access your company's accounts, wreaking havoc as they steal money. However, they can also steal your users' sensitive financial and personal data. That could also lead to ATO for your payout recipients.
Either way, it's never good. ATO fraud often occurs after a successful phishing scam. For instance, unauthorized bad actors can commit BEC fraud by stealing credentials that allow them to take over accounts without permission.
Fraudulent Expense Reimbursements
This payout fraud seems minor, but it can be a significant blow to your company's financials. It's similar to payroll fraud, where an internal employee "fudges the numbers" for financial gain. The fraudulent activity hinges on trust and exploits existing legitimate processes.
Employees or vendors commit this type of fraud whenever they submit false claims for business expenses. They may submit claims for entirely fictitious expenses that they never incurred, or they may overinflate legitimate expenses. For example, a traveling employee who submits a claim for reimbursement of 100 miles when they only drove 50 is committing fraud.
That's a minor example, but fraudulent expense reimbursements can be significantly more costly. If employees successfully commit this fraud, they may become bolder, costing your company thousands yearly.
Check Fraud
Finally, we have check fraud. This type of fraud is nothing new. Many believe that risks are declining because checks are less prevalent today. However, nothing could be further from the truth. According to a survey by the Association for Financial Professionals (AFP), 63 percent of respondents reported facing check fraud in 2024.
As the name implies, check fraud occurs when a criminal uses a fake, forged, or altered check to steal money from a business. In doing so, they steal money from your company. Check fraud can happen internally or externally. Recipients or vendors may alter a legitimate check to gain illicit funds. Alternatively, employees with access to company checks may steal them to move funds.
How Dots Can Help
If your business regularly sends payouts, you must do everything possible to prevent payout fraud. You can try many mitigation tactics, but using a platform like Dots can help you cover all your bases. Dots is a unified payout platform built from the ground up with security and fraud protection in mind. In addition to helping you streamline how you send payouts to recipients, the Dots API has robust fraud mitigation tools and features for peace of mind.
Comprehensive Know Your Customer (KYC) features help you onboard new recipients while doing necessary due diligence. Dots can verify identities, flag suspicious behavior, and perform ongoing checks to ensure your business is well-protected. That's not all.
Dots also has features to help with global payments, keeping your business safe while meeting all compliance regulations and standards. The Dots API actively manages fraud risks with ongoing monitoring and detection. The platform has a fully integrated fraud management system to protect your business, bottom line, and users.
Algorithmic fraud detection takes things even further. Dots monitors incoming and outgoing transactions to look for fraudulent activity. Stay in the loop and utilize game-changing tools to safeguard your business against payout fraud.
Get Started With Dots Today!
Payout fraud is an ever-present and ever-evolving risk. With Dots, you can stay on top of it. The Dots API can help you avoid bad actors and proactively fight fraud attempts. Focus on your business and let Dots cover your bases.
Dots is a payout platform that can benefit a wide range of companies. It's a streamlined payout solution to help you safely and securely pay recipients en masse. Simplify how you manage payments and get peace of mind with Dots' many fraud mitigation and security features.
Ready to learn more? Book your Dots demo today to see the payout platform in action and discover how it can protect your business.