In their rush to source product from low-cost geographies, companies may have underestimated the risk of fraud.

It's endemic, and it impacts every stage of the supply chain. When looking for a manufacturer for a new product, for example, an unwary company may show its design around dozens of firms, little realizing that they might take the specs and go into production on their account, turning out product that's almost identical to the real thing and that eventually makes its way back to the primary market, where it damages the brand.

Product counterfeiting is an area of "extreme growth," but other equally noxious varieties of fraud are on the rise, according to Dalit Stern, partner in PricewaterhouseCoopers LLP's advisory group focusing on investigation and remediation of fraud and misconduct. "Fictitious vendors, overbilling schemes, pay-and-return schemes, theft of intellectual property -- each one of these areas is on the increase because of globalization," she reports.

Vincent Volpi agrees. He's CEO of Pica Corp., a loss prevention and risk management services provider. Volpi thinks one root of the trend is companies' failure to transfer the best practices that they routinely adopt in their home environment when they venture into unfamiliar markets. "Our economy is globalizing, but best practices are a little behind that curve," he says. Cultural differences play a role, too; some concepts around checks, controls, and balances don't always translate well.

Companies have a false sense of security in the effectiveness of their supply chain controls, says Mark Sullivan, managing director in Kroll's Chicago office and leader of the firm's loss prevention practice. "But many times they find that those programs are easily beaten by those who want to beat them."

Stern offers the eye-opening example of a large manufacturer of telecom products that was defrauded by a clerk who processed vendor invoices and payroll. "What she'd done was to abuse the system controls by applying certain invoices that were not supplied to herself, and then diverting the money to a bank account that she controlled," Stern explains.

"When we interviewed the chain of command about her, and after reviewing some very detailed manuals of controls, we were told that it was impossible to do what she had done because there was a control in the system that prevented her from attaching certain invoices to certain POs without a review." It turned out that the "control" was nothing more than a pop-up box that appeared on the clerk's screen and asked, "Are you sure you want to do that?" Of course, the answer was yes.

"Management was absolutely shocked when we shared that with them," says Stern.

Understanding your vendor community is key to confronting fraud, but the vendor screening process can be challenging in some developing countries, where information about past performance may be difficult to access or nonexistent. That calls for extra attention to vendor relationships:

1. Insist on watertight contracts. "Step one is having really good contracts with all of your suppliers," says Volpi. "That means having master services agreements that say 'These are the standards that you must follow, these are the requirements, these are the deliverables. And these are our audit rights -- we can come in any time of the day or night and ask to see your books, your inventory, or raw material in your facility, or to interview your employees to make sure you're not employing underage labor.'"

2. Audit your vendors. You should aim at inculcating in your vendors all the standards for security, safety, and corporate social responsibility that your company itself holds. But recognize that while vendors may pay lip service to your goals, they don't always "walk the talk," according to Sullivan. "Best practice is to audit vendors for those kinds of programs," he says.

Companies tend to lose much of the value of audits by telegraphing their intentions, Sullivan adds. "Maybe the audits are annual, or they're tied into a trip with a buyer who's visiting the region and the trip's been planned for six or eight weeks, the vendor's picking them up at the airport, they're having dinner ... Everybody knows they're coming, so the vendor can get their house clean and in shape for the company representative to make it look like they're complying." A much more effective approach would be to use surprise audits or a continuous monitoring program.

3. Mine your data. Shady dealings may leave tracks in the form of unusual payment patterns. Even a relatively simple analysis like checking invoice numbers can tell you a lot. "If there is not a big spread of invoice numbers that you get from a vendor month by month, you can start to draw the conclusion that you're probably a very important customer to that vendor -- you're getting most of their invoices. And that's something you would clearly want to know," says Sullivan.

Look for dramatic increases in payments to a particular vendor; a high number of transactions under audit thresholds; multiple invoices dated to the same day; and checks written on weekends or holidays.