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Leveraging Artificial Intelligence to Detect Procurement Fraud

Updated: Aug 29, 2023

The integration of Artificial Intelligence in procurement fraud detection strengthens governance frameworks, enabling organisations to create a culture of accountability and integrity.


Leveraging artificial intelligence to detect procurement fraud

Procurement fraud poses a significant threat to organisations, leading to substantial financial losses and reputational damage. As technology advances, organisations are increasingly turning to artificial intelligence to combat fraudulent activities. This article explores the various ways in which AI can be harnessed to detect and prevent procurement fraud, ensuring transparency, efficiency, and integrity in the procurement process.


Data analysis is like solving a puzzle - each piece of information brings you closer to the complete picture

EXPERTISE AND CAPABILITY CHALLENGES

Procurement fraud can be complex in nature and dependent of the scale of the procurement or size of a project can hide many typologies and methods of procurement fraud and corruption.


Large organisations can generate large volumes of purchases particularly within projects and subsequently large quantities of invoicing from contractors or suppliers. Identifying the risk within these volumes of data may be the difference between preventing fraud and losing 25% of the value of a contract to fraud. Recognising the data sources that can be used to identify risk and having staff that have been trained in the identification of procurement fraud can be the first hurdle to overcome.


LIMITATIONS IN CURRENT FRAUD DETECTION METHODS

Traditional fraud detection methods, such as manual review and rule-based systems, have limitations when it comes to detecting procurement fraud. These methods can be time-consuming, prone to errors, and may not be able to identify complex patterns of fraud. Additionally, fraudsters can adapt to these methods particularly where there is an insider threat and find ways to bypass them. Is this an area that can benefit from AI, as it can analyse large amounts of data and identify patterns that may not be visible to humans.


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The complexity in identifying the scale of procurement fraud

Sources of data can be held on different IT systems that might include personnel and supplier information, procurement data, quality assurance, maintenance, finance, audit and investigation data as well as compliance data sources including conflicts of interest, gifts and hospitality and expenses.


There are hundreds of data points that can be considered when proactively used to identify procurement fraud risk, and understanding how they can be used as part of a proactive analysis approach in targeting risk within the procurement lifecycle, is essential. Some of the challenges that an organisation might have may be having limited access to data analysis expertise and solutions, minimal availability of personnel to confirm compliance in the contract management and invoice process.


There are a number of ways in which data analysis and analytics can be used.

  1. Intelligent Data Analytics - AI-powered data analytics plays a crucial role in identifying patterns and anomalies within large volumes of procurement data. Machine learning algorithms can analyse historical transactional data, supplier information, and purchase orders to uncover irregularities and potential instances of fraud. By comparing current transactions with past data, AI can detect inconsistencies in pricing, quantities, or supplier behaviour, raising red flags for further investigation.

  2. Risk Assessment and Predictive Models - AI can aid in assessing and mitigating the risks associated with procurement fraud. Machine learning algorithms can analyse multiple variables, such as supplier history, industry benchmarks, and compliance regulations, to calculate a risk score for each procurement transaction. By utilizing predictive models, AI can identify high-risk suppliers or transactions in real-time, enabling organizations to take preventive measures before fraud occurs.

  3. Natural Language Processing (NLP) and Text Analysis - AI-driven NLP techniques can analyse unstructured data sources, such as emails, chat logs, and contracts, to identify suspicious or fraudulent content. By applying sentiment analysis and entity recognition algorithms, AI can identify hidden relationships, conflicts of interest, or abnormal communication patterns. Furthermore, NLP can be used to extract valuable insights from procurement-related documents, enhancing the efficiency of fraud detection processes.

  4. Real-time Monitoring and Anomaly Detection - AI-powered monitoring systems can continuously track procurement activities and identify potential fraudulent behaviours in real-time. By setting up alerts and triggers based on predefined rules, AI algorithms can flag irregularities, such as sudden price spikes, unusual purchasing patterns, or unauthorized vendor changes. Real-time anomaly detection allows organizations to take immediate action, mitigating the impact of fraudulent activities.

  5. Network Analysis and Social Graphs - AI can leverage network analysis techniques to detect complex procurement fraud schemes involving multiple individuals or entities. By constructing social graphs and analysing relationships between suppliers, employees, and other stakeholders, AI algorithms can identify hidden connections, collusive bidding, or kickback schemes. Network analysis enables organizations to uncover fraud patterns that would be challenging to detect manually.

AI FRAUD SOLUTIONS

Artificial intelligence (AI) has been widely used to combat fraud and enhance security in various industries including the financial sector. There are several AI-powered fraud detection tools available in the market today. One such tool is Fraud.net, which uses machine learning algorithms to analyse data from multiple sources and detect anomalies in real-time. Another tool is DataVisor, which uses unsupervised machine learning to detect fraudulent activities in large datasets. Other popular tools include SAS Viya AI and Analytics Platform. There has been no published figures on the benefits of these systems, These tools can help organisations detect and prevent procurement fraud, saving them millions of dollars in losses.


LIMITATIONS OF ARTIFICIAL INTELLIGENCE IN PROCUREMENT FRAUD DETECTION

Currently, there is no one AI solution that can target all aspects of a procurement lifecycle and in addition to this there are many aspects of the procurement process that may not be documented electronically, that might include the identification of need, justification and business case, specification and design that can all be areas in which procurement can be influenced or manipulated.


There are a number of procurement platform with integrated AI solutions that create greater efficiency and have the potential to prevent a level of fraud. These include matching invoice and purchase data before payment, comparison of variances in contract clauses over time documenting iterations and risk vetted suppliers.


An organisation can generate data from various aspects of business operations that are likely kept on different systems, all of which can be used to identify procurement fraud risk. These data sources might include supplier onboarding, tender process, contract management and invoicing, an insider threat and the improper sharing of commercially sensitive information and asset management.


The challenge in developing machine learning to detect procurement fraud is the need to have a significant quantity of historical procurement data, in order to have a machine 'well trained' and requires:

  • a balance of data of positive procurement fraud cases and negative cases that do not involve fraud

  • increasing variables increases the difficulty to sufficiently train the model

Once a risk assessment has been concluded and there is a greater understanding of where the procurement fraud risk is being targeted, focusing on where an AI solution can best serve risk identification can then be of greater value.


AI SOLUTIONS

In considering which type of AI solution is best to support an approach to mitigate procurement fraud risk, it is best to start off with an organisation risk assessment to determine which business areas are most at risk from procurement fraud and corruption. In addition to the approaches and solutions already mentioned, here are some common AI-based fraud solutions:

  1. Anomaly Detection: AI algorithms can analyse large volumes of data to identify unusual patterns or anomalies that might indicate fraudulent activities. These systems can detect abnormalities in financial transactions, user behaviour, network traffic, or any other data stream.

  2. Predictive Analytics: AI models can analyse historical data to identify patterns and predict fraudulent activities in real-time. By using machine learning algorithms, these systems can continuously learn and adapt to new fraud patterns, improving their accuracy over time.

  3. Biometric Authentication: AI-powered biometric systems use facial recognition, voice recognition, fingerprint matching, or other biometric markers to verify the identity of individuals. These technologies help prevent identity theft and unauthorized access to systems.

  4. Natural Language Processing (NLP): AI-powered NLP algorithms can analyse text-based data, such as emails, chat logs, or social media posts, to identify potential fraud. They can detect phishing attempts, fraudulent claims, or suspicious communications.

  5. Network Traffic Analysis: AI algorithms can analyse network traffic patterns to detect abnormal behaviour, such as Distributed Denial of Service (DDoS) attacks, intrusion attempts, or data breaches. These systems can identify and mitigate potential threats in real-time.

  6. Fraud Prevention in E-commerce: AI systems can analyse customer behaviour, transaction data, and other relevant factors to identify fraudulent transactions in e-commerce platforms. They can flag suspicious activities, detect fraudulent sellers or buyers, and reduce chargeback rates.

  7. Credit Card Fraud Detection: AI models can analyse credit card transaction data to detect fraudulent activities, such as stolen card usage, account takeover, or unusual purchasing patterns. These systems help financial institutions prevent fraud and protect their customers.

  8. Insurance Fraud Detection: AI algorithms can analyse insurance claims data to identify patterns of fraudulent behaviour. They can detect false claims, staged accidents, or inconsistent information, helping insurance companies reduce losses and improve fraud prevention.

  9. Anti-Money Laundering (AML): AI-based AML solutions can analyse financial transactions, customer data, and other relevant information to detect money laundering activities. These systems help financial institutions comply with regulatory requirements and identify suspicious transactions.

  10. Cybersecurity Threat Detection: AI algorithms can analyse system logs, network traffic, and security events to identify potential cyber threats, such as malware attacks, data breaches, or insider threats. They provide real-time alerts and help security teams respond quickly to mitigate risks.

BENEFITS OF LEVERAGING AI FOR PROCUREMENT FRAUD DETECTION

Leveraging artificial intelligence for procurement fraud detection can provide several benefits for organisations. Firstly, AI-powered tools can analyse large amounts of data in real-time, which can help detect fraud risk quickly. Secondly, these tools can identify patterns and anomalies that may be difficult for humans to detect, increasing the accuracy of fraud detection. Finally, using AI for procurement fraud detection may save organisations significant amounts of money by preventing fraudulent activities before they cause financial losses.

  • Artificial intelligence not only strengthens fraud detection in the procurement lifecycle but also acts as a deterrent, discouraging potential fraudsters from engaging in illicit activities.

  • The continuous learning capabilities of AI systems enable them to adapt and evolve with changing fraud patterns, providing sustainable protection against procurement fraud.

  • AI-driven analytics can identify complex fraud schemes by examining interconnected data points, helping organisations stay one step ahead of fraudsters.

  • Procurement fraud detection powered by AI has the potential to minimise false positives and false negatives, ensuring a higher level of accuracy in identifying fraudulent activities.


Artificial intelligence is certainly on the road to revolutionise fraud detection in the procurement process. By leveraging intelligent data analytics, risk assessment models, NLP, real-time monitoring, and network analysis, organisations can significantly enhance their ability to identify and prevent procurement fraud. Implementing AI-powered systems allows for proactive detection, reduces financial losses, and safeguards the reputation of organisations.


However, it is crucial to ensure the ethical and responsible use of AI, with human oversight and continuous improvement to adapt to evolving fraud techniques. With AI as a powerful ally, organisations can fortify their procurement processes against fraudulent activities, promoting transparency, fairness, and efficiency.



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