What is bank fraud? It's a question that is on the lips of most people who interact frequently with the financial services offered by national or private financial institutions. However, the answer is multi-faceted. To put it simply, bank fraud represents the set of deceptive processes and practices in which external actors attempt to obtain financial assets fraudulently from financial organizations. Bank fraud is complex, ever-evolving, and hard to stop. Additionally, it is, unfortunately, one of the main factors that can lead to significant economic woes for nationally or internationally active organizations.
What is bank fraud? It's the number one enemy of national financial organizations or private creditors who want to expand their business to a high level. Fraud can lead to economic losses that are directly proportional to the severity of external attacks and the security measures implemented to prevent financial disruptions and confidential data losses. Are you a private financial entity at the beginning of your professional activity? Then, the economic damage caused by fraud attempts may not be significant. However, the real problem will be the reputational losses suffered by your business and the potential fines from regulatory bodies.
A Matter of Business Stability
Has the financial organization you manage been the target of repeated fraud attempts, some of which were successful? Did fraudsters succeed in accessing the private financial data of your clients, and as a result, your services had to be paused until the problem was solved? If so, this could result in loss of business, as clients will perceive your banking organization as insecure and not prepared to protect financial assets. In addition, the disruptions in your everyday operations will inevitably lead to project delays, which will have a negative effect on both the productivity of your workers and the profitability of your services.
Banks that manage to thwart external fraud attempts can enjoy an increase in market share and heightened recognition from customers. However, if you have not taken the necessary steps to prevent check or credit card fraud, or if your services have not been in tune with AML/KYC regulations, then the intense scrutiny from regulatory bodies could make insurers raise your policy premiums. Plus, ongoing fraud issues will distract your teams' attention from the other operational initiatives that need to be implemented this trimester and increase the costs associated with audits and internal investigations. Do you want to define what is bank fraud? This will be straightforward. However, how can it be prevented is another story.
What Are the Regulatory Risks?
Private financial institutions that fail to protect users' data and are late in implementing adequate anti-fraud solutions can be hit by regulatory fines both in Europe and the United States. What are the main regulatory acts that banks need to focus on? For one thing, if your organization works with the private financial data of domestic clients, then you must respect the Bank Secrecy Act and leverage AML programs. Non-compliance can, at best, result in a significant fine from FinCEN and, at worst, in an interruption of your business activity and potential legal actions taken against your firm's management.
US-based banking institutions are required by law to report to FinCEN any cash transaction exceeding $10,000, compile SARs when they detect monetary activities indicative of fraud, and verify the identity of users opening new accounts, per the stipulations of the 2001 USA PATRIOT Act. US banks are prohibited from providing financial services to OFAC-listed individuals; in accordance with the 2016 CDD rule, they must obtain details on persons possessing a 25% or higher stake in a legal organization, and they must implement KYC measures that will necessitate the classification of customers based on a risk profile.
What Categories of Bank Frauds Are There?
The most widely reported type of international bank fraud involves the use of stolen credit cards for unauthorized purchases. 82% of US adults had a credit card in 2023, and the percentage of those with an active debit card in their name is close to 93%. In the past, check fraud was the leading cause of concern for domestic banking institutions. However, as the popularity of checks has plummeted in recent years, the relevance of forged or stolen checks to banks' financial and reputational assets is now somewhat negligible.
A more significant impact is, however, being felt through phishing and account takeover attempts. Annually, these two fraud techniques lead to losses for international financial institutions of tens of billions of dollars. Additionally, for some, these losses are accompanied by regulatory penalties. Not least, financial institutions can be hit by money laundering, APTs, synthetic identity fraud, and social engineering. If they are sporadic, fraud attempts can most often be stopped by frequent transactional audits and by the use of conventional fraud prevention applications. However, suppose your organization operates at a high level, and you need to manage thousands of transactions simultaneously. In that case, the best solution for the prevention of financial fraud is to use an AI-based application.
A Crucial Element for Financial Success
A financial institution that fails to protect itself from financial fraud will suffer reputational damages that could be synonymous with the interruption of professional activity. Would you leave your confidential data in the hands of an organization that has become a favorite target of money launderers and fraudsters? Probably not, and the same is true for your clients. What is bank fraud? It is a set of techniques by which the financial activity of your organization can suffer. However, the essential thing is to invest in tools and techniques by which the effectiveness of these methods will be stopped.
How can AI-based applications prevent bank fraud? For starters, the program you use will verify the identity of your service users by collecting data from multiple data streams, both internal and external. Then, by leveraging complex algorithms, the program will look for anomalies in the transactional data and try to identify patterns indicative of financial fraud. The transaction request came from East Asia, but is the client's IP address from Western Europe? Do the amounts involved not match previous transactional figures? If so, something might be up.
The AI-based tool you use will perform real-time analysis of your recorded transactional data, apply predefined rules to create a risk score for your client's financial transactions, generate automated alerts for suspicious activities, and leverage machine learning models and NLPs to perform forensic analysis and identify the identity of the individuals behind money laundering and synthetic identity fraud attempts. What is bank fraud? It's a preventable issue that, with the help of professional tools, could be just a tiny bleep in your organization's journey for financial growth and market recognition.
