LEVERAGING TECHNOLOGY IN THE BATTLE AGAINST FINANCIAL FRAUD

Maria Loughlin

April, 2012

© Memento, Inc. 2011 – All Rights Reserved

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Exploring fraud and fraud management

• Through the lens of a Financial Institution (FI)• What are the threats, emerging channels and evolving risks?• How to respond?

• Through the lens of a technologist• How can technology help?

• What lies ahead?

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Sure, you’ve heard about Bernie and Jerome…

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… but can you pick out the fraudster here?

Amy Lynette SandersGrand Rapids, Michigan

Ray Van NormanOmaha, Nebraska

Jane WolffYarmouth, Massachusetts

Branch Manager. Transferred funds from customer accounts into her own – for over 3½ years.

Chairman and CEO.Stole $5.7 million by creating fictitious lines of credit over a 10-year period.

Husband and wife pair Benjamin Wolff (79) and Jane (72) wrote fraudulent checks for hotels, inns, and stores in Concord, Newburyport, Rockport, and Andover..

A B C

Sobering bank fraud statistics

• As much as 35% of operational loss in financial services is fraud – that’s $20B annually

• A mid-size US bank loses $50M to check fraud annually

• A top 10 credit card issuer loses $100-400M to first party credit card fraud annually

• 60% of bank fraud involves an insider

• Identity theft cost the US $48B in 2008

• 40% of ID theft is committed by collusive criminal networks

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Sources: KPMG, Celent, ABA, Tower Group, Javelin Research, CIMIP

Is Fraud A Trillion Dollar Problem Globally?

Banking

Healthcare

Brokerage/Securities

Mortgage

Insurance

Retail

Telecom

$20B

$125B

$150B

$10B

$42B

$100B

$55B

Sources: TowerGroup, Stanford Law School, Cornerstone Research, The Prieston Group , U.S. Dept. of Health & Human Services, U.S. Dept. of Justice, National Retail Federation, FIINA

$502 billion US fraud losses

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Why does bank fraud continue to be a problem?

• New products and channels expose new schemes• Defenses usually come long after new schemes are hatched

• Fraud is a business• Highly leveraged schemes

• Increased role of organized crime

• Weak defenses• Low efficiency, increasing cost

• Complex problem, disconnected data and systems, limited innovation

• Failure to comprehensively monitor accounts, account touch points

Top 5 fraud threats (2012)

Source: 2012 Faces of Fraud survey Sponsored by Authentify, Guardian Analytics, i2, RSA Security, Wolters Kluwer Financial Svcs

ATM Fraud

ACH and Wire Fraud

Phishing and Vishing

Check Fraud

Card Fraud

0 10 20 30 40 50 60 70 80 90

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Payments trends that affect fraud• Emerging technologies and rapid innovation

• Increase in # of players involved in the payments supply chain• Increase in # of payment options for consumers• Shift from Credit/Debit to ACH via Payment Services

• Evolving fraud• Cross channel fraud• International organized crime rings• Increased speed of use from compromise to fraud

• Shift in target• From mega data breaches to smaller merchants• Filtering down to rural areas

• Changing consumer views• More open to alternative payments• More conscious of security, yet willing to share personal information with “friends”

© Memento, Inc. 2010 – All Rights Reserved 10

Losses continue to grow: SAR by the numbers

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

52,069

732,563

697,389

14,385 152,874

115,757

21,655

411,697

SAR Volume

Total SAR Volume check Money Laundering

%of total SARs for check and ML: range 69.2 - 78.3 Avg. 74.4

SARs SubmittedTotal: 5,549,559

Check Fraud: 1,141,498Money Laundering:

3,013,569

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THROUGH THE LENS OF A FINANCIAL INSTITUTION

Why do banks care about fraud?

• Fraud losses go straight to the bottom line• Perceptions of insecurity leads to

• Reputational risk• Customer retention challenges

• Operational expense• Regulatory oversight/fines

• Calls for more regulation

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How do banks respond?“Keep the bad guys out”

• IT/network security• Online authentication• Applicant screening

Focused on protecting the perimeter

“Stop them from stealing”

• Transaction monitoring• Employee monitoring• List checking

Focused on protecting customer accounts

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“Break the cycle”

• Investigate cases• Prosecute criminals• Report to FINCen

Focused on preventing future attacks

TowerGroup estimates that for each $1 spent on fraud management, fraud losses will be reduced by $8

Implement comprehensive approach across all channels and products

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Deposit Account

Online

ATM

Call Center

Branch

Check ACH(Origination)

Wire DebitO

n-U

s (i

ncl.

AC

H C

onve

rsio

ns)

Kiti

ng

Dep

osit

Regulation also drives FI action

Layered Security FFIEC Guidance• 2005: The Federal Financial Institutions Examination Council

(FFIEC) issued guidance to banks on standards for Internet banking• 2007: Banks responsible for compliance

Of 200+ respondents:• 58% say their institutions will increase fraud spend in 2012• Only 11% believe the guidance will significantly reduce fraud

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User / Acct. Centric Specific Channel

• Monitors and analyzes user and account behavior, and identifies anomalous behavior using rules or statistical models

Layer 3

Navigation CentricLayer 2• Analyzes session behavior and points

out anomalies• Analyzes mobile device location

Layer 1

• Secure browsing, OOB authentication and transaction verification

• Endpoint device identification, location data

Endpoint Centric

User / Acct. Centric Multi Channel & Product

Layer 4

• Monitors and analyzes user and account behavior across channels, and correlates alerts across channels and products

Entity Link Analysis

Layer 5

• Enables analysis of relationships among internal and external entities and their attributes (e.g., users, accounts, machines)

FFIEC compliance – Layered security

© Memento, Inc. 2012 – All Rights Reserved

Source: Gartner

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HOW CAN TECHNOLOGY HELP?

Enterprise Fraud Management Systems 18

Data Aggregation & ManagementMultiple sourcesDifferent data types

Proactive Monitoring & Analytics

Identify suspicious behaviorBusiness user control

Forensic Research & Investigations

Queries and analysisCollaborative research

Case ManagementWorkflow and reportingAlerts and incidents

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Enterprise Fraud Management Data

Analytics Outputprofiles, risk scores, alerts …

Customer DataName, address, phone,

email …

Account DataStatus, open date, balance

…

Employee Dataname, ID, branch, job code,

contact info …

3rd Party Listsblack lists, white lists, OFAC

…

Transaction Datacheck, deposits, ACH, wire, other debits, RDI, returns …

• Single enterprise data store for financial crime and ops risk mgt

• Rich repository of cross-channel transaction & reference data

• Source system agnostic

Maintenance/Inquiry Datacontact info changes, service changes, balance lookups …

Other Detection Systemsalerts , other data as

required…

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Multiple Approaches to Fraud Analytics

Patterns/Rules• Advanced business rules and

statistical techniques

Profiling• Contextual history of customer,

employee and peer group behavior

Adaptive Analytics• Fraud is discovered through a

combination of risk indicators

Link Analysis• Uncover risky relationships between

people, accounts, alerts, etc.

Example: Employee Fraud Detection

Fraud Type Example Scenarios

Theft from institution • Self-dealing (e.g., fee reversals increasing overdraft limits)

• Inappropriate account maintenance on own or close associate account (e.g. check hold policy override)

• Incentive compensation schemes

• GL theft (debit to cash offset to employee acct)

Theft from customer • Debits from dormant, elder, out-of-region, high net worth accts

• Inappropriate acct maintenance (e.g., changing phone #, email, address); followed by unauthorized or unusual transactions

• Inappropriate acct inquiries, often out-of-region or business unit

• Inappropriate access to reports

• Screen capture, print screen

Example: ACH Fraud Detection

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Transaction Details

• Amount• Timing• Receivers• Type• Channels• Credits• Debits• Routing

+

Combine Advanced Analytics and Business Rules• Fraud Indicators: Unusual access (IP, device ID, time of day,

etc.), account maintenance, fund consolidation, negative balance, unusual amount, routing, timing, known bad receiver

• Business Rules: White/black lists, institution defined rules

Statistically-driven risk score for every transaction

ACH ActivityHistorical activity across all channels

Customer and Account Profile

Maintenance / Inquiry ActivityAddress or service changes, balance lookups …

Customer and Account DataName, address, phone, acct status, daily balance…

Originator InformationContact details, funding account, …

Example: Check Fraud Detection

Check serial number sequences• Book detection, distance out of

sequence

• Amounts• Quasi-periodic amounts, non-quasi

periodic amounts• Likely amounts, intimate amounts

• Velocity analysis• Account velocity (balances), book

velocity

• Account relationships

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Serial #

Velocity

Multiple checkboo

ksTiming

Acct Profile

$ Amount

Acct Intimacy

Multi-dimensional pattern analysis

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NEW TECHNOLOGIES

Emerging and enabling technologies• Big Data• Cloud Computing• Mobile

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Cloud computing• Reduced costs

• Some aspects of payments are moving to the cloud

• Risks:• Assuring proper data protection and compliance with security and

privacy regulations• Inadequate controls at third party service providers• Authentication and reliance on passwords

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The mobile revolution• Nearly half (46%) of American adults are smartphone

owners as of February 2012, an increase of 11% over last MaySource: Pew Research Center’s Internet & American Life Project, March 2012

Use of mobile banking expected to grow rapidly: expanding to 38M households by 2015

Source: FDIC Supervisory Insights - Winter 2011

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Mobile financial services4 usage patterns expected:

• Mobile Banking – Mobilization of existing online capabilities (e.g., balance checks, transfers of funds between customer accounts, bill payment to pre-authorized recipients)

• Alerting – Providing a convenient channel to alert customers of account activity

• Services Replacement – Replacement of select services that require physical customer presence (e.g., remote deposit capture)

• Mobile Payments – Including contactless payments, person-to-person payments, and substitution of mobile device for credit card, debit card or checks

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Who Consumers Trust with Mobile Payments

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Evolving payment landscape

WRAP UP

Parting words…

Fraud attempts and fraud losses continue to grow. Yet, there is opportunity to fight back harder and smarter.

• Customer education• New tools and new technologies

• Information protection• Fraud detection and management

• Increased collaboration• Engage customers in fraud management• Share information across banks• Collaborate with regulators, government, employees and third

parties

© Memento, Inc. 2012 – All Rights Reserved

Fraud management is a collaboration