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Network science and contagion for financial crime and fraud risk

Network science studies how accounts, people, companies and transactions connect. On this platform it explains how mule networks, layered transactions and ownership chains are detected from links that single-account monitoring misses.

01Register

Network science and contagion for financial crime and fraud risk on the record.

Method recordSTEM method
  1. MethodNetwork science and contagion
  2. Applied inFinancial Crime and Fraud Risk
  3. Canonical pageSTEM Commons
02Application

What network science and contagion does here.

Network science and contagion study how the structure of connections among entities shapes the spread of failures, information and disease. It provides tools to analyse interdependent infrastructure, supply chains and financial systems. In financial stability, cyber and digital resilience and governance and institutions, network science identifies critical nodes and pathways through which shocks propagate across sectors. It informs targeted protection and diversification to limit cascades. The canonical description is on the STEM Commons.

Mule network detection

Graphs of payments between accounts reveal clusters that receive and quickly pass on funds, a pattern typical of mule activity.

Ownership chain analysis

Corporate ownership graphs are traced to find ultimate beneficial owners and links to listed persons through layered entities.

Cross-institution patterns

Within legal gateways, linked data from several institutions show patterns that no single institution can see on its own.

03Monitor

Network analysis.

The screen a team would use to follow this method: its measures, states and decisions. Names are examples and values are illustrative.

Network analysis

Financial crime · Network science and contagion · Run R-1316

Single point of failureGRA · Financial Crime and Fraud Risk

Dependency graph

nodes: assets · edges: dependencies

Most central nodes

N30.298Critical
N40.346Normal
N50.347Normal
N60.0914Normal

Cascade size under removal

Network analysis: the screen's structure, terms and states for Financial crime.Example names and illustrative values; a design, not a record or a live system.
04Data

What the method consumes.

Datasets and records used by network science and contagion on this platform, with the role each plays and the label its values carry. Sources are listed in the source register.

DataRoleLabel
Payment transaction networksFlow linksOBSERVED
Corporate registersOwnership linksPublished statistics
Shared intelligenceCross-institution linksREPORTED
05Stress test

How a shock to assets becomes a system loss.

The equity the system loses after interbank contagion, against the initial hit, as leverage, interconnection and recovery rates change, the core of a macroprudential stress test. Teaching model with stated illustrative values, not a prediction.

Controls

Fall in external assets
2.0%
Leverage (assets over equity)
10 times
Interbank share of assets
10%
Recovery on interbank claims
40%
Banks in the system
20
Core banks
20% of banks

Readouts

Equity lost to the initial shock
18.0%
Equity lost after contagion
45.0%
Added by contagion (DebtRank)
27.0 points
Banks in default
0
Numbers, methods and sources
RoundSystem equity lost (%)Banks in default
018.000
128.800
235.280
339.170
441.500
542.900
643.740
744.240
844.550
944.730
1044.840
1144.900
1244.940
1344.960
1444.980
1544.990
1644.990
1745.000
1845.000
1945.000
2045.000
2145.000
2245.000
2345.000
2445.000
2545.000
2645.000
2745.000
2845.000
2945.000
3045.000

Methods

  1. DebtRank Battiston and others (2012), Scientific Reports 2:541
  2. Differential DebtRank Bardoscia and others (2015), PLOS ONE 10
  3. Contagion in financial networks Gai and Kapadia (2010), Proc. R. Soc. A 466
  4. Clearing in financial networks Eisenberg and Noe (2001), Management Science 47
  5. Uncertainty fan (parameter Monte Carlo) Spiegelhalter, Pearson and Short (2011), Visualising uncertainty about the future, Science 333
  6. One-at-a-time sensitivity (tornado) Saltelli and others (2008), Global Sensitivity Analysis: The Primer, Wiley

Data

No observed data enters this model: it runs on the teaching values set by the controls, to be replaced with a programme's own evidence.

How a shock to assets becomes a system loss. Illustrative teaching model: it runs on the values set by the controls, not on measured data. Methods: DebtRank (Battiston and others (2012), Scientific Reports 2:541); Differential DebtRank (Bardoscia and others (2015), PLOS ONE 10); Contagion in financial networks (Gai and Kapadia (2010), Proc. R. Soc. A 466).
06Validation

How results are checked.

Models are checked by reproducing observed cascades and outbreaks. Robustness of results to missing or uncertain links is tested.

CheckHow it is done
Entity resolutionNodes are de-duplicated and matched before analysis
False link riskNetwork findings are reviewed by analysts before action
Legal basisData used across institutions has a lawful gateway

Network data are often incomplete or confidential. Static network models may miss adaptive behaviour during cascades.

07Exposure, loss and capital

What it means for exposure, loss and capital.

The exposure, loss, scenario and capital views a risk officer, supervisor or ministry of finance would ask for, with the frameworks they report against. Structures follow supervisory and actuarial practice. Values are illustrative: never prices, ratings or advice.

Transmission channels

How a shock in network science and contagion for financial crime and fraud risk reaches credit, market, underwriting, liquidity and operational risk, and feeds back.

Channel structure after the Basel Committee's work on climate-related risk drivers and transmission channels; links shown are typical paths, not estimated exposures.
NGFS climate scenarios · Network for Greening the Financial SystemIFRS S2 Climate-related Disclosures · ISSBTCFD recommendations · Financial Stability Board TCFDPrinciples for the effective management of climate-related financial risks · Basel Committee on Banking Supervision
09Stewardship

Who maintains the method.

Systems Science and Modelling stewards network science and contagion for the Consortium and reviews how it is applied across platforms.

11Questions

Questions and answers.

What are the limits of network science and contagion in this field?
Network data are often incomplete or confidential. Static network models may miss adaptive behaviour during cascades.
How are results checked?
Models are checked by reproducing observed cascades and outbreaks. Robustness of results to missing or uncertain links is tested.
Are the values on this page real?
The data names, roles and checks are real descriptions of practice. The canvas shows a design of the method's use, not a run; no result is reported here.
Where else is this method applied?
The canonical method page lists every platform that applies it.
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