Explainable and Adaptive Machine Learning for Fraud Risk Detection in Bangladesh's Digital Banking Ecosystem

Financial crime costs U.S. institutions over $32 billion each year. Although AI tools for fraud detection have become more advanced, their use in real-world systems still faces a major obstacle: many of these models operate as black boxes that cannot provide the transparent, auditable explanations required by regulations such as OCC Bulletin 2011-12 and Federal Reserve SR 11-7. This study makes three main contributions. First, it offers a thorough evaluation of explanation quality across faithfulness (sufficiency and comprehensiveness at k=5, 10, and 15) and stability (Kendall's W across 30 bootstrap samples). XGBoost paired with TreeExplainer achieves near-perfect stability (W=0.9912), while LSTM with DeepExplainer shows weak results (W=0.4962). Second, the paper introduces the SHAP-Guided Adaptive Ensemble (SGAE), which dynamically adjusts per-transaction ensemble weights based on SHAP attribution agreement, achieving the highest AUC-ROC among all tested models (0.8837 held-out; 0.9245 cross-validation). Third, a complete three-architecture evaluation of LSTM, Transformer, and GNN-GraphSAGE on the full 590,540-transaction IEEE-CIS dataset is provided, with GNN-GraphSAGE achieving AUC-ROC 0.9248 and F1=0.6013. All results are mapped directly to OCC, SR 11-7, and BSA-AML regulatory compliance requirements.

Fraud detection systems must scale with rising transaction volume while remaining explainable and reviewable. We study a layered pipeline on the PaySim dataset that combines a gradient-boosted classifier, graph-derived structural features, an autoencoder-based anomaly signal, TreeSHAP explanations, and a bounded LLM investigation agent applied to cases the classifier scores uncertainly. Before any model comparison, we identify and remove a simulator-specific balance shortcut that would otherwise inflate baseline performance. After this correction, neither the graph features nor the anomaly signal improves Average Precision on the full test set. Both, however, rank fraud better within the subset of cases receiving intermediate baseline scores. In a controlled experiment with injected multi-account fraud rings, engineered structural features recover all injected test transactions, while the tabular baseline misses roughly a quarter of them. The investigation agent underperforms direct thresholding of the classifier it relies on, reaching 65.0% accuracy against 71.7% on a balanced 60-case sample, despite having access to model explanations, graph context, and retrieved reference cases. Of the eight decisions the agent changed, six replaced correct classifier outputs with errors, and it produced a coherent written rationale in each case. An exploratory disagreement-based escalation rule flagged two of these agent errors for human review without flagging any correct decision. We conclude that each component of a layered fraud system contributes only under specific conditions, and that a plausible rationale from an investigation agent is not evidence of a better decision.

High-frequency banking environments face a critical trade-off between low-latency fraud detection and the regulatory explainability demanded by GDPR. Traditional rule-based and discriminative models struggle with "zero-day" attacks due to extreme class imbalance and the lack of historical precedents. This paper proposes a Dual-Path Generative Framework that decouples real-time anomaly detection from offline adversarial training. The architecture employs a Variational Autoencoder (VAE) to establish a legitimate transaction manifold based on reconstruction error, ensuring <50ms inference latency. In parallel, an asynchronous Wasserstein GAN with Gradient Penalty (WGAN-GP) synthesizes high-entropy fraudulent scenarios to stress-test the detection boundaries. Crucially, to address the non-differentiability of discrete banking data (e.g., Merchant Category Codes), we integrate a Gumbel-Softmax estimator. Furthermore, we introduce a trigger-based explainability mechanism where SHAP (Shapley Additive Explanations) is activated only for high-uncertainty transactions, reconciling the computational cost of XAI with real-time throughput requirements.