Phantom suppliers in digital supply chains: An invisible threat

Digital procurement has become the beating heart of modern business operations. From cloud marketplaces to blockchain-based procurement networks, organisations face mounting pressure to streamline supplier onboarding, automate due diligence and build frictionless supply chains.

Yet, behind this promise of efficiency lurks a growing risk: phantom suppliers. These ‘ghost’ vendors appear legitimate in digital systems but lack real, trustworthy existence, presenting a challenge unique to the scale, complexity and automation of digital procurement.

Beyond traditional invoice fraud

Fraud in procurement hardly new. Historically, fake invoice scams dominated, which is where fraudsters submit convincing bills for undelivered goods or services and, if accounts payable overlooks red flags, organisations pay out, discovering the deception too late.

Phantom suppliers in digital ecosystems are more subtle. Rather than targeting accounts payable directly, they infiltrate supply chain infrastructure by creating seemingly valid accounts in procurement platforms. These ghost vendors can:

• Receive payments via auto-approved purchase orders.
• Serve as channels for counterfeit or malicious goods and services.
• Mask cyberattacks, inserting malware through software updates or phishing disguised as vendor communications.

The key difference between these activities and traditional fraud lies in scale and persistence. A fake invoice is usually a one-off attempt. Fake invoices are typically a one-off endeavour, whilst phantom suppliers can persist undetected for months or years, draining funds or disseminating malicious payloads.

Fake vendors in cloud and blockchain ecosystems

As enterprises adopt cloud marketplaces and blockchain-based solutions, phantom suppliers assume dangerous new forms.

Cloud marketplaces prioritise speed, allowing procurement teams to onboard vendors with minimal clicks, skipping physical verification or in-person audits. Fraudsters exploit this, posing as cut-price providers of infrastructure or tools. This can lead to a risk of organisations acquiring software with backdoors or relying on hostile-operated infrastructure.

Blockchain procurement, often praised for transparency, remains vulnerable. While it verifies transactions, it cannot confirm entity identities behind wallets. As a result, flawed onboarding can facilitate fake vendors with falsified 'verified' status and once on-chain, revoking them erodes system credibility.

Automation: A double-edged sword

Artificial Intelligence (AI) and machine learning are touted as solutions, analysing supplier performance and auto-approving contracts via risk scoring. Yet, these tools depend on input data, which means that if phantom suppliers are able to evade initial checks, automation amplifies rather than eliminates them.

This could lead to AI rating a ghost vendor highly for 'quick, low-cost fulfilment,' which would in turn direct more business its way. Loopholes such as these provide an opportunity for fraudsters to proliferate via algorithm manipulation and data masking.

This paradox highlights how tools for safer, efficient procurement can, without oversight, enable fraud and cyber exploitation.

The perfect cover for zombies

Another tempting solution may be traditional audits, which focus on patching, access control and compliance frameworks. Whilst these represent a great place to start, there is an increasing need for organisations to adopt a continuous assurance stance.

Continuous assurance is an effective way to tackle the threat of zombie vendors head on. Zombie vendors are inactive accounts from defunct suppliers or ex-employees, lingering in systems. Cybercriminals hijack them for new orders, payment redirects or malware insertion.

Audits must probe deeper: Interrogating supplier identities, activity patterns and lifecycle management continuously.

Real-world consequences

The risks posed by phantom suppliers inflict more than financial loss, yielding operational and reputational harm:

• Cybersecurity exposure – Malware via vendor updates grants attackers backdoors to critical systems.
• Regulatory breaches – Links to blacklisted entities risk sanctions violations.
• Supply chain disruption – Dependence on malicious vendors can halt operations through delays or sabotage.
• Erosion of trust – Exposures undermine confidence from customers, investors and regulators, especially in trust-critical sectors like finance, healthcare or defence.

Mitigating the phantom supplier threat

Defending against phantom suppliers requires a layered approach, blending technology, processes, and people:

• Enhanced supplier verification – Onboarding must include multi-factor authentication, registry cross-referencing and ongoing activity validation.
• Continuous monitoring – Real-time anomaly detection in platforms flags threats early.
• Human-in-the-loop AI – Balance autonomation with oversight, with teams reviewing approvals and scores.
• Audit evolution – Treat procurements platforms as high-risk, evolving audits accordingly.
• Cross-functional collaboration – United procurements, finance, IT and cybersecurity to dismantle silos.

Phantom suppliers are not going away. They thrive in digital ecosystems lacking continuous oversight, and we should expect supply chain threats to become increasingly sophisticated, using AI-generated identities, synthetic documents and deepfake verifications.

To tackle this increasing threat, defences must advance similarly, merging analytics with zero-trust supplier approaches. It represents an urgent need for AI-enhanced anomaly detection, blockchain for indisputable records, cross-verification of supplier data against external registries and continuous assurance to be deployed in unity rather than isolation.

In addition, by learning from earlier breaches, organisations can fortify their defences and prevent similar exploits as we expect that attacks will only persist as digital ecosystems expand, enlarging attack surfaces. The task is not mere identification but fostering resilience against advanced fraud.

Organisations should consider a cultural shift: viewing procurement as cybersecurity's frontline. Embracing this mindset transforms vulnerable supply chains into resilient, trusted networks.

Image by Mariakray from Pixabay

Giles Hamlin is the Global Head of Governance, Risk and Compliance (GRC) services at LRQA, the leading global risk management partner, and has over 20 years’ experience in cybersecurity, risk management and information governance. He leads initiatives to help global organisations navigate complex regulatory frameworks, achieve compliance with international standards and build resilient, secure digital operations. Prior to LRQA, Giles’s career spans leadership in cybersecurity consultancy, risk assurance and information security management across multiple brands and sectors.