Cause or Effect?

Barry Ritcholtz of TheStreet.com writes in Volker Rule Aims at Moral Hazard: "I keep hearing people complain that the Volcker rule would not have prevented the crisis. The Volcker Rule is aimed at the side effects of the rescue, not prevention. Indeed, in the post crisis, post-bailout era, we must strive not only to prevent the next set of taxpayer funded bailouts — but to minimize the negative repercussions of the last rescue.

He writes of a "false dichotomy" there is nothing that prevents a society from a) attacking the cause of problem and b) cleaning up the side effects of the prior rescue.

Let's look at the false dichotomy of the banking crisis in relation to bank fraud detection. The impact of the Goldman Sachs CDO scandal, Ponzi schemes, the Lehman Brothers failure, as well as the failure of other countless lesser known institutions, has a vast reach and impacts us all as tax payers hit by major recession. But does it also impact us as fraud prevention professionals? A discussion on LinkedIn asks What impact does the recession have on Fraud? The details of the responses vary, but they all point to the same answer… of course there is a positive correlation!

Over the last three years, the banking crisis and recession have created immense opportunities for fraudsters. The growth in fraud we've seen includes nearly all types - internal fraud, cyber fraud, wire fraud, check fraud, and kiting. And many legacy bank fraud solutions tackle the problem by taking a myopic approach, one characterized by rigid rules and narrow data sets. They focus on detecting the "side effects" of fraud, and often miss the opportunity to uncover truly risky activities early in the fraud cycle. The result of this approach is high false positive rates, and missed fraud altogether, thereby placing a variety of burdens and difficult choices on the financial institutions under attack.

We don't have to be burdened by these legacy systems. Technology and analytical models exist that can enable us to look at fraud through a wider lens, with higher priority given to detecting the often interconnected roots of the problem. By taking this broader view, banks can move away from a defensive position of managing fraud loss to a budget threshold and take a proactive approach aimed at aggressively minimizing fraud losses.

What impact would this approach to fraud management have for your organization?

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