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Verafin uses fuzzy logic and AI to fight bank fraud and money laundering

IT Best Practices Alert By Linda Musthaler, Network World
May 27, 2011 06:03 AM ET
Linda Musthaler
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In November I wrote an article about how payment card skimming is on the rise (see "On Santa's 'Naughty' list: credit card skimmers"). Skimming is the illegal act of copying the information stored on the magnetic stripe of a credit or debit card using a small device called a skimmer. Thieves then imprint the stolen data onto a blank card to create a replica that can be used virtually anywhere the legitimate card would be accepted, such as at an ATM or point-of-sale terminal.

Financial institutions (FIs) that issue cards are the ones that suffer the majority of the losses. According to the American Bankers Association, U.S. industry losses from debit card fraud were estimated at $788 million in 2008. Unfortunately, skimming is just one form of fraud and other financial crimes that FIs face. They must also grapple with stolen, forged or altered checks; wire fraud; money laundering; phishing and Internet fraud; internal theft; and many other types of transactional crimes. There are no hard statistics on the collective total value of losses, but experts say it's well into the range of tens of billions of dollars each year.

IN PICTURES: Credit card skimming: How thieves can steal your card info without you knowing it

It should come as no surprise, then, that FIs such as banks and credit unions are fighting back. In fact, both U.S. law and international cooperative agencies require that FIs implement strong anti-fraud and anti-money laundering (AML) programs, which can be either manual or automated with technology. It's not just about protecting consumers and preventing financial losses for the FIs. With a global concern about terrorism and organized crime such as drug trafficking, anti-fraud and AML programs are key to shutting down the movement of money for illegal purposes.

In the complex world of financial transactions, automated solutions are essential for connecting the dots that humans might miss. One technology company in particular is a real standout in the banking world when it comes to detecting and preventing fraud and money laundering. The company has an interesting background that helps with the creative application of technology toward the financial industry.

Verafin Inc. was founded in 2003 by a trio of post-graduate engineering students. They met in a university robotics lab where they were designing navigation systems for robotic vehicles. An investor approached them and asked if the engineers could apply the advanced technologies from robotics to financial services to address the problems of money laundering, fraud and other financial crimes. According to Jamie King, co-founder, president and CEO of Verafin, the two fields are similar in that they both have a lot of transactional data. By applying algorithms, it's possible to make sense of the data -- whether you are directing a vehicle to swerve to avoid an obstacle or you are detecting the possible malfeasant use of a debit card.

Most of the anti-fraud solutions that existed at the time were fairly simplistic, rule-based systems. Structuring the rules can be cumbersome and difficult to manage, and it's virtually impossible to create a rule for every situation. What's more, rules can only look at customer activity and banking systems in a very siloed way. For example, there are many ways a customer can make a bank transaction. He can make a cash deposit, cash a check, make a credit purchase, and so on. Most rule-based systems are limited to looking at one type of a customer's transactions at a time, but not all of them holistically. Without a holistic view of what's happening, a lot can be missed.

Linda Musthaler is a principal analyst with Essential Solutions Corporation.

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