SMARTER STRATEGIES

Artificial Intelligence Thwarting Fraud at Financial Institutions

Dennis McCafferty | Date: 10-20-10 | Comments

Money laundering and check kiting just got much more difficult in Louisiana with a solution that red-flags suspicious activity among customers.

When a financial institution starts out as a smaller, �local� entity, detecting incidents such as fraud and money laundering can be more of a grass-roots, staff-generated effort. Banking employees will try to get a sense of which customers can be trusted and which need some extra �attention.� Then, there�s always human oversight needed to stay on track of unusual transactions�like a series of $8,000 deposits into a blue-collar worker�s checking account.

Neighbors Federal Credit Union (Neighbors FCU) started out �local.� But then it experienced a growth spurt that continues to this day. It recently opened two more branches and plans to open an additional one. Today, it�s one of Louisiana�s largest credit unions. But in a state hit hard by Hurricane Katrina and the recent BP oil disaster, customers sometimes resort to desperate living under stressful circumstances. Meanwhile, Neighbors FCU was opening 600 new accounts every month. This is when the credit union realized that it needed a better way to reduce its risk from fraud and other criminal behaviors.

At the time, staffers were still overseeing fraud management by gathering and storing paper records, which, in addition to being a cumbersome process, didn�t offer a big-picture perspective on suspicious practices. So to provide a more analytical approach, Neighbors FCU hired Verafin, a St. John�s, Newfoundland-based solutions provider that specializes in fraud and risk reduction for financial institutions. Verafin�s AI (artificial-intelligence) technology enables users to detect and examine patterns of suspicious behavior, as well as produce consolidated �scores� for credit union members. When the score reaches a certain high level, an official alert to the Neighbors FCU is generated.

Prior to the Verafin solution launch, Neighbors FCU depended upon front-office employees to identify and complete suspicious activity reports two to five times each month. But the Verafin solution allows for an enterprise view of customers and their transactions, raising a red flag on risk when, say, a customer makes an unusually large deposit or withdrawal, or has a history of writing bad checks.

Soon after it was installed, Verafin generated an alert for one of Neighbor FCU�s members. An investigation revealed the member had been kiting checks over a seven-month period with a total value of $144,403. Because of the small value of the check deposits and withdrawals, this criminal activity had previously gone undetected.

�This solution has brought so many things to light, including this case of check kiting,� says Chrissy Viso, vice president of Compliance for Neighbor FCU. �Until his volume got so high that he would have showed up on a report from our core processor, we never would have caught it. And, by then, we might have been at the losing end. We knew we were a cash-intensive credit union and that we were potentially missing activity�we just couldn�t prove it. Now we can.�