In today’s digital society, fraud detection is struggling to keep up with the ever growing data sources and those that seek to take advantage of them. Yet one of the hardest types of fraud to combat is the one that comes from within. With more than $7 billion lost globally to internal fraud in 2018, it is clear that we need more controls in place with greater account visibility in order detect fraudulent activity. Companies, especially banks, need to be able to identify anomalies at the time they occur, rather than after the damage has been done. Such need from the market has been at the forefront of our thinking when creating products for the debt, real estate and commodity markets and is but of one of the ways blockchain solutions will take these industries into the future.
What Are the Main Types of Fraud?
Detecting and preventing fraud is a challenge for all businesses, but it is especially difficult if the threat stems from one’s own employees. In many banks, there are processes that aren’t fully automated and core systems that aren’t interlinked, leading to an over reliance on human involvement.
PwC’s Global Economic Crime and Fraud survey revealed a significant increase in crimes committed by internal actors in recent years. Some of the main types are:
Asset Misappropriation: A type of fraud that includes check tampering, accounts receivable skimming, fake billing schemes, payroll schemes, fake or duplicate expense reimbursement schemes and inventory schemes.
Collusion: One of the more devastating internal fraud schemes is when bank insiders collude with external fraudsters. Fraud rings tend to be highly sophisticated and organized as they may embed their members in a number of roles within a bank with the sole purpose of theft.
Financial Statement Fraud: This includes taking advantage of access to accounts payable or suspense accounts, which are used to temporarily record items such as loans in process, interdepartmental transfers, or currency in transit. This makes it easier for insiders to move funds between accounts. For example, an employee who has the authority to create an accounts payable record for a vendor could also create a fake company in the system and issue payments to that company.
Is Blockchain the “Silver Bullet?”
In an incident at Punjab National Bank, a deputy branch manager and his subordinate allegedly falsified 150 letters directing other banks to give loans to a group of jewelry companies, with PNB serving as the guarantor. Virtually all of them defaulted, causing PNB to be on the hook.
What made the fraud so difficult to detect was that, as far as its internal systems were concerned, the transactions didn’t exist. The letters were sent using the Swift network, but none were recorded on PNB’s internal record-keeping software. Yet if records were kept on an immutable decentralized database that multiple parties could view, it’s possible that the fraud either wouldn’t have happened or could have been detected sooner.
Currently, discovering fraud is slow, expensive and typically relies on whistle blowers within the company. Large enterprise companies sometimes spend more funds trying to catch fraud than the amount lost to it. Yet when new technology solutions emerge, they are often hailed as a panacea for all thing as their limitation are often overlooked. While blockchain is a major step in the right direction, it is no silver bullet. To truly prevent this type of fraud, banks need to utilize distributed ledger style technology combined with human supervision and fraud controls. For example, smart contracts could be programmed to require sign-offs from specific people. While blockchain can increase the efficiency of transaction processing and reduce fraud, it needs to be implemented in the proper way to ensure the desired results.
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