The application of data mining techniques in financial fraud detection: A classification framework and an academic review of literature

  • Authors:

  • E. W. T. Ngai;Yong Hu;Y. H. Wong;Yijun Chen;Xin Sun

  • Affiliations:

  • Department of Management and Marketing, The Hong Kong Polytechnic University, Kowloon, Hong Kong, PR China;Institute of Business Intelligence and Knowledge Discovery, Department of E-commerce, Guangdong University of Foreign Studies, Sun Yat-Sen University, Guangzhou 510006, PR China;Department of Management and Marketing, The Hong Kong Polytechnic University, Kowloon, Hong Kong, PR China;Institute of Business Intelligence and Knowledge Discovery, Department of E-commerce, Guangdong University of Foreign Studies, Sun Yat-Sen University, Guangzhou 510006, PR China;Institute of Business Intelligence and Knowledge Discovery, Department of E-commerce, Guangdong University of Foreign Studies, Sun Yat-Sen University, Guangzhou 510006, PR China

  • Venue:
  • Decision Support Systems
  • Year:
  • 2011

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Abstract

This paper presents a review of - and classification scheme for - the literature on the application of data mining techniques for the detection of financial fraud. Although financial fraud detection (FFD) is an emerging topic of great importance, a comprehensive literature review of the subject has yet to be carried out. This paper thus represents the first systematic, identifiable and comprehensive academic literature review of the data mining techniques that have been applied to FFD. 49 journal articles on the subject published between 1997 and 2008 was analyzed and classified into four categories of financial fraud (bank fraud, insurance fraud, securities and commodities fraud, and other related financial fraud) and six classes of data mining techniques (classification, regression, clustering, prediction, outlier detection, and visualization). The findings of this review clearly show that data mining techniques have been applied most extensively to the detection of insurance fraud, although corporate fraud and credit card fraud have also attracted a great deal of attention in recent years. In contrast, we find a distinct lack of research on mortgage fraud, money laundering, and securities and commodities fraud. The main data mining techniques used for FFD are logistic models, neural networks, the Bayesian belief network, and decision trees, all of which provide primary solutions to the problems inherent in the detection and classification of fraudulent data. This paper also addresses the gaps between FFD and the needs of the industry to encourage additional research on neglected topics, and concludes with several suggestions for further FFD research.