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Bad Debt Ruining Your Balance Sheet? Look at Bust-Out Fraud

Lock and chain
Sometimes I feel like fighting financial fraud is what PIMCO’s Bill Gross calls
“[s]ort of a reverse ‘Sisyphus’ moment – two steps upward, one step back.” He was talking about investment yields, but the same principle applies to financial organized crime. Despite increased awareness and prosecution of financial fraud (two steps up), its perpetrators are increasingly sophisticated and operating 24/7, worldwide (one step back).

Bust-out fraud damages every organization

I’m talking about bust-out fraud rings, of which there are many examples across industries. Credit card fraud is the classic example; fraudsters use stolen identities to apply for and use credit. They make regular payments for a short while, then quickly max out their credit and abandon the cards, with no plans of future repayment.

Bust-out fraud is a major force wherever there is a trusted exchange of money – from consumer and commercial loans, to healthcare and home insurance reimbursements, to tax refunds. From recent headlines, here are a few examples:

Fraud Ring Headlines

Skewed financial results

Because bust-out fraudsters appear, on the surface, to be legitimate customers, the financial damage they incur is typically classified as defaults or other bad debt. But bust-outs are a fraud problem, not a default problem, and a big one.

Analysts estimate that between 10% and 15% of all banks’ unsecured bad debt is actually bust-out fraud, resulting in tens of billions in losses every year. Financial results are skewed, and untold resources are spent chasing down debt that will never be collected.

Big Data: A giant step upward

Today, advances in Big Data analytics are making it possible to achieve big breakthroughs in detecting and busting bust-out fraud rings. This week, I’m speaking on this topic at the NACHA Payments 2014 conference, at the session: “Busting Fraud Rings with Social Link Analysis.”

You might want to keep an eye out for my next post; in it, I’ll go into detail about social link analysis, a key enabling technology in stopping today’s sophisticated fraud rings. By proactively exposing fraud rings’ biggest vulnerability, shared identity information, social link analysis uses more information to identify more relationships – and bust more bust-out fraud rings.

Until then, thanks for your comments, opinions and social shares below. And may all your pursuits take you upwards, not back.

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From what I recall, bust out fraud refers to a special class of fraud where the fraudster manages to go OVER their card limit.

TJ Horan

Thank you for the comments, Larry. I agree with your interpretation, as in the classic case of bust-out fraud, the perpetrator takes some last-minute actions to boost their credit line capabilities before they disappear. The term has evolved to often describe many related fraud types, including “sleeper fraud,” “advances fraud,” etc. Essentially, it’s an attempt to use behavior or events to maximize an ability of a perpetrator to receive funds. In the situation where individuals are working together, we sometimes refer that as “organized bust-out fraud.” FICO has a white paper on the bust-out fraud topic, if you are interested in reading more on how technology can be used to help with the defense: -- it's "Finding Persons of Interest Across the Global Enterprise." Hope you were able to catch the presentation at NACHA Payments 2014.

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