Internal Control Accouting System
Fraud Prevention and Detection
August 2009
Fraud Prevention and Detection for Credit and Debit Card Transactions
Richard Collard
Senior Business Lead and SME - Market Development ILOG, Software Sales, IBM Sales and Distribution
Fraud Prevention and Detection
Page 2
Contents Preface 2
Preface Over the past 20 years, financial institutions, governments, insurers and retailers have seen an explosion in the amount and types of fraud perpetrated against them. In the United Kingdom alone, card-fraud losses in 2006 totaled €620.6 million (£428 million) and while this total represented a reduction of 3 percent over 2004 and a decrease of nearly €116 million (£80 million) over the past two years, it was still a considerable loss to business. Of particular concern is the evolution of types of fraud to circumvent the effectiveness of PIN-based domestic transactions. This has led to a 43 percent increase in fraud committed on UK cards abroad, where perpetrators take advantage of non-PIN environments. Fraud Loss: A Cost of Doing Business? UK banks recently reported their total profits for 2006 amounted to £40 billion. Considering the size of this figure, it can be said that fighting card fraud is not wholly related to financial loss but rather to a significant risk to the banks’ reputations. The negative press associated with the use of fraudulent card transactions to support terrorism, drugs, prostitution and human trafficking can only result in a negative customer perception. Therefore, from a risk-management perspective, it is important to actively and effectively prevent and detect card fraud. The growth of organized crime and terrorism and their associated requirements are well documented. Their need for significant funding easily explains the inventiveness and increasing sophistication of criminal gangs and individuals in their attempts to defraud organizations of huge sums on a global scale. The manifestations of fraud are seen in money laundering,
August 2009
Fraud Prevention and Detection for Credit and Debit Card Transactions
Richard Collard
Senior Business Lead and SME - Market Development ILOG, Software Sales, IBM Sales and Distribution
Fraud Prevention and Detection
Page 2
Contents Preface 2
Preface Over the past 20 years, financial institutions, governments, insurers and retailers have seen an explosion in the amount and types of fraud perpetrated against them. In the United Kingdom alone, card-fraud losses in 2006 totaled €620.6 million (£428 million) and while this total represented a reduction of 3 percent over 2004 and a decrease of nearly €116 million (£80 million) over the past two years, it was still a considerable loss to business. Of particular concern is the evolution of types of fraud to circumvent the effectiveness of PIN-based domestic transactions. This has led to a 43 percent increase in fraud committed on UK cards abroad, where perpetrators take advantage of non-PIN environments. Fraud Loss: A Cost of Doing Business? UK banks recently reported their total profits for 2006 amounted to £40 billion. Considering the size of this figure, it can be said that fighting card fraud is not wholly related to financial loss but rather to a significant risk to the banks’ reputations. The negative press associated with the use of fraudulent card transactions to support terrorism, drugs, prostitution and human trafficking can only result in a negative customer perception. Therefore, from a risk-management perspective, it is important to actively and effectively prevent and detect card fraud. The growth of organized crime and terrorism and their associated requirements are well documented. Their need for significant funding easily explains the inventiveness and increasing sophistication of criminal gangs and individuals in their attempts to defraud organizations of huge sums on a global scale. The manifestations of fraud are seen in money laundering,
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