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Fraud Detection, Financial Industry and E-Commerce | Part 2

First-party bank fraud

First-party fraud involves fraudsters who apply for credit cards, loans, overdrafts and unsecured banking credit lines with no intention of paying them back. It is a serious problem for banking institutions. U.S. banks lose tens of billions of dollars every year (1) to first-party fraud, which is estimated account for as much as one-quarter or more of total consumer credit charge-offs in the United States (2). It is further estimated that 10%-20% of unsecured bad debt at leading US and European banks is misclassified, and is actually first-party fraud (3).

Contrary to third-party fraud, where fraudsters use stolen identities and there are actual people who are impacted, first-party fraud uses "synthetic" identities, which are identities fabricated using bits and pieces of genuine data along with other fake pieces of information.

The surprising magnitude of these losses is likely the result of two factors. The first is that first-party fraud is very difficult to detect. Fraudsters behave very similarly to legitimate customers, until the moment they “bust out,” cleaning out all their accounts and promptly disappearing. A second factor - which will also be explored later in greater detail - is the exponential nature of the relationship between the number of participants in the fraud ring and the overall dollar value controlled by the operation. This connected explosion is a feature often exploited by organized crime. However, while this characteristic makes these schemes potentially very damaging, it also renders them particularly susceptible to graph-based methods of fraud detection.

Next, let's dive in the actual fraud. What are the 10 steps that fraudsters use to defraud banks? We'll look at the anatomy of a particularly successful bank fraud attack.

References:

(1): Experian at http://www.experian.com/assets/decision-analytics/white-papers/first-partyfraud-wp.pdf

(2): Ibid

(3): Business Insider 2011 at http://www.businessinsider.com/how-to-use-social-networks-in-the-fight-against-first-party-fraud-2011-3

More Stories By Gorka Sadowski

Gorka is a natural born entrepreneur with a deep understanding of Technology, IT Security and how these create value in the Marketplace. He is today offering innovative European startups the opportunity to benefit from the Silicon Valley ecosystem accelerators. Gorka spent the last 20 years initiating, building and growing businesses that provide technology solutions to the Industry. From General Manager Spain, Italy and Portugal for LogLogic, defining Next Generation Log Management and Security Forensics, to Director Unisys France, bringing Cloud Security service offerings to the market, from Director of Emerging Technologies at NetScreen, defining Next Generation Firewall, to Director of Performance Engineering at INS, removing WAN and Internet bottlenecks, Gorka has always been involved in innovative Technology and IT Security solutions, creating successful Business Units within established Groups and helping launch breakthrough startups such as KOLA Kids OnLine America, a social network for safe computing for children, SourceFire, a leading network security solution provider, or Ibixis, a boutique European business accelerator.