Privacy-Preserving Federated Fraud Detection in Payment Transactions with NVIDIA FLARE

Financial fraud increasingly exploits institutional boundaries: laundering networks distribute transactions across multiple banks because no single institution can observe the full pattern. Federated Learning (FL) enables collaborative detection without raw data sharing, yet practical deployment in banking environments remains constrained by three pressures. First, homomorphic encryption schemes impose high computational costs that limit real-time aggregation at scale. Second, mask-based protocols such as Google's SecAgg require O(N^2) pairwise key exchanges, which become inefficient as participant count grows. Third, existing protocols provide limited verification that submitted gradient updates are well-formed, leaving aggregation vulnerable to consistency attacks. This paper presents Dynamic Sharded Federated Learning (DSFL), a secure aggregation framework for cross-institution fraud detection. DSFL introduces Dynamic Stochastic Sharding, which partitions participants into small cryptographically ephemeral clusters of fixed size m, reducing communication complexity to O(N*m). Within each cluster, participants submit Linear Integrity Tags, additive-homomorphic commitments that allow the server to verify update consistency without decryption. The mechanism detects inconsistent updates rather than malicious gradients. An Active Neighborhood Recovery protocol handles mid-round dropouts by reconstructing orphaned masks. Experiments on the ULB Credit Card Fraud Detection dataset (284,807 transactions across 10 simulated banking nodes) show that DSFL achieves approximately 34x lower aggregation latency than Paillier-based secure aggregation at N=1000, based on analytical extrapolation from empirical baselines, while maintaining 99% recovery fidelity under a 20% dropout regime. Global fraud recall reached 91.2% (+/-0.8%), above the 68% average of locally trained models.

With recent developments in Artificial Intelligence (AI), the adoption of distributed learning paradigms such as Federated Learning (FL) has emerged. In simple terms, FL enables multiple entities to collaboratively train AI models without sharing local data. The FL paradigm is particularly valuable in privacy-sensitive settings, such as financial services, because it enables institutions to collaboratively improve fraud-detection models while keeping sensitive transaction data local. However, FL schemes are prone to security vulnerabilities, where malicious clients can poison local data or model updates and degrade the global model, and hence the performance of the resulting model might be affected. Therefore, in this work, we propose Enhanced Detective, a dual-stage robust aggregation strategy that combines Median Absolute Deviation (MAD), distance-based update filtering, and FedMedian aggregation. Experiments on an imbalanced credit card dataset evaluate targeted label-flipping and weight-scaling attacks over 50 communication rounds. With 40% malicious clients, Enhanced Detective achieves an AUPRC of 0.796 and a Recall of 0.847.

Federated learning (FL) is a privacy-preserving machine learning paradigm that enables multiple parties to collaboratively train models on privately owned data without sharing raw information. While standard FL typically addresses either horizontal or vertical data partitions, many real-world scenarios exhibit a complex hybrid distribution. This paper proposes Hybrid Federated Learning (HybridFL) to address data split both horizontally across disjoint users and vertically across complementary feature sets. We evaluate HybridFL in a financial crime detection context, where a transaction party holds transaction-level attributes and multiple banks maintain private account-level features. By integrating horizontal aggregation and vertical feature fusion, the proposed architecture enables joint learning while strictly preserving data locality. Experiments on AMLSim and SWIFT datasets demonstrate that HybridFL significantly outperforms the transaction-only local model and achieves performance comparable to a centralized benchmark.