Harnessing fintech in governments’ fight against financial fraud

Cases of financial fraud skyrocketed worldwide during the COVID-19 pandemic. At a Global Government Fintech webinar, panellists discussed the merits of government use of fintech solutions – including artificial intelligence – to reduce manual processes, undertake due diligence, and ultimately, to identify and prevent fraud

Increasing the adoption of emerging tools and technologies such as artificial intelligence (AI) and ‘entity resolution’ to tackle financial fraud is crucial to help governments locked in an “arms race” against criminals.

That is the view of a senior representative of the UK Cabinet Office, who spoke at a recent webinar entitled ‘How can fintech solutions help governments tackle fraud, error and debt?’ organised by Global Government Fintech, the sister publication of Global Government Forum.

Ivana Gordon, head of government grants expert services at the Cabinet Office, told the online audience that fintech solutions were increasingly being considered and deployed to help tackle fraud, with “cross-system collaboration” being “key”.

Tech-based solutions used by the UK government to tackle fraud include an online automated due-diligence tool called Spotlight that highlights areas of risk to inform grant-making decisions. The Cabinet Office has also engaged a fintech company, Quantexa, to detect fraud in COVID-19 loan programmes, such as the Bounce Back Loan Scheme (BBLS), and to help tackle financial crime more broadly.

The government is using Quantexa’s Contextual Decision Intelligence (CDI), network analytics technology, and ‘entity resolution’ – which seeks to identify descriptions that refer to the same real-world entity appearing either within a single data source or across multiple data sources.

“We’ve been doing some innovation pilots with fintech, exploring entity resolution, for example, to try and build a single view of a company or individual, and harnessing analytics to find the connections and trends and risks,” Gordon said. “For example, linking a conviction for drugs [offences] to an account with a Bounce Back Loan, and then looking at the wider network of companies that also got Bounce Backs [loans].”  

Anti-fraud ‘under-resourced across public sector’

Such innovations are sorely needed when considering the scale of financial fraud and error in public spending, which in the UK is estimated to cost the taxpayer up to £51.8bn (US$69bn) every year. The UK government’s Counter Fraud Function comprises 16,000 professionals, of whom around 90% work for HM Revenue & Customs (HMRC) or the Department for Work & Pensions (DWP).

“The Counter-Fraud Function estimates that fraud loss was between £5bn (US$6.6bn) and £18bn (US$24bn) last year as a result of the pandemic,” Gordon said. “But this could be very conservative, and we won’t really know the extent of fraud-and-error loss for several years.”

Gordon described the UK’s anti-fraud infrastructure as “fragmented and complex”, and said that anti-fraud “continues to be an under-resourced area across the public sector”.

She referenced a report from think-tank the Royal United Services Institute (RUSI), The Silent Threat: The Impact of Fraud on UK National Security, published in April, which described crimes such as identity and credit card fraud as having reached “epidemic” levels in the UK. The amount lost by the government in fraudulent claims was described as a “heist on public services” by one official quoted in RUSI’s report.

Digital investment on the rise

Grants represent about 13% of the UK government’s annual spending. Gordon said grant schemes traditionally relied on manual processes but that following investment those processes had “really been bypassed by digital transformation over recent decades”. Now the government can process “over 10,000 applications in minutes, rather than spending two to three hours per applicant on the most basic due diligence checks”.

“When we were just about to launch Spotlight [in 2020] we were hit by the pandemic and grants were thrust to the forefront of government measures to help support the nation, providing essential funding. Our spend increased last year by over 400%,” Gordon said.

“Prevention of fraud and economic crime in grants due diligence is an arms race against criminals who are diversifying and taking advantage of COVID-19,” she added. “Spotlight has proved instrumental in supporting our COVID response. It has helped to risk assess billions of pounds-worth of grants and has consistently helped to identify and prevent millions of payment irregularities.”

Gordon also cited the usefulness of a virtual ‘hackathon’ held in June 2020 focused on how new technologies and greater collaboration between government and the private sector could be harnessed to fight fraud. “But we have only just begun to harness government information,” she said. “We are working to incorporate wider data sharing, such as tax, debt and police data, and even exploring counter terrorism intelligence.” In addition, she said, colleagues were also “exploring wider partnerships” internationally.  

“We know that our digital solutions are set to harness artificial intelligence, such as machine learning and predictive analytics, and we aim to catalyse the use of AI across UK governments and further improve the effectiveness and efficiency of grant management,” Gordon said. “We really look forward to exploring the opportunities of what other fintech solutions can bring to our journey and roadmap to developing these digital solutions, and collaboration going forward.”

Speeding up social payments

Another of the webinar’s panellists, Olga LaBelle, vice-president for government engagement at Mastercard, which was the webinar’s knowledge partner, focused her remarks on how technology solutions can help fraud in public procurement and social disbursements.

“Paper-based means of procurement, like using purchase orders, invoices and manual reconciliation, are not only time intensive, but also prone to risk and error,” she said. “Within tech solutions, governments can use algorithms to reduce fraud, while eliminating those manual processes.”

LaBelle cited an example from the US, where she is based, in the context of social payments during the pandemic. “Fintech solutions could be used to help people get paid much faster. Rather than waiting for weeks or months to receive a cheque from the government, people could receive it within days as a direct deposit to their bank account, or onto a prepaid card if they don’t have a bank account,” she said.

“We think of speed and fraud as having an inverse relationship: the faster you get payments out, the more fraud there will be. But in the US, we actually saw the opposite. Digital payments also reduced fraud in states that use cheques for government disbursements,” she said.  

Digital payments also enable greater transparency and generate data that can be used to monitor whether “money was being spent in the grocery stores and pharmacies, rather than gambling centres”, LaBelle added.

She cited a similar example from the UK where Mastercard was involved in an NHS and Royal Voluntary Service scheme whereby people who were self-isolating were able to provide helpers with a prepaid card that they could use only at specific shops, such as grocers, and not to withdraw cash from ATMs.

‘Time is money for the anti-fraud function’

Two further perspectives were provided during the webinar by Juha Kuusala, the Finland Tax Administration’s national VAT anti-fraud co-ordinator, and Martin Karro, deputy director-general in Estonia’s Ministry of Finance’s State Shared Service Centre (SSSC).

The SSSC was set up seven years ago as a hub for public procurements, grants and other services. According to Karro, the percentage of grants paid out “in an incorrect manner” by the SSSC was 0.75%. This relatively low percentage showed, he said, that “in-built controls are functioning”.

Kuusala, meanwhile, focused on Finland’s co-operation with Estonia to detect and prevent fraudulent financial activities, specifically the benefits of real-time data exchange with its Baltic neighbour’s authorities. “Time is money. Time is money also [for] the anti-fraud function,” he said.

He said the two countries do not share common IT architecture but that a “technical connection” has been devised through which they can share data. Finland wants to work with other countries in a similar way, he said.

Fintech uptake: barriers to break down

Speakers at the webinar were asked by its chair, former UK senior civil servant Siobhan Benita, what the biggest challenges were to further fintech uptake across governments to tackle fraud.

Gordon said a cultural shift was needed “in terms of how much more should be invested in preventative measures, particularly in the grants space”, as well as taking advantage of the use of technology to monitor and evaluate grants.

For Karro, it is greater collaboration that is key. He said that the centralisation of services necessarily involves different agencies and departments ceding control and that the SSSC was “still constantly working on” overcoming cultural resistance to this, whilst delivering “customer satisfaction” to other public authorities which remained a priority.

LaBelle, meanwhile, drew a distinction between digitisation and digitalisation, describing the former as using a digital tool instead of a manual tool, and the latter as “fundamentally changing the whole end-to-end process because you’re using digital fintech solutions”. This, she said “is hard because you have to start at the ground level to really get those benefits around fraud reduction efficiencies – you have to change the way the process works end-to-end.”

While barriers to fintech adoption remain, the webinar’s panellists demonstrate that governments are increasingly looking to financial technology to help fight fraud. Fintech is in its infancy but as the sector grows so too should governments’ armoury as they work to protect the public purse.  

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