Architecture for Fraud Detection in Financial Institutions

Abstract:
Financial fraud analysis, identification and risk assessment are important for either banks or
companies, as well as for others. Different stakeholders including financial institutions and
regulators, investors, academics, the community and businesses continue to pay considerable
attention to this subject. In order to ensure financial stability, assess risk and minimize
expected financial losses it is important to provide a maximum decidability and minimize
uncertainty to the fraud probability estimate. Artificial intelligence techniques are a
powerful and effective solution. This article discusses existing patents relating to the
detection of financial fraud using one or more technologies of artificial intelligence, machine
learning or statistics, describes the key characteristics of contemporary intelligent solutions
for the detection of fraud and summarizes the major trends.

Key words: Fraud detection, financial fraud, machine learning, performance.

Contents
Abbreviations..............................................................................................................................................1
1 Introduction..............................................................................................................................................2
2 Financial fraud..........................................................................................................................................2
2.1 Financial fraud Types........................................................................................................................2
3. Financial fraud detection Techniques......................................................................................................3
3.1 Related work......................................................................................................................................3
4 Comparative analysis review....................................................................................................................4
4.1 Classification based on fraud types and Techniques..........................................................................4
4.2 Performance measures of different techniques..................................................................................5
5 Discussion and analysis............................................................................................................................5
6 Conclusion................................................................................................................................................6
REFERENCES............................................................................................................................................7

Abbreviations
FFD: Financial Fraud Detection
LR: Logistic Regression
NN: Neural Network
SVM: Support Vector machine
FSF: Financial statement Fraud
SOM: Self-organization Map

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1 Introduction
Fraud includes one or more individuals who behave secretly deliberately to rob others
for themselves that result in financial or personal gain. Fraud is as old as society itself
and can take infinite forms. Nevertheless, the emergence of emerging technology in
recent years has created increased opportunities for criminals to commit fraud. Fraud
is a challenge to the status and relationships of a company with external stakeholders,
including customers, providers, financiers and partners in business. Similarly, fraud
can lead to enormous financial harm. The biggest motivation for fraudsters is to make
the money profit – which makes it more risky for banks, because it holds much capital.
Therefore financial institutions have long been a priority for criminals to target.
This paper aims survey current research trends on financial fraud Detection (FFD).
Selected approaches focused on machine learning techniques are examined that were
used in FFD. Our aim is to highlight its strength and limitations and also to recognize
open fraud detection issues.
The remaining paper has been compiled respectively. Section 2 provides a description
and types of financial fraud; Section 3 includes present methods for detecting financial
fraud and their overview. Section 4 outlines the comparative analysis of various
techniques. Eventually we discuss the results and future research.

2 Financial fraud
According to the ACFE Association of Certified Fraud Reviewers (ACFE)
definition, fraud involves any deliberate or extreme activity by which someone else is
robbed of property or money by cunning, frustration, or other injustice [1] .

2.1 Financial fraud Types

Many categories of financial fraud can be classified. The effects on economy include
credit card fraud, insurance fraud, financial statement fraud, money laundering,
corporate fraud, security and commodities fraud [1].
Credit card fraud is of two types; compliance and behavior fraud [2]. Application
fraud involves receiving new cards from issuers with incorrect information or
information from others. Four forms of behavioral fraud can occur: mail theft,
theft/loss card, fake card and 'no card holder present'.
Insurance fraud may be perpetrated by customers, agents and brokers, Insurance
companies' staff, health care workers and at many stages in the insurance process (i.e.
application, eligibility, ranking, accounting and claims) [3].
Financial statement fraud, financial statements represent the company's financial
condition [4]. It has an objective for the reduction of tax obligations.
Several research papers on credit card fraud, insurance fraud and the fraud in financial
statements have been published because of their relative broad influence on the global
economy. Money laundering work has also recently gained a great deal of attention.

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3. Financial fraud detection Techniques
In recent years the detection of fraud has been largely focused on statistical
approaches and neural networks but these are still used for detecting fraud in some
data mining problems. In order to understand any form of fraud we have to research
machine learning techniques for detecting complex fraud and classifying according to
each fraud. Classification based on techniques for the detection of fraud is useful to
understand the value for a specific issue of each technique. Table 1 show various
techniques used in financial Fraud detection in past years.
Table 1 Techniques used for financial Fraud detection

Classification Techniques
Descriptive or Self-organizing map (SOM)
Unsupervised Technique
Logistic regression
Predictive Techniques Decision Tree
Neural Network
Support Vector Machine
Naïve Bayes
Bayesion Belief Network
Artificial & Genetic Algorithm
computational Genetic Programming
Intelligence Techniques Hidden markov model
Artificial Immune system

3.1 Related work

With the advancement of information systems, data has become one of the important
factors. For effective data access, data exchange, extraction of data and use of this data
methods and techniques are important. There are several alternative approaches to
identify and prevent fraud [5]. Bolton and Hand [6] address strategies for fraud
detection in a number of subgroups such as credit card, telecoms and related areas,
such as money laundering and intrusion detection. Credit card, telecommunications
and intrusion detection methods are illustrated by Kou [7]. Weatherford suggests
neural networks, recurrent neural networks and fraud detection artificial immunes
system [8]. Green et al [9] proposed a fraud classification neural network model that
uses endogenous financial details. A model of classification is then applied to a test
sample based on the observed behavior. Data mining has been one of the main
techniques derived from the data set in recent years. The technology has provided
useful commercial and scientific information and has obscured a lot of data. For data
mining applications and development, a variety of fields were described. Various data
mining strategies have been used in FFD, including neural networks [10] [11] [12] and
decision trees (DT) [13]. Richarya [14] and Wang [15] provided a comprehensive
survey and review for different data mining techniques used to detect financial fraud.

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 In this report, we review publicly accessible Internet articles and journals explicitly on
data extraction and accounting for FFD in detail.

4 Comparative analysis review

We organize our survey into three groups in order to find out the current pattern and
method of identification of financial fraud. Firstly, we categorize different techniques
used in fraud detection. Secondly, in relation to the machine learning techniques used
to detect fraud, we present the research published in the literature on financial fraud
detection. Thirdly, the findings of the current work are analyzed using machine
learning techniques.

4.1 Classification based on fraud types and Techniques

Early research on fraud detection was mainly based on neural networks and
mathematical models. In recent years the detection of fraud has been largely focused
on statistical approaches and neural networks but these are still used for detecting
fraud in some data mining problems. In order to understand any form of fraud we have
to research data mining techniques for detecting complex fraud and classifying
according to each fraud. Classification based on techniques for the detection of fraud
is useful to understand the value for a specific issue of each technique. The
classification system is outlined in this section. The study on the identification of
financial fraud is classified according to the methods used and is shown in Table 2.

Table 2 Classification based on fraud types and techniques

Study Fraud Type Technique Used

[16],[17, Credit card fraud Logistic Regression
18, 19] Bayes Classifier
Artificial Neural Network
Artificial immune system
Genetic algorithm, Scatter search
Hidden markov Model
[20], [21] Financial statement Neural Network
Fraud Support Vector Machine
Logistic Regression
Beneish M-score model
Decision tree
[22, 23] Insurance Fraud Social Network analysis
Logistic regression
Fuzzy Logic
[24] Money Laundering Network analysis

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 4.2 Performance measures of different techniques

In general, multiple considerations are taken into account for output assessment. Yet
precision, sensitivity and specificity are the most widely used matrices. Precision is
the relationship between the positive number of classification and the failed number of
classification. Sensitivity calculates the quantity of samples correctly reported as fraud
against the quantity of fraud mistake. Specificity compare between true positive and
false positive.
Table 3 demonstrates the accuracy of techniques for detecting financial fraud in
relation to the various forms of fraud as stated by the researchers.

Table 3Classification based on Techniques & Accuracy

Study Technique Type of fraud Accuracy
[23,20] Logistic Credit card 96.6%-9.4%
regression Insurance fraud 60.68%
FSF 19% - 79%
[25,26] SVM Credit card 95.5%-6.6%
[27] Insurance Fraud 70.41%73.41%
FSF 65.8%
Self- Credit card 100%
Organizing
Map
[20] Genetic FSF 89.27%–
programmi 94.14%
ng
[20] Neural FSF 95.64%-96.4%
Network
[28] Artificial Credit card 94.65%–96.4%
Immune
system

5 Discussion and analysis

Examination of various methods and the outcomes of the identification of fraud show
that predictive methods have a higher rate of performance than other. Nevertheless,
other approaches have also been found to be more accurate than the predictive
techniques in some cases. The findings of the analytical and statistical approach can be
different depending on the function selection of a specific form of fraud.

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Results based on accuracy show that the NN was the best option (98.09%) in the
financial statement fraud, following the Genetic algorithm (95%), in most cases with
marginally lower accuracy. Logistic Regression and SVM offer strong credit card
fraud results (99.4% & 96.6%). We noticed that:
SOM Clustering helps to detect new trends in input data that can otherwise not be
detected by conventional statistical approaches and transaction filtering decreases total
costs and processing time for further analysis.
Logistic regression fits well with linear credit card fraud detection data.
The support vector machine approach can detect the fraudulent activity during
transactions.

6 Conclusion
In recent years, fraud has increased, particularly in large and sensitive technical areas.
Therefore, the battle against fraud is a desperate need. The best defense mechanism
against fraud is fraud prevention and detection. This is not enough to prevent fraud
alone. This paper analyzed existing methods for detecting fraud in different fields of
fraud. In addition, the approaches and techniques of fraud detection have been
classified and analyzed. Neural networks, support vector machines (SVM), logistic
recovery, decision-making trees and meta-heuristic systems, such as genetic
algorithms are the most common technique for detection of fraud. All techniques can
be used alone or combined to create powerful detection classifications with an
ensemble / meta-learning technique. In our future research, we will continue
researching card fraud with a view to improving present algorithms, we will provide a
hybrid model that is both able to handle the imbalanced dataset and the real-time
problem and will respond with better accuracy throughout the financial transaction.

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