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How Blockchain can tackle fraud in procurement

Blockchain can help companies avoid fraud in their procurement operations

British businesses lost over £40mn last year due to fraud committed by their own employees, with London businesses accounting for 29% of those losses. Most organisations will do all they can to protect their networks and payment systems from hackers, but sometimes there is no stopping those internal stakeholders with malicious intentions and duping the systems for their own gain.

Businesses require a certain level of trust in anyone involved in financial transactions, including procurement; yet, clearly ‘trust’ isn’t enough in certain situations. Perhaps it’s time for more organisations to consider a completely different approach to reducing fraudulent behaviour.

Blockchain is one of the latest tech buzzwords. The technology is an incorruptible digital ledger of economic transactions that can be programmed to record financial transactions and other things of value and allows information to be distributed digitally but not copied. The tech community has been quick to uncover a number of potential uses for the technology but it is its ability to prevent fraud that I find particularly interesting.

From a procurement perspective, invoice management is one area that would benefit from Blockchain, as it can ensure that an invoice doesn’t change from the point that a supplier submits it to when a buyer processes it.  Transactions would have to be verified by all participants (e.g. suppliers and buyers). No individual will be able to change the invoice for their own gain without all other users of the system validating it.

And as it’s a decentralised approach, people external to the organisation have no obvious place to target and carry out a cyber-attack, as the data is stored across the PCs of all network participants. They will know that it is valid due to an algorithm, taking the form of a set of rules.

 As organisations grow and set up new offices overseas, the size of their network and payment systems might put them at greater risk of security breaches, particularly if they’re operating in territories where fraud is rife. For example, Operation Car Wash has seen Brazilian oil company, Petrobras face an ongoing investigation for alleged bribery for awarding contracts to construction firms at inflated prices.

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Any business that has transactions take place in regions where business corruption is common might be particularly concerned about invoices being changed, or wrongful updates to supplier bank details. Blockchain can help here by ensuring that only valid changes are made, which are then verified by all network participants.

Double spending is another fraudulent activity that Blockchain has the potential to eliminate. As cryptocurrencies such as Bitcoin are digital payment systems, there is the risk that network users can pay with the currency more than once if executed cunningly. But if the transaction is stored in the Blockchain, another transaction using the same cryptocurrency cannot be carried out. This stops an employee from making a legal payment, while using the same token to pocket that amount of money for themselves.

With the rise of activities such as mobile working and the Internet of Things, businesses are more connected now than ever, potentially putting their data at greater risk of unlawful access. Now is the time for organisations to take a new approach to how transactions are made to ensure greater protection. Some experts expect Blockchain to go mainstream in the next three to five years.

Some also refer to it as the new Internet, likening the conversations we have about Blockchain to how we spoke about the Internet 25 years ago. Organisations especially keen to tackle fraud and security issues in their procurement systems should establish what Blockchain can do for them.

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