By Tanisha Saxena | IMAWS

In the latest data released by the Reserve Bank of India (RBI) in December 2022, a significant 46% decline in the quantum of banking fraud was reported for the period spanning April to September 2022. This noteworthy decrease is attributed to the increasing adoption of cutting-edge data-science-backed technology tools within banks and other organizations. These advanced tools enable early detection of fraud risks, empowering institutions to proactively address and mitigate potential threats. As a result, this proactive approach has proven effective in curbing losses associated with fraudulent activities in the financial sector. We connected with Mohan Ramaswamy – Co-Founder & Chief Executive Officer at Rubix Data Sciences to understand the situation and how we can combat the problems. 

Q1. Can you explain how Rubix’s solutions assess and monitor B2B credit, supplier, and compliance risks, especially in the context of fraud detection?

Ans. Rubix’s solutions leverage data, analytics, and technology to not only assess B2B credit, supplier, and compliance risks but also to identify and prevent different types of B2B fraud. Our comprehensive offerings enable businesses to make informed decisions, minimize risks, and ensure the integrity of their business partnerships. Rubix solutions address the following key aspects:

Identity Validation and Fraud Prevention: We offer solutions for identity validation of counterparties, such as customers, distributors, dealers, suppliers and vendors. These solutions are usually deployed before counterparties are onboarded into the client’s distribution or supply chains. These solutions include Video KYC (vKYC), Electronic KYC (eKYC), Key Registration Checks, and Promoter ID checks. 

Rubix runs API calls on various statutory databases (e.g., GST, MCA) to ensure that the identity data and documentation provided by prospective counterparties are accurate. Our Video KYC Solution (vKYC) helps companies validate the identity of their dealers and sub-dealers located in remote areas in a matter of minutes, without any physical visits. 

Credit Decisioning and Supplier Risk Assessment: The Rubix Automated Risk Management & Monitoring System (Rubix ARMSTM) platform helps assess credit risk and set credit limits for distributors, dealers, and customers and check the financial stability and reliability of suppliers, vendors, and service providers. If the Rubix ARMSTM platform determines that a counterparty has a high risk or poses a fraud risk, our client can avoid dealing with it to prevent losses.

Besides, our Compliance Risk assessment Solution checks the following key parameters about counterparties:

• Statutory compliance (GST, PF, MCA etc)
• Status of pending litigation in all courts from magistrates’ courts to the Supreme Court, Tribunals etc.
• Politically Exposed Person (PEP) checks
• Anti-Money Laundering Cases (e.g., PMLA)
• Compliance with Anti-Bribery laws (e.g., Prevention of Corruption Account, FCPA, etc.)
• Compliance with international economic and trade sanctions

This helps ensure that our clients deal with only genuine and statutorily compliant counterparties.

Risk Monitoring: The Rubix Early Warning System (EWS) platform offers ongoing risk monitoring of counterparties by continuously collating key risk indicators from various data sources, including statutory compliance, financial filings, news, and media. This dynamic monitoring helps our clients keep track of changes in their counterparty’s risk profile in near real-time and make informed risk decisions based on the most up-to-date information. Any red flags are immediately highlighted by our EWS platform which allows our clients to rapidly reduce their risk exposure.

B2B Debt Collection Solutions: In the final stage of the transaction lifecycle, Rubix provides end-to-end B2B debt collection solutions. This includes accounts receivable management, amicable debt collections, legal support, and skip tracing to locate defaulting debtors. Skip tracing especially helps trace owners of entities that may have committed fraud and disappeared.

Thus, Rubix solutions are instrumental in preventing fraud by validating the identity of counterparties, making it difficult for fraudulent entities to infiltrate the B2B transaction cycle. With continuous risk monitoring, any suspicious or unexpected changes in a counterparty’s risk profile can be quickly identified and investigated, potentially revealing fraudulent activity. 

As previously mentioned, our solutions also ensure compliance monitoring by accessing data related to AML, PEP, financial crimes, court cases, and more from multiple sources. This comprehensive approach helps businesses efficiently monitor the compliance of their counterparties, reducing the risk of regulatory non-compliance, which is often the first indicator of fraud.

Q2. How does Rubix stay updated on the latest trends and developments in fraud detection to ensure its solutions are up-to-date and effective?

There are several factors at play here:

• Our Founders and team members are highly experienced in this domain and have deep networks in the Risk Information and Analytics industry both in India and overseas. Having been involved in the establishment and management of business information companies, credit rating agencies, and credit bureaus, they are focused on developing best-in-class solutions suitable for India.
• Our product team spends a lot of time examining global solutions and benchmarking them with tools available in the Indian market.
• Most importantly, our data specialists are constantly checking for the availability of new, consistent, reliable data sources about businesses that can be used to assess the risk of a business. There is no point in spending money on technology or platforms if the granular entity-level data that is required for risk assessment and fraud detection is not available. During our careers, we have seen expensive risk and fraud tools deployed but failing in the Indian context because of the paucity of reliable data. We are, therefore, equally focused on the data, as we are on the analytics and technology.

Q3. What are the key challenges in fraud detection within the Indian financial landscape, and how does Rubix address these challenges?

Ans: Fraud detection in the Indian financial landscape faces several unique challenges, stemming from the country’s diverse and rapidly evolving financial ecosystem. Some of the key challenges include:

A) Diverse Financial Ecosystem: India has a complex and diverse financial landscape that includes traditional banks, cooperative banks, non-banking financial companies (NBFCs), microfinance institutions, and digital payment platforms. Each of these institutions may have different fraud vulnerabilities and require tailored detection mechanisms. Another important factor is the availability of client and transaction data in formats that are easy to analyze. While the large PSU Banks, Private Banks, NBFCs and new age Fintech companies have organized their data very well, this may not be true for the smaller cooperative banks and NBFCs. 

B) Digital Transformation: India has witnessed a significant shift towards digital payments and online banking services. While this has improved convenience, it has also opened up new avenues for fraud, including phishing, identity theft, and cyberattacks.

C) Regulatory Challenges: The regulatory environment in India is evolving to keep up with the changing financial landscape and requirements. BFSI players must quickly adapt to new regulations and compliance requirements in order to protect themselves from newer frauds that the regulator is concerned about. It is important for fraud detection systems to be upgraded to stay in line with new regulations. For instance, several banks have been recently fined by the RBI for non-compliance with KYC regulations.

D) Cash-based Economy: India has a significant cash-based economy, which can lead to informal and untraceable transactions, making it difficult to detect fraud or trace illicit activities. Besides, a significant portion of India’s population is still underbanked or unbanked, relying on informal financial services. This segment may be more susceptible to fraud due to a lack of regulatory protection.

E) Cross-border Transactions: With the growth of international trade and remittances, cross-border transactions are on the rise. These transactions can be more challenging to monitor for fraud, especially when different regulatory environments and currencies are involved.

F) Data Privacy and Security: Ensuring the privacy and security of customer data is a critical challenge in fraud detection. Data breaches can expose sensitive information, making customers vulnerable to fraud. We have seen a profusion of consumer and commercial fraud based on data and identity theft.

G) Resource Constraints: Smaller financial institutions, including rural cooperative banks and credit cooperatives, may lack the resources and expertise to implement advanced fraud detection systems, making them more vulnerable to fraud.

H) Staying Ahead of the Fraud Curve: Fraudsters continually adapt and develop new techniques to exploit weaknesses in the financial system. Staying ahead of these evolving threats is a constant challenge.

I) Consumer Awareness: Many individuals, especially in rural areas, may not be fully aware of the risks associated with digital financial transactions. This lack of awareness can make them more susceptible to fraud.

Q4. Can you discuss the role of LEIs in fraud prevention? 

Ans. Legal Entity Identifiers (LEIs) play a significant role in fraud prevention by providing a standardized and unique identifier for entities engaged in financial transactions across the world. LEIs are 20-character alphanumeric codes that are assigned to valid legal entities and were introduced to enhance transparency and traceability in financial markets.

Each legal entity involved in financial transactions is assigned a unique LEI. This distinct identifier ensures that there are no ambiguities when it comes to identifying the entities involved, reducing the risk of fraudsters impersonating legitimate entities. Thus, LEIs provide transparency in financial transactions, making it easier for regulators, financial institutions, and market participants to identify and validate entities, and understand the ownership structure.

Various regulators around the world mandate the use of LEIs by entities participating in certain financial transactions. This not only helps regulators monitor market activities but also ensures that transacting entities are accurately identified, reducing the risk of fraudulent transactions.

Perhaps the biggest advantage of LEIs is that they help in identifying the true ownership and control of legal entities. This can reduce the misuse of shell companies, which are often used in fraudulent schemes to hide the identities of wrongdoers.

Q5. What strategies or best practices do you recommend for small and medium-sized enterprises (SMEs) and micro, small, and medium-sized enterprises (MSMEs) to enhance their fraud detection capabilities?

Ans. Here are some steps that MSMEs can adopt to enhance their fraud detection capabilities:

A) Strengthen internal control mechanisms: This can be done through steps such as dual authorisation of transactions, tiered approval systems, regular internal audits by a third party, segregation of duties between departments, and background checks of employees who have access to financial data and information.

B) KYC of counterparties: MSMEs must put in place a simple system for validating the identity of counterparties before entering into any financial transactions.

C) Credit, Supplier and Compliance Risk Assessment of counterparties: The MSME must check on a customer, distributor, or dealer’s credit risk before providing credit. Similarly, Supplier Risk Assessment must be done before appointing new suppliers and vendors. MSMEs must validate that the counterparties that they are dealing with are statutorily compliant to prevent financial penalties.

D) Risk Monitoring: The MSME must put in place a mechanism to monitor the credit and supplier risk. An entity’s best customer for the past decade may be on the verge of bankruptcy and its long-standing supplier could be financially unstable. The only way you will know is by monitoring risk; fortunately, inexpensive tools are available for MSMEs to monitor the changing risk profile of counterparties.

E) Build the Right Culture for Fraud Prevention: MSMEs often do not have the luxury of spending money on HR activities. However, preventing fraud needs the right culture. Team members should feel confident about bringing issues up to the owners or management and know that they will not be penalized. 

Q6. In what ways does Rubix collaborate with organizations like The Federation of Indian Export Organizations (FIEO) to facilitate prompt and affordable LEI issuance for Indian exporters and improve fraud prevention in the export sector?

Ans. FIEO has signed a Memorandum of Understanding (MoU) with Rubix Data Sciences to facilitate LEI issuance to Indian exporters and entities. This partnership enables FIEO to refer its members to Rubix for LEI issuance. Rubix, as part of the MoU, assists FIEO-referred Indian exporters and entities through the documentation process required for obtaining an LEI. 

This assistance streamlines the process and ensures that exporters can obtain their LEIs promptly and cost-effectively. This helps them reduce the time and financial resources required for obtaining LEIs. In addition to issuance, Rubix also collaborates with exporters to ensure the timely renewal of LEIs, ensuring that their LEIs remain active and compliant.

Overall, this arrangement between Rubix and FIEO is aimed at simplifying the LEI issuance process for Indian exporters, making it cost-effective, and supporting them in maintaining compliance with regulatory mandates. The LEI serves as an important identifier in cross-border transactions and helps prevent fraud by verifying the legitimacy of entities involved in financial transactions. 

This partnership between FIEO and Rubix aims to enhance trust and transparency in the export sector in India, while also aiding in global market access for SMEs.

Q7. What metrics or key performance indicators (KPIs) should organizations monitor to gauge the effectiveness of their fraud detection and monitoring efforts? 

Ans. Establishing KPIs (Key Performance Indicators) for a fraud prevention system is crucial for evaluating its effectiveness. Here are the top KPIs that an organization should consider when evaluating its B2B fraud detection and prevention solutions:

• Detection Rate (Hit Rate): This is perhaps the most direct KPI, indicating a fraud detection system’s effectiveness in identifying fraudulent activities. It is the ratio of the number of true positive cases (actual frauds correctly identified) to the total number of fraud cases (both detected and undetected). A higher detection rate signifies better performance of an organization in detecting fraud.
• False Positive Rate: While identifying fraud is the priority, it’s equally important that your fraud detection system doesn’t generate an excessive number of false alarms. A high number of false positives can lead to “alert fatigue” and unnecessary operational costs for organizations. This KPI measures the number of legitimate transactions incorrectly flagged as fraudulent against the total number of legitimate transactions processed.
• Financial Impact Mitigated: This KPI refers to the total value of potential loss that has been prevented due to the timely detection of fraud. It highlights the financial effectiveness of an organization’s fraud prevention system.
• Resolution Time: This measures the average time taken to investigate and resolve alerts generated by the organization’s fraud prevention system or team. A shorter resolution time often indicates higher efficiency and a better understanding of the patterns or signs of fraudulent activity, leading to quicker decision-making processes.
• System Uptime/Availability: While evaluating a fraud detection system, system reliability is crucial. This KPI tracks the availability of an organization’s system for continuous fraud screening. High uptime indicates reliability because it means that transactions are being monitored consistently.

It is also essential to ensure that an organization’s fraud prevention system is compliant with relevant regulations, and data privacy standards.