Last updated on June 21st, 2023 at 04:47 pm
Every industry faces cases of fraud, and the finance sector without a doubt is not left out. Fraud emanates from a lack of transparency, thereby making it easy for unscrupulous elements to manipulate records and data to their advantage. Depending on the level of fraudulent activity, a company may close up if care is not taken.
Every year, Risk.net releases a list of top ten operational risks, and fraud has always made the ranking for several years. The 2021 version that was released ranked fraud as the fourth most operational risk encountered in businesses:
1: IT disruption | 2: Data compromise | 3: Resilience risk | 4: Theft and fraud | 5: Third-party risk | 6: Conduct risk | 7: Regulatory risk | 8: Organisational change | 9: Geopolitical risk | 10: Employee wellbeing.
This recurrent enigma has been present for a long time, and it is only wise that firms, institutions, and persons seek solutions to this malady.
Blockchain is valid in fraud detection because it is a distributed ledger stored in different nodes, with immutability and high transparency. Its immutability makes it resistant to tampering, hence allowing viewers of the data to have trust in its authenticity. With this feature, only those contributors that are eligible can store data. A trail of any alterations or additions made to the ledger is accessible to authorized participants. The use cases of blockchain technology in abating fraud runs across a myriad of industries, from health care down to the supply chain industry.
Use Cases of Blockchain in Fighting Fraud
- Finance
- Supply Chain
- Identity fraud
- Insurance scams
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Finance
Different processes in finance involve interaction between human beings, from checking the credibility of potential borrowers to choosing the settlement date. People may falsify records in the finance realm to embezzle money, carry out tax evasion, and much more. Whatever the reasons are, it has been noticed that many unscrupulous parties tend to get away with falsifying records. Both insiders and outsiders can carry out financial fraud activities. For the former, they have access to the internal operations of the platform and may use that information to their advantage. The latter, on the other hand, tends to look for loopholes in the security of the company.
Blockchain technology does not only add an extra layer of security to the company’s database, it leaves a trail of records to any changes in the platform. Though this technology may be pseudonymous, transactions done within the network can be traced. The alterations or transactions done by an address are visible and traceable.
Apart from the aforementioned, it is difficult to alter previously verified data, unlike other data storage systems.
Blockchain allows information to be shared in real-time, as long as it is done by a verified party. The amount of energy that will be needed to alter existing transactions or data is draining.
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Supply Chain
This is another field that has been besieged by fraudulent cases because of how lucrative it is. Most industries, including the pharmaceutical industry, make use of the supply chain. Because multiple participants work in the supply chain, and it is difficult to keep a track of the movement of items, some parties may manipulate the records. Usually, the record-keeping system in this field is paper-based, which could be destroyed or altered without anyone detecting it. With the loopholes in this system, one would think that the industry is not important, but that is far from the truth. The medical industry, for example, deals with life and death, meaning that drugs and other items that are used in the field should possess a top-notch distribution system. Many industries are as delicate as the aforementioned.
The immutability, transparency, and traceability principles of this technology have made it difficult to alter records, and this is what the supply chain industry needs. Once data is incorporated, it can’t be deleted. Every participant can easily view the data and the person responsible for creating the data or adding them. If the government incorporates this in monitoring health care facilities in their countries, it will go a long way to curb the cases of fake drugs and equipment.
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Identity Fraud
According to Define Financial, “Individuals reported losses of $3.3 Billion to identity theft or fraud last year. That’s up from $1.8 Billion in 2019. Some estimates though, like that of ID.me CEO Blake Hall, say that as much as $200 – $500 Billion will have been lost in 2020 due to government scammers.”
Identity fraud is a big issue for individuals, as people tend to lose their savings to thieves that have perfected the act of cloning the identities of others. Someone can take on the identities of others to take out loans, buy luxury items, and wreak havoc. Annually, people lose billions of dollars to this malady, and it seemed to worsen during the pandemic.
According to AARP,
“Identity thieves were busier than ever as the pandemic erupted nationwide last year, with reports of identity theft in the U.S. skyrocketing to nearly 1.4 million in 2020, more than double the number a year earlier.
The figures released Thursday by the Federal Trade Commission (FTC), a consumer protection agency, show identity theft reports last year were more than triple the number from 2018. Cases reached 1,387,615 in 2020; 650,523 in 2019; and 444,344 in 2018.”
To reduce the cases of fraud, many financial institutions tend to notify their clients of transactions that they think may be fraudulent. Though this has mitigated the situation a bit, there is still a lot that needs to be done to nip it in the bud.
With blockchain, verifying the identity of users by financial firms is quite easy. People can decide what information they want to share, thereby reducing the cases of identity theft.
Let’s use the typical wallet address to buttress this point. With a wallet address, anyone can verify the receipts and outgoing transactions. This record can’t be falsified. Only the owner of the private keys is allowed to send funds from the address to someone else. Those without the secret keys can’t. In this identity case, the owner of the private keys may decide to share data to verify their identity with financial firms. Outsiders won’t be able to steal an identity because they don’t have private keys.
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Insurance Scams
Statistics released by Coalition Against Insurance Fraud showed that,
“Insurance fraud steals at least $80 billion every year from American consumers. (Coalition Against Insurance Fraud estimate).
Fraud occurs in about 10% of property-casualty insurance losses.
Medicare fraud is estimated to cost $60 billion every year. (AARP 2018)
The FBI estimates non-medical insurance fraud to be at least $40 billion every year.
Property-casualty fraud steals about $30 billion each year.”
A great deal of insurance scams is linked to human interactions, and that is why the new genre of parametric insurance backed by blockchain’s shared ledger technology could reduce this issue. This type of insurance removes the need for human intervention but works with smart contract technology and data oracles. Let’s say an insurance plan was taken on a delayed flight. Once the smart contract is fed with data from the oracles that the flight has been delayed past the stipulated period, a payout is done automatically. The recipient of the payout does not necessarily have to claim before they are rewarded.
Can blockchain validate authenticity?
Before a blockchain can actively validate the authenticity, there is the need for a network of users such as nodes. Some verified participants are allowed to feed the network with data, and immediately the data is added, they can’t be altered.
The blockchain should be accessible to clients that want to view the ingredients used in a product, supply chain processes, and other things concerning the said product.
For instance, the manufacturer of a high-end product wants to reduce the cases of piracy and fraud. To curb this issue, it mints NFTs once a new product is released into the market. When the product is sold, the NFT is transferred to the wallet of the buyer. If the owner decides to re-sell the product in the future, it is easy to show the potential buyer that the product is legitimate through the transactions on the network. It is that easy.
In Conclusion…
- Blockchain is capable of reducing fraud cases.
- This technology can curb identity fraud and thefts.
- It plugs the loopholes noticed in the supply chain space.
- Financial fraud will reduce drastically once financial firms start to embrace blockchain technology
- Billions of dollars could be saved with the introduction of blockchain to combat fraud of different types.
