By Dr. Kurt Nielsen, Co-Founder and President of Partisia Blockchain
A recent study carried out by PricewaterhouseCoopers (PwC) found that between 2019 and 2020 alone, the estimated cost of fraud to companies was a staggering $42 billion. As eye-watering a number as that is, it pales in comparison to a 2019 report by the Centre for Counter Fraud Studies at the University of Portsmouth, which found that “fraud is costing the global economy £3.89 trillion, with losses rising by 56% in the past decade”. There are a myriad of examples of financial fraud, from money laundering to social engineering schemes, to phishing scams.
Unfortunately, the COVID-19 pandemic has exacerbated this already dire situation. Fraud is on the rise due to increased online global activity, as well as the dissemination of stimulus funds in many countries leading to further instances of financial fraud. As frequent targets of such nefarious activities include the most vulnerable in our society, instances of financial fraud increase inequality, contrary to the 17 Sustainable Development Goals devised by the United Nations, which serve as a blueprint to achieve a better and more sustainable future for all. Fraudsters across the world have become more and more advanced in their practices, and the patterns in which their money moves has become increasingly difficult to distinguish from normal behavior.
The tenth Sustainable Development Goal centers on reducing inequalities and represents a commitment to ensuring that no one is left behind by reducing inequality within and among countries. The elimination of fraud is integral to achieving this Sustainable Development Goal.
Instances of fraud that target massive financial institutions or high-net worth individuals are harmful, yet the impact on their finances is less likely to be life changing, nor is it likely to impact the distribution of wealth or inequality of any given nation. As some of the most vulnerable in our society are gravely affected by the occurrence of fraudulent activities, it is imperative that the financial services industry ensures it does all it can to prevent such people from suffering fraudulent attacks.
Utilizing fraud-prevention technology will allow us to benefit from a fairer, more equal, and more equitable financial system, and advance the achievement of the Sustainable Development Goal of reduced inequalities. However, in order to do so, financial fraud detection must become a key priority - but, how can governments and financial institutions tackle this problem if it has only gotten worse?
Some in the financial sector have proposed measures to tackle fraud which involve information sharing between financial institutions, such as the creation of an Open Banking data sharing ecosystem proposed by Deloitte. The majority of proceeds from financial fraud pass directly through banks, intermediaries, or other financial institutions. This is crucial, as each transaction leaves a digital trail for fraud investigators to investigate, however, the number of instances of fraud make it practically impossible to trace every fraudulent or criminally related transaction. The majority of fraud detection today is left up to the bank within which the transaction takes place.
As fraudsters' patterns become more complex, this increases the levity of the challenge presented to Know-Your-Customer (KYC), Compliance and Anti-Money Laundering (AML) professionals. The most simple solution to preventing financial fraud would, in theory, be to maintain full transparency between all banks, financial institutions, financial investigation units, and regulators, allowing each concerned party to trace the origins of any given transaction. However, this, in itself, presents serious challenges.
Why would, for example, a marketing agency share research with a direct competitor, which would inevitably help their business and decrease their own market share? Banks are in competition with each other; it is not within their own self-interest to share their proprietary data and information with their competitors. Adding to this, competition authorities do not even want banks to share information with each other, particularly when it comes to their customers.
Data protection regulations across the world also limits the use of personal identifiable information across banks, which would further prohibit intense collaboration between banks. As fraudulent gains often travel throughout different jurisdictions, language, cultural, legislative, and technological barriers may also get in the way of effective investigations.
The activities of fraudsters are becoming more advanced and pervasive, however, so too is the technology that we can utilize to stop them. We know increased cooperation is necessary, but undeniably difficult to achieve. This is where Multi-Party Computation (MPC), a privacy-preserving technology, can play a critical role. MPC technology has already been recognized by regulators, including the Financial Conduct Authority (FCA) in the United Kingdom, which hosted an event that brought together banks, regulators, and experts in MPC and other privacy-preserving technologies.
MPC allows for companies or financial institutions to interact with targeted individuals without compromising the users’ confidential data, paving a trustworthy road for advanced solutions and greater peace-of-mind for all parties involved. When it comes to fraud detection and prevention, MPC allows the use of confidential data across banks, regulators, and jurisdictions without violating regulations while also ensuring competition remains intact. MPC also ensures that the individuals’ right to privacy is maintained.
MPC technology would allow banks to build upon their current best practices regarding fraud detection in a number of ways, such as implementing pre-transaction technology that utilizes confidential information held by independent banks about both the sender and the receiver of any given transaction. Sensitive information would remain encrypted and under control by the involved banks, and suspect transactions would be flagged in real-time to the relevant parties.
This would mean that banks only get information about the transactions they are directly involved in, whereas the regulators would receive information about the full chains of transactions in the financial system. This fuels healthy collaboration without hampering competition between banks as no sensitive information is shared between financial institutions and the regulatory authorities that carry out the necessary investigations maintain full oversight of all transactions and can act upon them where necessary.
The use of MPC in fraud detection is in its nascent stages, but it is up to financial institutions and regulators to ensure that everything that can be done to prevent fraudulent activity is done with the utmost urgency. The technology already exists, and it has the propensity to greatly reduce the frequency of fraudulent activities.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.