ACADEMIA

Australia's new scambusters are taking world stock exchanges and security markets by storm, using a combination of high technology and maths to launch an international assault on securities fraud. In barely two years, a new anti-fraud product "Compliance Explorer" developed by the Capital Markets Cooperative Research Centre has captured 95% by volume of the Australian broker market and has made significant inroads into markets in New Zealand, Singapore, Hong Kong, the United Kingdom and Canada. The new broker anti-fraud technology complements systems already supplied by the CRC and its partners to 26 stock exchanges and regulators in 20 countries worldwide, to provide three-point, round-the-clock online surveillance. With good money to be made in fraud prevention, revenues from the CRC's new spinoff venture, Capital Markets Surveillance Services (CMSS) are already approaching $2 million a year with projections it will grow to $30-40m a year by 2010, says Capital Markets CRC CEO Professor Mike Aitken. Of significant importance is that expansion of the company has been largely self-funding meaning that the CRC has not yet had to seriously dilute its holding in CMSS. This means greater returns for Australia, says Prof. Aitken. The rapid uptake off the new anti-stock fraud venture follows the CRC's earlier success in developing and taking to market a new system for picking up fraudulent health insurance claims called Dtechtive, which tackles a problem estimated to cost the Australian industry as much as $2 billion a year. This has been commercialized through Dtecht Pty Ltd. A recent report by the Allen Consulting Group (2005) found that the CRC Capital Markets' four new spinoff companies generated earnings of $1.2 million in 2005. This will rise to $4m in 2006, Prof Aitken says. The systems behind the smart detection technology have been under development since 1994 and are based on Australian innovations in managing, mining and interpreting vast volumes of data in real time, scrutinizing them for patterns which betray a fraud in progress. "The basic problem is that there is so much information pouring through stock exchanges and health funds all the time that it is beyond human ability to scan it and spot anomalies that point to someone trying to rort the system in time to catch them. Our researchers have developed an intelligent system that can ring the alarm bell very quickly if something odd shows up," Prof. Aitken says. "Assembling hundreds of data sets across 80 countries was a major challenge that had baffled quite a few of our competitors for years. Our solution was for our industry partner, SMARTS, to use their existing relationships with exchanges in many countries to secure one data source for all brokers for a particular country. This saved huge costs, as in most markets only one data bridge to the exchange was needed to service all brokers." Another breakthrough was in data management. The CRC optimized the data structure so 10,000s of transactions could be monitored every second, providing real-time feedback to broker compliance divisions on what their traders are doing. This service has been outsourced along with an industry training package so brokers can 'plug and play' after as little as a 90-minute training session. "This isn't just protecting the assets of the wealthy, either," Prof Aitken adds. "40 per cent of Australia's superannuation funds are invested in local securities markets, so this is literally helping to guard the life-savings of the nation." The system has benefits for small as well as large securities markets. The Newcastle Stock Exchange, for example, can comply with anti-fraud regulations for a mere fraction of the costs or larger more established exchanges, reducing the cost of regulation which has traditionally been a barrier to the entry of new players. "From indications so far, we consider it may be possible for our technology to capture up to half of the global market for anti-securities fraud, which is worth around $2 billion a year, and we can add further value to that," Prof. Aitken says, "by using the same data to provide other information services to stakeholders within the securities community. Further, new fraud detection services for other stakeholders (accountants and Auditors and fund managers are also about to be released deploying similar technology and knowhow that gave rise to the recent health insurance fraud spin-off." The CRC's other major commercial product, Dtechtive, is aimed at curbing an alledged $500m in private healthcare and potentially up to $2 billion in overall fraudulent health transaction claims every year in Australia alone. The technology was spun off into Dtecht Pty Ltd in October 2005, and several major health insurance funds have trailed its services in recent months. "Dtecht stands to be the market leader in data mining technology in the health insurance industry over the long term and is very well positioned to gain substantial revenue from saving even a small proportion of the current losses," he says. The CRC's research addresses National Research Priorities two, three and four - a healthy Australia, frontier technologies for transforming industry and a secure Australia. Overall, the nation is $1.14 billion better off, or sixty cents wealthier for every dollar invested by the Federal Government in CRC research, according to the Allen Consulting Group report. This found that real consumption in the economy was up by $763 million, real investment by $417 million and tax revenue by $66m as a result of CRC research.