What is Vendor Fraud and How Do Manual Processes Put Me at Risk?
Do you see the full picture?
by Ashley Poynter
Content Manager
PaymentWorksWhat is Vendor Fraud and How Do Manual Processes Put Me at Risk?
What is vendor fraud, exactly?
Picture this: You’ve been diligently cutting checks, wiring payments, and keeping vendors happy. Everything seems to be running smoothly—until you get the call: one of your vendors never received payment.
You double-check the bank details. Yep, the payment went out. But not to them.
It went to a fraudster.
This isn’t a far-fetched story. It’s not even uncommon anymore. Welcome to vendor fraud in the era of social engineering—where one spoofed email or compromised inbox is all it takes to reroute thousands (or millions) of dollars.
Vendor fraud is the kind of threat that doesn’t need a hacker’s toolkit—just a convincing email, a dash of urgency, and a vendor payment process riddled with manual gaps and blind trust. Fraudsters don’t need to break in when they can just ask nicely.
These scams live in your inbox, thrive in spreadsheets, and bypass security controls with nothing more than a fake domain and a compelling story. They wait for the moment someone says, “Sure, I’ll update that bank account,” without verifying it’s really the vendor.
And here’s the harsh truth: when you’re onboarding vendors over email, managing bank details in shared folders, and approving payments without clear controls, you’re making it easier for the fraudsters than you might think.
Still think vendor fraud is something that happens to other organizations? Let’s break down how it really works, the role of business email compromise (BEC), and what your team can do to stop it before it hits your bottom line.
Table of Contents
What is Vendor Fraud? More Than Just Fake Invoices
Social Engineering: The Silent Art of Vendor Fraud
What is Vendor Fraud? The Jeopardy of Manual Processes
The Domino Effect: Consequences of Vendor Fraud
What is the Vendor Fraud Solution? Automation to the Rescue
Best Practices: Building a Fraud-Resistant Framework
Get Ready for Vendor Management Day 2025
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What is Vendor Fraud? More Than Just Fake Invoices
Let’s zoom out for a second and get real about vendor fraud—because it’s no longer just about bogus businesses submitting fake invoices.
Today, vendor fraud is increasingly rooted in social engineering, with criminals using deception and manipulation—not hacking—to trick employees into sending money to the wrong place. It’s a version of business email compromise (BEC), and it’s costing organizations millions.
Here’s how it usually works: A fraudster poses as a legitimate vendor—often by spoofing an email address or hijacking an actual vendor’s account—and sends a request to update banking details. The email looks routine. The language is polite and familiar. The urgency sounds reasonable. And if no one double-checks with the real vendor? The next payment goes straight into the fraudster’s hands.
That’s vendor fraud in 2025. And it’s scarily effective.
Sure, there are still the “classic” scams—fake vendors set up by insiders, inflated invoices slipped through during busy seasons—but BEC-style fraud has become the weapon of choice. Why? Because it doesn’t require breaching your systems. It just requires one person to trust the wrong email.
The usual suspects
Let’s look at a few common examples of socially engineered vendor fraud:
- The Impersonation Play: A vendor’s email is spoofed. A banking change request comes through. It looks real, sounds legit—and the update is made without verifying it directly with the vendor.
- The Email Hijack: The real vendor’s email account is compromised. The fraudster watches from the shadows, waiting to strike. When they do, it’s through a perfectly timed, perfectly worded message that redirects payment to a fraudulent account.
- The Executive Pressure Tactic: An employee receives what looks like an urgent message from their CFO, pushing for a quick vendor payment. Except the CFO didn’t send it—and the “vendor” is a scammer.
These aren’t fringe cases. These are the everyday tactics fraudsters use—and they’re designed to exploit human trust and manual gaps in your process.
The scariest part? It all seems normal until it’s not. A routine update. A friendly reminder. A “just making sure this gets processed today” nudge. It takes one missed call, one skipped verification, one assumption that it’s all good—and suddenly, the money’s gone.
What enables that kind of fraud? Manual processes. Email-based approvals. Spreadsheets. No audit trail. No consistent way to verify what’s real.
We’ll get into that next, but for now, know this: social engineering vendor fraud is not a tech issue—it’s a people and process issue. And it’s preventable.
Social Engineering: The Silent Art of Vendor Fraud
Now that we’ve answered “what is vendor fraud,” let’s explore one of its most devious forms in greater detail: social engineering. This isn’t the brute-force, smash-and-grab kind of crime. It’s subtle. Psychological. Built on trust and manipulation.
Social engineering attacks work not by hacking your systems, but by hacking your people.
These fraudsters don’t need to breach firewalls—they just need someone in your AP department to believe a convincing email, skip a verification step, or approve a vendor change without asking too many questions.
Here’s how it plays out in the real world:
1. The “please update our bank info” scam
It starts innocently enough. An email arrives from what appears to be a trusted vendor, requesting an urgent change to their bank account details. It’s professional, friendly, and even signed by someone you recognize.
But here’s the catch: it’s not actually from your vendor. The domain might be off by one letter. The reply-to email is a lookalike. If your process doesn’t require independently verifying these changes—say, with a phone call to a known contact—you’re about to reroute payments straight into a criminal’s account.
2. The fake vendor setup
Sometimes, fraudsters don’t even impersonate existing vendors—they create entirely new ones. They send over onboarding paperwork, W-9s, and bank details that look completely legit. With no automated verification system in place, the vendor gets added to your system. Invoices start rolling in. Payments follow.
By the time someone realizes the vendor isn’t real, the fraudster is long gone—and your money went with them.
3. Business email compromise (BEC)
This tactic goes after internal employees. A fraudster gains access to (or spoofs) an executive’s email account and sends instructions to Accounts Payable: “Urgent request—please pay this vendor today.” The employee, not wanting to delay or question leadership, processes the payment.
Again, no system error, no suspicious login activity. Just social pressure and a convincing email. Listen as Matt Klein, National Fidelity Product Leader at Lockton, talks about how social engineering is continuing to grow—and outpace everything else. As he puts it, “All it takes is one employee…to make a mistake. You’re only as strong as your weakest link.”
4. Vendor impersonation in RFPs and procurement
Social engineers are getting bold. Some are inserting themselves earlier in the procurement process—responding to RFPs or vendor inquiries with altered contact information or fake credentials. Without a proper vetting system, a fake vendor can be selected as a finalist or even awarded a contract before anyone realizes what’s happening.
Why it works: the verification gap
All of these frauds have one thing in common: they rely on the absence of independent, multi-step verification. When vendor data changes are accepted via email, when new vendors are onboarded based solely on forms, and when payment instructions aren’t verified out-of-band, fraudsters thrive.
It’s not about technical loopholes. It’s about human ones.
Manual processes don’t naturally come with verification logic. They depend on memory, attention to detail, and the hope that everyone follows the protocol 100% of the time. But in a fast-paced business environment? That’s a tall order.
And that’s exactly what social engineers are counting on.
What is Vendor Fraud? The Jeopardy of Manual Processes
If this were a gameshow, Alex Trebek would be announcing: “This is caused by manual processes and the resulting data entry errors, lack of verification, and detection delays.” Smart contestants would answer, “What is vendor fraud?, Alex.”
While Mr. Trebek might not be here to talk about the elephant in the room—your manual vendor processes—we will. The spreadsheets, the email chains, the vendor packets that sit on someone’s desk for a week. These aren’t just outdated—they’re dangerous.
Manual processes are the silent enablers of vendor fraud. They create loopholes, introduce errors, and make fraud harder to detect and easier to get away with. Let’s break it down:
1. Data entry errors
Even the best vendor manager can transpose a number or miss a decimal point. One wrong bank account digit, and your payment ends up in a scammer’s hands. Manual data entry is the fraudster’s best friend because it’s so easy to manipulate—and so hard to audit without a digital trail.
2. Lack of verification
When vendor onboarding is handled through email or scanned forms, who’s really checking the details? Is someone calling the vendor to verify that new bank account? Are you running TIN and address checks? Probably not. Manual workflows leave these steps vulnerable to being skipped entirely—or rushed through without proper scrutiny.
3. Delayed detection
Manual audits happen occasionally—monthly, quarterly, or maybe just at year-end. That means you might not catch vendor fraud until long after the money’s gone. By then, recovering it is like chasing a ghost.
Real-life example: the manual miss
A large regional organization relied on spreadsheets and email to onboard new vendors. One day, an urgent email came in from a known vendor asking for a bank update. Because the email looked legitimate and the sender’s name matched the records, the change was made manually. The next three payments—totaling over $750,000—went to a fraudster. No one realized until the real vendor called, wondering where their money was.
Had there been an automated system in place to verify changes and flag anomalies, the fraud wouldn’t have made it past the first email.
The Domino Effect: Consequences of Vendor Fraud
Vendor fraud doesn’t just sting financially—it shakes the foundation of your operations. When one bad transaction slips through, it sets off a chain reaction of consequences, many of which ripple far beyond the finance department.
1. Financial loss
This is the most obvious and immediate impact. You’re paying for services not rendered or products never received. Sometimes, the amounts are small—$1,000 here, $5,000 there. Other times, they’re catastrophic. Either way, that’s money you’ll likely never see again.
2. Reputational damage
Once fraud becomes public—or even just known internally—it undermines trust. Your board starts asking questions. Vendors get nervous. Employees get skittish. Worse, your customers may lose confidence in your ability to manage critical operations.
3. Operational disruption
When vendor payments go awry, real vendors don’t get paid. That means supply chain delays, contract disputes, and strained relationships. Suddenly, your team is scrambling to fix issues that never should have happened in the first place.
4. Regulatory and legal risks
If you’re in a regulated industry, vendor fraud can lead to serious compliance violations. Failing to properly verify vendor information or prevent unauthorized payments could trigger investigations, fines, and worse.
Think of it this way: vendor fraud doesn’t just take your money—it takes your time, your resources, and your credibility. And often, it all traces back to one weak link: a manual process that couldn’t keep up with the risks.
What is the Vendor Fraud Solution? Automation to the Rescue
If you’ve made it this far and your palms are sweaty—good. Vendor fraud is a serious risk, and understanding it is half the battle. So, what’s the other half?
Automation.
When people ask, “What is vendor fraud and how can I stop it?”—the first word out of our mouths is always the same: automate.
Why automation works
Automated systems don’t rely on memory, mood, or multitasking. They rely on logic, controls, and audit trails—things that social engineering and human error can’t manipulate so easily.
Here’s how automation steps in like the fraud-fighting superhero it is:
1. Automated vendor onboarding
The best way to beat fake vendors? Stop them at the gate. Automated onboarding platforms like PaymentWorks verify tax ID numbers, check banking info, and flag inconsistencies in real time. There’s no more “hoping” that the W-9 looks okay—it’s verified against legitimate databases automatically.
2. Real-time monitoring and alerts
Automation doesn’t sleep. It monitors transactions around the clock, looking for unusual activity: a sudden spike in invoice frequency, payments to new bank accounts, or duplicate invoice numbers. When something looks fishy, it gets flagged—instantly.
3. Built-in verification for changes
With automation, changes to vendor information aren’t approved by email or casual chats. They go through a secure, structured workflow. Bank changes? Automatically verified and confirmed with the vendor directly. No phone calls forgotten. No assumptions made.
4. Clear audit trails
Manual processes create messes. Automation creates records. Every action taken—who approved what, when, and why—is logged and trackable. That means fewer “he said, she said” moments during audits and faster resolution when issues arise.
As Debra Richardson, MBA, CFE, APM, APPM, CPRS, of Debra Richardson LLC puts it, fraudsters spend 100% of their time trying to figure out how to trick you. So, when you’re stuck in manual processes, you’re putting yourself at a disadvantage. You only get a sliver of whatever time is leftover to figure out how to outsmart fraud. Automation, on the other hand, immediately frees you up to focus on high-value things while staying one step ahead of fraud:
Best Practices: Building a Fraud-Resistant Framework
Automation is your foundation, but it’s not the whole house. Let’s talk about the habits and protocols you need to build a culture that’s hostile to fraudsters.
Because answering “what is vendor fraud” isn’t enough. You’ve got to answer, “What are we doing to stop it?”
1. Segregation of duties
Never let one person control the full lifecycle of a vendor transaction—from onboarding to invoice approval to payment. Divide responsibilities across roles and departments to create natural checks and balances.
2. Regular audits
You don’t need to wait for a financial crime to run an audit. Routine checks can surface red flags early—duplicate payments, unverified vendors, or abnormal payment patterns. Better yet, schedule them quarterly and include random sampling for surprise quality control.
3. Employee education
Fraud awareness shouldn’t be a one-time training. Make it part of onboarding, monthly check-ins, and annual reviews. Train your team to spot suspicious emails, verify payment change requests, and speak up if something feels off.
4. Ironclad vendor verification
Whether you’re onboarding a brand-new vendor or making changes to an existing one, always validate the information through secure, structured processes. No exceptions. No shortcuts.
5. Strong policies and easy reporting
Write clear policies around vendor onboarding, payment approvals, and fraud prevention—and make sure everyone knows them. Also, create easy ways for employees to report suspected fraud anonymously, without fear of backlash.
Fraud prevention isn’t just a technology issue. It’s a mindset.
Proactive Measures for Peace of Mind
So—what is vendor fraud?
It’s the silent siphon that drains your finances. Or the cleverly disguised email that reroutes six-figure payments. And the fake vendor form that somehow gets approved. It’s real, it’s rising, and it’s a risk no organization can afford to ignore.
But it’s also something you can absolutely prevent—with the right mix of automation, internal controls, and good old-fashioned awareness.
Here’s your action list:
- Assess your current vendor onboarding and payment processes. Where are the manual gaps?
- Automate verification and approvals to close those gaps.
- Educate your team on what fraud looks like and how to stop it.
- Audit regularly and build a culture where red flags don’t get brushed aside.
Vendor fraud might be clever—but your defenses can be smarter. And with the right systems in place, peace of mind isn’t just possible. It’s built in.
Get Ready For Vendor Management Appreciation 2025
The Vendor Management Appreciation Day (#VMAD) celebration continues in 2025! And you should join us.Â
Why? Because there’s no expiration date on honoring one of the most important, under-recognized roles across industries: vendor management.
Join us in observing Vendor Management Appreciation Day (VMAD)! We’re gearing up for the 2025 celebration, and we want you to be a part of it!
VMAD is a new holiday geared toward unifying vendor management professionals and celebrating innovation in the field.
Moreover, we’ve released gifts each month to help you supercharge your vendor management efforts. Additionally, we’re planning some awesome events so everyone can connect and celebrate the important, strategic role of vendor management.
In the meantime, learn more here, and grab some free vendor management goodies.
Want Help Aligning Teams On How To Answer: What is Vendor Fraud?
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