Vendor Fraud Detection: How to Find and Stop Threats Before They Happen

In 2023, financial services organizations experienced a 137% increase in vendor email compromise (VEC). In the same year, an attempted VEC attack aimed to steal $36 million from the target.

These statistics underscore the importance of vendor fraud detection in protecting your organization's financial ecosystem. From March 2024 to March 2025, attackers attempted to steal over $300 million through VEC attacks, and 44% of employees who read a VEC message either replied or forwarded it—an alarming engagement rate that shows how easily these threats can escalate.

Sophisticated VEC cyberattack schemes are now increasingly powered by artificial intelligence, enabling fraudsters to bypass traditional controls and exploit vulnerabilities in accounts payable workflows.

To combat these threats, organizations must adopt layered defenses that combine real-time behavioral analytics, robust internal controls, and cross-functional collaboration. This guide explores how vendor fraud happens and how to stop it.

Vendor fraud refers to deceptive schemes where external suppliers or malicious insiders manipulate the vendor payment process to divert funds or extract illegitimate payments. These schemes may include submitting fraudulent invoices, creating fictitious vendors, inflating legitimate bills, or compromising a vendor’s email account to change payment instructions.

Because vendor fraud often mimics routine business operations, it can go undetected for weeks or months, resulting in substantial financial losses and audit complications. Organizations with high volumes of vendor transactions are particularly vulnerable.

The rise of remote and hybrid workplaces has amplified vendor fraud risks. In traditional office settings, payment requests are often reviewed in person or by verbal confirmation. Today, most requests are received via email or online portals, making it easier for attackers to exploit digital communication channels.

Fraudsters now use AI to craft convincing emails that mimic the tone, branding, and writing style of legitimate vendors. They often strike during off-hours or holidays, when internal verification procedures are relaxed. For example, an attacker may send a banking update from a slightly altered email domain, prompting the recipient to divert funds inadvertently.

These tactics are difficult to spot using static rules or manual reviews. Traditional controls often rely on pre-set thresholds, such as flagging high-dollar transactions, while attackers use lower-value invoices to remain invisible. Keyword-based email filters are also easily bypassed by sophisticated social engineering. This shift demands dynamic, behavior-based approaches to fraud detection.

Fraudulent activities often masquerade as normal business operations, making them difficult to spot. Understanding the most common schemes and their tell-tale warning signs empowers your team to act early and decisively.

Adding fraud checks into your onboarding, invoice review, and payment processes strengthens internal control and helps detect vendor fraud before funds leave your system.

Here are some of the most common vendor fraud schemes and red flags to watch out for:

Fraudsters create fake businesses complete with false tax IDs, illegitimate bank accounts, and convincing, professional-looking websites. Accounts Payable (AP) teams might onboard these entities without sufficient due diligence. Key indicators of this scheme include:

• Incomplete or suspicious documentation

• Newly established business entities

• Bank accounts connected to internal employees

Without thorough verification, fictitious vendors can easily slip through onboarding. Strengthening due diligence is critical to prevent fraud before it starts.

Attackers gain access to legitimate vendor email accounts and use them to send fraudulent payment change requests. These emails often look authentic and pressure the recipient with urgency to bypass standard verification. Watch for:

• Slightly altered email domains

• An unexpected sense of urgency

• Requests for beneficiary changes without prior discussion

Because these messages come from trusted sources, they often bypass detection. Verifying all payment changes through a secondary channel is essential.

Fraudsters exploit the large volume of invoices processed to introduce deceptive charges. This can include:

• Duplicate invoices with minor alterations

• Charges for goods not delivered or inflated quantities

• Unexplained pricing discrepancies

These schemes are designed to blend into normal workflows. Vigilance in invoice review is key to catching inconsistencies.

Despite digital advancements, paper checks remain a significant vulnerability. Criminals intercept checks, alter the payee or amount, and quickly deposit the funds. Red flags include:

• Smudged or altered endorsements

• Checks originating from unfamiliar printers

• Routing numbers that don't match the vendor's profile

Paper-based payments are still a prime target for fraud. Monitoring physical check handling is just as important as digital controls.

This form of procurement fraud involves insiders manipulating the bidding process to ensure specific vendors win contracts. Indicators of bid rigging include:

• The same vendor consistently wins bids

• Shortened or unusually restricted bidding periods

• Undisclosed personal relationships between approvers and suppliers

When competition is compromised, so is pricing integrity. Transparent bidding processes help reduce this risk.

Cybercriminals steal vendor login credentials, often through phishing or malware, then silently change banking information within the vendor's profile. Be alert to:

• Logins from unusual IP addresses or devices

• Last-minute changes to banking details

• Suspicious activity on vendor portals right before pay cycles

These attacks can be nearly invisible until funds are lost. Strong access controls and monitoring can limit the damage.

This sophisticated scheme uses technologies like AI-generated voices and documents to trick teams into believing a legitimate vendor is making a valid request. Look out for:

• Misspelled words or unusual language patterns

• Inconsistencies in branding or logos

• Requests made outside normal communication channels

Fraudsters are now mimicking real vendors with alarming accuracy. Trust should be earned through verification, not assumed.

A single security tool is insufficient to stop sophisticated fraud attempts. Organizations require a comprehensive, multi-faceted strategy that leverages three interconnected pillars: People, Process, and Technology.

• People: Effective fraud defense involves specific personnel strategies. Cross-functional teams are formed, spanning procurement, finance, security, and compliance, to prevent isolated operations. Employees are trained using real-world fraud examples, with a focus on urgency triggers and pattern recognition. Responsibilities for vendor setup and approvals are rotated to reduce insider threat exposure.

• Process: Standardized onboarding protocols (KYV) are used to collect tax IDs, validate bank information, and verify company legitimacy. Multi-approver workflows are implemented for high-risk transactions. Quarterly vendor audits are conducted, and three-way matching is enforced. An incident playbook is maintained, outlining roles and escalation steps for suspected fraud.

• Technology: Behavioral analytics are deployed to establish baselines for normal vendor behavior. Real-time anomaly detection is used to identify deviations, such as logins from new locations or invoices submitted at unusual hours. Alerts are integrated with ERP, case management, and email security platforms. Enrichment and case creation for flagged transactions are automated to streamline triage.
  

These layers reinforce one another: trained staff design better workflows, strong processes feed quality data into AI tools, and adaptive technology enhances decision-making.

Rolling out an effective vendor fraud prevention program requires a phased approach that balances control deployment, automation, compliance, and performance monitoring.

Start with a comprehensive assessment of your current environment. Map existing fraud controls, identify coverage gaps, and collect baseline metrics such as current fraud loss rates, average detection times, and false-positive ratios. These benchmarks provide the foundation for tracking progress and identifying areas for improvement.

Next, move into a pilot deployment phase. Choose a high-risk process—like invoice processing—and introduce a targeted control, such as real-time bank detail validation. Monitor its effectiveness closely, comparing outcomes against your baseline metrics to validate impact before broader rollout.

Once validated, proceed to a full rollout across your vendor ecosystem. This step should integrate new controls with procurement systems and email platforms and enforce access controls to support the separation of duties. It’s also important to establish audit-ready processes—such as maintaining detailed onboarding files, logging all banking changes, and documenting multi-step approval workflows—to meet regulatory requirements like SOX and AML.

The final phase is ongoing optimization. This involves refining detection logic based on confirmed fraud cases, retraining staff as workflows evolve, and reviewing the system quarterly to identify workarounds or control failures. Key metrics to track include:

• Percentage of vendors fully validated

• Time to fraud detection

• Number of duplicate invoices prevented

• Rate of audit findings year-over-year

AI plays a crucial role throughout this lifecycle. Unlike traditional rule-based filters, AI-powered platforms like Abnormal detect subtle behavioral anomalies, such as banking detail changes made at unusual times or from unrecognized devices. By continuously analyzing vendor communications and access patterns, AI adapts to emerging threats and helps reduce false positives over time. In one case, Abnormal prevented a $1.6 million vendor fraud attempt, demonstrating the tangible value of automation in fraud defense.

When implemented as a unified, data-driven program, these steps not only reduce financial exposure but also build long-term resilience and trust across your vendor ecosystem.

Vendor fraud is no longer just a finance issue. It’s a security, compliance, and operations concern. Legacy tools can’t adapt quickly enough. To protect your organization and streamline compliance, schedule a demo with Abnormal today.