What is Fraud Detection?

Fraud detection is a series of policies, procedures, and technological safeguards designed to identify and protect individuals and businesses from fraud. Because corporate fraud poses such large financial and legal ramifications for businesses, ongoing and proactive fraud detection is a critical part of any enterprise security strategy.

Areas of focus for fraud detection

Because fraud is primarily concerned with monetary gain, fraud detection prioritizes any personal or financial information, accounts, or company assets that could be compromised and stolen, whether by external scammers or current employees.

In some cases, bad actors can gain access to a company’s vital systems, lock out company employees, and then blackmail the company to regain access.

Company resources that are vulnerable to fraud include:

  • Business accounts and financial records;
  • Customer accounts and financial records;
  • Personal information for key executives and personnel;
  • System login names and passwords;
  • Confidential business intelligence and research;
  • Company inventory, assets, and equipment.

Fraud detection best practices

To protect this information, fraud detection uses a multi-dimensional approach that relies on both a company’s employees and infrastructure.

Employee training and support

Company personnel remain one of the key ways to detect and stop fraud, as many techniques—such as phishing, smishing, and impersonation—rely on deceiving employees into inadvertently giving access to bad actors. Employee education helps workers to identify and avoid these traps, as well to detect internal fraud intentionally perpetrated by other employees. Having a dedicated fraud team, with robust reporting frameworks and whistleblower protection, is crucial as well.

Internal safeguards and audits

Strong controls are essential to any fraud detection program. Process and procedures should be clearly documented and followed. Access to potentially sensitive information or equipment should be limited only to essential employees, and all changes and transactions should be tracked and require sign-offs and verification. Regular audits by a compliance team can also help ensure adherence and detect any irregularities.

Strong technology defenses

While employees are a critical defense against fraud, many actions and transactions take place outside of their direct control—or occur in such volumes that it’s impossible to manually monitor them. Digital safeguards can provide additional support in these cases. Features like requiring strong passwords, frequent password changes, and two-factor authentication can help discourage breaches. Investing in know your business (KYB) and know your customer (KYC) verification practices can also ensure that businesses are not dealing with imposters.

Evolving technologies for fraud detection

As a part of installing fraud detection software, many enterprises are leveraging AI and machine learning technologies to help improve their ability to analyze, identify, and flag potential instances of fraud.

These technologies can be trained to:

  • Detect unusual or high-risk activity on an account;
  • Detect patterns of activity that might not seem unusual when only viewed individually;
  • Review network traffic to identify potentially insecure or improper connections between servers;
  • Assist with user verification, such as fingerprinting or identification documents / facial recognition.

More importantly, because these systems are capable of adapting and learning, they can continue evolving to recognize and counter new fraud techniques.