Financia Fraud has become a headache for everyone where Detecting Fraud is no less than a challenge to organizations. You might receive an intriguing SMS or email saying “Congratulations! You have won an iPhone!”. Sometimes, Fraudsters will play with your sympathetic feeling for humanity. They might contact you through a Facebook account saying that their mother is sick (sends you images of a patient on a ventilator). Finally, they will request you to send some money for the treatment and promise you that they will return it.
It does not stop here as fraudsters go to the deep level and now pose themselves as FBI or another government agency. They warn you for being suspected of a serious crime where you might go to jail. Out of fear of getting caught, you might do as they say by paying a bribe or fine to them. But the question remains unanswered how can we detect fraud at a personal or organizational level? Today, we will shed light on fraud detection and explain key strategies for detecting fraud at the initial stages.
What is Financial Fraud?
Basically, Financial Fraud is a deceptive or fraudulent activity where a fraudster takes illegal benefits from victims. Mainly, it includes falsifying identities, manipulating information, and misrepresenting facts. Financial fraud has many forms among which of them are listed below:
- Identity Theft
- Advance Fee Fraud
- Fake Cheque Fraud
- Tax Refund Fraud
- Charity Fraud
- Credit Card Fraud
- Financial Account Takeovers
What is Fraud Detection?
Detecting Fraud requires in-depth knowledge and a high degree of alertness. Also, in today’s digitized world, new fraudulent techniques have been observed. So, to detect digital financial fraud, AI techniques work best. There are traditional statistical methods for fraud detection that are pretty much combined with the AI model now.
How does AI help in Detecting Fraud?
AI (Artificial Intelligence) is the latest concept and emerging technology. It can be used in multiple and beneficial ways in the financial sector. Especially, when it comes to fraud detection, AI is a handy tool for regulators and law enforcement. Here are the basic AI techniques for Detecting Fraud.
1 Data Mining
It does the classification, segmentation, and grouping of data. So, it helps in fraud detection and finding fraud patterns
2 Neural Network
Another deep learning concept is known as Artificial Neural Network. It uses the layers concept namely neurons, weights, bias, and activation function. Additionally, further layers can be added as hidden layers to fine-tune the process.
3 Machine Learning
Machine learning is another technology-based fraud detection tool. Automatically, machine learning identifies the characteristics of fraud through algorithms and codes. These codes check patterns and other trends of fraudulent activities.
4 Pattern Recognition
Pattern Recognition clusters and classifies the patterns of suspicious behaviors. It is another deep learning technique used in AI for detecting fraud and money laundering.
5 Key Strategies in Detecting Fraud
For an ideal anti-fraud system there are 5 ways to detect fraud on a personal level. You can greatly reduce your cost and efforts in detecting fraud by implementing these strategies in your financial circle.
1 Ongoing Monitoring of Accounts
Regular review of banking and accounts helps a lot in tracing fraud patterns. In most cases, fraud detection starts by closely monitoring the credit card, bank account, and other activities. Any unauthorized transactions must be reported to the bank and law enforcement.
2 Vigiliance In Online Activities
While surfing the internet, be sure to play it safe and do not provide personal information to anyone online. Immediately, block or spam the person who tries to reach you out for personal information account information, and other. Always use ad blockers, anti-spam, and anti-virus software. Use VPN and only surf safe and trusted websites. Do not respond to unsolicited emails and calls that ask for your personal information.
3 Stay Up To Date with Fraud Schemes
Always stay updated with ongoing fraud schemes and prevalent scams. In this way, you can personally identify many fraud schemes and scams.
4 Monitor Your Credit Card
Always keep a close eye on your credit card transactions. Immediately, report any suspicious or unauthorized credit card transactions to the bank. Make sure not to provide your credit card details to anyone you do not know.
5 Trust Your Instinct
Certainly, your sixth sense is your best friend in detecting fraud. If you feel suspicious about something it is good. Trust your gut feeling and be very careful and sensitive about sharing your financial information with anonymous people.
KYC and AML in Detecting Fraud
If we study the system closely, we will find a connection between KYC (Know Your Customer), AML (Anti Money Laundering), and Anti-Fraud Activities. Essentially, AML compliance and fraud detection require similar checks. Following are the initial level checks that are the imperative requirement for AML and Fraud detection.
- Proof of Identity
- Red Flags
- Suspicious Activity Reports (SARs)
- Transaction Monitoring
- Data Analytics
Hence, the blockchain method of data storage prevents Money Laundering and helps in Detecting Fraud.
Elements of Fraud Detection
Actually, the element of fraud detection is the triangle framework that identifies fraudulent activity. This triangle shows that there is an increased risk of fraud in a particular transaction or activity. This triangle has three corners namely:
Detecting fraud also entails a risk-based approach that is crucial for both anti-fraud and anti-money laundering procedures. It entails the due diligence processes where Customer Due Diligence and Enhanced Due Diligence are conducted.
Overall, Anti-Fraud Management is as important as any other compliance activity. But it is necessary to use a single, robust, and effective regulatory framework that covers KYC, AML, and Anti-Fraud too. For this purpose, KYC AML Guide provides a knowledge-based comparative analysis where you can choose your best partner in Detecting Fraud and Money Laundering.
Frequently Asked Questions
KYC Regulations help in the prevention of money laundering and detecting fraud as well as combating terrorism financing. Outrightly, KYC compliance is a one-way solution to multiple financial security problems. through identity verification and authentication fraudulent activities can be traced well-before they actually occur.
AML refers to laws, policies, and regulations that ensure the prevention of Money Laundering. While Fraud Monitoring is an ongoing monitoring procedure that is carried out to Detecting Fraud in financial institutions and banks.
Statistical Analysis is considered as of the pillars of bank fraud detection. Gathering data and establishing patterns related to a risk-based approach and using algorithms builds a strong bank fraud detection mechanism.