Synthetic Identity Fraud

Definition

Synthetic Identity Fraud is a type of financial fraud in which criminals create a new, fictitious identity by combining real and fabricated information. Unlike traditional identity theft, which involves stealing and using another person’s identity, synthetic identity fraud uses elements such as a real Social Security Number (SSN) paired with a fake name, birthdate, or address to create a new, synthetic persona. This type of fraud is challenging to detect because it does not target a specific individual and often goes unnoticed until significant financial damage has occurred.

How Synthetic Identity Fraud Works

  1. Creation of Synthetic Identity: Fraudsters gather legitimate data—such as a real SSN, often belonging to children or individuals who do not actively use their credit—and combine it with fake information to construct a synthetic identity. This may include fabricated names, birthdates, and addresses.
  2. Building Credit: Once the synthetic identity is created, the fraudster uses it to apply for credit or services. Initial applications are often denied, but these activities establish a record of inquiries. Over time, the synthetic identity may be granted small lines of credit, which are then used and paid off to build a credit history.
  3. Exploitation: After establishing a solid credit history, the fraudster maximizes the available credit across multiple accounts. This often culminates in a “bust-out” scenario, where they exhaust all credit limits and disappear without repayment.
  4. Long-Term Invisibility: Because the identity is synthetic, there is no actual victim who might notice unusual activity and report it. This allows the fraud to continue undetected for extended periods.

Key Characteristics of Synthetic Identity Fraud

  • No Immediate Victim: Unlike traditional identity theft, synthetic identity fraud does not immediately impact a real person, making it harder to detect and report.
  • Complex Detection: Synthetic identities often appear legitimate due to their established credit history, fooling credit bureaus, financial institutions, and fraud detection systems.
  • Impact on Businesses: Businesses, especially in financial services, bear the brunt of synthetic identity fraud through unpaid loans, credit card debt, and charge-offs.

Methods Used in Synthetic Identity Fraud

  1. Use of Unused SSNs: Fraudsters often use Social Security Numbers that belong to minors, the deceased, or individuals who do not have an active credit file. These SSNs provide a clean slate for building a synthetic identity.
  2. Piggybacking: In some cases, fraudsters may attach the synthetic identity to a legitimate account as an authorized user to build credit quickly.
  3. Fabricated Documents: Fraudsters may use fake documents such as driver’s licenses, utility bills, or pay stubs to further legitimize the synthetic identity.
  4. Exploitation of Data Breaches: Data breaches provide access to real SSNs and other personal information that can be used in combination with fake details to create synthetic identities.

Consequences of Synthetic Identity Fraud

  1. Financial Losses: Synthetic identity fraud leads to significant financial losses for businesses, particularly financial institutions. Losses include unpaid loans, defaulted credit cards, and fraud-related chargebacks.
  2. Strain on Credit Systems: Synthetic identities can create inaccurate credit histories, skewing credit reporting data and undermining the reliability of credit scores.
  3. Long-Term Damage: Victims whose SSNs are used may face challenges when they eventually need to establish credit, as their records could be entangled with synthetic identities.
  4. Increased Operational Costs: Organizations must invest in more sophisticated fraud detection and prevention systems to combat synthetic identity fraud, increasing operational expenses.

Detection and Prevention Strategies

  1. Advanced Fraud Detection Tools: Financial institutions and businesses use machine learning and artificial intelligence to analyze patterns and detect anomalies associated with synthetic identities.
  2. Enhanced Identity Verification: Implementing robust identity verification processes, such as multi-factor authentication, document verification, and biometric checks, can help prevent synthetic identities from being established.
  3. Social Security Number Verification: Verifying SSNs against databases such as the Social Security Administration’s (SSA) verification system can help identify mismatched or suspicious combinations of personal information.
  4. Collaboration Between Organizations: Sharing data and insights across industries and with government agencies can help identify and mitigate synthetic identity fraud. Credit bureaus play a crucial role in recognizing and flagging synthetic identities.
  5. Public Awareness: Educating consumers and businesses about synthetic identity fraud, how it works, and the importance of safeguarding personal information can reduce the risk of data being exploited.

Synthetic identity fraud is a sophisticated and rapidly growing form of financial crime that poses significant challenges for businesses and individuals. By leveraging both real and fake information, fraudsters create identities that are difficult to detect, leading to substantial financial losses and operational burdens. Combating this type of fraud requires a multi-faceted approach, including advanced detection technologies, rigorous identity verification processes, and industry collaboration. As fraudsters continue to evolve their methods, organizations must remain vigilant and proactive in their efforts to mitigate synthetic identity fraud’s impact.

Resources

Podcast episode: #598: Keeping up with consumer payment preferences with Will Mavromichalis at Kount