How is AI Transforming Financial Fraud Detection and Investigation

As technology advances, so do the creative tactics of the criminals, making traditional fraud detection systems increasingly inadequate.

In response, a new wave of hybrid AI models is making headway. These models blend the strengths of Machine Learning (ML), Deep Learning (DL), and Natural Language Processing (NLP) to revolutionize fraud detection.

What’s unique about these hybrid AI models is that they can spot patterns, go through lots of complex data, and understand important points from all sorts of data, including images. This cutting-edge technology is rapidly being adopted by institutions worldwide, reflecting its growing importance.

In fact, the shift’s impact is reflected in financial projections. By 2027, spending on AI technologies for fraud prevention is expected to reach $10 billion, a significant increase from just over $6 billion in 2022.

In this article, we’ll explore the different AI use cases that can be assistive in your investigative efforts to combat financial fraud.

Leveraging Machine Learning for Financial Fraud Detection

The digital transformation of the financial sector has brought with it a surge in online transactions and, consequently, a rise in cybercrimes such as account takeovers, credit card scams, and identity fraud.

For instance, fraudulent losses from credit card transactions reached $28.65 billion in 2020, with the US accounting for a third of that gross loss with $9.62 billion.

Traditional rule-based systems, which once served as the primary defense against these threats, are now struggling to keep up. They often produce false positives and are ill-equipped to detect evolving fraud patterns. 

This is where Machine Learning fraud detection offers a transformative solution. Here’s how:

Anomaly Detection

Machine learning excels at spotting anomalies or deviations from the norm. Unlike rule-based systems that primarily look for known patterns of fraud, ML algorithms continuously learn from the data they process. 

This enables them to identify new and evolving patterns of fraudulent behavior. For instance, if a user who typically makes small, local purchases suddenly makes a high-value international transaction, ML can flag this as suspicious.

Identity Verification

Identity theft is a prevalent form of financial fraud. Cybercriminals often look for vulnerabilities to steal sensitive information like names, bank details, passwords, and login credentials. 

ML aids in verifying the authenticity of users by comparing every new transaction with previous ones, considering factors like personal information, IP address, and location. If there’s a mismatch or an irregularity in the pattern, the system can flag transactions for further verification.

Data Analysis

The strength of ML lies in its ability to process vast amounts of data swiftly. It can analyze thousands of transactions per second, looking for patterns or behaviors that might indicate fraud. 

This is far more efficient than traditional methods, which often require manual checks and can be prone to human error.

Predictive Analysis

Beyond just identifying current fraud, ML can predict potential future fraudulent activities.

A recent study suggests that 63.6% of the financial institutions that use automated fraud prevention methods successfully prevent fraud before its occurrence.

By analyzing past data, understanding the patterns leading up to fraudulent activities, and continuously updating their knowledge, ML models can forecast risks and raise red flags to take preventive measures.

Real-life Case Study

Facing a complex financial fraud case involving countless transactions, an experienced analyst struggled with manual tracking. Traditional software proved inefficient as it involved tedious manual entry, which was time-consuming and error-prone.

Meanwhile, fraud investigation tools like ScanWriter can swiftly recognize bank details, even interpreting handwritten checks with precision. Within weeks, the analyst was able to transform thousands of documents into a clear ‘Flow of Funds’ visualization, revealing the intricate money trail. 

The result? A comprehensive analysis not only expedited the case, allowing the analyst to convert thousands of documents into useful evidence but also earned him a standing ovation. 

Decoding Financial Texts with Natural Language Processing

From insurance claims to banking transactions, the financial sector is awash with textual information that holds valuable insights. However, manually sifting through this data to detect fraudulent activities is not just tedious but also inefficient. 

This is where Natural Language Processing (NLP), a subset of AI, comes into play.

NLP combines computational linguistics with statistical models, enabling machines to read, understand, and derive meaning from human languages. 

The rise of computational hardware, such as the Tensor Processing Unit (TPU), has significantly advanced NLP research, leading to the development of state-of-the-art language models.

NLP offers solutions like:

• Text Mining: One of the primary strengths of NLP is its ability to sift through unstructured data and extract relevant information. 

For instance, from financial statements, NLP can derive details about financial transactions, the entities involved, and the purpose of the transactions. This capability allows for the identification of patterns or trends that might be indicative of potential compliance issues, such as unusual or high-risk transactions.

• Sentiment Analysis: Financial statements, while primarily numerical, contain textual sections such as management discussions and analysis. Sentiment analysis can be employed to track the sentiment trend over multiple reports.

By gauging the sentiment or tone behind textual data, it offers a unique lens to scrutinize financial documents, revealing potential discrepancies that might otherwise go unnoticed.

• Communication Surveillance: With the vast amount of communication happening within and outside financial institutions, manual monitoring is nearly impossible.

Instead of post-facto checks, NLP allows for real-time analysis of emails, chats, and other forms of communication for suspicious patterns or keywords that might indicate illicit activities.

Financial Fraud Detection with Deep Learning & AI

Deep learning, inspired by the human brain’s structure, is a special machine learning technique that uses artificial neural networks to process data and create patterns for decision-making.

Unlike traditional machine learning models that require more human intervention to correct any algorithmic errors, deep-learning models can automatically learn on their own and improve analysis outcomes.

This self-learning capability ensures that as fraudsters evolve their tactics, the deep learning models can adapt and identify new fraudulent patterns.

Different deep learning models can be applied in various financial sectors to detect fraud, such as: 

• Convolutional Neural Networks (CNN) can be used to analyze transaction patterns and flag potential fraudulent activities. 

• Autoencoders (AE), on the other hand, can reconstruct input data and are used to identify anomalies by recognizing discrepancies between the original and reconstructed data. 

• Another deep learning model, Generative Adversarial Networks (GAN), can generate synthetic financial data, which can be used to train models more effectively by providing a broader dataset.

• Artificial Neural Networks (ANN) can also be used to identify factors of fraud in financial data. A recent study highlighted that ANNs effectively identified tax fraud with an accuracy of 92%, precision of 85%, and recall score of 99%.

You may also like: The Ultimate Guide to Investigating Synthetic Identity Frauds

How ScanWriter Can Help You Detect Financial Fraud

ScanWriter supports fraud investigators with a suite of financial investigation tools. Its robust forensic capabilities, audit trail features, and compatibility with 21 languages and over 40,000 institutions have earned the trust of fraud investigators, forensic experts, and district attorneys worldwide.

Here are three ways ScanWriter empowers fraud analysts to prioritize vital tasks, ensuring timely completion, data authenticity, and in-depth data scrutiny.

Automated Data Capture

ScanWriter offers a transformative approach to data entry by minimizing manual intervention and the associated errors. Utilizing state-of-the-art optical character recognition (OCR) capabilities, ScanWriter promises swift and automated data extraction. 

Here’s what sets ScanWriter apart:

• Precision in Data Capture: With advanced OCR, ScanWriter guarantees 100% error-free data critical for precise investigations. The smart error-detection feature enhances accuracy.

• Greater Speed: No more manual data entry. With ScanWriter, process over 1,000 checks flawlessly in an hour.

• Versatile Data Sourcing: ScanWriter extracts data from bank statements, invoices, and receipts, supporting over 40,000 formats, with quick format additions when necessary.

• Data Standardization: Investigators can set specific rules in ScanWriter, allowing for data normalization and ensuring a consistent format across all entries.

• Comprehensive Audit Trail: ScanWriter’s integration with Excel allows investigators to quickly find associated PDFs, streamlining the investigation process.

Data Visualization with Flow of Funds Model

Once data is extracted from diverse sources, the next step for investigators is to refine and structure it, a task that can be cumbersome in Excel.

However, ScanWriter’s advanced data visualization feature, developed in collaboration with Microsoft Power B.I., can autonomously craft visual representations of financial data, leveraging predefined models such as “All Transactions,” “Flow of Funds,” “Benford’s Law,” “SAR Analysis,” among others.

For instance, the flow of funds model by ScanWriter maps out the movement of money across accounts, for instance, where money comes from, where it goes, who has been involved, and more.

In this model, individual accounts are depicted as nodes, each embedded with graphics for easy identification. Unknown entities in the data are symbolized by a question mark, highlighting accounts that warrant further scrutiny or those that might not have sufficient transactional data.

ScanWriter automatically populates the ‘Flow of Funds’ visualization, allowing investigators to easily follow the money trail between accounts by applying required filters and detecting any anomalies.

Explore how ScanWriter’s ‘Flow of Funds’ visualization can be instrumental in asset tracing!

The Future of Fraud Investigation with Artificial Intelligence

Recognizing the inadequacy of relying solely on traditional methods for fraud detection and investigation, organizations are increasingly acknowledging the need for more sophisticated approaches to safeguard against financial losses. 

The surge in demand for cutting-edge AI solutions highlights an essential truth: to harness the full potential of this revolutionary technology, a harmonious blend of human insight and AI’s precision is imperative. This synergy dramatically boosts accuracy and minimizes errors in a landscape that’s constantly evolving.

In response to this shift, tools like ScanWriter are at the forefront of AI innovation, trusted by district attorneys, forensic accountants, and fraud investigators across the US for their 100% accuracy, exceptional conversion speeds, visualization models, and reliable customer support.

Using ScanWriter’s 14-day hands-on pilot program, you can try out our popular fraud investigation software to see if it’s right for you.

If you’re ready to strengthen your financial fraud detection and investigation, schedule a free demo of ScanWriter today!