Fraud detection

Financial fraud is an increasing problem that globally costs trillions for dollars and fuel organized crime from drug dealing to human trafficking. Financial fraud takes many forms from money laundering to social engineering schemes that take advantages of typically weak citizens among many other forms. The fraudsters become more and more advanced and money moves around in patterns that become harder and harder to distinguish from normal behaviour. Fortunately, most financial fraud passes through banks and other financial institutions, which leave digital traces origin from single transactions between a sender and a receiver. Most fraud detection today is conducted within a single bank with too little information to recognise fraud. Information have to be shared across not just the sender and the receiver but the large number of banks involved in the chain of transactions used to disguise fraud. Only strong collaboration across banks, financial investigation units and regulators can address this type of crime – or in other words – it takes a network to beat a network.

Creating strong collaboration throughout the global financial system is, however, where the problems starts. First, the banks are competing companies that are not supposed to share information about customers – the banks themselves as well as the competition authorities are concerned about this. Second, data protection regulations such as GDPR limits the use of personal identifiable information across banks. Third, the regulators are reluctant to engage in a systematic collaboration with banks to maintain arms-length regulation. Fourth, collaboration across national and regional jurisdictions is an additional barrier and may involve conflicting rules and regulation.

There is a number of initiatives around the globe trying to facilitate the broader collaboration required to address financial fraud, though the information sharing remains a central problem. This is, however, where MPC can play an important role. Done the right way, MPC allows the use of confidential data across banks, regulators and jurisdictions without violating neither regulation that ensure competition and the individuals’ right to privacy. This has been recognised by regulators and recently, FCA (the financial regulator in England) hosted an event that broad together banks, regulators and experts in privacy-preserving technologies. (https://www.fca.org.uk/events/techsprints/2019-global-aml-and-financial-crime-techsprint) This description origin from the proposed solution dubbed “breaking bad actors” developed in close collaboration among Partisia, Sedicii, Goldman Sachs, Deloitte and Ex Ante Advisory.

The proposed solution extends the banks’ current best practice on-premise fraud detection:

  • The first extension is a pre-transaction use of MPC that systematically use confidential information from both the sender and the receiver.
  • The second extension links flagged transactions and analyse chains of transactions.

Throughout the system sensitive information is encrypted at all time and only the agreed results are shared in tailored views. The banks only get information about the transactions they are directly involved in unlike the regulators that receive information about the full chains of transactions.

The use of MPC in fraud detection has just started and future work will focus on utilizing MPC to establish arms-length collaboration between commercial banks and regulators, needed to combating financial fraud.

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