New financial scam requires innovative fraud prevention

Frauds and financial scams have been around for centuries, and banks have been trying to prevent them for almost as long. But now we’re seeing a fundamental shift in the types of fraud that take place, and that requires a corresponding change in fraud prevention in banks.

Uri Rivner, CEO and co-founder of Refine Intelligence, spent his whole life fighting financial scams and other types of financial crime. He spoke to Brian Monroe of ACFCS about how banks can improve their fincrime prevention capabilities to stay one step ahead of fraudsters, and what motivates and energizes him to succeed in a challenging career.

Financial scams are giving way to APP fraud

Financial scams have caused plenty of headaches for banks over the years, but at least it used to be relatively easy to prove if a scam took place. Banks needed to verify if the account holder was the one who authorized a transaction. If not, it was fraudulent. “In fraud you hardly need to investigate cases – you just ask customers whether they did the transaction,” Uri said.

But today’s fraudsters have moved onto authorized push payment fraud, or APP fraud, where they trick victims into transferring money to fake accounts. These transactions were genuinely authorized by the account holder, which makes them much harder to investigate.

“Fraud has shifted from phishing, trojans and account takeover attempts to scams that trick customers into sending their money to the bad guys,” Uri said, adding that this is “disrupting all traditional lines of defense.”

Banks are facing an increased AML workload

At the same time, several countries including the UK and the US are introducing new liability laws that place more responsibility on banks to protect victims and prevent fraud. In the UK, the Payment Systems Regulator (PSR) proposed laws that would obligate banks to reimburse fraud victims.

Taken together, these developments drastically ramp up the pressure on AML investigation teams. Banks are far quicker to flag potentially suspect transactions, but the false positive rate stands at 99%. As a result, AML investigators spend a lot of time tracking dead ends, increasing the risk that they’ll miss genuine scams.

“If you’re a Financial Crime Investigations Officer, you can have a pretty frustrating daily routine, as almost all the alerts you’re investigating end up being totally legit activities done by the customer,” he pointed out.

Preventing today’s financial scams requires a new approach

In 2023, the answer to most problems is to find a way to automate it, but that’s not possible for traditional AML investigations. There isn’t enough data to run machine learning models that detect fraudulent behavior. The only solution is to look at the problem from a different angle, one where you know your customers well enough that you can quickly resolve the 99% of false positives. This is Refine’s “catch the good guys” methodology.

“Detection can’t be about catching the bad guys,” states Uri. “It’s about finding anomalies in the customer account and then investigating anything that might be risky from a money laundering perspective.” This leaves financial crimes teams with more time and resources to investigate the tiny remainder of alerts.

Uri gives the example of an account that sends a large wire transfer to Mexico for the first time. It triggers all the AML alerts, but it turns out that the account holder’s daughter is studying at a college in Mexico and he’s just paid her tuition. The trouble is, few banks truly understand their customers. “In 88% of [RFI] cases, they [banks] had no clue why the customer was operating this way in their account. Years ago, the branch knew everything, but today they hardly know the customers and if they don’t know, who in the bank does?”

Fraud prevention in banks is evolving at lightning speed

The massive jump in APP fraud poses a new challenge for banks, and their traditional fraud prevention systems aren’t equipped to cope with it. But new times require new approaches. Shifting the mindset from catching the bad guys to defining the good guys can help banks keep pace with fraudsters and ease the burden on AML teams.

Read th full article on ACFCS.