Discovering, Investigating and Preventing Application Fraud

1. Discovering, Investigating and Preventing Application Fraud Presents… National Fraud Center

2. Agenda • Introduction-Application Fraud and Privacy • Anti-Money Laundering Requirements Within The Banking, Securities and Insurance Industries • Operational Best Practices to Reduce ApplicationFraud • The Red Flags of Application Fraud • Employment Application Fraud • Concluding Remarks and Q&A

3. Application Fraud and Privacy Norman A. Willox Jr. Chief Privacy Officer, LexisNexis, and Chairman of the National Fraud Center

4. Who’s Responsible for Dealing With Fraud? Society Government • No single Entity • Public/Private Partnership • Laws/Regulations Education • Balanced Approach Law Enforcement Citizens Industry Reactive Proactive

5. What Data Process Helps? Decisions Knowledge Cost Time Information Data Proactive Reactive

6. Authentication and Identity Fraud Data Needed Personal Identity Data • Name • Address • Telephone # • Sanctions • Previous Addresses • Previous Telephone #s • SSN • High Risk Address • DOB • Employment • Driver License # • Demographics Corporate Identity Data • Principals names • Corporate Address • Corporate Phone #s • State of incorporation • Tax ID # • UCC’s • Duns #

7. Privacy and Personal Identifying Data Uses Regulation • Credit Granting • Insurance Underwriting • Pre-employment FCRA Credit Report Gramm-Leach Bliley Credit Headers Consumer opt out • To Protect against fraud, unauthorized transactions, claims or liabilities • Required institutional risk control • Persons holding a legal interest relating to the consumer • Acting as a fiduciary or representative for the consumer • Comply with federal, state or local laws • Necessary to effect, administer or enforce a transaction that a consumer authorizes • Name • Address • Phone #s • SSN

8. Other Privacy Laws and Regulations • Drivers Privacy Protection Act (DPPA 1996) • Children's Online Privacy Protection Act (COPPA 1999) • Right to Financial Privacy Act (RFPA 1999) • Health Insurance Portability & Accountability Act !(1996) • E.U. Data Protection Act • Foundation Principles • Notice • Choice • Access • Security • Enforcement • Audit

9. What is Next? • FTC to enforce and further evolve current regulations • Privacy advocates vs. Security debate • Further compliance and enforcement of E.U requirements • Global pressure to internationally comply • Urgent need to educate all policy makers and influencers as to unintended consequences of or actions and responsible uses

10. Money Laundering in the Year 2001 James Vaules CEO National Fraud Center National Fraud Center

11. “The world financial system has become a ‘money launderer’s dream.’” - Pino Arlacchi, Under Secretary-General of the UNExecutive Director - Office for Drug Control and Crime Prevention Source: Interpol National Fraud Center

12. Good News • Approximately US$500 million will be recovered through anti-money laundering measures (Source – Interpol) • Renewed emphasis to determine the source of suspicious funds. • Several new anti-money laundering initiatives before Congress National Fraud Center

13. Bad News • World’s third largest ‘business’ (Source: Interpol) • International drug trade is valued at approximately $500 billion (Source: Interpol) • Approximately $200 billion of drug money is laundered each year (Source: Interpol) • $1 billion spent annually on detection and enforcement (Source: Interpol) • Recent terrorist events demonstrated weaknesses in the detection process National Fraud Center

14. 3 Reasons to Combat Money Laundering • Fight underlying crime that generates the dirty money • Keep public and corporate officials honest • Protect integrity of the financial system National Fraud Center

15. Money Laundering in the Year 2001 Specific Unlawful Act (SUA) Placement Layering Integration National Fraud Center

16. 3 Choke Points for the Launderer • Initial entry of illicit money into the financial system • Transfers to/from the financial system • Cross-border cash flow National Fraud Center

17. Traditional Money Laundering Scheme A real life example National Fraud Center

18. Megabyte Money • Cash-less transactions • Electronic trading • Computerized clearing Source: Interpol National Fraud Center

19. Cyberpayments • Electronic transfer of values • Internet • Stored Value Smart Cards • No regulated third party (bank) • Rapid • Degree of anonymity • Eliminate physical movements of large sums of cash • Little or no paper trail • Not personnel intensive • International infrastructure • Global basis National Fraud Center

20. Law Enforcement • International sharing of information • Infrastructure to identify suspicious criteria • Differentiation of cyberpayments from broader Internet traffic flow • Public-private collaboration • Challenge to keep up with rapidly evolving technology • Government access to cyberpayment data • Jurisdictional issues • Federal • State • Local National Fraud Center

21. Driving Due Diligence • Wolfsberg Principles • Gramm-Leach-Bliley Act • Know Your Customer Policy • Federal Sentencing Guidelines • Annunzio-Wyle Anti-Money Laundering Act • OFAC Regulations • Foreign Corrupt Practices Act • Economic Espionage Act • Bank Secrecy Act • Financial Action Task Force • Organization for Economic Cooperation and • Development National Fraud Center

22. Hard Copy Report Generated Output Client Data More Data Social Address Needed? Security UCC Internet Name Media Judgment, Property & Suits & Liens Assets National Information National YES NO Fraud Center Resources Fraud Center Associations Bankruptcy & Affiliations Employment Licenses Education Credit Criminal History Proprietary Databases Civil Web Enabled Due Diligence Process Flow Client Request via Internet Due Diligence Complete National Fraud Center

23. Online Data Offline Data NFC Due Diligence Process Interpretation (Investigator and Analyst) Final Report National Fraud Center

24. Operational Best Operational BestPractices to Reduce Application Fraud Todd Ampe Risk Consultant RiskWise

25. Screening Existing Application Screening Tools Emerging ApplicationScreening Tools • Data Validation • Credit Report Data • Internal Customer Data • External Data • Manual Processes • Higher Risk Identification • Data Verification • Fraud Scores

26. Validation Validation Results Fraud Rate • 22.1% • 10.4% • 6.1% • Invalid Social Security # • Invalid Address • Invalid Phone

27. Results Higher Risk Results Fraud Rate • 23.4% • 11.6% • 7.3% • Social Security Number = Deceased, Bankrupt • Address = Non USPS, P.O. Box • Phone = Cellular, Fax #, Disconnected

28. Verification Verification ResultsAppsBad Rate Nothing Verified 8,033 31.4% Name and SSN Only 12,107 25.7% Partial Verify - One Source 13,741 12.5% Partial Verify - Multi Source 5,202 9.4% Full Verify - One Source 25,768 4.8% Full Verify - Multi Source 14,111 2.6%

29. 1 Highest 3.8 : 1 2 Higher 9.9 : 1 3 High 22.6 : 1 4 Moderate 93.0 : 1 5 Low 199.6 : 1 Total 60.4 : 1 * Fraud / Early default in first six months FraudDefender Bankcard Sample Results Score Good / Bad Odds* Risk Customers Determine the Level of Manual Review * Fraud / Early default in first six months

30. Application Fraud Loss Trends77% improvement after full implementation of Riskwise verification.

31. The Red Flags of Application Fraud William Fister Public Records Expert LexisNexis

32. Outline • Definition of Fraud • Red Flags of Fraud • Tools Available for Raising the Red Flags • Internet Facts, Sites and Drawbacks • Commercial Resources

33. Fraud Intentional or reckless misrepresentation or omission of a material fact which is reasonable and believable and which when relied upon results in injury.

34. Red Flags • Multiple current addresses • Excessive short term address changes • Holes in address history • Name variations • Multiple SSN • Evidence of financial distress • Litigiousness

35. Red Flags • Relationships to known problem people, addresses or businesses • Inconsistencies in the information provided • Work and residence addresses not proximate • Phone number outside reasonable address scope

36. Tools for Raising the Red Flags • Public Records • Publicly Available Data • Self Reported or Created Information • Third Party Prepared Information • Compilations

37. How and Where? • Government Sponsored Sites • Sometimes remote access • Sometime free of charge • Internet Sites • Proprietary Databases • Nationwide searches • Group Searches • Linked Records

38. Internet Drawbacks • Access • Speed • Advertising • Reliability • National Searches • Security • Search engine limitations

39. Internet Search Engines • Search Techniques • Keyword • Concept (clustering techniques) • Database built by spiders or direct submittal by Web developer • Focus on keyword density, meta-tags, position of keywords

40. Search Engine Drawbacks • Out of date and incomplete • “Cheat” techniques • Most sites spending on marketing and advertising rather than technology • Search sites sell their rankings • Search sites deliberately exclude competitor sites (Yahoo/Mining Company)

41. DEPEW RHETT

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47. People Finder Products Specific Sources -- “Free” • Big Book • bigbook.com • Database America • databaseamerica.com • Ultimate White Pages • theultimates.com • Lookup USA • lookupusa.com • WorldPages • worldpages.com • Yahoo People Search • yahoo.com/search/people • WhoWhere • whowhere.com/wwphone/phone. • Switchboard • switchboard.com • Four11 Phone Directory • four11.com • TelDir.com • teldir.com

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