Mitigate Risk, Combat Fraud and Financial CrimesSession #6863

Rick Hoehne

Scott Burroughs

October 27, 2014

© 2014 IBM Corporation

The Issue at Hand

http://www.youtube.com/watch?v=hKeq9L7GBsY

Fraud is a deliberate deception or misrepresentation which violates a legal statute and is intended to produce an undue financial gain

Opportunistic

Organized

Organized Provider

Individual Employee

Staged events

Money laundering

Slip and fall

Arson

Tax fraud

Medical fraud

Improper billing

Improper payments

Procurement

Financial statement

Expense

Scope includes

Financial crime including money laundering, cyber attack and illegal security breach.

Abuse which similar to fraud but not determined to violate the law.

Waste & Error refer to improper payments which are the result of over paying due to poor policies or operational mistakes

Risk includes financial, operational, IT and security risks and financial crimes which all must be identified, monitored and controlled.

1 The 2013 Norton Report2 United Nations Office on Drug and Crime, Comprehensive Study on Cybercrime, February 20133 The Fiscal Times, Feds Blow $100 Billion Annually on Incorrect Payments, Jan 15, 2014, amount in US $4 Reuters, Dec 11, 2012, amount in US $5 Brand Index, Company perception falls after data breach, Dec 23, 2013, Brand Index ranges from -100 to 100 pts6 Entersekt-sponsored Harris Interactive US survey conducted May 14-16, 2013

Increasingly frequent and complex fraud

schemes

12 cybercrime victims per second1

80% of schemes are perpetrated by organized criminal groups2

The explosion in global connectivity has escalated the vulnerabilities of individuals, enterprises and nations to cybercrime

Fraud no longer acceptable as “cost of

doing business”

$100 billion annual improper payments by US Fed Agencies3

$1.92 billion largest fine to-date in money laundering case4

Intensifying regulatory enforcement and operational losses apply significant pressure on profitability

Customer expectations are on the rise

45point drop - retail store brand perception index change one week after data breach5

71%customers who will switch banks due to fraud6

Customer convenience, satisfaction and trust drive brand choice and must be earned on an ongoing basis

Converging forces are escalating fraud risk, exerting significant downward pressure on an organization’s bottom line

Fines, Losses, Non Compliance, Tarnished Brand, Lost Customers, Slow Innovation

Organizations face a distributed and fragmented observation space that limits their effectiveness in defeating today’s fraudsters

Transactions

Accounts

Analytics

Legal

Risk

Special Investigative Unit (SIU) – Analysts &

Investigators

Management

Narrow observation space

Isolated Data

Reactive versus Proactive

Accepted cost of doing business

Departmental band-aides

The challenges:

Dept A Dept B Dept C Dept D

Our Point of View: Successful organizations move forward when they conclude that Fraud is no longer an acceptable cost of doing business

• You can’t fight fraud

from the fraud unit

• You must drive an

enterprise approach

• Make decisions at the C-

Levels

Elevate the agenda Gain insight superiority Act with agility

• Expand the observation

space

• Glean actionable insight

through deliberate layering

of analytics

• Know more than the

fraudsters think you

should know

• Move decision making

to the point of operation

• Don’t rely on point

solutions - once you

change, the

fraudsters will adapt

• Be a hard target—learn

from others

1 2 3

Raising the agenda means fighting fraud beyond the “fraud unit” as an enterprise endeavor that interlocks with key elements of the business

Security &

Authentication

Policies &

Procedures

Business Applications

& Workflow

Counter Fraud

Management

Prevent

Counter

“I’d like to file a claim…”

Define Business Policies• Document rules and limits for payment/access• Document approvals and escalations• Define required “evidence” to support request• Limit access in areas of known fraud

Authenticate• Validate requester is who they say they are• Validate they have right to request benefit for

payment• Stop known bad guys from “entering”

Implement in Applications & Workflow• Implement rules in the applications used to process

requests for payment• Implement approvals and guidelines in workflow and

BPM

Counter and Defeat• Detect fraudsters in real time• Respond quickly and consistently• Discover fraud retrospectively• Investigate suspicious activity

Detect

Investigate

Respond

Discover

Detect

Within a business process detect if a

request or transaction brought forward by a

customer, employee, or partner is likely fraud

Respond

Apply fraud insight to take the next best

action – in real time when it matters most

Discover

Discover fraudulent providers, schemes,

firms, or other actors through retrospective

analysis of data

Investigate

Confirm suspicions with efficient and

effective investigative forensic analytics

Four capabilities are needed to defeat fraudsters that bypass Prevent layers

Reporting Intelligence

Governance

The IBM Smarter counter fraud framework enables our customers to both prevent an intrusion within the institution and counter fraudulent activity regardless of where it originates

IBM Smarter Counter Fraud capabilitiesEnterprise approach to stopping fraud, financial crimes, waste, and abuse

Single integrated product delivers

Counter Fraud Detection

Counter Fraud Response

Counter Fraud Investigation

Counter Fraud Discovery

Counter Fraud Intelligence

IBM Counter Fraud Management v1.5

1. Solves wide array of fraud business problems faced by today’s public and private organizations

2. Delivered through flexible engagement models

including cloud, gain share, and as-a-service

models

3. Backed by continuous innovation including

Watson, G2, Red Cell, and IBM Research

Fraud Experience and Expertise

Counter Fraud Discovery Assets

Counter Fraud As a Service (a Cloud Business Solution)

Counter Fraud Business Services

Counter Fraud Advisory Services

IBM Counter Fraud Business Services

The Smarter counter fraud portfolio is founded on the integration of Best of Breed Acquisitions into one complete solution

2005

SRD is acquired for identity resolution software and entity analytics

2012

Tealeaf is acquired to improve digital experience across channels

AdvancedFraud Protection

Digital Experience Management

2013

Trusteer is acquired for mobile and application security, counter fraud and malware detection

Case Management 2006

FileNet is acquired for advanced case management and enterprise content management

Business Intelligence 2008

Cognos is acquired for business intelligence

2008

ILOG is acquired for business process management

Business Rules

2009

SPSS is acquired for text and data mining, advanced statistical analysis and predictive solutions

Predictive Analytics

2009

Guardium is acquired for enterprise database activity monitoring and protection capabilities

Database Protection

2010

OpenPages is acquired for integrated set of solutions that automate risk management across the enterprise

Risk Management

2011

i2 is acquired for intelligence analysis targeting fraud, crime

Intelligence Analysis

2011

Q1 Labs is acquired for analytics to correlate information across domains and create security dashboards

Security Intelligence

2011

Cúram is acquired for solutions for social programs and ability to improve service delivery

Service Delivery

Entity Analytics

2014

IBM Research and Development

IBM

Smarter counter fraud

announcement

For 10 years, IBM has invested in

strategic capabilities that enable

best of breed enterprise fraud and

threat management

IBM Counter Fraud Management

Detect Respond Investigate Discover

IBM Counter Fraud Management

GeoSpatialAnalytics

Context Analytics

Content Analytics

Entity Analytics Predictive Analytics

BehavioralAnalytics

Content Management

BusinessIntelligence

Forensic Analysis

Social NetworkAnalysis

DecisionManagement

CaseManagement

GeoSpatialAnalytics

GeoSpatialAnalytics

Context AnalyticsContext Analytics

Content AnalyticsContent Analytics

Entity Analytics Predictive Analytics

Predictive Analytics

BehavioralAnalytics

BehavioralAnalytics

Content Management

BusinessIntelligence

BusinessIntelligence

Forensic AnalysisForensic AnalysisForensic Analysis

Social NetworkAnalysis

Social NetworkAnalysis

DecisionManagement

DecisionManagement

CaseManagement

CaseManagement

Different crime typologies need different analytical techniques

It costs too much to stitch together point solutions

One product provides access to best-in-class tools

Massive investment to blend capabilities seamlessly together

Supported with Integrated Implementation Services

Focused offerings for Banking, Insurance, HealthCare, Government

IBM Counter Fraud Management provides the arsenal you need to attack fraud

and compliance threats today…and adapt to tomorrow’s schemes

An unparalleled arsenal of capabilities focused on combating fraud

Game Changing capabilities in the Fraud Management Lifecycle

•Operational Risk

•Fraud Exposure

•Case Evidence

•INVESTIGATE•RESPOND

• Decision

• Management

•DETECT

•Current Line of Business Data Sources

•Big Data Analysis

•Cybercrime Intelligence

•Point Solution Alerts

•Security Intelligence

•External data and intelligence

•Multi-Layered Analytics & Business

Rules

•Predictive, Entity, Context, Behavioral

• Forensic and Case

• Management Tools

•Social

•Network

•Geo

•Spatial

•Context

•REPORT

•DISCOVER •Retrospective

•Analysis

Multi-layered analytics provide an optimum mix of

techniques to deliver more accurate fraud detection

Identity Context Analysis

• Resolve identities

• Identify relationships

Uniquely identify entities

and relationships

Business Rules• Industry specific rules

• Business expertise

Encode what we

already know

Segmentation• Company, Region

• Fraud types

Automatically group

based on similarity

Predictive Models• identify potential fraud through patterns

and trends in the data

Use historical experience to

predict current fraud

Anomaly Detection• Compare with normal behavior

• Association exposes relationships

Identify atypical events

DETECT & RESPOND

Business

Rules

Entity

Analytics

Predictive

Model

Optimize

Fraud

Decisions

Anomaly

Detection

Detection &

Decision

Mgmt

FNOL, Application, etc.

Intelligent InvestigationIntelligent Fraud

Dashboards

Entity Analytics

Putting the IBM Smarter counter fraud into motion for Insurance

Case Management

Real Time Alert

New Investigation

Claimant

Provider

Discovery

9,500 model library

SelectionEvaluation

Identification

Observation Space

IBM Counter Fraud Management leverages Big Data

Operational Risk

Fraud Exposure

Case Evidence

INVESTIGATERESPOND

DecisionManagement

!DETECT

Current Line of Business Data Sources

Big Data Analysis

Cybercrime Intelligence

Point Solution Alerts

Security Intelligence

External data and intelligence

Multi-Layered Analytics & Business RulesPredictive, Entity,

Context, Behavioral

Forensic and CaseManagement Tools

Social Network

Geo Spatial Context

REPORT

DISCOVER RetrospectiveAnalysis

Operational Risk

Fraud Exposure

Case Evidence

INVESTIGATERESPOND

DecisionManagement

!!DETECT

Current Line of Business Data Sources

Big Data Analysis

Cybercrime Intelligence

Point Solution Alerts

Security Intelligence

External data and intelligence

Multi-Layered Analytics & Business RulesPredictive, Entity,

Context, Behavioral

Forensic and CaseManagement Tools

Social Network

Geo Spatial Context

REPORTREPORTREPORT

DISCOVER RetrospectiveAnalysis

DISCOVER RetrospectiveAnalysis

BigInsights

Administration & Security

Workload Optimization

Connectors

Advanced Engines

Visualization & Exploration

Development Tools

IBM-certified

Apache Hadoop

and related

projects

Discover:

• Discover patterns in raw data, often from different systems, to find new patterns of Fraud

• Analyze large volumes of unstructured information for clues to develop Fraud Analytics

• Assess all the information about a particular customer / entity to discover new instances of Fraud

Detect:

• Identify fraud indicators and implement analytic models

• Correlate fraud indicators from internal and external sources

• Detect suspicious activity at time of transaction to prevent pay-out

• Maintain evidence of decisions

17 | ©2014 IBM Corporation

An Integrated Risk Platform incorporates fraud and financial crime exposures

Inte

llig

en

ce

IBM X-Force and Trusteer Research

• Monitor and evaluate the rapidly changing threat landscape; leverages Trusteer endpoint intelligence

• Research new attack techniques; developing protection for tomorrow’s security challenges

• Collaborate with leading public & private institutions to enhance internet security WW

• Educate our customers and the public through its renowned X-Force Trend Risk Reports

IBM Red Cell

• Monitor and evaluate emerging trends in financial crime across industries and around the globe

• Provide cutting-edge thought leadership to counter and prevent fraud and financial crime across the ecosystem

• Create opportunities for intelligence sharing

• Educate our customers and the general public

Advanced Threat, Fraud, and Financial Crimes Intelligence

IBM Counter Fraud business services: providing the skills and expertise to deliver world class solutions

Counter fraud capabilities are available as a service to provide clients with flexible

choices to match their business needs and technical requirements

HostingApplication

ManagementManagedServices

Analytics & Referral

Generation

Counter Fraud Advisory Services

Cloud Business Services represent a new offering between SWG and GBS that allow

IBM to deliver a Counter Fraud solution on a consumption or rental basis, delivered

from the cloud

Outcomes Sourcing

Cloud Business Services

Counter Fraud as a Service (Cloud Business Solution)

Medical Fraud

(FAMS)

Public Tax Fraud

(TACS)

Occupational

Fraud

Insurance Fraud

(LAWS)

Fraud discovery assets in the cloud enabled by IBM SoftLayer

IBM Counter Fraud Skills and Expertise leverage IBM’s depth and breadth of expertise

• Deep counter fraud Subject Matter Experts

• Hired primarily from Industry

• Expertise aligned to specific industries and functions

• Deep industry Subject Matter Experts

• Includes expertise in Banking, Insurance, Retail, Telco, etc.

• Provides specific knowledge regarding processes, exposures, and risks in each industry

Industry

Center of Competency

• Deep Subject Matter Expertise in the technology and techniques needed to fight fraud

• Analytics, Data, Mobile, Cloud, etc.

Specialty Skills

Centers of Competency

• Mainstream service lines for skills, labor, and locations for fraud operations

• GPS, GTS, AMS, AIS, and Software Lab services

IBM Service Lines

Counter FraudCenter of Competency

Why IBM for Counter Fraud Business Solutions?

1. IBM is able to help our customers solve a wide array of fraud and financial crime business problemsthrough the combination of our skills and technology

2. IBM is able to provide a variety of flexible partnership and commercial terms models to match each customers unique business needs

3. IBM’s Innovation and Intelligencekeep our customers ahead of the fraudsters

•Case Studies

Rapid Time to Value. Examples of ways clients are getting started with IBM Counter Fraud Management

Client: Global Health Payer in Europe

Use Case: Counter Fraud Service for the Market

Client: Global bank, Asian operations

Use Case: Improve AML operations

Client: Global bank in North America

Use Case: Advanced Fraud Analytics platform

incorporating security and transactional data correlation

Client: Insurance co. in Latin America

Use Case: Enterprise-wide transformation initiative

Proof of Concept identified $190M in Potential Fraud

Objective: Determine if client has the breadth

and depth of data necessary to proactively identify patterns of fraud

Identify the extent of aberrant billing practices and clients potential exposure

Accelerate client exposure to FAMS and LAWS technology and maturity in the area of fraud discovery

Scope: 12 Months of Health Payments 24 Months of Auto Payments

Conclusions: Discovering fraudulent providers is

feasible Data needs improvement to achieve

expected results Exec’s desire the insight provided –

want more

Findings: 10 high risk body shops billing S/. 30M 10 high risk medical providers billing

S/. 286M

A French healthcare organization achieved >6500% ROI in two months by applying analytics to workers compensation claims

Business Challenge:

EUR 5B in sick compensation benefits in France

High perceived fraud rate due to inefficiencies and errors, so many more

investigations are conducted than necessary

Spot checking / random selection and query methods produced no clear

benchmark for how many claims are truly fraudulent, so allocating

resources to the highest probability claims was unscientific

The Smarter Solution:

Integrate large volumes of citizen and client data from multiple sources

Layer multiple models and data mining techniques to find the claims and

groups of claims most likely to represent real fraud loss rather than

errors, so resources can focus on the items with biggest impact

To detect EUR1000 fraud, it took 310h with random method, 119h with

queries, and just 22min with predictive analytics

6514%ROI achieved within two months as

a result of applying predictive

analytics vs random or query-based

methods

19xReduction in time spent on

identification and selection of

suspicious records

93%Reduction in suspicious workers

compensation files investigated in

one month (6300 to 321 files)

A US specialty auto insurance provider applies wider dataset and layered analytical techniques to reduce fraud and penetrate new markets

Business Challenge:

High risk business finding 2% of claims as fraud vs 10% for industry

Investigations very time consuming, costly, and manual

Slow to penetrate new markets due to unclear risk assessments

The Smarter Solution:

Identity resolution to resolve common denominators to same person

Tealeaf integration to track visitor web activity and feed fraud analytics

Predictive analytics and rules to flag suspicious claims

Automated collection and routing for faster claims investigation

Link analysis and forensic investigation to spot rings and collusion,

such as “device linked policies”

600%More confirmed suspicious claims

flagged after applying automation

and analytics

Expanded marketsBy better assessing regional risk

using clustering techniques

Expedite claimsBy using wider set of data and

analytics to score for risk

A large Korean life insurance company accelerates fraud detection by 50% and realizes $1.4B increase in profits

Business Challenge:

Business rules embedded in core applications difficult to

maintain

Manual fraud detection; random investigation

Slowed down processing of non-fraudulent claims

Drove higher investigative costs

High liability fee exposure

Missed opportunities to collect money

The Smarter Solution:

Scans thousands of claims in real time

Risk scoring based on 800 different factors

High risk claims quickly passed to auditors for further

investigation

Projected savings – millions of dollars annually

50%Faster fraud detection

improves fast tracking of

legitimate claims to improve

customer experience

$1.4B USDIncreased profits

12%Reduction in liability fees

60% Investigation productivity

gained

1.3 millioncustomers

A South African healthcare insurance provider acts with superior insight to reduce fraud and maximize subscriber value

Business Challenge:

Business model based on keeping member premiums as low as

possible (15% less than competitors)

Need to take active, preventive steps to keep its members as healthy

as possible to keep premiums low

The Smarter Solution:

Analytics applied against large pool of data is source of competitive

advantage

Extracts deep and accurate insights from clinical, pathological,

demographic, billing, external pharmacy data, external hospital

admissions records, and unstructured member data

Reveals fraud and chronic health risk patterns within member base

USD 25 millionrecovered in fraudulent health

insurance claims and billing errors

More effective preventive programs offered for at-

risk subscribers, reducing overall

cost of care

99%decision time improvement as a

result of reduced time to run the

predictive models

2.6 millioncustomers “In sensitive areas such as patient care and fraud investigation, the details are everything.

With the IBM solution, instead of inferring a ‘near enough’ answer, we can get the right

information and provide accurate analyses that meet the precise needs of the business.”

L Steenkamp, Divisional Manager, Risk Intelligence Technical Development

Business value assessment

Align business capabilities with business strategy, and recommend a road map for improved value.

Solution workshop

Lay out the path ahead, from immediate improvements to a common future vision.

Pilot

Prove the path forward, starting small and scaling up.

2

3

4

1

Visioning workshop

Whether via web seminar, at your facility or in an IBM solution center, we can begin charting a course.

The path forward to achieve better business outcomes with proven approaches to collaborative problem solving

Comprehensive Technology Portfolio

Consulting and Professional Services

Fraud and Threat Intelligence

IBM Research

IBM Smarter counter fraud framework

www.ibm.com/smartercounterfraud

Building a Smarter Planet with IBM Smarter counter fraud

Explore Smarter Counter Fraud at Insight 2014

Stop by Booth #717 for an update on how IBM Counter Fraud Management is helping

customers detect fraud with more precision and more quickly investigate exposures.

Plan to join these sessions and workshops to learn more:

Program Date & Location INSIGHT 2014 Sessions

Program: Business & Industry Leadership

Track: Business Strategies for Big Data & Analytics

Mon Oct 27 2:00 PM

South Pacific

Mitigate Risk Combat Fraud & Financial Crimes with Data

TSB-6863

Program: Enterprise Content Management

Track: ECM Solutions

Tues Oct 28th 10:00 AM

Lagoon B

A Holistic Approach to Fighting Fraud: IBM Counter

Fraud Management ESN-6050B

Program: Business Analytics

Track: Risk Analytics

Tues Oct 28th 4:30 PM

Reef C

Big Regulatory Risk Require Big Data Thinking: Ernst &

Young Counter Fraud, Powered by IBM BRK-6476A

Program: Business Analytics

Track: Analytic Business Solutions

Wed Oct 29th 10:00 AM

Mandalay Bay L

Counter Fraud: Detecting Fraud Through Predictive

Analytics BBS-5863

Program: Business & Industry Leadership

Track: Banking

Wed Oct 29th 11:15 AM

Islander G

New Threats. New Thinking. Case Study in Fighting

Fraud in Banking TBA-5676A

Program: Information Management

Track: Big Data, Integration and Governance

Wed Oct 29th 3:00 PM

Jasmine B

IBM Counter Fraud Management Powered by Context

Computing IIS-6001

CFO/ CRO Workshops Tues Oct 28th 1:45 PM and

Wed Oct 29th 10:15 AM

Boardroom

Stopping the Profit Leak with Next Generation Counter-

Fraud Solutions

Let’s Continue the Counter Fraud Conversation

Please join us for a Cocktail Reception

Monday October 27th

7:00 – 10:00 pm

Franklin Lounge, in the Delano Las Vegas

Meet with peers and industry

leaders while enjoying a

a signature cocktail

- The Aurora

- The Fraud Terminator

Register at Booth 717

Please bring your Insight ID to ensure entry into the Franklin Lounge

Sponsored by the i2, Threat and Counter Fraud team

Acknowledgements and Disclaimers

Availability. References in this presentation to IBM products, programs, or services do not imply that they will be available in all countries in which IBM operates.

The workshops, sessions and materials have been prepared by IBM or the session speakers and reflect their own views. They are provided for informational purposes only, and are neither intended to, nor shall have the effect of being, legal or other guidance or advice to any participant. While efforts were made to verify the completeness and accuracy of the information contained in this presentation, it is provided AS-IS without warranty of any kind, express or implied. IBM shall not be responsible for any damages arising out of the use of, or otherwise related to, this presentation or any other materials. Nothing contained in this presentation is intended to, nor shall have the effect of, creating any warranties or representations from IBM or its suppliers or licensors, or altering the terms and conditions of the applicable license agreement governing the use of IBM software.

All customer examples described are presented as illustrations of how those customers have used IBM products and the results they may have achieved. Actual environmental costs and performance characteristics may vary by customer. Nothing contained in these materials is intended to, nor shall have the effect of, stating or implying that any activities undertaken by you will result in any specific sales, revenue growth or other results.

© Copyright IBM Corporation 2014. All rights reserved.

— U.S. Government Users Restricted Rights – Use, duplication or disclosure restricted by GSA ADP Schedule Contract with IBM Corp.

IBM, the IBM logo, ibm.com, and IBM Counter Fraud Management are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. If these and other IBM trademarked terms are marked on their first occurrence in this information with a trademark symbol (® or TM), these symbols indicate U.S. registered or common law trademarks owned by IBM at the time this information was published. Such trademarks may also be registered or common law trademarks in other countries. A current list of IBM trademarks is available on the Web at

•“Copyright and trademark information” at www.ibm.com/legal/copytrade.shtml

•Other company, product, or service names may be trademarks or service marks of others.

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