Master data management: Why the unique identifier is critical for fighting fraud
Generally speaking, fraud analysis embraces two different processes: discovery and detection. Discovery typically analyzes a blend of historical transaction and demographic data to look for outlier patterns that might indicate suspicious activity. Further investigation of these outlier patterns helps analysts determine if the activity is benign or if it indeed represents fraudulent behavior (and the extent of that behavior’s economic impacts). The result of this process is one or more fraud patterns, which are then integrated into the detection process. Detection generally scans sequences of events looking for matches of known suspicious patterns and flagging one or more transactions when a pattern is detected.
One of the main challenges of fraud analytics is rooted in a fundamental aspect of the “fraud business.” Namely, fraud perpetrators are constantly looking for ways to bypass the methods organizations use to detect it. One example is the $10,000 rule of the Bank Secrecy Act, in which a financial institution must report any cash transaction over $10,000. A simple detection rule would monitor all transactions – and if a person deposits $10,000 or more in cash, it would automatically be reported to the IRS, as it might be indicative of some money laundering scheme.
But anyone who knows that detection rule would consider dividing the cash into two bundles of $4,000 and $6,000. Then they could make two deposits and (supposedly) elude detection. Of course, banks are smart enough to know that someone might try this trick. So they put controls in place to look for multiple cash transactions from the same individual over a defined time period. In fact, the rule talks about whether it is one lump transaction or a collection of smaller transactions over a 12-month period.
That being said, most fraud schemes are much more complex than this. They often involve many transactions executed by multiple “named individuals” colluding to commit their crimes.
