You’re a supplier of widgets. You received a juicy order from a well known company to be delivered to them on account. You accept the order, ship it, invoice it. Then nothing. You’ve probably just become a victim of distribution fraud. Distribution fraud is an insurable risk, usually covered as part of a crime insurance policy.
Distribution Fraud is, unfortunately, fairly common these days, costing UK businesses tens of millions a year. However, this is a European wide problem, not just affecting UK businesses. A recent article in The Times highlighted the plight of Moon Buggy, a German supplier of prams, who were tricked into shipping over £200,000 worth of buggies to criminals in the UK posing as John Lewis buyers. Although the scale of this particular distribution fraud is not typical, Moon Buggy are not alone; and many may think they have insurance coverage when in fact they do not.
What is Distribution Fraud?
Fraudsters will set up an identity resembling that of a well recognised organisation with enticing purchasing potential; a retailer, manufacturer or even a government department or educational institution. Correspondence via email can be convincing, all with the appropriate identities cloned, similar domains and identical logos used, together with familiar language. Relationships are established, trust is built and an order is placed. In some cases there may be time pressure on that order. The lure and/or power of a big brand may result in goods being ordered on account/credit. If not then a fake bank transfer confirmation will be used. Delivery is then made. A genuine address may (or may not) have been used initially, but is then changed when the goods are en-route. In some cases the the goods are actually collected! (the nerve!)
The thrill of doing the deal quickly turns to panic as the supplier realises the invoice hasn’t been paid and that the genuine ‘buyer’ knows nothing about the order! Distribution fraud has been committed and unless the supplier in question has the appropriate insurance covers in place, they will have to suffer the financial burden of the fraud.
Experience of Distribution Fraud
A small number of our commercial insurance clients have actually experienced distribution fraud in 2018. Albeit not on the scale of Moon Buggy, the financial loss was nonetheless significant. In one case, unfortunately they did not take the appropriate Crime Insurance cover to respond to the distribution fraud. Goods had been shipped to a University. When the invoice was queried, alarm bells started to ring. For more detail on what to look for from your standard, cyber and crime insurance policies, see the relevant section below. Speak with your broker or insurer directly to make sure you have the right level of insurance cover in place.
How to Protect Yourself from Distribution Fraud
Bog standard phishing emails can be very convincing, others very much less so!! A targeted attack made by skilled criminals are capable of duping the best of us, so you need be wary of the detail. Having the right insurance product in place is a good start, but obviously there are other things you can be doing in order to protect your business:
- Have you done business with the organisation previously? Is it odd that they would be engaging with you, at short notice, with significant order volumes?
- Pay attention to the detail. Are there any basic errors in spelling and grammar? Anyone can make the odd typo, but does this correspondence feel right?
- Check the email domains being used. Keep an eye out for subtle differences, such as @macbeths.co.uk and @mcbeths.co.uk. Perform a whois lookup to get a bit more detail.
- Do a bit of research. Has there been any suspicious or fraudulent activity in the media involving this ‘buyer’? Do phone numbers correspond? Locate the genuine contact details (externally of the correspondence you received!) and make a quick call to verify.
- Independently verify and authenticate the banking and delivery details supplied. A quick internet search and a couple of phone calls can achieve this.
- Educate your logistics. Changes of delivery address need to be approved before the product is delivered.
- As mentioned earlier, have the right insurance cover in place! It may not prevent Distribution Fraud from occurring, but it will soften the blow to the business.
Distribution Fraud Insurance: Cyber and Crime, Not the Same Thing
As an Independent Chartered Insurance Broker, we work with a number of insurers, one of which is Royal Sun Alliance. We have confirmed with RSA that their crime cover will respond to distribution fraud.
A Crime Insurance policy will protect a business from the results of criminal activity, including robbery, fake CEO fraud, bank transfer fraud and Distribution Fraud. It will not support your business if your client database is compromised, for example. Distribution Fraud specifically is unlikely to be picked up by either a standard commercial liability insurance policy or a cyber liability policy.
Even though digital channels will have been used to engineer the distribution fraud a cyber liability insurance policy will not respond. Common terms for the threats posed by cyber attacks include hacking, viruses and malware, data/system breach and employee error. Cyber Liability insurance covers losses, (such as business interruption and loss or damage to data or software) arising from these types of threats and will provide support and assistance in the event of an incident. A Cyber Liability policy will not cover an organisation from loss of money or stock arising from criminal activity.
There is a huge cross over across the insurance industry right now, and the insurance cover overlaps between both Cyber and Crime products varies greatly from insurer to insurer. If you’re unsure on any aspect of Distribution Fraud Insurance that’s where a broker such as Macbeth comes in.