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Development of a Local Bank Fraud Detection Strategy (Research Paper Sample)


The Task was about developing a local bank fraud detection strategy based on that of the central bank of qatar. the research paper proposed a strategy which uses conventional rules and regulations as well as artificial intelligence and machine learning to predict, detect and deter fraud


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Fraud Detection for a Local Bank
The meteoric rise in information and communication technology has also coincided with advancements in fraud processes and procedures. For financial institutions, fraud prevention is one of the most pertinent practices and an exorbitant amount of money and time is spent on the same. For instance, the Central Bank of Qatar’s fraud detection policy adopts both standard operating procedures as well as automated rule-based, artificial intelligence (AI) and machine learning aided fraud detection (QCB par 3). But developing such a framework is a complex task that requires an understanding of The Qatari Fraud Prevention Law. Therefore, a local bank must ensure that its risk management framework is similar and effectively minimizes fraud risk across all its operations, while at the same time having the flexibility to adapt to change. Typically, the Qatar Central Bank’s rule-based, AI and machine learning detection systems operate using insights on location, frequency as well as the sender and receiver (QCB par 3). The bank has also put in place standard operating procedures to combat fraud. Inspired by the same, this report provides a comprehensive fraud detection strategy for a local bank. The report suggests standard operating procedures as well as rule based, artificial intelligence and machine learning approaches to combat fraud including phishing, identity theft, credit card fraud as well as document forgery.
Standard Operating Procedures
Fig. 1: Fraud Prevention Framework (PWC 1)
Fraud Risk Assessment. The local bank should put in place a framework for fraud risk assessment that is rooted in accountability and transparency (PWC 8). The bank should however ensure not to limit the framework to thwarting financial fraud risks because the prevalence of information theft and cybercrime can cause irreparable damage to the bank’s reputation. To ensure that the framework is effective the local bank should assess all risks pertaining to fraud and curate a sustainable, and long-term process of fraud detection (PWC 8). The risk assessment should include all employees both at the product level and the business level. However, the local bank should bear in mind that it is not a walk in the park when it comes to conducting a fraud risk assessment because it entails significant commitment by both staff and management and the process should be labor-intensive. In other words, people with fraud risk expertise should be employed to ensure that the local bank is kept up to date with emerging trends and themes in the area of fraud.
The advantage of expert fraud risk analysts is that they are well-versed in areas pertaining to establishing the context, risk identification as well as evaluation and then implementation of appropriate courses of action (PWC 8). Risk experts can also come in handy for the local bank because they are often good communicators, consultants, monitors and reviewers. They would significantly improve the local bank’s fraud detection approach by inspecting important sites, offering a detailed examination of corporate procedures and policies, conduct employee interviews and examine the local bank’s books of accounting as well as corporate documentation. The risk experts can also bolster the fraud risk assessment of the local bank by posing hypothetical scenarios and inquiring how the bank is equipped to address them. Such scenarios would help the bank to identify areas of potential financial loss as well as non-financial losses.
Identification of Common Risk Areas. The local bank should embark on an appraisal of the risk areas that are most susceptible to fraud. Akin to other industries, the banking sector’s most common risk areas are payroll management, inventory, cash and cheques, physical security, intellectual property and private or confidential information and information technology (PWC 8-9). Under payroll management, the bank is likely to be susceptible to fraud when it comes to purchasing, expenses, reimbursement and payroll operations. These are areas which entail the exit of funds from the bank’s premises thereby rendering them susceptible to fraudulent transactions. Moreover, the meteoric rise in electronic purchasing has elevated the risk because attackers can leverage gaps in security and commit fraud against the local bank. For instance, the bank should ensure to learn all the emerging trends in purchasing fraud including bribed and kickbacks, false invoices as well as the manipulation of master files and purchasing systems (PWC 9). Moreover, payroll management fraudulent schemes are rather hard to detect that it may take the local bank a long time to discover them. That being said, the local bank should be alarmed when it comes to light that suppliers and employees share a joint account, there are duplicates of invoices from a single transaction and there are shared bank accounts between unrelated bank employees.
When it comes to inventory, the local bank should know that debtors, sales and inventory are associated with fraud in most cases. Typically, the fraud that prevails herein includes the theft of inventory from a warehouse or inventory diversion especially when it is un transit (PWC 9). Some employees also partake in fraudulent cash collections through understating and underreporting figures. Furthermore, there is the prevalence of awarding notes of credit through bribing of bank employees to facilitate transactions with the bank especially when it comes to contractual obligations. In some cases, some fraudulent parties report false transactions and carry out refunds to bank customers even when unauthorized by the higher-ups (PWC 9). The local bank should therefore be aware that inventory fraud is eerily similar to sales fraud because fraudulent employees may make up fake sales invoices and sell of bank inventory and credit the sales to un-authorized staff. The local bank should therefore look out for unauthorized debt write-offs, inventory entries that are negative and reversed transactions from one period to another.
For cash and cheques, most local banks have standard operating procedures to safeguard cash but when it comes to cheques, the procedures may not be unform and may be a bit hazy (PWC 10). However, this is no longer a major fraud risk area because of the advent of electronic transactions. Nonetheless, the local bank should ensure that when it comes to cheques, there is no misappropriation of the receipts and that no cheques are reported missing if they are transferred by the postal system. Furthermore, the local bank should streamline its cheque reconciliation processes to ensure that large scale cheque fraud does not occur because the existent processes and procedures are characterized by the decentralization of cheque duties.
For physical security, the local bank should safeguard against asset misappropriation by both employees and outsiders (PWC 10). Typically, banks run a stringent security approach when it comes to cash, inventory as well as other assets held by a bank. However, there is still a risk when it comes to cash security especially if employees by the local bank are involved. In most cases fraudsters target local banks because they know that such banks do not have military-grade physical security. Therefore, the issue of physical security is a straightforward one for banks because the higher the level of physical security, the lower the chances of the fraud prevalence and vice versa.
For intellectual property and private information, privacy is the biggest concern for local banks as it relates to the distribution of branded products and services (PWC 9). The internet has eased access to information but it has also caused more security threats to information. For instance, data breaches are common in the United States and have caused the loss of not only organization reputations but also cost organizations exorbitant amounts of money in lawsuits and settlements. For instance, AT&T one of the world’s leading telecommunications company suffered a data breach that exposed the private information of more than a million customers (Brewster par 2). Customers has their social security numbers leaked as well as a host of other private information. The investigation report revealed that the cause of the data breach was partly due to an insider weakening AT&T’s fraud protection processes (Brewster par 3). Therefore, the local bank should ensure that the private information of its stakeholders and customers is safeguarded with state-of-the-art technology and software.
The local bank should also be aware that information technology is a fraud risk area as much as it is useful. Most banks' day-to-day operations include a large amount of information technology (PWC 10). However, while technological integration has many advantages, it also has significant threats. Information technology fraud is defined as an intentional act in which the use of a computer is required to carry out the crime. Phishing, spamming, hacking, domain name hijacking, online money laundering, denial of service, server takeovers, data destruction or theft, electronic vandalism and terrorism, electronic eavesdropping and illegal fund transfers, and sales and investment fraud are all examples (Microsoft).
Fraud Prevention Techniques. For effective fraud control and prevention, the local bank should adhere to oversight by the board and audit committee, training and policies, the screening of employees and the establishment of internal fraud controls.
Board and Audit Committee Oversight. The board is in charge of supervising management's internal cont...

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