Hi everyone,  

Welcome to the 134th edition of The Pattern, a weekly where we dive into the latest from the world of economy, technology and finance. Let’s get started. 

RBI's approach to combat financial crimes   

Financial fraud is constantly evolving and getting harder to pin down. What we once considered basic scams, which we would warn our parents not to fall for, now involve sophisticated tactics with high-tech tools and a frightening ingenuity. The statistics paint a grim picture. India lost over Rs 11,000 crore in the first nine months of 2024. This is an alarming number.  

Today's fraudsters are highly organised and tech-savvy. They find ways to exploit system loopholes and hide their actions with various tools. One of the most common and damaging forms of fraud is creating mule accounts. These accounts are used for money laundering or transferring for illegal purposes. Mule accounts are often active, with fraudulent transactions popping up in unexpected places.   

Tracking mule accounts

The RBI is actively turning to technology, specifically artificial intelligence, to tackle the growing menace. The regulatory body has introduced Mulehunter.Ai, an AI-driven tool which uses advanced algorithms to find 19 types of fraud. It can detect sudden high-value transactions in inactive accounts and small deposits that lead to large withdrawals. It has been deployed to major public-sector banks, and the result is promising. This highlights the potential of AI in fortifying fraud detection frameworks.   

Fostering AI    

The brilliance of AI is not just restricted to tracking the mule accounts. As banks integrate AI into their fraud detection systems, these tools have started to identify suspicious transactions across all accounts. Unlike manual reviews prone to human error, AI is monitoring activity 24/7, analyzing transaction patterns, and raising red flags so that financial institutions can mitigate risks beforehand. As banks continue to adopt machine learning, these tools will only get better, smarter, and more effective at preventing fraud before it happens.    

Reintroducing the cash retraction feature    

And then there's the classic issue of ATM fraud. Recent innovations have led to scams involving fake shutter overlays, where fraudsters manipulate ATMs to trap cash. In this scam, fraudsters place fake covers over ATM cash dispensing slots, trapping money behind the cover. When a customer tries to withdraw cash, it appears that the transaction has failed, but the money is still there, waiting for the fraudster to retrieve it once the customer leaves.    

The RBI has decided to reintroduce the cash retraction feature in select ATMs to combat this. This feature automatically retracts cash if the customer doesn't collect it within a certain time. The RBI disabled this feature in 2012. However, because new types of fraud have emerged, the RBI has decided it is necessary to bring back the retraction feature.   

Tightening hiring processes    

Considering the risks of the digital financial landscape, one may yearn for the earlier days of managing finances through physical transactions and fostering better customer relationships. The problem isn't just about external threats; some fraud cases are the result of insider involvement.    

In response, the RBI is trying to make employee background verifications even stricter. Banks are tightening their hiring processes and running more comprehensive checks, including verifying education, criminal records, and past employment. 

A report from AuthBridge shows that from 2021 to 2024, the banking and financial sectors have seen a 10.4% increase in differences between employee information and background check data. The report explains that the increase is due to more pressure on bank employees, changes in the job market, and rapid growth in credit services. As a result, some employees have submitted false credentials. An anonymous fintech executive noted that private banks face around 30% employee turnover, with many workers switching jobs frequently.  

The RBI ensures that only trustworthy people can access sensitive financial data by performing background checks. Today, fraud can have dire consequences, so it is not enough to trust employees based on appearances. The background check process needs to be thorough and ongoing.   

Here's the thing: fraudsters are never going to stop evolving. As soon as one loophole is closed, they'll find another way in. Much like the high-profile case, Amtek Auto Ltd. scam, where falsified documents, shell companies, and hidden ownership allowed fraudsters to siphon off ₹27,000 crores. It's a textbook example of just how creative fraudsters can be. The sad truth is that fraud will always be a moving target, and banks must stay agile.    

Safeguarding tomorrow 

Tools like Mulehunter.Ai, stricter employee verification, and cash retraction features represent significant strides in this battle. Yet, to be successful, everyone, including banks, regulatory bodies, and consumers—needs to work together. It is important for all of us to stay informed and proactive.   

Digital literacy is essential. When people learn to spot and report potential fraud, we can build a culture of awareness. In today's digital world, preventing fraud is not just the responsibility of banks; everyone must take part. 

That’s all for this week. I will see you next week. As always, I’ll leave some reading recommendations below. 

Reading List:  

Curbing cyber fraud: RB(A)I wants more banks to join hunt for mule accounts  

Platforms to be created for discussions with CBI to expedite investigation in bank fraud cases; FinMin holds meet with stakeholders  

Some ATMs to retract cash to tackle fake shutter overlay fraud: RBI  

Banks increase employee background checks as mule accounts and frauds rise  

Banking on tech: Lenders keep an eagle 'AI' on mule accounts  

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates. 

Cheers,

Mayank  

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.