From the Blogosphere
Fraud Detection, Financial Industry and E-Commerce | Part 2
First-party bank fraud
By: Gorka Sadowski
Dec. 5, 2013 01:00 PM
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.
(3): Business Insider 2011 at http://www.businessinsider.com/how-to-use-social-networks-in-the-fight-against-first-party-fraud-2011-3
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