Research Report Rough

Research Report 2019
Acknowledgements
There are so many people to whom I am indebted for their assistance during my endeavors to complete
my Masters candidate in information technology at the Islamic University.
Dr. Tawfig Barhoom whose invaluable guidance and support was very helpful throughout my research.
Gratitude to Information technology teachers staff, Dr. Alaa'a AL-Halees, Dr. Rebhi Baraka, Dr.
Nabeel Hweehy and Dr. Ashraf AL-Attar. It is unlikely that I would have reached completion without
their encouragement and support. Besides that, I would like to thank the Non-Technical Loss (NTL)
team at the department of water theft combat(DWTC ) at the municipality of Gaza (MOG) for
providing me a valuable data.
My appreciation also goes to the MOG for providing me the customer data, and other helpful
information about business logic and functionality. I express my appreciation to everyone who has
involved directly and indirectly to the success of this research.
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Susmita dhital(HND/3rd Semester)
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In recent years, due to the expansion of financial institutions, as well as the popularity of the World
Wide Web and e-commerce, a significant increase in the volume of financial transactions observed. In
addition to the increase in turnover, a huge increase in the number of fraud by user’s abnormality is
resulting in billions of dollars in losses over the world. So it has been necessary to consider the
identification and diagnosis of the fraud techniques.
Abbreviation used on this report
AI Artificial intelligence
MI Machine learning
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Table of Contents
Abstract ............................................................................................... Error! Bookmark not defined.
Chapter 1: ......................................................................................................................................... 6
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Chapter 1
Introduction
 What is artificial intelligence?
Artificial intelligence is a field of study that aims at replicating and enhancing human
intelligence through artificial technologies to create intelligence machine. According to Nils J. Nilsson,
“Artificial intelligence is that activity devoted to making machines intelligent, and intelligence is that
quality that enables an entity to function appropriately and with foresight in its environment.” (Nils J.
Nilsson, 2010). It is known as machine intelligence where intelligence is demonstrated by machine
that mimic “cognitive” functions that human associate with the human mind like “learning” and
“problem solving”. It can be classified into three different type of system such as analytical, human-
inspired and humanized artificial intelligence. The field of Artificial Intelligence (AI) was officially
born and christened at a 1956 workshop organized by John McCarthy at the Dartmouth Summer
Research Project on Artificial Intelligence. The goal was to investigate ways in which machines could
be made to simulate aspects of intelligence. McCarthy is credited with the first use of the term
“artificial intelligence”.
Nowadays artificial Intelligence (AI) is becoming an important part of our daily life, in social as well
as the business environment. Globally there is a wave of artificial intelligence across various industries,
business and healthcare, this technology is being introduced in all the sectors to reduce human effort
and give an accurate and faster result. The AI systems are capable enough to reduce human efforts in
numerous areas and help to get the work done faster and with accurate results. The artificial
intelligence applications help to get the work done faster and with accurate results.
Artificial intelligence in fraud detection and prevention
Wide Web and e-commerce, a significant increase in the volume of financial transactions observed. In
addition to the increase in turnover, a huge increase in the number of fraud by user’s abnormality is
resulting in billions of dollars in losses over the world.
Along with the increase in trading volume, it can be seen a huge increase in the number of cheats by
abusive users, resulting in billions of dollars annually causing losses worldwide.so it is necessary to
consider the identification and diagnosis of the fraud techniques and this a motivation for doing many
researches(1). Data mining techniques and classification algorithms are used to examine the large
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amount of information and discovery of data. These methods are typically classified into two groups:
Anomaly Detection and Abuse Detection Method. In the first method, customer behavior history
Fraud in financial organization has been steadily growing over the past years and is a challenge to
finance organization worldwide. Fraud is a dominant form of white collar crime that continues to
extract a significant toll not only on the organizations, but also on investors, financial institutions, and
the economy in general.
With the evolution of internet in the financial sectors, people have changed the way they used to
finance organization. But this digital evolution is also creating new opportunities for fraudsters to hack
into personal accounts. Financial sector frauds have been in existence for centuries, with the earliest
known frauds pertaining to insider trading, stock manipulation, accounting irregularity/ inflated assists
etc. There are many issues that make effective fraud management a challenging task. These include:
enormous and ever-expanding volumes of data, the growing complexity of systems, changes in
business processes and activities and continuous evolution of newer fraud schemes to bypass existing
detection techniques. Detecting fraudulent financial statements is a difficult task when using normal
audit procedures due to limitation in understanding the characteristics of financial statements, lack of
experience and dynamically changing strategies of fraudsters. According
According to the Basel II definition, Fraud is a part of operational risk and has been classified as
Internal and External fraud. Internal Fraud is the risk of unexpected financial, material or reputational
loss as the result of fraudulent action of persons internal to the firm. Losses are due to acts of a type
intended to defraud, misappropriate property or circumvent regulations, the law or company policy,
excluding diversity/discrimination events, which involves at least one internal party. It includes
misappropriation of assets, tax evasion, intentional mismarking of positions, bribery. The Basel
Committee is the primary global standard-setter for the prudential regulation of banks and provides a
forum for cooperation on banking supervisory matters.
The complexity involved in detection of such fraudulent activities further adds to the problem. A
thorough examination of fraud and its possibilities is necessary to pinpoint and distinguish the few
fraudulent cases within the vast volumes of banking data.
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A financial fraud is the intentional use of illegal method for the purpose of obtaining personal financial
gain. (centre bank, 2017) It is the issue that cause wide consequence in both finance industry as well
as daily life. A large number of fraud transaction are made every day. Similarly emergence of online
transitions has increased more fraud in financial institution. A lots of transaction activities are being
performed through online banking, e-commerce, credit card, ATM card and increasing number of
fraud is taking place and causing heavy loss for customer and also for the institution. Fraud detection
involves monitoring the behavior of users in order to estimate, detect, or avoid undesirable behavior.
To counter the financial fraud effectively, it is necessary to understand the technologies involved in
detecting frauds and to identify various types of frauds. Different types of fraud take place in
organization such as credit card fraud, ATM fraud and payment fraud etc. The financial institution
detect fraud through customer transaction behaviors.
With the implementation of artificial intelligence it has been very successful in battling financial fraud
and catching up criminals. Fraud is an ever growing problem for financial institutions, with criminals
using a wide variety of methods to attack organizations across systems, channels, processes and
products. Financial fraud is the use of potentially illegal means to obtain money, assets, or other
property owned or held by a financial institution. (Wikipedia, bank fraud, 2019);
Fraud detection systems analyze clients’ behavior, location, and buying habits and trigger a security
mechanism when something seems out of order and contradicts the established spending pattern. AI
detect fraud before it happens. It proactively detect whether fraud is going to take place in a financial
system or not. This Technology rapidly mimic the thought process of a human analyst to review each
transaction in every portfolio at a finance organization. It makes a point to keep all thing secure and
take steps towards safety before any chances of fraud can occur. AI fraud detection systems analyze
clients’ behavior, location, and buying habits and trigger a security mechanism when something seems
out of order and contradicts the established spending pattern. It help to reveal and prevent fraud like,
credit card fraud, money laundering fraud etc.
Research hypothesis
Research hypothesis was formulated to determine the appropriate research methods. It was used to
formulate to specific research question the help to predict the expected outcomes or result of the
research study. Research hypothesis help to determine appropriate research method and to draw the
conclusion. After implementing different algorithms and techniques based on artificial intelligence
help to detect fraud and prevent fraud in the financial institution
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Null (H(0)) = AI is significant in detecting fraud and preventing fraud in financial organization by
using mobile alert system to reduce or detect fraud and prevent fraud.
Alternate(H(1)) = AI is not significant in detecting fraud and preventing fraud in financial organization
by using mobile alert system to reduce or detect fraud and prevent fraud
Statement of problems
Fraud detection was the challenging task for the financial organization. As account holders can
performed online payment that don’t required any kind of card or cheque. And if anyone who know
the details of account holder can make the transactions. And the account holders come to know only
after the fraud transaction is carried out. No proper mechanism are there to track the fraud transaction.
Aim of study
The main aim of this project was to detect fraud by using various algorithm based on the artificial
intelligence. As well as to prevent fraud with the help of mobile alerts system by artificial intelligence.
Mobile alerts system are customers alarm system.
Objective of study
The main objective of this study is to detect fraud and find out the solution of controlling fraud, since
it seems to be a critical problem in many financial organization. Specifically the following are objective
of the study;
i. Identify the factors that cause fraud,
ii. Explore the various techniques of fraud detection
iii. To reduce number of fraud transaction
iv. Carry some major detection techniques based on the artificial intelligence to prevent fraud in
organization.
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Chapter 2:
LITERATURE REVIEW
Financial fraud detection has received significant consideration from researchers in the world. Several
techniques have been developed to detect fraud which are based on Bayesian networks, neural network,
data mining, clustering techniques, genetic algorithms, decision tree etc. In the financial organization
different kind of fraud take place such as ATM fraud, credit card fraud, payment fraud, e-commerce
fraud. Nowadays, due to rapid advancement in the electronic commerce technology the use of credit
cards has dramatically increased and the number of fraud transaction is also increasing. Credit card
fraud is very serious and growing problem throughout the world and causing heavy loss to financial
organization.
Ghosh and Reilly (2004) proposed a neural network method to detect credit card fraud transactions.
The author built a detection system, which uses a three-layered feed-forward network with only two
training passes and is trained on a large sample of labeled credit card account transactions. (S.ghosh
& D.Reilly, 2004) These transactions contains sample fraud cases due to stolen cards, lost cards,
application fraud, stolen card details, counterfeit fraud etc. The researchers tested on a data set of all
transactions of credit card account over a subsequent period of time. The system significantly reduced
the investigation workload of fraud analysts.
An algorithm suggested by Bentley is based on genetic programming. Bentley (2000) describe that “a
Genetic algorithm is used to establish logic rules capable of classifying credit card transactions as
suspicious and nonsuspicious.” (j.bentely, 2004) Basically, this method follows the scoring process in
which overdue payments are checked against the last three months payment. If it is greater than that
of the last three months, it is considered as suspicious or otherwise.
Ghosh and Reilly (2004) proposed a neural network method to detect credit card fraud transactions.
The author built a detection system, which uses a three-layered feed-forward network with only two
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training passes and is trained on a large sample of labeled credit card account transactions. (S.ghosh
& D.Reilly, 2004) These transactions contains sample fraud cases due to stolen cards, lost cards,
application fraud, stolen card details, counterfeit fraud etc. The researchers tested on a data set of all
transactions of credit card account over a subsequent period of time. The system significantly reduced
the investigation workload of fraud analysts.
An algorithm suggested by Bentley is based on genetic programming. Bentley (2000) describe that “a
Genetic algorithm is used to establish logic rules capable of classifying credit card transactions as
suspicious and nonsuspicious.” (j.bentely, 2004) Basically, this method follows the scoring process in
which overdue payments are checked against the last three months payment. If it is greater than that
of the last three months, it is considered as suspicious or otherwise.
RaghavendraPatidar and Lokesh Sharma in 2011 have proposed a hybrid of Artificial Neural Network
and Genetic Algorithm in their paper. They used a neural network to classify the transactions and
genetic algorithm to optimize the solution and to not over train the system.
In 2015, Tanmay Kumar and SuvasiniPanigrahi in their paper proposed a hybrid approach to credit
card fraud detection using fuzzy clustering and neural network. It makes use of two phases. In phase
one, they used a c-means clustering algorithm to generate a suspicious score of the transaction and in
next phase if a transaction is suspicious it is feed into neural network to determine whether it was really
fraudulent or not.
AyushiAgrawal and others [14] proposed testing a transaction using Hidden Markov Model, Behaviour
based technique and Genetic Algorithm, wherein they used the Hidden Markov Model to maintain the
record of previous transactions, Behaviour based technique for grouping of datasets and lastly genetic
algorithm for optimization i.e. calculating the threshold value.
ThurayaRazooqi[16] proposed a system of fraud detection using Fuzzy Logic and Neural Network.
They found out that ANN was 33% more accurate than fuzzy logic. The existing data in the system
was used for decision making and using fuzzy logic each data was given a membership attribute then
for the validation of results ANN was used.
fraud detection which used a hybrid of feature selection and genetic algorithm. They observed the
salient features of the transactions and used the same while detecting any unusual feature and flagging
it to be the fraud one. The genetic algorithm was used in the optimization and search problems.
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Sumanet.al [2013] describes a survey of new techniques used in credit card fraud detection and
telecommunication fraud process. Fraud detection methods based on neural network are the most
popular ones. An artificial neural network consists of an interconnected group of artificial neurons. It
is widely applied in classification and clustering. A improve neural networks, successfully and banks
can detect fraudulent use of a card, and faster. Among the reported credit card fraud studies most have
focused on using neural networks. In more practical terms neural networks are non-linear statistical
data modelling tools. They can be used to model complex relationships between inputs and outputs or
to find patterns in data. [5]
Bhusari V. et.al [2011] presented a credit card fraud can be detected using Hidden Markov Model
during transactions. HMM model helps to obtain a high fraud reporting combined with a low false
alarm rate. A HMM is a finite set and each state is linked with a probability distribution values.
Transitions dataset state among these states are governed by a set of probabilities called transition
probabilities. In a particular state a possible outcome or observation can be generated which is
associated symbol of observation of probability distribution. Hence, HMM is a great value solution
for addressing detection of fraud transaction through credit card.
[1] Benson Edwin Raj S. et.al [2011] discussed of fraud detection, two Bayesian networks to describe
the behaviour of user is constructed. First, a DBN is make to model behaviour under the assumption
that the user is fraudulent (F) and another model under the assumption the user is a legitimate (NF).
The ‘fraud net’ is set up by using expert knowledge. The ‘user net’ is set up by using data from
nonfraudulent users. In proposed method current operation user net is adapted to a specific user based
on emerging data. By inserting evidence in these networks and propagating it through the network, the
probability of the measurement x less than two above mentioned hypotheses is obtained. This
probability value means, it gives judgments to what degree experiential user behaviour meets typical
fraudulent or nonfraudulent behaviour.
Abhinav and Amlan [6] proposed a Hidden Markov Model to detect the frauds in credit cards.
Proposed Model does not require fraud signatures and yet is able to detect frauds by considering a
cardholder’s spending habit. This system is also scalable to handle large number of transactions.
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Financial fraud characteristics and related work
I will like to, first summarize the main characteristics of financial institution fraud, and then discuss
the related work on different areas of fraud detection. Most published work about fraud detection is
related to the domain of credit card fraud, money laundering fraud, payment fraud etc. Therefore I will
discuss each of these and explain the limitations of the existing work when applied to detect financial
fraud.
Investigations based on literature review shows that real-world banking transaction data sets and most
banking fraud has the following characteristics and challenges: (1) highly imbalanced large data set;
(2) real time detection; (3) dynamic fraud behavior; (4) weak forensic evidence; and (5) diverse
genuine behavior patterns.
According to a study on one Australian bank’s Electronic banking data, banking fraud detection
involves a large number of transactions, usually millions. However, the number of daily frauds is
usually very small. For instance, there were only 5 frauds among more than 300,000 transactions on
one day. These results in the task of detecting very rare fraud dispersed among a massive number of
genuine transactions.
Fraud detection needs to be real time.
According to Linda D., Hussein A., John P., (2009), in online banking, the interval between a
customer making a payment and the payment being transferred to its destination account is usually
very short. To prevent instant money loss, a fraud detection alert should be generated as quickly as
possible. This requires a high level of efficiency in detecting fraud in large and imbalanced data.
The fraud behavior is dynamic.
According to MasoumehZareapoor, Fraudsters continually advance their techniques to defeat

Electronic banking defenses. Malware, which accounts for the greater part of online banking fraud,
has been reported to have over 55,000 new malicious programs every day. This puts fraud detection
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in the position of having to defend against an ever-growing set of attacks. This is far beyond the
capability of any single fraud detection model, and requires the adaptive capability of models and the
possibility of engaging multiple models for leveraging the challenges that cannot be handled by any
single model. (Seeja.K.R, and M.Afshar.Alam, 2012)
The forensic evidence for fraud detection is weak.
For online banking transactions, it is only possible to know source accounts, destination currency value
associated with each transaction, but other external information, for example, the purpose of the
spending, is not available. Moreover, with the exception of ID theft, most electronic banking fraud is
not caused by the hijack of an Electronic banking system but by attacks on customers’ computers. In
fraud detection, only the Electronic banking activities recorded in banking systems can be accessed,
not the whole compromise process and solid forensic evidence (including labels showing whether a
transaction is fraudulent) which could be very useful for understanding nature of the deception. This
makes it challenging to identify sophisticated fraud with very limited information. (Adnan M. Al-
Khatib, 2012)
The customer behavior patterns are diverse.
An online banking interface provides a one-stop entry for customers to access most banking services
and multiple accounts. In conducting Electronic banking business, every customer may perform very
differently for different purposes. This leads to a diversity of genuine customer transactions. In
addition, fraudsters simulate genuine customer behavior and change their behavior frequently to
compete with advances in fraud detection. This makes it difficult to characterize fraud and even more
difficult to distinguish it from genuine behavior. (Tung-shou Chen, 2006)
The banking system is fixed.
The online banking process and system of any bank are fixed. Every customer accesses the same
banking system and can only use the services in a predefined way. This leads to good references for
characterizing common genuine behavior sequences, and for identifying tiny suspicions in fraudulent
Electronic banking.
The above characteristics make it very difficult to detect banking fraud, and banking fraud detection
presents several major challenges to the research, especially for the mainstream data mining
community: extremely imbalanced data, big data, model efficiency in dealing with complex data,
dynamic data mining, pattern mining with limited or no labels, and discriminate analysis of data
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without clear differentiation. In addition, it is very challenging to develop a single model to tackle all
of the above aspects, which greatly challenge the existing work in fraud detection. (Tung-shou Chen,
2006)
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CHAPTER 5
METHODOLOGY
Method and methodology
Method
There are several effective methods to detect transaction frauds. Some of these approaches are:
Machine learning
We use Machine Learning for detecting fraud. Here, a machine tries to learn by itself and becomes
better by experience. Also, it is an efficient way of detecting fraud because of its fast computing. It
does not even require the guidance of a fraud analyst. It helps in reducing false positives for
transactions as the patterns are detected by an automated system for streaming transactions that are in
huge volume.
The below picture shows the basic structure of the working of fraud detection algorithms using
Machine Learning:
Feeding Data: First, the data is fed into the model. The accuracy of the model depends on the amount
of data on which it is trained, more data better the model performs.
For detecting frauds specific to a particular business, you need to input more and more amounts of data
into your model. This will train your model in such a way that it detects fraud activities specific to
your business perfectly.
Extracting Features: Feature extraction basically works on extracting the information of each and
every thread associated with a transaction process. These can be the location from where the
transaction is made, the identity of the customer, the mode of payments, and the network used for
transaction.
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 Identity: This parameter is used to check a customer’s email address, mobile number, etc. and it can
check the credit score of the bank account if the customer applies for a loan.
 Location: It checks the IP address of the customer and the fraud rates at the customer’s IP address and
shipping address.
 Mode of Payment: It checks the cards used for the transaction, the name of the cardholder, cards from
different countries, and the rates of fraud of the bank account used.
 Network: It checks for the number of mobile numbers and emails used within a network for the
transaction.
Training the Algorithm: Once you have created a fraud detection algorithm, you need to train it by
providing customers data so that the fraud detection algorithm learns how to distinguish between
‘fraud’ and ‘genuine’ transactions.
Creating a Model: Once you have trained your fraud detection algorithm on a specific dataset, you
are ready with a model that works for detecting ‘fraudulent’ and ‘non-fraudulent’ transactions in your
business.
Unsupervised algorithm:
Unsupervised learning models are built to detect unusual behavior in transactions which is not detected
previously. Unsupervised learning models involve self-learning that helps in finding hidden patterns
in transactions. In this type, the model tries to learn by itself, analyzes the available data, and tries to
find the similarities and dissimilarities between the occurrences of transactions. This helps in detecting
fraudulent activities.
Artificial Neural Network
Bayesian Network
Neural Network
Hidden Markov Method
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Genetic Algorithm
Data mining
In this project I will be using artificial neural network and genetic algorithm to detect fraud in financial
organization.
Methodologies
In this research on detecting and preventing fraud in financial organization I will be using different
methodologies. Such as:
Questionnaire
Data analysis
Secondary data
Observation
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Abstract
With the advancement of modern technology and the global super highways of communication
financial fraud is increasing gradually and costing heavy billions of dollars loss to the financial
organization. Different sort of financial fraud are taking place in financial institution like debit and
credit card fraud, money laundering fraud, online payment fraud etc. As the technology is evolving
people are performing many monetary transaction through credit card, and online payment, whereas
the fraudsters are gradually increasing in same pace for stealing and performing new tactics to perform
fraud transaction. Hence due to increase number of fraudster’s financial institution are facing
difficulties to detect and prevent fraud. But nowadays with ongoing technology of artificial intelligence
(AI) many financial organization like bank, insurance company, and finance are able to minimize the
fraud and detect the fraud number in financial organization. Therefore, the main objective of this
research project was to study the mechanism of AI based on financial fraud detection and how it
worked to detect and prevent fraud in financial institution and improve standard monetary security in
organization. The targeted participants for this research project was bank, insurance company, and the
relevant organization evolving in monetary transaction. The financial organization to detect fraud and
prevent number of fraud in organization that was studied with interviews, data analysis, questionnaire’
and action research. Finally, literature will be systematically reviewed to gather in-depth understanding
of how combining AI had help to detect fraud and prevent fraud and control the monetary loss of
organization. The main motive of this research paper was to use the AI to detect heavy financial fraud
and decrease heavy loss of organization by preventing fraud using mobile alert system.
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Chapter 1:
Introduction
What is artificial intelligence?
According to Nils J. Nilsson, “Artificial intelligence is that activity devoted to making machines
intelligent, and intelligence is that quality that enables an entity to function appropriately and with
foresight in its environment.” (Nils J. Nilsson, 2010). In another word, AI is a branch of computer
science that studies the properties of intelligence by synthesizing intelligence. The field of Artificial
Intelligence (AI) was officially born and christened at a 1956 workshop organized by John McCarthy
at the Dartmouth Summer Research Project on Artificial Intelligence. The goal was to investigate ways
in which machines could be made to simulate aspects of intelligence. McCarthy is credited with the
first use of the term “artificial intelligence”. Artificial intelligence involves computational technologies
that are inspired by – but typically operate differently from – the way people and other biological
organisms sense, learn, reason, and take action
ai definition, ai ma k vairako xa kasari evolved vairako xa
jun sytem ma ai implement vairako xa tesko barema ma lekhnu paryo
like biometric ma k vairako xa,,,,, total 9k+_ 10 word not matter of page
Artificial Intelligence provides a faster, more accurate assessment of a potential borrower, at less cost,
and accounts for a wider variety of factors, which leads to a better-informed, data-backed decision.
For a number of years now, artificial intelligence has been very successful in battling financial fraud
and the future is looking brighter every year, as machine learning is catching up with the criminals. AI
is especially effective at preventing credit card fraud, which has been growing exponentially in recent
years due to the increase of e-commerce and online transactions.
mechanism when something seems out of order and contradicts the established spending pattern.
Banks also employ artificial intelligence to reveal and prevent another infamous type of financial
crime: money laundering. Machines recognize suspicious activity and help to cut the costs of
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investigating the alleged money-laundering schemes. One Case study reported a 20% reduction in the
investigative workload.
Finance is one of the industries most likely to be disrupted by AI. The field is data intensive and small
improvements in process and accuracy offer major opportunities for companies looking to out-
innovate their competitors and industry challengers.
Banking institutions are becoming more and more susceptible to fraud over the
years although various control measures have been put in place. Fraudsters are
now more versatile in designing their modus operandi to circumvent the controls.
The fraudsters could originate from both internal (employees) and external sources
(customers, supplier, contractor, and lawyer). As banking institutions engage in
wide range of activities, fraud could potentially affect many parties, including the
shareholders, the depositors, the borrowers, the staff as well as the banking
institution itself
AI can detect fraud before it happens. Technology can rapidly mimic the thought process of a human
analyst to review each transaction in every portfolio at a bank (big data stream). AI enables banks to not
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only be alerted to potential fraud but also gives them a percentage that depicts the likelihood of a
card ever becoming compromised.
The appropriate usage of machine learning algorithms could result in the reduction of false positives
which not only improves the efficiency of the AI/ ML Fraud Detection process but also helps in
improving customer satisfaction.
CITATION
Nils J. Nilsson, The Quest for Artificial Intelligence: A History of Ideas and
Achievements (Cambridge, UK: Cambridge University Press, 2010).
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Financial institution is also known as banking institution that provides services as intermediaries of
financial markets.
Fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right
that can violate civil law and criminal law that may cause no loss of money, property or legal right.
Data analysis is required for fraud detection, more specifically (particularly) predictive analytics or
forensic analysis.
Or data analysis is used for fraud detection that includes predictive analytics or forensic analysis.
Forensic analysis is the use of electronic data to reconstruct or detect financial fraud. Forensic analysis
is the use of fraud risk-scoring model to identify high risk forensic unit like (customer, employee,
locations, insurance claims and so on).
The analytic test usually start with high- level data overview test to spot highly significant
irregularities.
Bank Fraud
Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or
held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or
other financial institution.(Wikipedia, bank fraud, 2019);
Wiki2.org. (2019). [online] Available at: https://wiki2.org/en/Bank_fraud [Accessed 4 Nov. 2019].
Data analysis techniques for fraud detection
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Traditionally data analysis have long been used to detect fraud that required complex and time-
consuming investigations that deals with different domain of knowledge such as financial, economics,
business practices and law.
The first industries to use data analysis techniques to prevent fraud were the telephone companies, the
insurance companies and the bank (Decker 1998).
One early example of successful implementation of data analysis techniques in the banking industry is
the FICO falcon fraud assessment system that is based on a neural network shell.
Fraud is an adaptive crime, so it needs special methods of intelligent data analysis to detect and prevent
fit. Yet detecting and preventing fraud is not a simple task.
In order to effectively test, detect, validate, correct error and monitor control system against fraudulent
activities, business entities and organizations rely on fraud detection techniques like statistical and
artificial intelligence.
Artificial intelligence is known as machine intelligence where intelligence is demonstrated by

machines.
Artificial intelligence is device that perceives its environment and takes action that maximize its chance
of successfully achieving its goal.
The term artificial intelligence is often used to describe machines that mimic “cognitive” functions
that humans associate with the human mind like “learning” and “problem solving”.
Artificial intelligence can be classified into three different types of system such as analytical, human
–inspired, humanized and artificial intelligence.
Analytical AI has only one characteristics consistent with cognitive intelligence
Artificial intelligence was founded as an academic discipline in 1956
The term “artificial intelligence” was coined by John McCarthy to distinguish the field from
cybernetics and escape the influence of cyberneticist Norbert Wiener and the field AI research was
born at a workshop at Dartmouth College in 1956.
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AI is the study of intelligent agents where any devices that perceives its environment and takes actions
that maximize its chance of successfully achieving its goals.
AI as a system capability to correctly interpret external data, to learn from such data. and to use those
learning to achieve specific goals and tasks through flexible and adaption.
The main goal of artificial intelligence is to create technology that allows computers and machines to
function in an intelligent manner.
Financial institution have long used artificial neural network system to detect charges or claims outside
of the norm, flagging these for human investigation.
Bank use artificial intelligence system today to organize operations, maintain book-keeping, invest in
stocks and manage properties. AI can react to changes overnight or when business is not taking place.
Fraud detection is a knowledge-intensive activity. The main AI techniques used for fraud detection
includes:
Data mining:
Expert systems
Pattern recognition:
Machine learning:
Neural network
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“Implementing artificial intelligence in fraud detection and fraud prevention in financial

organization with the help of mobile alerts system”
Abstract
Keyword: financial institution, fraud detection, mobile alert system, artificial neural network, genetic
algorithm.
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Chapter 1:
Introduction
 What is artificial intelligence?
Artificial intelligence (AI) is the simulation of human intelligence processes by machines, especially
computer systems. These processes include learning (the acquisition of information and rules for using
the information), reasoning (using rules to reach approximate or definite conclusions) and self-
correction. (Margaret Rouse, 2019) It is a field of study that aims at replicating and enhancing human
intelligence through artificial technologies to create intelligence machine. It is known as machine
intelligence where intelligence is demonstrated by machine that mimic “cognitive” functions that
human associate with the human mind like “learning” and “problem solving”. It can be classified into
three different type of system such as analytical, human-inspired and humanized artificial intelligence.
The field of Artificial Intelligence (AI) was officially born and christened at a 1956 workshop
organized by John McCarthy at the Dartmouth Summer Research Project on Artificial Intelligence.
The goal was to investigate ways in which machines could be made to simulate aspects of intelligence.
McCarthy is credited with the first use of the term “artificial intelligence”.
as the business environment. Globally there is a wave of artificial intelligence across various industries,
business and healthcare, this technology is being introduced in all the sectors to reduce human effort
and give an accurate and faster result. The AI systems are capable enough to reduce human efforts in
numerous areas and help to get the work done faster and with accurate results. The artificial
intelligence applications help to get the work done faster and with accurate results.
Artificial intelligence allows banks to become more efficient in the process of detecting fraud and
money laundering, AI automatically conducts & compress data that normally requires many hours of
labor in just a matter of minutes, banks use machine learning & big data to prevent criminal activities
and monitor potential threats to customers in commerce.
Banking sector ma fraud pahelai deki vairako thiyo, fraud le huge numner of paisa kharcha vairako
thiyo,, different system haru use gare tha fraud detect garna but tyo metho haru sufficient vayena ,,
jhan aele ta technology ko karan le naya naya fraud vairako xa ,,s o tyo fraud rokna ra country ko
economic strength strong banaune arttifical intelligence prayok garnu parxa,, artificial intelligence le
27
yesari fraud detect garxa, jasle garda yeti fraud kaam nhune vaye ra contry ko ecomnic strength ni
strong hune vaye,,
In recent years due to the increase of e-commerce and online transaction huge number of fraud are
taking place. With the implementation of artificial intelligence it has been very successful in battling
financial fraud and catching up criminals.
Fraud is an ever growing problem for financial institutions, with criminals using a wide variety of
methods to attack organizations across systems, channels, processes and products. Financial fraud is
the use of potentially illegal means to obtain money, assets, or other property owned or held by a
financial institution. (Wikipedia, bank fraud, 2019);
AI detect fraud before it happens. It proactively detect whether fraud is going to take place in a financial
system or not. This Technology rapidly mimic the thought process of a human analyst to review each
transaction in every portfolio at a finance organization. It makes a point to keep all thing secure and take
steps towards safety before any chances of fraud can occur. AI fraud detection systems analyze clients’
behavior, location, and buying habits and trigger a security mechanism when something seems out of
order and contradicts the established spending pattern. It help to reveal and prevent fraud like, credit
card fraud, money laundering fraud etc.
Yesto yesto fraud vairako xa pahela yo yo system thiyo tara tyo system le yesto garthiyo tara artificial
intelligence use gare paxi yo yo hunxa yesari detect garxa lekhne ho avaa
Pahela k thiyo system ani tyo system le k jhau vo ani aaele ai implement garera k garna sakiyo
Fraud vana k ho lekxhu ani financial organization vana k ho ni lekxhu
Yesari dherai fraud vayera nai artfical intelligence or machine learnig chaine vo tespaxi
The main AI techniques used for fraud detection include:
Artificial neural network
28
Pattern Recognition
Data mining
Bayesian networks
29
Abstract
30
Chapter 1:
Introduction
What is artificial intelligence?
Artificial intelligence is known as machine intelligence where intelligence is demonstrated by machine

that mimic “cognitive” functions that human associate with the human mind like “learning” and
“problem solving”. It can be classified into three different type of system such as analytical, human-
inspired and humanized artificial intelligence. According to Nils J. Nilsson, “Artificial intelligence is
that activity devoted to making machines intelligent, and intelligence is that quality that enables an
entity to function appropriately and with foresight in its environment.” (Nils J. Nilsson, 2010). In
another word, AI is a branch of computer science that studies the properties of intelligence by
synthesizing intelligence. The field of Artificial Intelligence (AI) was officially born and christened at
a 1956 workshop organized by John McCarthy at the Dartmouth Summer Research Project on
Artificial Intelligence. The goal was to investigate ways in which machines could be made to simulate
aspects of intelligence. McCarthy is credited with the first use of the term “artificial intelligence”.
Artificial intelligence involves computational technologies that are inspired by but typically operate
differently from the way people and other biological organisms sense, learn, reason, and take action.
as the business environment. From business to the healthcare, this technology is being introduced in
all the sectors to reduce human effort and give an accurate and faster result. The AI systems are capable
enough to reduce human efforts in numerous areas. Not only to reduce human effort and give an
accurate and faster result artificial intelligence is capable for detecting and prevent fraud in financial
organization which is supporting financial growth of country as well as financial institution.
Globally there is a wave of artificial intelligence across various industries, business and healthcare.
The wave is like to continue in the years to comes with the expanding base of applications of the
technology.
The wave is likely to continue in the years to come with the expanding base of applications of the
technology. The global market for artificial intelligence is expected to witness phenomenal growth
31
over the coming years as organizations worldwide have started capitalizing on the benefits of
such disruptive technologies for effective positioning of their offerings and customer reach.
ai definition, ai ma k vairako xa kasari evolved vairako xa
jun sytem ma ai implement vairako xa tesko barema ma lekhnu paryo
like biometric ma k vairako xa,,,,, total 9k+_ 10 word not matter of page
Banks also employ artificial intelligence to reveal and prevent another infamous type of financial
crime: money laundering. Machines recognize suspicious activity and help to cut the costs of
investigating the alleged money-laundering schemes. One Case study reported a 20% reduction in the
investigative workload.
Finance is one of the industries most likely to be disrupted by AI. The field is data intensive and small
improvements in process and accuracy offer major opportunities for companies looking to out-
Banking institutions are becoming more and more susceptible to fraud over the
years although various control measures have been put in place. Fraudsters are
now more versatile in designing their modus operandi to circumvent the controls.
The fraudsters could originate from both internal (employees) and external sources
(customers, supplier, contractor, and lawyer). As banking institutions engage in
wide range of activities, fraud could potentially affect many parties, including the
shareholders, the depositors, the borrowers, the staff as well as the banking
institution itself
32
CITATION
Nils J. Nilsson, The Quest for Artificial Intelligence: A History of Ideas and
Achievements (Cambridge, UK: Cambridge University Press, 2010).
33
Financial institution is also known as banking institution that provides services as intermediaries of
financial markets.
Fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right
that can violate civil law and criminal law that may cause no loss of money, property or legal right.
Data analysis is required for fraud detection, more specifically (particularly) predictive analytics or
forensic analysis.
Or data analysis is used for fraud detection that includes predictive analytics or forensic analysis.
Forensic analysis is the use of electronic data to reconstruct or detect financial fraud. Forensic analysis
is the use of fraud risk-scoring model to identify high risk forensic unit like (customer, employee,
locations, insurance claims and so on).
The analytic test usually start with high- level data overview test to spot highly significant
irregularities.
Bank Fraud
Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or
held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or
other financial institution.(Wikipedia, bank fraud, 2019);
Wiki2.org. (2019). [online] Available at: https://wiki2.org/en/Bank_fraud [Accessed 4 Nov. 2019].
Data analysis techniques for fraud detection
34
Traditionally data analysis have long been used to detect fraud that required complex and time-
consuming investigations that deals with different domain of knowledge such as financial, economics,
business practices and law.
The first industries to use data analysis techniques to prevent fraud were the telephone companies, the
insurance companies and the bank (Decker 1998).
One early example of successful implementation of data analysis techniques in the banking industry is
the FICO falcon fraud assessment system that is based on a neural network shell.
Fraud is an adaptive crime, so it needs special methods of intelligent data analysis to detect and prevent
fit. Yet detecting and preventing fraud is not a simple task.
In order to effectively test, detect, validate, correct error and monitor control system against fraudulent
activities, business entities and organizations rely on fraud detection techniques like statistical and
artificial intelligence.
Artificial intelligence is known as machine intelligence where intelligence is demonstrated by

machines.
Artificial intelligence is device that perceives its environment and takes action that maximize its chance
of successfully achieving its goal.
The term artificial intelligence is often used to describe machines that mimic “cognitive” functions
that humans associate with the human mind like “learning” and “problem solving”.
Artificial intelligence can be classified into three different types of system such as analytical, human
–inspired, humanized and artificial intelligence.
Analytical AI has only one characteristics consistent with cognitive intelligence
Artificial intelligence was founded as an academic discipline in 1956
The term “artificial intelligence” was coined by John McCarthy to distinguish the field from
cybernetics and escape the influence of cyberneticist Norbert Wiener and the field AI research was
born at a workshop at Dartmouth College in 1956.
35
AI is the study of intelligent agents where any devices that perceives its environment and takes actions
that maximize its chance of successfully achieving its goals.
AI as a system capability to correctly interpret external data, to learn from such data. and to use those
learning to achieve specific goals and tasks through flexible and adaption.
The main goal of artificial intelligence is to create technology that allows computers and machines to
function in an intelligent manner.
Financial institution have long used artificial neural network system to detect charges or claims outside
of the norm, flagging these for human investigation.
Bank use artificial intelligence system today to organize operations, maintain book-keeping, invest in
stocks and manage properties. AI can react to changes overnight or when business is not taking place.
Fraud detection is a knowledge-intensive activity. The main AI techniques used for fraud detection
includes:
Data mining:
Expert systems
Pattern recognition:
Machine learning:
Neural network
36
37
Artificial Intelligence provides a faster, more accurate assessment of

a potential borrower, at less cost, and accounts for a wider variety of
factors, which leads to a better-informed, data-backed decision.
Credit scoring provided by AI is based on more complex and
sophisticated rules compared to those used in traditional credit
scoring systems. It helps lenders distinguish between high default
risk applicants and those who are credit-worthy but lack an extensive
credit history.
For a number of years now, artificial intelligence has been very
successful in battling financial fraud — and the future is looking
brighter every year, as machine learning is catching up with the
criminals.
AI is especially effective at preventing credit card fraud, which has

been growing exponentially in recent years due to the increase of e-
commerce and online transactions. Fraud detection systems analyze
clients’ behavior, location, and buying habits and trigger a security
mechanism when something seems out of order and contradicts the
established spending pattern.
Banks also employ artificial intelligence to reveal and prevent

another infamous type of financial crime: money laundering.
Machines recognize suspicious activity and help to cut the costs of
investigating the alleged money-laundering schemes. One Case
study reported a 20% reduction in the investigative workload.
F inance is one of the industries most likely to be disrupted by AI.
The field is data intensive and small improvements in process and

accuracy offer major opportunities for companies looking to out-
38
Fraud Detection
39
Fraudulent transactions are a costly business. Financial institutions

unable to detect fraud suffer from not only monetary losses, but also
hits to their reputation. The prevalence of false positives, instances
where users are wrongly identified as fraudsters, has historically been
a thorn in the sides of big banks. In an industry where detection
accuracy traditionally hovers around 40%, it is much easier to run a
false positive than the other way around. In fact, $118 billion in credit
card sales are declined each year, even though real fraud only amounts
to $9 billion. Each year, almost 15% of all American cardholders
experience at least one wrongfully declined transaction.
There are many reasons fraud is difficult to detect with current

systems. The number of actual fraudulent transactions is low, it can be
hard to discover patterns and fraudsters are constantly changing their
strategies to avoid detection. Analysts often attempt to build up a vast
set of rules derived from historical data and industry knowledge,
however these processes are limited by the amount of data they can
ingest and the ability to handle exceptions. These are all areas where
AI can help.
40
Companies like Stripe are actively innovating in this space. By using

machine learning, they have been able to reduce fraud by over 25%
without increasing the number of false positives. This was
accomplished by integrating hundreds of new signals into the
detection algorithm and constantly retraining their model to stay up
to date with the newest tricks fraudsters are using.
Anti-Money Laundering
Anti-Money Laundering
41
42
43
Money laundering is the process of running illegally obtained money

through a series of transactions to give the appearance of legitimacy.
Illegal operators attempt to wash their funds of association with
criminal activity, similar to how everyday people wash their clothes of
association with dirt. Unfortunately, money launderers appear to be
quite good at it. The UN reports that money laundering transactions
comprise 2% of global GDP, however banks are only able to seize less
than 1% of all laundered money.
As a result, regulatory bodies hold financial institutions to a high

standard when it comes to money laundering compliance. All parties
and transactions are subject to a thorough and intensive due diligence
process. This involves developing an understanding of who the
senders and receivers are, what their relationship may be, navigating
many layers of shell companies and getting a sense of historical
transaction history. In the US, companies spend up to $7 billion on
anti-money laundering and compliance operations each year. The
analysis needed to determine if a customer is engaging in money
laundering is long, inefficient, and almost entirely performed by
humans.
Banks like HSBC are already getting a move on building more

intelligent compliance processes and have invested heavily in
research, development and partnerships. However, there are
regulatory hurdles that need to be dealt with, as regulators worry that
human reviewers will mindlessly follow the recommendations of black
box AI systems. Fully automated financial compliance departments
are still a thing of the future, but it is encouraging to see the largest
financial institutions in the world actively working towards it.
Credit Scoring
This era of rapid development in artificial intelligence would have been
impossible without an accompanying explosion in the availability of
data. In the past, banks were able to get by with just using historical
data of transactions and payments to determine how creditworthy a
44
potential borrower was; however, with the increased availability of

new structured and unstructured databases, novel new techniques are
now necessary.
This new constellation of data gives lenders the opportunity to

produce more accurate segmentation of their borrowers, as well as
produce a more nuanced view of creditworthiness by
incorporating qualitative factors such as willingness to pay and
consumption behaviour. Since a larger array of data is now consulted,
lenders can make more accurate assessments of traditionally difficult
to score individuals, such as those without a credit history. Crucially,
this clearing process is able to happen almost automatically, resulting
in a better customer experience.
There are a slew of fintech startups already employing this model,

especially in the developing world where banking histories are more
sparse. A prominent example is Ant Financial, an arm of the Alibaba
Group. They have developed an application that pulls from a
combination of traditional and non-traditional data to produce a
comprehensive credit score.
45
46
47
Money laundering is the process of running illegally obtained money

through a series of transactions to give the appearance of legitimacy.
Illegal operators attempt to wash their funds of association with
criminal activity, similar to how everyday people wash their clothes of
association with dirt. Unfortunately, money launderers appear to be
quite good at it. The UN reports that money laundering transactions
comprise 2% of global GDP, however banks are only able to seize less
than 1% of all laundered money.
As a result, regulatory bodies hold financial institutions to a high

standard when it comes to money laundering compliance. All parties
and transactions are subject to a thorough and intensive due diligence
process. This involves developing an understanding of who the
senders and receivers are, what their relationship may be, navigating
many layers of shell companies and getting a sense of historical
transaction history. In the US, companies spend up to $7 billion on
anti-money laundering and compliance operations each year. The
analysis needed to determine if a customer is engaging in money
laundering is long, inefficient, and almost entirely performed by
humans.
Banks like HSBC are already getting a move on building more

intelligent compliance processes and have invested heavily in
research, development and partnerships. However, there are
regulatory hurdles that need to be dealt with, as regulators worry that
human reviewers will mindlessly follow the recommendations of black
box AI systems. Fully automated financial compliance departments
are still a thing of the future, but it is encouraging to see the largest
financial institutions in the world actively working towards it.
Credit Scoring
This era of rapid development in artificial intelligence would have been
impossible without an accompanying explosion in the availability of
data. In the past, banks were able to get by with just using historical
data of transactions and payments to determine how creditworthy a
48
potential borrower was; however, with the increased availability of

new structured and unstructured databases, novel new techniques are
now necessary.
This new constellation of data gives lenders the opportunity to

produce more accurate segmentation of their borrowers, as well as
produce a more nuanced view of creditworthiness by
incorporating qualitative factors such as willingness to pay and
consumption behaviour. Since a larger array of data is now consulted,
lenders can make more accurate assessments of traditionally difficult
to score individuals, such as those without a credit history. Crucially,
this clearing process is able to happen almost automatically, resulting
in a better customer experience.
There are a slew of fintech startups already employing this model,

especially in the developing world where banking histories are more
sparse. A prominent example is Ant Financial, an arm of the Alibaba
Group. They have developed an application that pulls from a
combination of traditional and non-traditional data to produce a
comprehensive credit score
49
Wide Web and e-commerce, a significant increase in the volume of financial transactions observed.
Along with the increase in trading volume, it had seen a huge increase in the number of cheats by
abusive users, resulting in billions of dollars annually causing losses worldwide. So it was necessary
to consider the identification and diagnosis of the fraud techniques.
Fraud is a dominant form of white collar crime that continues to extract a significant toll not only on
the organizations, but also on investors, financial institutions, and the economy in general. Reserve
Bank of India has defined fraud as “All instances wherein Banks have been put to loss through
misrepresentation of books of accounts, fraudulent encashment of instruments like cheques, drafts and
bills of exchange, unauthorized handling of securities charged to banks, misfeasance, embezzlement,
theft, misappropriation of funds, conversion of property, cheating, shortages, irregularities etc.”
Examples of fraud include insurance fraud, credit card fraud, accounting fraud, etc.
A financial institution is a company engaged in the business of dealing with financial and monetary
transactions such as deposits, loan and investment and currency exchange. Financial institution is also
known as banking institution. According to a Delloite survey, 93% respondents indicated that there
has been an increase in fraud incidents in the banking institution in the last two years.
There are dozens of ways in which an individual can commit banking fraud. Typically, fraud in
financial institution can be categorized into 3 main categories: Corruption, Asset Misappropriation and
Financial Statement Fraud. Corruption includes cases of conflict of interest, bribery, illegal gratuities
and extortions. Asset misappropriation may be embezzlement or inventory related fraud. Financial
statement fraud involves overstating or understating the assets or revenue generated.
Fraud cases involving theft of identity are a serious and growing problem in the era of internet banking.
With so many transactions done online, hackers have the ability to frequently access bank account and
credit card information from unwitting consumers. Fraudsters can also use obtained names and
addresses to apply for fraudulent accounts, credit cards and loans.
Globalization, technology advancement and other factors, have led to increased cases of finacical
fraud. In addition, frauds have no constant patterns and they always change their behavior over time.
Artificial intelligence has been growing at a rapid rate over the past couple of years,
50
The field has been growing at a rapid rate over the past couple of years,
Artifical intelligence has reach the mountain in the todays world.
Traditional methods of data analysis have long been used to detect fraud. They require complex and
time-consuming investigations that deal with different domains of knowledge like financial,
economics, business practices and law.
Primarily, most banks employ Rule-based Systems with manual evaluation for detecting fraud.
Although these systems were doing a pretty decent job, in the recent years, they have become more
inconsistent. That’s because new fraud patterns are evolving rapidly and these systems are unable to
evolve accordingly, allowing frauds to go undetected, and resulting in huge financial losses.
Considering all these challenges and shortcomings, Machine Learning can play a vital role in effective
and efficient fraud detection in the banking industry.
Data Mining and Computational Intelligence techniques are commonly used in fraud detection. Here, I
will be mainly focusing on Credit Card Fraud Detection and talk about the techniques, approaches and
lessons learnt, based on our experience in building a Machine Learning application for detecting credit
card fraudulent transactions in real time.
https://medium.com/engineered-publicis-sapient/fraud-detection-in-banking-industry-and-
significance-of-machine-learning-dfd31891a0b4
Summary and Observations
 We compared the performance of all the 4 algorithms we implemented and found that neural
network technique gave the best results. Finally, we created a Rest API in Flask for real-time fraud
prediction using the feedforward neural network model we trained. The assessment/benchmarking
and comparisons were done against F1 metrics score (using Precision/Recall).
 While detecting real-time fraudulent credit card transactions, it is tricky to flag a transaction as
fraud, since usually, fraudulent transactions don’t happen in one big transaction, but across multiple
smaller transactions over a period of time. In such cases, a fraud score/weightage-based approach
should be used. This will help detect transaction-level or account-level frauds more effectively and
accurately.
51
Conclusion
From our learning, we found ML-based systems are better equipped to detect fraud, as they are able to
detect and recognize thousands of patterns as opposed to rule-based systems. In the banking industry,
we are definitely witnessing more and more banks embrace ML for fraud detection. A model with just
the supervised ML algorithms/techniques would not be effective enough to detect fraud efficiently and
provide the right, required insights. I believe, a model with the right combination of supervised and
unsupervised ML techniques would enable banks better to detect frauds more accurately.
I still believe we have some more way to go when it comes to leveraging unsupervised learning
techniques for fraud detection. More detailed research needs to be done with different ML techniques
by considering aspects like their performance, hyper-parameter optimization and operationalizations.
52
Detection of fraudulent activity is thus critical to control these
costs. This paper hereby addresses bank fraud detection via
the use of data-mining techniques; association, clustering,
forecasting, and classification to analyze the customer data in
order to identify the patterns that can lead to frauds. Upon
identification of the patterns, adding a higher level of
verification/authentication to banking processes can be added
Keywords: Data mining techniques, banking sector, fraud, and
authentication.
53
A good fraud detection system should be able to detect the transaction in real time and with
accuracy. There are two kinds of fraud detection systems: anomaly detection and misuse detection.
Anomaly detection does not need to be trained whereas misuse detection systems needs a training
phase. We are going to focus in this paper in anomaly detection systems.
Several approaches in terms of machine learning (ML) have been implemented. Typical ML
algorithms used are KNN (K Nearest Neighbor), decision trees and logistic regression, but they are
supervised methods, meaning that they need to learn by labels in order to understand what
transactions are fraudulent or not. If the company lacks this information, these algorithms cannot
be trained. Figure 1 shows a typical process for fraud detection where ML or Deep Learning (DL)
algorithms can be used.
There are many issues that make effective fraud management a challenging task. These include:
enormous and ever-expanding volumes of data, the growing complexity of systems, changes in
business processes and activities and continuous evolution of newer fraud schemes to bypass existing
detection techniques. Detecting fraudulent financial statements is a difficult task when using normal
audit procedures due to limitation in understanding the characteristics of financial statements, lack of
experience and dynamically changing strategies of fraudsters.
It is a part of operational risk and has been classified as Internal and External fraud. Internal Fraud is
the risk of unexpected financial, material or reputational loss as the result of fraudulent action of
persons internal to the firm. Losses are due to acts of a type intended to defraud, misappropriate
property or circumvent regulations, the law or company policy, excluding diversity/discrimination
events, which involves at least one internal party. It includes misappropriation of assets, tax evasion,
intentional mismarking of positions, bribery.
Reserve Bank of India has defined fraud as “All instances wherein Banks have been put to loss through
misrepresentation of books of accounts, fraudulent encashment of instruments like cheques, drafts and
bills of exchange, unauthorized handling of securities charged to
54
Therefore, fraud detection techniques to identify users motivated to do a lot of scientific research. To
check the volume of such information data mining techniques used. Data mining, knowledge discovery
process that finding patterns in large data sets by combining techniques from statistics, artificial
intelligence, database management and etc. In data mining techniques we examine and analyze
information to discover uncertain communication and hidden patterns of data. This study aimed to
detect fraud in banking data using classification algorithms.
and this a motivation for doing many researches(1). Data mining techniques and classification
algorithms are used to examine the large amount of information and discovery of data. These methods
are typically classified into two groups: Anomaly Detection and Abuse Detection Method. In the first
method, customer behavior history
Fraud detection is the recognition of symptoms of fraud where no prior suspicion or tendency to fraud
exists. Examples include insurance fraud, credit card fraud and accounting fraud.
55

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Research Report 2019

Abbreviation used on this report

 What is artificial intelligence?

Artificial intelligence in fraud detection and prevention

i. Identify the factors that cause fraud,

ii. Explore the various techniques of fraud detection

iii. To reduce number of fraud transaction

Financial fraud characteristics and related work

Fraud detection needs to be real time.

The fraud behavior is dynamic.

According to MasoumehZareapoor, Fraudsters continually advance their techniques to defeat

The forensic evidence for fraud detection is weak.

The customer behavior patterns are diverse.

The banking system is fixed.

Method and methodology

Artificial Neural Network

Hidden Markov Method

What is artificial intelligence?

ai definition, ai ma k vairako xa kasari evolved vairako xa

jun sytem ma ai implement vairako xa tesko barema ma lekhnu paryo

Wiki2.org. (2019). [online] Available at: https://wiki2.org/en/Bank_fraud [Accessed 4 Nov. 2019].

Data analysis techniques for fraud detection

Artificial intelligence is known as machine intelligence where intelligence is demonstrated by

Analytical AI has only one characteristics consistent with cognitive intelligence

Artificial intelligence was founded as an academic discipline in 1956

“Implementing artificial intelligence in fraud detection and fraud prevention in financial

 What is artificial intelligence?

Artificial intelligence in fraud detection and prevention

Fraud vana k ho lekxhu ani financial organization vana k ho ni lekxhu

The main AI techniques used for fraud detection include:

Artificial neural network

What is artificial intelligence?

Artificial intelligence is known as machine intelligence where intelligence is demonstrated by machine

ai definition, ai ma k vairako xa kasari evolved vairako xa

jun sytem ma ai implement vairako xa tesko barema ma lekhnu paryo

Wiki2.org. (2019). [online] Available at: https://wiki2.org/en/Bank_fraud [Accessed 4 Nov. 2019].

Data analysis techniques for fraud detection

Artificial intelligence is known as machine intelligence where intelligence is demonstrated by

Analytical AI has only one characteristics consistent with cognitive intelligence

Artificial intelligence was founded as an academic discipline in 1956

Artificial Intelligence provides a faster, more accurate assessment of

AI is especially effective at preventing credit card fraud, which has

Banks also employ artificial intelligence to reveal and prevent

F inance is one of the industries most likely to be disrupted by AI.

The field is data intensive and small improvements in process and

Fraudulent transactions are a costly business. Financial institutions

There are many reasons fraud is difficult to detect with current

Companies like Stripe are actively innovating in this space. By using

Money laundering is the process of running illegally obtained money

As a result, regulatory bodies hold financial institutions to a high

Banks like HSBC are already getting a move on building more

potential borrower was; however, with the increased availability of

This new constellation of data gives lenders the opportunity to

There are a slew of fintech startups already employing this model,

Money laundering is the process of running illegally obtained money

As a result, regulatory bodies hold financial institutions to a high

Banks like HSBC are already getting a move on building more

potential borrower was; however, with the increased availability of

This new constellation of data gives lenders the opportunity to

There are a slew of fintech startups already employing this model,

Artificial intelligence in fraud detection and prevention

Artifical intelligence has reach the mountain in the todays world.

Summary and Observations