|Fraud Definition: An organization loses typical 5% of revenue due to fraud each year. As per Oxford dictionary, fraud is defined as wrongful or criminal deception intended to result in financial or personal gain. The most common characteristics of frauds are being uncommon, impeccably concealed, time evolving and carefully organized. Fraud cases are covered by lots of non-fraudulent cases, only minority are fraud cases; hence fraud is uncommon. It makes harder to detect frauds. Fraudster try to blend in and not behave different from normal behaviour, it makes fraud impeccably concealed. Fraudsters change their way of doing fraud with time in order not to get caught, hence its time evolving. Fraudsters often operate in group to avoid getting caught, and hence they plan carefully, its organized crime.|
|Different types of Fraud: There are various kinds of frauds such as credit card fraud, insurance fraud, health care fraud, money laundry, identity fraud, and tax fraud. In credit card fraud, there are application fraud and behavioural fraud in credit card. In application fraud, it involves getting new credit by using false details. In behavioural fraud, credit card is often used by someone else without owner’s knowledge. In insurance fraud, its application and claim frauds. In application fraud, someone is insured using either false personal details or often hiding the condition of insured. In claim fraud, claim is being made using false means. Healthcare fraud often involves making false claim by collusion of doctor and patient. Money laundry and tax invasion is often being confused. Money laundry is often converting illegal money into legal by using wrong means. Tax invasion is not paying the due taxes on income. Identity fraud is making use of other identity for wrongful activities.|
|Motivation behind the fraud: Motivation behind fraud can be explained by fraud triangle. Three possible reason for a someone to do frauds are shown in below diagram (Image source- Internet)|
|Pressure: it is first component of fraud triangle, there could be financial and work pressure in the current situation. It’s not possible to resolve it by authorized means.
Opportunity: its second component of fraud triangle and fraudster see the fraud opportunity to deal with current situation. Internal controls are weak.
Rationalization: its psychological mechanism by which fraudsters try to justify the fraud, they commit. They think that its acceptable behaviour in current situation.
|Estimated losses due to Frauds: Fraudster achieve personal gains, which comes at the cost of other honest member of society. To compensate again the loss due to fraud, insurance company will increase the cost of premium. Below is cost of different frauds as per different organizations:
|Fraud detection and prevention systems: The above losses highlight the need of a sound fraud detection and prevention system. Fraud detection refers the ability to detect the various kinds of frauds, while prevention refers the measure, which we can take in order to stop the fraud happening. Both techniques complement each other. Classical approach to fraud detection is making rule based out of experience of experts, these rules are implemented in transaction and claim system in order to check for fraud when a transaction takes place. These rules create red flag for frauds, for example:
If any of such flag comes then investigation officer is alerted for fraud investigation. Its possible to build such simple system but expansive to build because
Hence an alternative but complementary approach is needed to address the above issues. That’s where we come on using the machine learning techniques. The advantage of using machine learning techniques is
Source: Lots of information is used from various research papers and internets. I would like to give due credits to them.