The 101: Everything Synthetic ID

Some of the most horrible crimes we have seen in our career was not Identify theft but synthetic ID. We saw a fraud vector that had the patience to raise the digital ID footprint of babies, toddlers and teenagers that had passed away. To eventually commit credit card, car loan and even mortgage fraud.

Synthetic identity fraud is a sophisticated and rapidly growing type of financial crime where fraudsters create new identities by combining real and fake information. Unlike traditional identity theft, which involves stealing an existing person’s identity, synthetic identity fraud constructs a fictitious identity that does not correspond to a real person. This type of fraud is particularly challenging to detect and prevent, as it often evades traditional security measures designed to protect against identity theft.

How Synthetic ID Fraud Works

Synthetic identity fraud typically involves the following steps:

1. Creating the Identity:
   • Fraudsters begin by creating a synthetic identity, often using a combination of real and fabricated information. A common method is to use a real Social Security Number (SSN) that is not currently active or belongs to a child or deceased individual. The fraudster pairs this SSN with a fake name, date of birth, and address.
2. Building a Credit Profile:
   • The fraudster then uses this synthetic identity to apply for credit. Initially, these applications are likely to be denied due to a lack of credit history. However, these denials help create a credit file associated with the synthetic identity. Over time, the fraudster continues to apply for credit, and with persistence, may eventually be approved for small lines of credit.
3. Exploiting the Identity:
   • Once the synthetic identity has been established and has gained access to credit, the fraudster will often make timely payments to build a positive credit history. This process, known as “credit piggybacking,” can take months or even years. The fraudster’s goal is to maximize the creditworthiness of the synthetic identity.
4. Cash Out:
   • After building up a strong credit history, the fraudster will apply for larger loans or lines of credit and, once approved, will “bust out” by maxing out the credit limits and disappearing without repaying the debts. Since the identity is synthetic, it is difficult for creditors to trace the individual responsible.

Impact of Synthetic ID Fraud

The consequences of synthetic identity fraud are far-reaching and affect various stakeholders:

• Financial Institutions:
  • Banks, credit card companies, and other lenders are the primary targets of synthetic identity fraud. The financial losses can be significant, with estimates suggesting that synthetic identity fraud accounts for billions of dollars in losses annually. Furthermore, because synthetic identities often go undetected for extended periods, the losses can accumulate over time before being recognized.
• Consumers:
  • While synthetic identity fraud typically does not involve the direct victimization of an existing individual, those whose SSNs are used in the creation of synthetic identities may face difficulties. For example, children or elderly individuals whose SSNs are used may discover issues when they eventually try to establish their credit or apply for benefits.
• Credit Bureaus:
  • Credit bureaus are often involved in the creation and perpetuation of synthetic identities, albeit unintentionally. Fraudsters exploit the processes that credit bureaus use to create new credit profiles, leading to the proliferation of synthetic identities.
• Regulatory Bodies:
  • Government agencies face challenges in tracking and preventing synthetic identity fraud. The fraud complicates efforts to maintain accurate records for individuals and can undermine the effectiveness of programs that rely on accurate identification.

Detection and Prevention

Detecting and preventing synthetic identity fraud is complex due to the nature of the crime. However, several strategies can be employed:

• Enhanced Verification Processes:
  • Financial institutions can implement more rigorous identity verification processes when opening new accounts. This might include verifying SSNs against government databases to ensure that they are not associated with deceased individuals or minors.
• Use of Artificial Intelligence (AI) and Machine Learning:
  • Advanced analytics and machine learning can help identify patterns associated with synthetic identities. For example, inconsistencies in application data, such as mismatched names and SSNs, can be flagged for further investigation.
• Collaboration and Information Sharing:
  • Increased collaboration between financial institutions, credit bureaus, and regulatory bodies can help in identifying and mitigating synthetic identity fraud. Sharing data and insights across institutions can lead to the early detection of fraudulent activity.
• Education and Awareness:
  • Educating consumers about the risks of synthetic identity fraud and the importance of protecting their personal information, especially SSNs, is crucial. Consumers should be encouraged to regularly monitor their credit reports and report any suspicious activity.

Conclusion

Synthetic identity fraud represents a significant and growing threat to the financial industry. Its complexity and the time it takes to unfold make it difficult to detect, often resulting in substantial financial losses. Combating this type of fraud requires a multi-faceted approach, involving enhanced verification processes, the use of advanced technology, collaboration across institutions, and increased consumer awareness. As fraudsters continue to evolve their tactics, it is essential for all stakeholders to remain vigilant and proactive in addressing this pervasive issue.