Blockchain: Procurement’s New Weapon Against Fraud?

With the continual growth of supply chains and their value to companies, it should come as no surprise that they are often the targets of fraud attacks and come with a range of different issues that procurement teams have to keep in mind. Moreover, with the evolution of technology, these chains are becoming ever more layered, with more players at the table, meaning more interactions and, more importantly, more transactions.

The global supply chain management market size is projected to reach US$19.3bn in value by 2028. With it having access to all sorts of products, it is not surprising that it finds itself under pressure, not only from a value creation perspective but also from issues such as fraud, including lies about the origin of goods, manipulation of financial and inventory records and counterfeit products.

Procurement fraud, a typical type of fraud, remains prevalent and poses a significant concern for businesses of all sizes and sectors worldwide.

The PwC Global Economic Crime Survey 2024 reveals that procurement fraud is among the top three most disruptive economic crimes globally in the past 24 months, following cybercrime and corruption.

While ample data and enterprise resource planning systems support diligence in procure-to-pay processes, advanced technology can also enable sophisticated procurement fraud by criminals.

Speaking after the publication of this report, Ryan Murphy, Global & US Forensics Leader, Partner, PwC US, said: “Companies have an opportunity to build compliance programmes that support businesses in maintaining trust and building resilience, contributing to the confidence to transform, invest and grow. With the right data and insights, risks can be taken with confidence.”

In 2023, Procurement Fraud in the UK jumped up 13%, with the figure of fraud cases rising from 153 up to 173, according to research by Accuracy, an international independent advisory firm.

Accuracy director, Robert Maluf, believes that the increase in procurement fraud was most likely due in part to global supply chain disruption in the wake of the Ukraine war. With many businesses forced to find alternative suppliers within a narrow timeframe.

“Supply chain disruption, the cost-of-living crisis, and the increased sophistication and volume of cyber-security attacks have created the ideal breeding ground for procurement fraud,” said Roberto.

“This fraud is a major hidden cost for businesses and can be difficult to detect. In some cases, procurement fraud schemes can go undetected for years, resulting in substantial losses for companies and investors.”

How Blockchain technology works

This new technology is making it easy to verify the authenticity of the people and businesses with whom people trade – the blockchain. It is seen as a more robust defence against fraud, a persistent challenge in supply chains and sourcing processes.

Through the use of blockchain’s transparent and immutable ledger, procurement leaders can ensure that their transactions are legitimate, supplier credentials are verified and goods can be traced through every step of the supply chain. Not only does this enhance trust between suppliers, it also eliminates counterfeit goods and tackles invoice fraud.

Blockchain is a decentralised digital ledger that records transactions securely and transparently across a network of computers (nodes). Each transaction is grouped with others into a block, which contains the transaction data, a timestamp and a unique cryptographic hash that links it to the previous block, forming a chain. This creates an immutable and chronological record of all transactions.

Because the blockchain is distributed across a network, it does not rely on a central authority. Instead, it uses consensus mechanisms like Proof of Work or Proof of Stake to validate and add new blocks. Once a block is added, it is nearly impossible to alter, ensuring data integrity.

Security is further enhanced by cryptographic techniques that protect transaction data, making it accessible only to authorised parties. Blockchain’s transparency allows participants to view the entire transaction history, though the identities behind transactions remain anonymous.

Additionally, blockchain can support smart contracts – self-executing agreements coded to trigger actions when certain conditions are met, further reducing the risk of fraud.

In essence, blockchain technology provides a secure, transparent and tamper-proof system for recording transactions, making it a powerful tool for enhancing trust and preventing fraud.

The Road Ahead: Challenges and opportunities

As blockchain technology continues to evolve, several key challenges and opportunities are shaping its adoption in the procurement and broader business landscape:

1. Regulatory Clarity
   The need for clear regulations is crucial, especially for financial services and overall market confidence. Progress is being made, albeit slower than some would prefer.
   The European Union's Markets in Crypto Assets (MiCA) legislation, implemented in June 2024, is a significant step forward. It provides a regulatory framework for various digital assets, including stablecoins.
   Other regions, such as Hong Kong, Singapore and Japan, are also developing progressive regulatory regimes.
   The United States is currently lagging in this area, which may impact adoption rates in that market.

2. Strategic Clarity
   There’s a growing recognition that private or permissioned blockchains may not be the most effective approach. Centrally managed decentralised ledgers often lack a clear purpose, as centralised servers can typically fulfil the same role more efficiently.
   The true value of blockchain lies in its decentralisation, particularly in preventing the formation of extractive monopolies in digital marketplaces. Many private blockchain initiatives have failed due to the inherent contradiction between centralised control and the benefits of decentralisation.

3. Technology Scalability
   Significant progress has been made in addressing scalability issues. Layer 2 transactions on Ethereum have become dominant, dramatically increasing transaction capacity.
   Current estimates suggest the Ethereum ecosystem can handle hundreds of millions of transactions per day, up from about one million 12-18 months ago. However, to fully support major industrial production, capacity needs to reach an estimated 40 billion transactions per day.
   Ethereum is emerging as the dominant blockchain ecosystem, mirroring the tendency towards standardisation seen in other technology sectors.

4. Privacy
   Privacy remains a critical concern, especially for enterprise applications. Businesses require privacy to protect sensitive information about their operations, inventory and business relationships.
   Recent developments in privacy-preserving technologies are making blockchain more viable for enterprise use. EY has developed two key solutions:

   • Nightfall: Nightfall is an Optimistic Zero-Knowledge (ZK) Roll-Up that helps enable private transactions on the public Ethereum blockchain. Using Nightfall, enterprises can orchestrate private transactions efficiently on the Ethereum mainnet without compromising the transparency, data immutability and security that Ethereum provides

   • Starlight: A tool which supports the needs of complex business agreements where business logic must be shared between parties at the network level but privacy from competitors also remains critical.

EY and Blockchain

Paul Brody has been the Global Blockchain Leader at EY since 2016. He presented a keynote to the Korea Blockchain Association in 2023. There, he spoke on his history of working with blockchain, having started in 1996 at McKinsey, before working at IBM. In 2013, at IBM, he got involved in his first blockchain project with the multimedia solutions centre at Samsung.

But it was at EY where he really got to pursue blockchain technology and work out how it can be most beneficial for enterprises.

In this keynote, Paul highlighted how blockchain can help with a business’s procurement operation. He emphasised the importance of privacy for industrial applications:

“The reason for that very simply is that if you're an enterprise, you want to do something like inventory management or you want to have an automated procurement relationship with your business partner or track your products or manage your trade across borders, it's really important that your competition cannot see what you're doing.

“The problem with a lot of blockchain infrastructure by default is that it becomes very easily visible. It's very easy if you do lots of transactions, especially if you do them with non-fungible tokens. It's easy for us to figure out who you are transacting with and what you're doing—that is sensitive business information for enterprises. And so privacy is essential for enabling enterprise business models.

“The reality is that until very recently, privacy hasn't really been a functional capability.

“The connections today that exist between are all digital, that is for sure, but mostly they're very unsophisticated forms of digital assets. With privacy, we can take these digital silos that are connected by fax or EDI or send around PDFs and we can turn it into this continuously integrated blockchain-based business ecosystem where you can have real continuity of data and information and business rules from one end to another.

“If you think about a typical supply chain, you can create digital tokens for the assets. You can move them from manufacturer to integrator, out to distributor and to the transport system and you can use smart contracts to basically manage those business relationships. Things like volume discounts, special pricing agreements, price lists. And if you can do those things with privacy, you can build a really robust model where instead of recreating data at every company, you're actually moving a token.”

The Future is bright (and blockchain-shaped)

As we look to the future, one thing is clear: blockchain in procurement is not just a passing fad: it is here to stay and it is transforming the landscape.

It promises a world where every transaction is traceable, every contract is smart and every supplier is verified.

To read the full story in the magazine click HERE

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