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New Trends in Fraud Analytics and Tools

images THE MANY FACES OF FRAUD ANALYTICS

In a 2012 article in New Perspectives, Scott Smith and Jon Mueller stated:

When it comes to using fraud analytic tools in place of manual processes, the benefits clearly outweigh the challenges. From increased productivity and efficiency to improved risk assessment, fraud analytics is well worth the effort at any given time. [All entities that use fraud analytics are challenged with data-related issues,] including accessing data, inconsistent formats from various sources, excessive file size, and data import and export issues.1

This chapter introduces some of the best practices and new tools that can assist with overcoming these data challenges. These include effective emerging strategies for dealing with specific data, and some new resources that are available to assist you in your efforts when using fraud analytic tools.

Current and future technology is our greatest asset in the war against financial crimes; it is therefore imperative that we keep abreast of the newest innovations in fraud analytics. While it often appears that the criminals may be winning, with the use of more sophisticated fraud analytic tools, we are in the process of expanding to a new dimension in detecting and preventing fraud.

Fraud analytic tools help to combat fraud by identifying patterns in financial statements that are indicative of fraud. Analytical models analyze transactional and relationship data, enabling fraud examiners to uncover formerly unknown types of fraud, identify ongoing fraud schemes, and discover fraud networks.

It would seem obvious that more data would be helpful in this effort. Big data, however, sometimes presents too many potential paths and overwhelms the fraud examiner's ability to sift through the really meaningful data. To address this challenge and countless others, fraud examiners must move toward applying more analytical tools to their data. From Smith and Mueller's article:

In the middle of difficulty lies opportunity. [Fraud] data analysis benefits clearly outweigh the associated challenges. Increased productivity, efficiency, and improved risk assessment make data analysis well worth the effort. What we must ask ourselves is, “Can we use fraud analytics technology to help us do something in a matter of minutes that may have taken us several hours of manual work to complete in the past, and improve the quality of our work as a result? . . .

However, with data growing exponentially, manual [analytic] techniques are no longer an efficient or effective option for small- and medium-sized audit functions. The use of fraud analysis tools has evolved from a luxury to a necessity required by internal auditors, fraud examiners, law enforcement, forensic accountants, and functions of all sizes in an effort to keep up with our data-abundant world. While there may be challenges, there are also opportunities to directly improve the value that fraud analytic tools bring to our organizations.

...

The elusive goal of [fraud analysis functions] is obtaining valid data, in a consistent format, from different systems and groups within the organization and import it into a data analysis tool. This process takes collaboration, cooperation, and trust between [vested parties] to gather the required data needed to conduct a thorough [analysis].2

images THE PAPER CHASE IS OVER

“The use of fraud analysis tools does not have to be overly complex to be effective. Collaborate with others in your organization, and when a solution to a specific fraud analysis problem is found, document it.”3

Fraud analytics technology within the fraud industry is at an all-time high. Software is available to detect anomalies, red flags, and provide detailed visual analytics on our findings. With all of the latest news on big data and data analysis, we could have not asked for better tools. Nor could fraud examiners have asked for a better career choice.4 Fraud continues to rise, and we need the tools to uncover and prevent it. According to an ACL 2010 discussion paper:

In today's automated world, many businesses (private and public, law enforcement, and the financial sector) depend on the use of technology. This allows for people committing fraud to exploit weaknesses in security, controls, or oversight in business applications to perpetrate their crimes. However, the good news is that technology can also be a means of combating fraud. . . . Leveraging technology to implement continuous fraud prevention programs helps safeguard organizations from the risk of fraud and reduce the time it takes to uncover fraudulent activity. This helps both catch it faster and reduce the impact it can have on organizations.

Data analysis technology enables auditors and fraud examiners to analyze an organization's business data to gain insight into how well internal controls are operating and to identify transactions that indicate fraudulent activity or the heightened risk of fraud. Data analysis can be applied to just about anywhere in an organization where electronic transactions are recorded and stored.

Data analysis also provides an effective way to be more proactive in the fight against fraud. Whistleblower hotlines provide the means for people to report suspected fraudulent behavior, but hotlines alone are not enough. Why be only reactive and wait for a whistleblower to finally come forward? Why not seek out indicators of fraud in the data? That way, organizations can detect indicators of fraudulent activity much sooner and stop it before it becomes material and creates financial damage.

To effectively test for fraud, all relevant transactions must be tested across all applicable business systems and applications. Analyzing business transactions at the source level helps auditors provide better insight and a more complete view regarding the likelihood of fraud occurring. It helps focus investigative action on those transactions that are suspicious or illustrate control weaknesses that could be exploited by fraudsters. Follow-on tests should be performed to further that auditor's understanding of the data and to search for symptoms of fraud in the data.5

images TO BE OR NOT TO BE

The ACL discussion paper continues:

There is a spectrum of analysis that can be deployed to detect fraud. It ranges from point-in-time analysis conducted in an ad hoc context for one-off fraud investigation or exploration, through to repetitive analysis of business processes where fraudulent activity is more likely to occur. Ultimately, where the risk of fraud is high and the likelihood is as well, organizations can employ an “always on” or continuous approach to fraud detection—especially in those areas where preventative controls are not possible or effective.6

Fraud analytics that supports real-time decision making at the time of a transaction can go a long way toward flagging and stopping suspicious transactions before criminals cash out. When these measures are applied on a continuous basis and everyone is aware of their existence, detective measures become preventive in nature.

A layered hybrid approach to help prevent, detect, and manage fraud across the enterprise is an effective tactic. An orchestrated solution—encompassing detection, alert generation, alert management, social network analysis, and case management—can tremendously reduce the time, cost, and effort required to implement individual point solutions for each element.

By using multiple analytical approaches across all organizational transactions, you can achieve better monitoring of fraudulent activities and more accurate customer behavior profiles. This can result in incremental detection and lower false positive rates—helping to keep your customers safe from financial harm while protecting your organization's reputation.7

Now is the time to explore the latest technology that has been set before us. We should arm ourselves by enhancing our skills in the latest fraud analysis and fraud detection software as well as by attending informative training from various professional organizations. In spite of all our hard work, fraud has increased and continues to do so. Therefore, we must be prepared for the new opportunities that will allow us, as fraud examiners, to prove our abilities. We must be proactive in an industry that is growing by leaps and bounds.

In 2012, several federal government agencies were allotted massive amounts of funding to enforce criminal investigations of mortgage and corporate fraud, cybercrimes, and financial crimes of sorts. It was not more than five years ago Mollie Garrett had the opportunity to participate in a joint investigation of mortgage fraud with the U.S. Department of Justice Mortgage Fraud Task Force in which she was assigned as one of the lead fraud examiners. It was Mollie's first experience with a mortgage fraud investigation, and she found it to be rather intriguing. She hadn't seen so much paper in all of her professional and personal life. A plethora of boxed documents awaited each individual assigned to the case. Mollie and a few of the other task force members looked at the boxes and wondered what they had gotten themselves into.

It was a scary thought, but somehow Mollie's team knew that this case would be overwhelming and long lasting. Mollie and her team made a decision that they would see it to the end and secure restitution—if anything was left—and ensure that all suspects involved were prosecuted to the fullest extent of the law. After two years of traveling back and forth to assist with the investigation, it finally came to an end, and the outcome was successful. Mollie and her team discovered that it takes determination, diligence, and patience to find your way within the fraud fighting industry. For those new to the field of financial crimes, your level of expertise doesn't happen overnight—it takes time and effort. And for those who have been in the industry for quite some time—you have seen and heard it all. We must be willing to share our experiences with those who are new in the game.

Today's fraud scams and schemes are more sophisticated than in years past, but we must not shy away from the intricacies of the scams. As the schemes evolve, so must we as fraud fighters. It's not in our nature to sit back and be complacent; fraud fighters must fight until the scheme has been uncovered and the perps are exposed. There's so much to learn, but with the right fraud analytical tools the odds should all be in our favor. The rise of fraud around the globe has surpassed even the “good old days” of corruption. So, what do we do now?

The Association of Certified Fraud Examiners (ACFE) 2010 Report to the Nations on Occupational Fraud and Abuse noted that the greatest fraud increase comes from individuals embezzling funds from their firms.8 The debacles of some of the world's largest fraud schemes in U.S. history haven't shown any signs of deterring current and future fraud, so fraud fighting is a growing business to be in right now. In other words, the twenty-first century is going to be good for the use of fraud analytic tools and for fraud fighters.

Scammers who engage in fraud often display characteristics commonly attributed to good citizens and even good leaders. The fraudsters strategize with vision; they motivate and develop others to want to follow their lead. Scams have been around as long as there have been people to be fooled. Fraud is as old as the Bible and as common as the cold. We can win this fight if we are open-minded and use the analytical tools that can and will assist with fraud detection, whether those tools are sophisticated or not so complex.

In order to decipher thousands or millions of transactions and to select the few that maybe fraudulent, fraud examiners, accountants, auditors, and investigators need powerful fraud analytical tools. The analysis techniques that use the latest fraud analytical tools are somewhat complex if one has not had the necessary training or understanding of the product.

More and more fraud is committed with the help of computers. The majority of frauds are discovered on the outside perimeter; others are discovered by happenstance. In recent years, fraud analytic tools have become more powerful and somewhat more user friendly.9

For many years fraud examiners, accountants, and auditors relied upon manual analysis and for the most part the method worked in their favor. It was standard practice, and the end results were often gratifying because so much time and effort were put into the manual process. In the twenty-first century, fraud examiners are taking advantage of automated tools and techniques and using them as a major part of their investigations.

Fraud analytic software allows the fraud examiners, investigators, accountants, and auditors to analyze and review data more quickly. As a result, fraud investigations and examinations are more detailed in nature and more reliable than manual processes ever will be. Fraud analytic tools are used to implement and develop understanding of associations and anomalies between various elements of financial statements and cyberforensics and to determine trends and patterns.

The analytical procedures can be used to perform a plethora of examinations and investigations. The tools provide not only analytical assistance but also a greater understanding of opportunities for fraud and of fraud risks. Identifying risks is an important factor and can improve most fraud examinations and/or investigations. Analytic results can assist fraud examiners and fraud investigators detect high volumes of fraud and insufficient transactions.

Fraud analytic software uses associations between data and unusual transactions. To verify and interpret the results, good judgment is always needed. Fraud analytical tools are not the be-all and end-all of analysis; however, they do assist us in applying our knowledge to the case at hand.

The main goal of fraud analytic tools is to provide fraud examiners and fraud investigators with an enhanced view of how to complete queries and analysis based upon results of their findings, concerns, and under-exposed transactions. Fraud analytic tools help you recognize and identify trends. Knowledgeable users of fraud analytic tools can easily detect something associated with fraud because of their ability to dig deeper into the details.

Fraud professionals understand that analysis of raw data is one of the most effective components when detecting and preventing fraud. In years past, fraud analytic tools were not used often enough in regard to detecting red flags of fraud in the analysis of financial transactions and the like. “Having access to data extraction and analysis software provides users with more power to analyze and understand the data than ever before.”10

New trends of fraud analytics have surfaced. While most tools appear to compete with the others, one thing is certain: Fraud professionals have many capable tools to select from. In the following sections, we mention a few notable tools.

images RAYTHEON'S VISUALINKS

Raytheon's Visual Analytics Inc. delivers one of the latest advanced fraud analysis tools: VisuaLinks. VisuaLinks has been built from the ground up to reveal links and patterns as you have never seen them before. VisuaLinks, in production for over a decade, is an advanced fraud analysis tool designed for use in varied markets for almost any type of analytical function. It integrates, standardizes, controls access to, and enables analysis of operational and organizational information in a visual manner, drawing connections between entities to expose and identify patterns and trends in data.

The data in Raytheon's VisuaLinks is presented graphically—“connecting the dots” by extracting and visually displaying data to uncover patterns, associations, networks, trends, and anomalies in data. “VisuaLinks addresses the entire analytical process—from access and integration to presentation and reporting—providing a single complete solution to a broad range of data analysis needs.”11

Raytheon's VisuaLinks is the analysis software to consider when you want to:

  • Discover the schemes of money laundering.
  • Filter strategic and tactical analysis
  • Uncover duplicate entities of wire transfers
  • Follow the money. VisuaLinks includes a powerful Integration modeling system that allows the user to pull together data from different sources and create a single, consistent representation of the data. VisuaLinks pioneered the use of federated access models so data could be queried in its original content and location without the need for any reformatting or the expense of creating a centralized database. The modeling system of VisuaLinks gives you an expanded way to design the data representation of suspicious transactions, including icons and images to represent entity types, relationship types, data labels and/or links, and legends, to name just a few.

Raytheon's VisuaLinks addresses the need for better, faster, and more accurate analysis by making data visually readable and applying rules that show relationships between entities by taking rows and columns of data values and turning them into pictures representing different types of entities (e.g., person, address, phone, ID, weapon, vehicle, etc.). VisuaLinks then draws the relationships between these entities based upon the values found in the data sets. It is a tool that can enable reactive and proactive analysis, regardless of its purpose.

From Raytheon's Product Description, VisuaLinks provides an advanced analysis process to:

  • Couple data directly to the existing database systems without moving, transporting, or copying data.
  • Integrate multiple sources of data to create a comprehensive view of data.
  • Query and display large amounts of data with no size limits.
  • Use a number of query algorithms to expose networks, patterns, and trends in data.
  • Perform proactive and reactive analysis supporting tactical and strategic operations.
  • Provide advanced analytical functions, ensuring accurate pattern detection.
  • Collaborate with peers, sharing data and related analyses.
  • Prepare and print final analysis presentations.
  • Save and export data to a variety of formats.12

Criminals launder money to hide illegal gains—everything from drug trafficking to tax evasion. It is the means that criminals use to legitimize the money. The exact amount of money laundered yearly is still not known, but experts estimate that money-laundering schemes are well in the billions of dollars—possibly as high as $100 billion.

Money launderers operate through layers of activities designed to hinder the detection, investigation, and prosecution of their activities. Often they structure transactions, establish businesses specifically for the purposes of manipulating accounts, or simply coerce individuals to ignore reporting regulations.

Raytheon's VisuaLinks and Digital Information Gateway (collectively defined as the Data Clarity Suite) are indispensable for highlighting and tracking suspicious transactions that can expose illegal financial activity.13

Data Clarity is a solution that according to the Data Clarity website allows users to:

  • Access data. Search through and extract information from a wide variety of data sources at once.
  • Visualize mass data. Review thousands of financial transactions to identify questionable behaviors and unusual filing patterns.
  • Expose structures. Identify and display relationships that exist between individuals and organizations involved in criminal activities.
  • Examine accounts. Reveal associations between accounts and people, banks, organizations, or other accounts.
  • Identify duplicates. Discover indirect relationships that show addresses, accounts, or ID numbers with multiple users.
  • Analyze transactions. Uncover different types of transactions used by criminals.
  • Pinpoint exchanges. Use chronological and geographic data to target asset seizures.14

Raytheon's VisuaLinks and Data Clarity Suite allow users to maximize the effectiveness of data within any organization.

images FICO INSURANCE FRAUD MANAGER 3.3

FICO Insurance Fraud Manager 3.3 is an analytical tool that unleashes new analytics for fighting health care fraud, waste, and abuse. FICO Insurance Fraud Manager 3.3 integrates link analysis with business rules and predictive analytics, and also adds a facility model for detecting fraud at a hospital or an outpatient provider. According to a 2012 press release:

“Fraud has always been a part of the insurance business, but the magnitude of insurance fraud today is startling,” said Russ Schreiber, who leads FICO's insurance practice. “Experts estimate the annual cost of health care fraud, waste, and abuse in the United States to be upward of $700 billion, and last May [2011] one Medicare fraud scam alone racked up $452 million. Now, with FICO Insurance Fraud Manager 3.3, insurers have a better way to fight back.

FICO Insurance Fraud Manager 3.3 boasts the first fully integrated link analysis capability with an insurance fraud application. Insurers who previously had to configure separate link analysis tools can now save time and improve results with an easy-to-use solution preconfigured to use health care claims data. With FICO Insurance Fraud Manager 3.3, insurers can investigate organized fraud rings using the visualization capabilities of a proven link analysis tool set, and easily create displays that reveal connections between disparate claims, patients, and providers. . . .

FICO Insurance Fraud Manager now scores claims from doctors, ancillary providers, pharmacies, and health care facilities, as well as detecting fraudulent patterns associated with specific medical providers, pharmacies, and dentists.15

images IBM i2 iBase

IBM i2 iBase is a collaborative, intuitive database application designed to support intelligence-led operations, helping collaborative teams of fraud examiners and analysts capture, control, and analyze multisource data in a security-rich, single working environment in order to address the daily challenge of discovering and understanding connections in volumes of complex structured and unstructured data.16 According to an IBM white paper from 2012:

iBase is not just another repository. It provides an analytical environment specifically designed with investigative analysis in mind. Its intuitive visual approach provides straightforward access to powerful analytical functionality developed through collaboration with law enforcement, intelligence, national security, and commercial analysts since it was first released in 1995.17

And, from an IBM Industry Solutions paper from 2012:

Designed with input from analysts' real-world usage across national security, law enforcement, military intelligence and commercial organizations, iBase is not just another repository; it provides rich analysis and visualization capabilities to help identify cohesive networks, patterns and trends, together with dissemination tools to support faster and more informed decision making.18

According to the IBM Industry Solutions paper, Some of the highlights of IBM i2 iBase include the ability to:

  • Gather, structure, and process disparate data into a single repository for improved management.
  • Discover hidden connections across structured and unstructured data with visual analysis tools.
  • Leverage the value of intelligence stored within Analyst's Notebook.
  • Collaborate and share knowledge and information across the analyst community.
  • Cost-effective deployment options and a flexible data model, with robust security capabilities designed to meet evolving organizational needs. . . .

IBM iBase offers highly flexible tools to map and transform information imported from structured and unstructured data sources into a centralized repository. Once information is modeled in a common format, users can capitalize on data management tools to identify duplication and commonality across previously unrelated sources. . . .

IBM iBase users have access to a wide range of analytical tools designed to uncover hidden connections faster, helping analysts to delivery timely and actionable results. These tools include the security-enhanced Search 360, which comprehensively searches intelligence stored in records, charts, and documents through a straightforward Internet-style search bar. Alternatively, powerful visual-based queries provide the ability to ask complex, focused questions without the need to learn complicated computational query languages, allowing analysts to more quickly and effectively interrogate the data rather than waste time trying to identify whether they have posed the question that they intended.19

images PALANTIR TECH

Palantir Tech develops software that deciphers a plethora of information in an amicable time frame.20 Palantir has several solution packages for these professional industries: accountability, anti-fraud, law enforcement, capital markets, cyber security, insurance analytics, intelligence, legal intelligence,20 and health care delivery.

Palantir Insurance Analytics quickly fuses disparate data sources, structured and unstructured, for unified search and analysis. The Insurance Analytics allows the user to integrate medical coding, drug codes, claims formats, approved drug attributes, prescription transactions, and comparative hospital data.22

images FISERV'S AML MANAGER

According to Fiserv's website, AML Manager combines

technologically advanced features and a user-friendly, data-rich interface with powerful prevention and detailed tracking tools. It makes investigation of suspicious activity simpler and more effective. Based on behavioral profiling and peer group analysis and rules, the intelligent transaction monitoring in AML Manager uncovers only those alerts with the highest degree of risk, which significantly minimizes the number of false positives.

The easy-to-use investigation interface in AML Manager, with advanced drill-down and link analysis, makes it easy to uncover suspicious networks and associations. The interface supports profile investigation capabilities, such as peer-group comparison. Trends are displayed in graphs that make it easy to zoom in on a specific time interval. . . .

A built-in case management system tracks, prioritizes, and manages suspicious cases, automates reporting, and records an audit trail with complete case history and a detailed log of all actions taken and reports filed.23

Fraud continues to grow at an astonishing rate as sophisticated criminals refine and adapt their tactics in response to anti-fraud measures. The highly adaptive nature of these criminals renders industry-standard automated solutions less effective with each passing day. Organizations need a better way to interact with the massive amounts of information they collect in order to identify and eradicate patterns of fraudulent activity hidden within their enterprise data. They need an immune system for the enterprise; they need fraud analytical tools that can get the job done.

images NOTES

1. Scott Smith and Jon Mueller, “Data Analysis Challenges: Try Proven Strategies for More Success,” New Perspectives: Association of Healthcare Internal Auditors (Summer 2012): 11.

2. Ibid.

3. Ibid., p. 14.

4. Delena D. Spann, President's Message, Association of Certified Fraud Examiners Greater Chicago Chapter newsletter, February 2009.

5. ACL Services, “Fraud Detection Using Data Analytics in Government Organizations,” discussion paper, 2010, pp. 1–2.

6. Ibid., p. 2.

7. SAS, “Hit 'Em Where It Hurts,” white paper, 2011.

8. Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse (Austin, TX: Author, 2010).

9. David Coderre, Fraud Analysis Techniques Using ACL (Hoboken, NJ: John Wiley & Sons, 2009).

10. David G. Coderre, Fraud Detection: A Revealing Look at Fraud (N.P.: Ekaros Analytical, 2004).

11. Raytheon's Visual Inc., Data Clarity Suite, www.visualanalytics.com/products/dcs/.

12. Raytheon's Visual Analytics, www.visualanalytics.com/pressKit/Resources/VisuaLinksSlicks_V13_FW02.pdf

13. Raytheon's Visual Analytics, Data Clarity Suite, Money Laundering Investigations, 2011. http://www.visualanalytics.com/solutions/antiMoneyLaundering.cfm.

14. Ibid.

15. Press release, “FICO Unleashes New Analytics for Fighting America's $700+ Billion Healthcare Fraud, Waste and Abuse Problem,” October 2,2012. http://investors.fico.com/phoenix.zhtml?c=67528&p=irol-newsArticle_print&ID=1740806&highlight=

16. IBM, “IBM i2 iBase,” Product Overview White Paper, September 2012, p. 1. http://public.dhe.ibm.com/common/ssi/ecm/en/zzw03180usen/ZZW03180USEN.PDF

17. IBM, “IBM i2 iBase,” Product Overview white paper, September 2012, p. 1. http://public.dhe.ibm.com/common/ssi/ecm/en/zzw03180usen/ZZW03180USEN.PDF

18. IBM, “i2 iBase,” Industry Solutions paper November 2012. http://public.dhe.ibm.com/common/ssi/ecm/en/zzd03126usen/ZZD03126USEN.PDF

19. IBM, “IBM i2iBase,” Industry Solutions paper, November 2012. http://public.dhe.ibm.com/common/ssi/ecm/en/zzd03126usen/ZZD03126USEN.PDF

20. Palantir Technologies, 2012. www.palantir.com

21. Palantir Technologies, Insurance Analytics, 2012 www.palantir.com/solutions/insurance-analytics/.

22. Ibid,

23. Fiserv, AML Manager, 2013. www.fiserv.com/industries/bank-platforms/multi-platform-solutions/aml-manager.htm

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