Blockchain and Fraud Detection

How Blockchain Can Help in Fraud Detection

Blockchain refers to a shared ledger that is decentralized and resistant to any sort of tampering. It gives the verified contributors the access to store, view, and share the digital information in an environment that is rich in security, which in turn helps in fostering trust, accountability, and transparency in business relations. To capitalize on these stated benefits, companies have now started exploring ways in which the Blockchain technology could be used for preventing fraud in various industry verticals.

Three Features of Blockchain Which Prevents Frauds

The main three characteristics which makes the blockchain technology an ideal choice for preventing fraud are-

i. Distributed Networks

The blockchain technology consists of a distributed digital ledger that contains data that is shared between computers and reconciled on a regular basis. There is no central authority which gives no point of failures. The management and authorization of the data spread across the network is transparent, such that there is no place to commit fraud. The members in the business network or supply chain management can quickly check and verify the processes from beginning to end. Not only the current data, but the historical data of the asset transfer is almost on the go for the participants present in the network. For making alterations to the data on the block, one needs to gain control over the majority of the systems present in the network

ii. Immutable

Once a data or transaction is registered on the blockchain, it can’t be altered, thus making it immutable. Also, before a block is formed and added to the chain, all the participants in the networks need to validate the data. This validation is known as Consensus. Once the consensus is done, the block is approved and given a timestamp, prior to which it is attached to the previous block on the chain. Thus, with blockchain one can procure the data of an asset in terms of its origin, the journey it has done, and the owner for the given asset

iii. Permissible

Blockchain networks are built on permission or non-permission which depends on the type and formation of blockchain. Such permission-based blockchain networks work great in preventing fraudulent activities as they can restrict the access of the systems. This is also known as private blockchain

What Type of Frauds Are Detected?

1. Financial Fraud

Blockchain can help in combating financial fraud. Various aspects can make financial transactions look more complex. Some of these tasks could be- the time needed for any settlements, collateral requirements, the difference in currency denominations, and many more. Some procedures are multi-staged and necessitate reasonable levels of human interactions for most cases. Blockchain can help in fraud detection by enabling the sharing of information in real-time and updating the ledger upon the agreement of all parties. This will not only prevent frauds but also lower the overall costs and time taken for the process too.

2. Identity Frauds

Identity theft is one of the serious issues that has impacted consumers across the globe in the past few years. Blockchain ensures the security of the digital ID of an individual in a manner that makes it tamper proof. In cases of identifying data being kept in a permission-required framework, the authorized parties can access a single version of the real information and verification of transactions can be done only by a known party. This keeps the records safely and importantly, valid.

3. Supply Chain Frauds

Supply chain fraud is also a major issue that is faced by several companies in recent times. The supply chain networks are quite complicated with a large number of people being involved in the process. Blockchain helps in preventing fraud by a more transparent and easily traceability of products. The Blockchain products can’t be manipulated with ease and verification and updating takes place once an agreement amongst all approved participants has been done. Digitization by the blockchain helps in tracing back the products to their origins.

Financial Fraud Case: 2017 Fyre Festival Scam

Fyre Festival of 2017, is a musical festival which was supposed to take place at the Bahamas received attention on its failure post-release of the documentaries by Hulu and Netflix. The organisers made a false promise to the attendees and the main organizer of the event cheated a dozen investors with a million dollars. In July 2018, it was stated that the lead organizer had cheated more than 100 investors with a total of $27.4 million. The organizer lied about his personal business and used the brokerage account statements for showing the fraudulent income. He told his investors that he had more than $2.5 million in his personal stock holding, but in reality, he had an amount which was less than $2000. The money obtained from the investors was being used for funding his lavish and rich lifestyle

Identity Fraud Case: Facebook Security Scam

The Facebook Security Scam is an instance of social media fraud, which was specially designed to separate social media users from their money. In the year 2012, scam pertaining to Facebook was developed in an attempt to steal financial information from their users. Hackers hijacked the user accounts by impersonating the security set up by Facebook. These hacked accounts were used to send fake messages to other users by warning them that their account was about to get deactivated and thereby, instructing the users to click on a link to verify their account. Post this, the users were directed to a false Facebook page which asked them about their account credentials as well as the credit card information in order to secure their account.

Supply Chain Fraud Case: Supply and Distribution of Seafood

The supply chain in seafood has been in the headlines for negative reasons for quite some time. The current seafood supply chain holds tedious processes like the manual record keeping, which makes it more vulnerable to errors. Other issues that result in making the supply chain inefficient include improper food storage conditions, mislabelling fraud, and the existence of unregulated prices. As a result of this, the quality and security of food reaching the end customer is compromised. Also, there are various types of fraud involved in the chain, leading to a lacking trust between the customers and vendors. The blockchain technology can prove to be of great help in the seafood verification as it can track the seafood right from its production stage and ending with its distribution.

Rishabh Sinha

Rishabh Sinha joined ESDS post completion of his MBA in Marketing from NMIMS, Mumbai. He is passionate about writing and some of his works have been published in The Times of India at Ahmedabad. Currently he is a part of the Content Team under ESDS Online Marketing.
Rishabh Sinha