Technology in fraud


By Marc McAuley, CIPFA Counter Fraud Services Lead

Fraud has existed for many years, with the earliest recorded attempt around 300BC. A Greek sea merchant named Hegestratos sought to insure his ship and cargo, taking out an insurance policy against them known as ‘bottomry’ at the time. The policy worked on the basis that a merchant borrowed money to the value of his ship and cargo and as long as the ship arrived safely at the destination with the cargo intact, the loan was paid back with interest.

In the case of Hegestratos, he planned to sink his empty boat, keeping the loan and selling his cargo. However he was caught in the act of trying to destroy his ship once he’d already sold the cargo, and drowned trying to escape.

It is safe to say that fraud has evolved over the years, enabled by advancements in technology, the growth of ecommerce, changes in payment methods, and the ease by which financial transactions can be made, accounts accessed and data stored and retrieved. However, simple insurance fraud still exists 2,300 years later.

Organisations have also evolved, whether they are in the private or public sector, introducing strong internal controls and robust internal control environments to mitigate fraud. However this in itself cannot guarantee that organisations will not fall victim to foul play.

While fraud is becoming ever more sophisticated, so too are the means of combatting it. New technology that has enabled fraud provides opportunities to develop improved prevention and detection methods. Advanced analytics build a better picture of fraud and its root causes, and the sharing of best practice and lessons learned further strengthens organisational resilience to fraud. But are we doing enough?

There is an argument that the public and private sectors have evolved differently, with differing priorities steering investment and digital transformation. While private sector organisations have invested millions, if not billions, in technology with a focus on preventing and detecting fraud and reducing risk, the public sector has not had the luxury of investing public money, usually earmarked for essential services, in cutting edge technology.

Despite digital transformation now being high on the public sector agenda, it is fair to say most public sector organisations are at least a decade behind the private sector in relation to technological implementation and tools at their disposal.

Private sector investment has led to the development of systems that can utilise data to identify patterns and trends and connect common denominators. By applying insight to understand cause and effect, these systems can even predict future fraud risk. This creates a rich source of intelligence that can inform business decisions, determine risk appetite and focus organisational resources on areas of importance. Advanced analytics have helped identify the root causes of fraud, establish effective fraud prevention controls and implement decision making tools that can prevent fraud from entering systems in the first place. This has been achieved through long-term investment and planning, driven by the desire to protect company assets, increase profit potential and safeguard against possible financial and reputation loss.

Although the public sector may be years behind the private sector and suffering from the impact of continuous austerity measures, the time is right to take advantage of the innovation and investment-led developments of the private sector. For many years, public organisations have tried their best to keep up, embracing technology and implementing ever-improving data matching solutions in the fight against fraud. 

In 2014 the Ministry for Housing, Communities and Local Government (MHCLG) established a Counter Fraud Fund to increase the capacity and capability of local government to tackle losses from non-benefit fraud. Fifty two authorities received funding of around £16m and projects were established for setting up shared services, data sharing and analytics, improving fraud detection rates and developing smartphone apps for fraud reporting, amongst others.

Receiving an average of just over £250,000 each, these projects achieved over £142m of savings in the first two years alone, representing almost a ten-fold return on the funding provided by MHCLG. This represents only a small fraction of the possibilities technology could offer in the fight against fraud. 

Primarily focused on detecting the risk of fraud, these solutions have been an invaluable source of intelligence to focus investigative resources, or stop suspicious payments or withdraw fraudulently obtained services. But still we ask, is enough being done?

The public sector should take advantage of private sector innovation, utilising both new and established technology designed to prevent fraud at source. We should not be relying solely on existing methods of detection, costly investigation and recovery. Organisations should be working together and collaborating to develop new ways of working, innovating to tackle existing issues and evolving to keep up with the changing landscape. 

Fraud is for the ages, but so is technology, and while fraud may be thousands of years old, digital technology is in its infancy; fast evolving and a powerful tool to be embraced in our counter fraud efforts.

CIPFA’s FREE ‘Technology in Public Finance Conference’ will bring together industry figures, public sector digital pioneers and tech experts to explore the challenges and opportunities presented by our rapidly advancing digital world: Book online.

This article first appeared in Public Finance.

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