Recently, there has been a rise in the frequency and complexity of ghost payrolling schemes nationwide. These schemes often involve third parties exploiting vulnerabilities within a company’s internal processes for financial gain. They are difficult to detect and can cause significant damage to the company.
What is third-party ghost payroll fraud?
This occurs when external parties, such as clients, subcontractors, or rogue hiring managers, manipulate payroll processes, timekeeping, or job orders to profit from payments to employees who either do not exist or are no longer employed.
Why staffing agencies are vulnerable
Many staffing firms are decentralized, with offices across a wide footprint, making them vulnerable to these schemes.
- Limited oversight: Employees placed at various job sites often lack direct supervision at each location.
- Payroll processes: Dependence on client-provided or self-reported timekeeping data opens opportunities for falsification of records.
- Rapid onboarding and offboarding: High turnover of new hires creates a short window for verification.
- Internal risks: Recruiters, HR professionals, and payroll administrators with internal system access can manipulate records of ghost employees.
Common forms of third-party ghost payroll schemes
- Client manager ghosting occurs when a client-side supervisor approves hours for workers who no longer show up on-site or who never existed to begin with. These “ghosts” remain on the staffing firm’s payroll, with kickbacks sometimes funneled back to the manager.
- Fake job orders or worksites involve collusion between a third party and someone inside the agency (or hacks onboarding systems) to create fake work assignments, trigger onboarding of ghost employees, authorize fraudulent timekeeping and collect wages. This scheme can exploit automated systems that assume job orders from verified clients are legitimate.
- Contracting company ghosts are common in large workforce supply chains. Subcontracted vendors may add ghost workers to rosters, submit timesheets and invoices for nonexistent labor, rely on staffing firms to unknowingly process payments, and delay billables for as long as possible.
- Stolen identity-based ghosting uses stolen personal data to create fake employee profiles. Payroll is then redirected to fraudulent accounts while the “employees” never show up for work, but their timecards are approved remotely.
Red flags to watch for
- Duplicate deposit accounts across different employee records.
- Employees listed who never appear on-site.
- Discrepancies between timekeeping logs and invoicing.
- Unusually high overtime or billable hours for certain employees.
- Lack of supporting documentation (e.g., I-9, background checks, timesheets).
Why these schemes are hard to detect
- Staffing firms rely on client supervisors to verify attendance.
- Timekeeping systems may lack real-time validation.
- Subcontractor arrangements often involve less oversight.
- Fraudsters exploit processes between staffing firms and clients.
Prevention strategies for staffing firms
- Enforce timekeeping authentication: Use biometric or location-based time tracking—especially at remote or client-controlled sites.
- Client supervisor verification: Maintain updated records of authorized approvers at each site; require dual sign-off on hours worked.
- Regular reconciliation with client site logs: Review attendance logs against the payroll reports.
- Audit subcontractor and vendor rosters: Conduct periodic physical headcounts random and onsite inspections to uncover discrepancies in the number of active workers.
- Monitor for payment anomalies: Watch for no time off requests, high pay without productivity metrics, or duplicate bank accounts across vendors.
- In-person client meetings: Have a company representative meet with the prospective client at their place of business.
Legal and financial consequences
Ghost payroll schemes can lead to:
- Massive financial losses from unauthorized payments.
- Civil litigation from clients or shareholders.
- Criminal charges for fraud and embezzlement.
- Reputational damage that erodes trust in staffing services.
- Liability for staffing firms lacking inadequate control.
Conclusion
As staffing operations expand across a broad footprint, protecting against third-party ghost payrolling schemes become more difficult. Staffing firms must extend their fraud prevention efforts to include client sites, vendors, and technology partners. Implementing strong contracts, clear accountability, and ongoing audit practices are essential to safeguarding against manipulation of payroll processes.
For more information on third-party ghost payrolling fraud, please contact a Marsh McLennan Agency (MMA) advisor today.
