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AI REDUCES PROCUREMENT FRAUD, ERROR AND ABUSE

Hans Bonde, Senior Industry Consultant, SAS

 

In recent years, there has been an increasing focus on financial crime in both public and private entities. The press coverage of money laundering, tax fraud and employee embezzlement of public funds is greater than it has been in the past several years. This increased awareness leads to an increasing expectation that we must detect and punish financial crime.

It is a wonder why big data and analytics are not mentioned more often in the debate. Experts recognise analytics as one of the most important tools in the fight to identify and resolve financial crime.

 

How big is the problem?

An estimate from PwC indicates that procurement is one of the areas most prone to fraud. International organisations, including the Association of Certified Fraud Examiners and the English CROWE, indicate that the number of errors, fraud and abuse is on average 5% of public/private entities’ procurement. In other words, if your organisation purchases £100 million, there will most likely be a high risk of £5 million in fraud. In addition, international institutions point out that:

  • The process of identifying fraud is complicated. Typically 18-24 months pass before an organisation identifies and acknowledges that it has been subjected to fraud.
  • Typical perpetrators have been in the organisation for a long time (over 10 years), and only 4% have been previously convicted of fraud.
  • Fraud is committed at all levels of an organisation. And people at the highest management level commit almost 20% of it.

 

Fraud does not start out as fraud

One of the reasons why fraud is both widespread and difficult to uncover is that there are many different types of fraud. And most often it occurs as errors, which if not detected, will be tried again and again, becoming more systematic.

This means that fraud may not start with the perpetrator intending to profit from it, but that those involved gradually read the possibilities, and then develop and refine the fraud, possibly other people, internally or externally. This makes it even more complicated to uncover what is happening.

Some of the typical types of fraud are double invoicing, splitting orders/invoices in order to keep the value below a limit for extra processing, agreed action between two or more individuals (can be both internal and external) and payment for items that are never delivered. Furthermore, employees often have financial interests in companies that serve as suppliers.

Generally, all types of fraud bypass internal processes. Organisations design their procurement processes to balance rigidity and flexibility. The process must be rigid enough to be difficult to circumvent, but flexible enough that procurement can be carried out efficiently, without undue costs in the form of checks or disruptions to internal operations.

 

Problems with manual monitoring

This means that it is not enough for a company that wants to systematically fight fraud and ensure good control to tighten up procurement and payment processes by adding extra checks of the individual processes. For example, there may be an extra check of payments over £1000. If you want to safeguard a company effectively against fraud, there must be a more systematic follow-up and monitoring of process compliance.

An internal or external auditing function typically performs such monitoring, whose task is to dive into the volume of data on procurement and payments in order to identify and verify fraud. This is often a time-consuming, manual – thus costly – process that often uses random samples or checks on leads from whistleblowers. In some cases, auditors find collusion between the perpetrator of the fraud and the person who should monitor for it.

Moreover, it takes a lot of experience, and possibly great ingenuity, to manually identify new patterns in the enormous amount of procurement-related data.

 

Continuous monitoring

The solution is to use analytical tools to constantly monitor compliance with processes and rules. This is called continuous monitoring.

Continuous monitoring automates a number of the functions that are currently manual. First, the solution extracts millions of data records from the relevant systems, including purchase orders, invoices, payments, HR data, etc. Afterwards, the data is cleaned and prepared for the actual analyses of anomalies, patterns and events that can identify possible fraud, error and misuse.

 

Continuous monitoring with the support of analytical tools is far more effective than the more traditional audit. The main differences are:

  1. Analysis of ALL transactions. Full analysis not only proportionally increases the chance of finding fraud, but is crucial for effective identification of anomalies and patterns.
  2. Automated data integration, cleaning and preparation. A good data basis is essential for finding fraud. Experience shows that 80% of the time spent on auditing goes to locating, compiling and cleaning data. Automation of these processes will free up time for the more important task of monitoring for fraud.
  3. Using artificial intelligence. You can look at AI as the automation of cognitive processes. This means that the problems that traditionally require human logic to solve can be handled efficiently and often more precisely by computer. Today, AI can improve all stages of the process, from data cleaning to reporting.
  4. Known vs. unknown scenarios. In our experience, companies will be able to automate simple rule-based controls that capture known scenarios of error, fraud or misuse. In the worst-case scenario, such controls increase the possibility of fraud, as new scenarios go under the radar.

 

The value of AI for detecting errors, fraud and abuse

Artificial intelligence is an essential element in building an effective procurement monitoring process. The Association of Certified Fraud Examiners points out that the use of data and analysis is among the most effective elements in reducing loss and resolution time. Using AI to complement more traditional analytics only reinforces this trend. You can apply artificial intelligence to many of the key tasks of the overall analytical process:

  • Cleaning and compiling data.
  • Preparing data.
  • Generating and analysing networks.
  • Identifying anomalies.
  • Scoring the potential for fraud, error and abuse.

Artificial intelligence, therefore, provides fraud investigators with the best opportunities for efficiently identifying possible fraud, prioritising scenarios and documenting their investigation. Thus, in addition to reducing the organisation’s financial losses, this strong management tool also reduces the risk of bad publicity. And it conveys that you are working purposefully to avoid fraud because it is unacceptable.

 

Technology

HOW FINANCIAL INSTITUTIONS CAN PROTECT THEIR ONLINE ACTIVITY FROM HACKERS

As working from home becomes the new normal, senior leaders of financial institutions need confidence that their company information will remain secure when employees are discussing work matters online.

A recent survey by PwC, as part of its Cyber Security Strategy 2021, found that 50% of UK organisations said cyber security would be baked into every business decision. The research, presented as an ‘urgent business priority’, highlighted how organisations will seek to improve their cyber resilience in 2021. Only 36% of the UK respondents said they were very confident that they were getting the best return on their cyber spend although 56% said they had plans to increase their cyber budgets in 2021.

When taken into consideration with a recent survey conducted by Forcepoint in partnership with WSJ Intelligence, which revealed that 71% of global CEOs said they were losing sleep over the prospect of their company’s next security breach, it comes as no surprise that effective cyber-security is high on the corporate agenda for 2021 and beyond.

So, what is the risk of a security breach when discussing sensitive and confidential financial reports, strategy and information in cyber space? How can organisations protect themselves against hackers and malicious threat actors?

Hackers listen in to conversations and can see and read data – information which can be very useful to a competitor, criminal or some other nefarious entity. If a hacker succeeds it can be hugely costly to the company which falls prey through a data breach fine, as well as being commercially damaging in terms of productivity and reputation.

Financial institutions must be acutely aware of the potential threats that hackers pose to their business and reputation, the security issues they need to consider when choosing an online video, calls, messaging and file sharing platform, as well as the practical measures they can take to protect their company and its interests.

The problem is real, and it’s one that is on the minds of those responsible for protecting not only internal company data, but also that of their complex chain of suppliers and clients. With the Forcepoint and WSJ Intelligence survey also revealing less than half (46%) regularly reviewed their cyber security strategy – coupled with more and more companies relying on video technology for remote working – the likelihood, and therefore the risk, of a security breach is significantly higher.

When it comes to technology to keep us connected, there are many different platforms available that those in the finance industry could use for remote working with some having been around for a long time, but how many of them are as secure as they need them to be? As hackers become increasingly sophisticated, it’s crucial companies check that the systems they use have moved with the times, and that they continue to review and improve the security of the technology they rely on to communicate.

Here are my top tips to consider when choosing a secure videoconferencing, calls, messaging and file-sharing platform to facilitate remote working for businesses in the finance industry:

 

Avoid allowing the use of ‘unofficial’ social media platforms

A simple step here is to have policies in place to insist your employees use systems approved by their employer, rather than using popular social media messaging platforms for business communications. These platforms are inherently risky and despite claims about encryption, are often compromised, providing a gateway to other data on your computer or mobile device.

 

Keep everything to one application

Use a supported enterprise system that meets true end-to-end Advanced Encryption Standard (AES) 256-bit encryption. This might sound costly and overly ‘techy’, but in reality is very cost effective, especially when compared to the potential reputational and financial costs of a data breach.

Ideally, choose a system where all features are integrated within one application (app), so that messaging, calling, video conferencing and file sharing stays within one eco-system. As soon as users need to go ‘outside’ the system, the risk from hackers opens up.

 

Keep things simple

Remember, not all your employees will be tech experts. Staff productivity will benefit from having easy to use platforms that work in a similar way to those employees are used to using every day on their computers and mobile devices. Even better, look for a system that works on their own devices without the need to install sophisticated new software.

 

Invest in training

It is vital that companies working in the financial sphere implement cyber-security training for all its staff to make them aware of the risks and gain their buy-in for its online security policies. Consider extending this training to all companies and individuals in the supply chain, including contractors and clients. These interdependent supply chains can be undermined through ransomware attacks and service disruptions. Your company may have state of the art cyber-security, but if your interdependent supply chain doesn’t, then you have a weak link.

 

Consider the costs

Think about the cost in terms of productivity, reputational damage and even potential fines rising from data protection breaches. Do your homework before choosing a platform; where will your communication be routed? Where are the servers based? Are they trusted and do they directly support your business needs? Some systems offer features that are better suited for social use, but the development costs are often recovered through charging business users.

Aim for a system that is designed for your business needs and don’t pay for features you don’t need. Security standards can never be too high, and the system needs to have high fidelity in terms of video and audio quality. Go for a system that can be used via mobile devices and the web without having to be installed onto computers or local servers.

 

John Parkinson OBE is a former UK Police Chief and Senior National Counter Terrorism Coordinator. With broad experience as an international security consultant he is now president of US tech company Secured Communications, which recently launched its Mercury secure video conferencing, audio calling, messaging and file transfer platform in the UK.

 

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Finance

2021 TRENDS: TECHNOLOGY CONTINUES TO TRANSFORM FINANCIAL SERVICES

By Angus Panton, Head of Banking and Financial Services at Expleo

 

Angus is responsible for leading strategic client relationships and driving business forward within Expleo’s financial services, banking & fintech and insurance portfolio.

 The financial services industry has evolved at an incredible rate in recent years, underpinned by rapid advances in technology.

In fact, our own consumer research into people’s attitudes toward technology revealed that 62% of people consider easier and faster banking one of the best technological developments of the past decade. And it seems traditional banks are listening, with 56% now putting digital disruption at the heart of their strategy.

At the same time, rather than going away as traditional banks would have hoped, younger banks like Monzo and Starling have matured into formidable rivals for customers and their cash, putting pressure on the rest of the financial services sector to step outside its comfort zone, innovate rapidly and embrace a fail-fast culture.

As we look past the end of 2020 and into the future, technology is only going to play a bigger role across the banking sector. With that in mind, we’ve outlined the biggest tech-driven trends we can expect to see in 2021 and beyond that financial services need to take note of.

 

Personalisation

Marketing experts have promoted the benefits of personalisation to attract, and keep, customers. Big data – and artificial intelligence that helps us process, store, and drive insights from the data – means that personalisation will be possible on a scale never seen before.

Banks now have information about their customers’ behaviour and social and browsing history. AI enables real-time multi-channel integration of these insights to deliver a personalised one-to-one marketing experience for their customers at the time when the information is most relevant and useful (e.g a car loan or credit card).

That said, sorting through torrents of unstructured data for useful information is no small undertaking. It requires powerful data analytics technology if institutions are to reap rewards.

 

RPA

Already, financial firms have quietly introduced machines that think. Moving forward, robotic process automation (RPA) will continue to impact financial institutions to help them be more efficient and effective.

This includes processes such as customer onboarding, verification, risk assessments, security checks, data analysis and reporting, compliance processes as well as most other repetitive administrative activities. This frees up a bank’s workforce to perform more complex, value add activities.

Importantly, RPA shouldn’t been seen as a risk to jobs, it should be seen as an exciting opportunity to innovate. After all, with basic processes taken care of, people will have more time to focus on creativity in order to drive improvements.

 

Chatbots

According to Gartner, by 2020, chatbots will interact with the customers of 85% of banks and businesses. According to one report, financial chatbots save over four minutes on every interaction, so it’s within a bank’s interest to use them.

Customers of financial institutions have come to rely on the 24/7 service these conversational interfaces provide, as the possibility of an instant response and quick complaint resolution improves the experience of personal banking significantly. Conversational interfaces also provide an easy and economical way for organisations in the financial sector to receive customer feedback.

 

Blockchain

Blockchain will continue to disrupt financial institutions, beyond just ensuring data security.

Cases across the globe are already proving the value of blockchain in a wide variety of banking and investment applications, such as solving challenges faced by investment banks, to helping customers make safer payment transactions.

Industry-wide adoption of blockchain is unlikely to occur until we reach a tipping point, however – when that time arises, the regulators will need to determine best practice and how to oversee its use.

 

Biometrics – especially around mobile payments

Mobile payment innovations could do away with traditional wallets entirely as global consumers become less reliant on cash. Google, Apple, Tencent, and Alibaba already have their own payment platforms and continue to roll out new features such as biometric access control, inducing fingerprint, and face recognition, which is likely to become the preferred route of access over the next decade

 

Greater collaboration between fintechs and traditional banks

While many financial institutions are continuing to adopt new technology to enhance operations and improve customer service, Fintechs provide exciting avenues for ongoing innovation. Already, financial institutions have realised they must learn how to use fintech to their competitive advantage, and this is only going to continue in the years ahead.

 

Tech-first is the only approach

A tech-first approach is now the only approach. How banks leverage RPA, Blockchain, Chatbots and Biometrics will determine their ability to tackle cyber risk and compete with highly scalable alternative banking providers, who are reducing the lending cycle down from a few weeks to a few hours.

Businesses are digitising their customer journeys and scaling-up transformation. They’re finding more agile ways of working, boosting productivity, building key skills of the future in-house and modernising with targeted investment in technology, data, testing, assurance and information.

If innovative technology is implemented incorrectly, then there can be a severe, negative impact not only in terms of working ability but a knock-on effect in the form of consumer trust.  Something no business can afford to lose…especially at this time.

This can all be avoided by embedding continuous quality to help drive digitalisation and innovation. Combined, they achieve excellence in execution and help to deliver greater cost-efficiency, by identifying and mitigating business risk at every step. At Expleo, we’re experts at shaping agile cultures across entire organisations, and at fully-equipping teams for the path ahead, embedding quality right down into your own DNA too.  We help identify and mitigate business risk in technology-led transformations, using standardised methodology, industrialised automation solutions, global delivery and deep domain knowledge. With Expleo as a trusted partner, businesses can embed continuous quality to drive digitalisation and innovation.

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