A.R.

J College of Engineering and Technology

Department of Computer Science and Engineering

Completed the Project named as

Fraud Detection financial transaction

Submitted by

M.Ranjith-820122104303
B.Veeramani-820122104069

S.Vetrivel-820122104071

S.veeramuthu-820122104070

PROJECT DEVELOPMENT-FRAUD DETECTION

 FINANCIAL

TRANSACTION

What Is Fraud Detection? Definition, Types, Applications, and Best Practices

Fraud detection is defined as a process that detects scams and prevents fraudsters from
obtaining money or property through false means. Fraud is a serious business risk that needs
to be identified and mitigated in time. This article explains fraud detection in detail and
shares some best practices that should be followed in 2021.

Table of Contents
• What Is Fraud Detection
• Types of Fraud Detection Techniques in Computers
• Applications of Fraud Detection
• Top 8 Best Practices for Fraud Detection and Prevention in 2021

What Is Fraud Detection

Fraud detection is a process that detects and prevents fraudsters from obtaining
money or property through false means. It is a set of activities undertaken to detect
and block the attempt of fraudsters from obtaining money or property fraudulently.
Fraud detection is prevalent across banking, insurance, medical, government, and
public sectors, as well as in law enforcement agencies.

How Fraud Detection Works

Fraudulent activities include money laundering, fraudulent banking claims, forged

bank checks, identity theft, and many such illegal practices. As a result, organizations
implement modern fraud detection and prevention technologies and risk management
strategies to combat growing fraudulent transactions across diverse platforms.

Types of Fraud Detection Techniques in Computers

Fraud detection generally involves data analysis-based techniques. These techniques
are broadly categorized as statistical data analysis techniques and artificial intelligence
or AI-based techniques. Let’s understand both in detail.

Types of Fraud Detection Techniques

Statistical data analysis techniques

Statistical data analysis for fraud detection performs various statistical operations such
as fraud data collection, fraud detection, and fraud validation by conducting detailed
investigations. These techniques are further subdivided into the following types:
1. Statistical parameter calculation

Statistical parameter calculation refers to the calculation of various statistical

parameters such as averages, quantiles, performance metrics, and probability
distributions for fraud-related data collected during the data capturing process.

2. Regression analysis

Regression analysis allows you to examine the relationship between two or more
variables of interest. It also estimates the relationship between independent and
dependent variables. This helps understand and identify relationships between several
fraud variables, which further helps in predicting future fraudulent activities. These
predictions are based on the usage patterns of fraud variables in a potentially
fraudulent use case.

3. Probability distributions and models

In this technique, models and probability distributions of various business fraudulent

activities are mapped, either in terms of different parameters or probability
distributions.

4. Data matching

Data matching is used to compare two sets of collected data (i.e., fraud data). The
process can be carried out either based on algorithms or programmed loops. In
addition,maclearning is used to remove duplicate records and identify links between
two data sets for marketing, security, or other purposes.

AI-based techniques
Deploying AI for fraud prevention has helped companies enhance their internal
security and streamline business processes. Through improved efficiency, AI has
emerged as an essential technology to prevent fraud at financial institutions.AI-based
fraud dection techniques include the following methods:
1. Data mining

Data mining for fraud detection and prevention classifies, clusters, and segments the
data and automatically finds associations and rules in the data that may signify
interesting patterns, including those related to fraud.

2. Neural networks

Neural networks under fraud detection perform classification, clustering,

generalization, and forecasting of fraud-related data that can be compared against
conclusions that are raised in internal audits or formal financial documents.

3. Machine learning (ML)

Fraud detection with machine learning becomes possible due to the ability of ML
algorithms to learn from historical fraud patterns and recognize them in future
transactions. Machine learning either uses supervised or unsupervised learning
methods.

4. Pattern recognition

Pattern recognition algorithms detect approximate classes, clusters, or patterns of

suspicious behavior, either automatically (unsupervised) or manually (supervised).

Other techniques such as link analysis, Bayesian networks, decision theory, and
sequence matching are also used for fraud detection purposes.

Applications of Fraud Detection

Fraud detection is of paramount importance for banks and other companies that deal
with a significant number of financial transactions and are therefore at higher risk of
suffering from financial fraud. However, other sectors such as ecommerce companies,
credit card companies, electronic payment platforms, and B2C fintech companies also
need to employ fraud detection to prevent or limit financial fraud.
Let us now dive into industry-specific fraud detection.

1. Banking & financial services

As the digital trend has been gaining traction worldwide, frauds have been increasing
with the rising number of online and ATM transactions. The most common types of
banking frauds are:

• o APIfraud: Payment Services Directive 2 (PSD2) mandates certain

European financial institutions to open up their services via application
programming interfaces (APIs). This creates a new attack surface. o
Stolen/fake credit card fraud: A fake card is generated based on a user’s
card information that scammers manage to gain access to. There are
numerous ways that scammers use to do this, with card skimming being
the most common. Credit card skimming is a technique where the
scammer attaches a small device to the transaction machine that cannot

2. Ecommerce & retail

With the ecommerce sector booming amid the COVID-19 pandemic, targeting users
through ecommerce channels has become more frequent than ever. The most common
methods include:

• o Promo abuse: Promo abuse or coupon fraud occurs when an individual

customer, vendor, or partner agency takes advantage of a promotion,
abusing the coupon policy. Fraudsters can benefit by redeeming coupons
multiple times or simply by using them to gain money and other valuable
items or services. o Payment fraud: One of the most common fraudulent
activities is ecommerce payment fraud, which is any kind illegal online
transaction performed by a cybercriminal. The victim is usually an online
user who gets deprived of their money, interest, sensitive info, or personal
property. o Delivery fraud: The two types of delivery fraud include
identity theft and friendly fraud. In identity theft, a fraudster attempts to
obtain personal user data via malware, fake websites, emails, or short
 messages. The cybercriminal uses these to purchase goods on an invoice
and have them sent to a different delivery address, with no intention of
paying for the items.

3. Marketplaces & online ads

This kind of fraud is typically done through referral and promotion abuse as well as
fake reviews.

• o Fakereviews: Many consumers rely on online reviews when making a

purchase, signing up for services, or engaging with specific businesses.
Fake reviews are shared to discredit brands, erode trust, and give
examples of bad experiences that never actually occurred. o Referral and
promo abuse: Referral programs are one of the best ways to amplify
word-of-mouth referrals for online stores. However, many customers try
to take advantage of these programs to get better deals and discounts than
what they deserve, leaving a business reeling with extra hidden costs.

4. IT & telecom

These frauds are carried out through phone calls and other methods involving phones.

• o Phone fraud: Generally referred to as communications fraud, phone fraud

uses telecommunication products or services intending to illegally acquire
money from or failing to pay a telecommunications company or even its
customers. o Call forwarding fraud: A call forwarding hack is a common
form of VoIP telecom fraud. In such a scenario, criminals gain
unauthorized access to an enterprise private branch exchange system
(PBX) or a voice mail system IVR. With this, they can configure call
forwarding to an expensive longdistance destination and profit from a
revenue-sharing deal therein.
Top 8 Best Practices for Fraud Detection and
Prevention in 2021
Advances in fraud detection technologies act as an accurate and efficient arsenal
against fraudsters and cybercrimes. Let’s look at the top eight best practices for fraud
detection and prevention in 2021.

Fraud Detection Best Practices

1.Create a potential fraud risk profile

Take a top-down approach to your risk assessment, listing the areas in which frauds are
likely to occur in your business and the types of frauds that are possible in those areas.
After doing this, qualify the risks based on the overall exposure that the organization
might face. Develop fraud risk profiles that are a part of the overall risk assessment
and include all stakeholders and decisionmakers in the process.

2. Address the possible indicators of fraud

Organizations need to test 100% of their data rather than opting to test just random
data samples. While sampling may be effective for detecting problems that are
relatively consistent throughout data populations, that isn’t always the case for fraud
involved. Fraudulent transactions, by nature, do not occur randomly. Transactions can
fall within the boundaries of certain standard testing and still not be flagged.

3. Implement continuous auditing and monitoring

Continuous auditing and monitoring can be implemented to test and validate the
effectiveness of an organization’s controls over transaction authorizations.This process
can substantially improve the overall efficiency, consistency, and quality of an
organization’s fraud detection process.

4. Increase organizational awareness of the monitoring activity

A significant part of fraud prevention is communicating the program across the
organization. This can be especially helpful to avoid fraud within the organization. If
everyone is aware of the prevention systems that have been put in place, employees
will not indulge in fraudulent activities. This can act as a great preventive measure.

5. Deploy artificial intelligence

Machine learning is a powerful force for improving both the accuracy and efficiency
of fraud detection. Thought machine learning, systems can automatically perform the
following tasks:

• Create and update rules for detection and alert handling: Machine
o

learning can examine masses of data to help establish rules and keep
them up to date. Even something as simple as a decision tree can add
some benefits (certainly in the segmentation approach) to more
accurate rules.

6. Encourage anti-money laundering and fraud suspicious

activity reporting
The goal of suspicious activity reporting (SAR) and the resulting investigation is to
identify customers involved in money laundering, fraud, or terrorist funding. SAR can
cover most of the activity that is deemed to be outoftheordinary. An activity may be
included in SAR if it gives rise to a suspicion that the account holder is attempting to
hide something or make an illegal transaction.

7. Deploy intelligent case management

An advanced, analytics-driven, intelligent case management solution can
automatically:

• o Prioritize cases, recommend investigative steps, and fasttrack

straightforward cases. o Enrich alerts with details about the
associated customers, accounts, or beneficiaries. o Intelligently find
and pull data from an internal database or even from a third-party
data provider.

8. Learn, adapt, and repeat

Review, re-evaluate, and restructure your fraud profile, taking into account the most
common fraud schemes and also those relating specifically to the risks that are unique
to your organization, thereby moving your investigative lens accordingly.

Use data analytics to find out where controls are not working or are ineffective. Also,
keep a watch on controls that application control settings cannot govern. You will need
to investigate patterns and fraud indicators shown by fraud detection tests and
continuous monitoring and auditing processes.

In conclusion
Fraud detection and prevention need to be a top priority for any business. A well-
designed and implemented fraud detection system can significantly reduce the chances
of fraud occurring within an organization. In addition, timely detection of fraud
directly impacts the business in a positive way by reducing future potential losses.

FLOW CHART:
Implementation:

Sample code:

class ProjectDevelopmentSystem: def

__init__(self, fraud_threshold):

self.projects = [] self.fraud_detector =

FraudDetection(fraud_threshold)
 def create_project(self, project_name):

project = Project(project_name)

self.projects.append(project) return

project

def find_project(self, project_name):

for project in self.projects: if

project.name == project_name:

return project

return None

def add_task_to_project(self, project_name, task):

project = self.find_project(project_name)

if project:

project.add_task(task.to_dict())

return True return False

def list_project_tasks(self, project_name): project

= self.find_project(project_name)

if project: return

project.list_tasks() return []
 def update_project_task_status(self, project_name, task_name, status):

project = self.find_project(project_name)

if project:

return project.update_task_status(task_name, status) return

False

def get_task_from_project(self, project_name, task_name):

project = self.find_project(project_name)

if project:

return project.get_task(task_name) return

None

def detect_fraud(self, transaction):

return self.fraud_detector.is_fraudulent(transaction)

# Example usage:
# Initialize the system system =

ProjectDevelopmentSystem(fraud_threshold=10000)

# Project Management project = system.create_project("Fraud

Detection Project") task1 = Task("Data Collection", "Collect

financial transaction data", "2024-06-

01") task2 = Task("Model Training", "Train fraud detection model", "2024-06-15")

system.add_task_to_project("Fraud Detection Project", task1)

system.add_task_to_project("Fraud Detection Project", task2)

print("Project Tasks:") print(system.list_project_tasks("Fraud

Detection Project"))

system.update_project_task_status("Fraud Detection Project", "Data Collection",

"Completed")

print(system.get_task_from_project("Fraud Detection Project", "Data Collection"))

# Fraud Detection transaction1 = {'id': 1, 'amount': 5000, 'description': 'Payment

to vendor'} transaction2 = {'id': 2, 'amount': 15000, 'description': 'Large

payment'}
print("Fraud Detection Results:")

print(f"Transaction 1 is fraudulent: {system.detect_fraud(transaction1)}")

print(f"Transaction 2 is fraudulent: {system.detect_fraud(transaction2)}")

Output:
Conclusion:

In conclusion, effective fraud detection in financial transactions is crucial for

safeguarding assets, maintaining trust, and ensuring regulatory compliance. Advanced
technologies such as machine learning algorithms and AI-powered systems play a
significant role in identifying suspicious activities, patterns, and anomalies, enabling
organizations to mitigate risks and protect against fraudulent activities. Ongoing
vigilance, robust risk management strategies, and collaboration between financial
institutions, regulators, and law enforcement are essential to stay ahead of evolving
threats in the financial landscape.