Synthetic Identity Fraud and How to Prevent it

Few years ago,  a major U.S. bank was shocked to know that they have been duped by fraudsters who have used over 7,000 fake identities. Using these identities they obtained credit cards and loans of $200 million dollars. They used real Social Security numbers combined with fabricated personal details. This sophisticated scheme helped them evade detection for years. Known as synthetic identity fraud,  over 80% of all new account fraud can be attributed to this sophisticated scheme.

This growing threat poses a significant risk to organizations across various industries, as synthetic identity fraudsters can inflict substantial economic losses and reputational damage. Addressing this challenge requires a multi-faceted approach, combining advanced fraud detection technologies, robust identity verification processes, and collaborative efforts among industry players. 

This  blog explores in detail about various aspects of synthetic identity fraud and suggests ways to prevent such instances. 

What is Synthetic Identity Fraud? 

Synthetic identity fraud involves combining real and fabricated personal information. Fraudsters use a genuine Social Security number with a false name, address, and birth date. Then, they use these synthetic identities to obtain credit cards, loans, or other financial products. 

By carefully crafting this synthetic identity, they can establish a seemingly legitimate credit profile that can go undetected for years. 

Fraudsters meticulously build up the synthetic identity, opening and utilizing numerous accounts, loans, and credit cards. This allows them to amass a significant amount of credit and funds before cashing out in one fell swoop and disappearing without a trace. 

The tricky and sophisticated nature of synthetic identity fraud makes it particularly challenging to detect and prevent. Fraudsters leverage advanced techniques to create an air of legitimacy around their fabricated identities, making it difficult for businesses and financial institutions to distinguish them from genuine customers. 

Fraudsters exploit these fabricated personas to:

• Deceive businesses
• Circumvent Know Your Customer (KYC) procedures
• Abuse promotional offers
• Secure unauthorized credit
• Make fraudulent purchases
• Facilitate money laundering

This fraud type poses a major, escalating threat to finance and other sectors dependent on identity verification. Its effectiveness stems from the blend of authentic and false information, making synthetic identities challenging to distinguish from genuine ones.

Fraudsters generate synthetic identities theft through numerous methods:

1. Modifying authentic ID information (e.g., altering birth dates or social security numbers)
2. Combining real personal data from multiple sources
3. Creating entirely fictitious identity elements (like random social security numbers)

Swift detection of these fabricated identities is critical for businesses, regardless of their construction. Identifying synthetic identities early is vital, as they frequently serve as gateways to more sophisticated fraud operations.

How Synthetic Identity Fraud Works

To construct a synthetic identity, fraudsters blend authentic and fabricated information. They then use this fictitious persona to:

1. Apply for credit
2. Gradually build a positive credit history
3. Establish credibility with financial institutions
4. Execute a major fraud against banks or businesses
5. Vanish without a trace

This process, known as ‘busting out,’ allows criminals to exploit the credit system by creating a seemingly legitimate identity before committing large-scale fraud.

Synthetic identity fraudsters often employ sophisticated, long-term strategies:

1. Manage multiple fake identities simultaneously
2. Maintain accounts for extended periods (months or years) before detection
3. Build credit history through responsible account usage
4. Improve credit scores to access larger credit lines
5. Eventually, exploit high credit limits for substantial fraudulent gains

In some cases, these criminals add an extra layer of deception:

• Rack up fraudulent charges
• Use the real information in their synthetic identity to pose as fraud victims
• Successfully appeal for credit line restoration
• Exploit the reinstated credit for further theft

This patient, multi-faceted approach makes synthetic identity fraud particularly challenging to detect and combat.

The Impact of Synthetic Identity Fraud

Synthetic identity fraud has widespread consequences across the United States, affecting multiple sectors like Financial Services, Healthcare, Government Entities, and Individual Consumers.

The impact of this fraud extends beyond financial losses, potentially compromising data integrity, service delivery, and personal information security across these diverse areas.

Impact on individuals

Children are prime targets for synthetic identity fraud due to the delayed discovery of compromised Social Security Numbers (SSNs). This vulnerability stems from:

1. Long detection time frame: Years may pass before a child or their guardians realize the SSN has been misused.
2. Lack of active credit monitoring: Children typically don’t have credit reports, making unauthorized use harder to spot.
3. Clean credit history: A child’s unused SSN provides a blank slate for fraudsters to build a synthetic identity.

This extended window of opportunity makes children’s identities attractive to fraudsters crafting synthetic identities.

Impact on businesses

Synthetic identity fraud inflicts massive financial damage on businesses, costing billions annually. Additionally, companies waste countless hours pursuing non-existent individuals. This raises a critical question: Why aren’t more rigorous screening and onboarding processes implemented to detect potential synthetic identity fraud?

The escalating threat of synthetic identity fraud demands a more robust approach to user identity verification. Consider these factors:

1. Frequent large-scale data breaches
2. The widespread availability of compromised personally identifiable information (PII)
3. Easy access to dark web resources

Given these challenges, relying solely on social security numbers and credit bureau data is no longer sufficient. Traditional identity fraud prevention tools fall short in detecting synthetic identities.

Businesses must adopt more sophisticated, multi-layered verification processes to effectively combat this evolving threat and protect their assets and reputation.

How to Identify Synthetic Identity Fraud

Synthetic identity theft presents a unique challenge in the fraud detection landscape:

1. Extreme difficulty in detection: It’s one of the most elusive forms of fraud.
2. Inadequate existing safeguards: Current filters used by financial institutions often lack the sophistication to identify these fraudulent identities.
3. Deceptive authenticity: When applying for accounts, synthetic identities can appear as legitimate customers with limited credit histories.

This combination of factors—the fraud’s complexity, the limitations of current detection methods, and the convincing facade of the false identities—makes synthetic identity theft particularly challenging to identify and prevent.

Financial institutions and businesses must evolve their verification processes to address this sophisticated threat effectively

Synthetic identity theft often eludes detection by financial institutions due to a sophisticated tactic known as ‘bust-out fraud’:

1. Initial responsible usage: The fraudster establishes a history of reliable account management.
2. Mimicking genuine financial distress: They gradually transition to delinquency, simulating a real person facing financial difficulties.
3. Delayed malicious intent: Unlike traditional fraud, they don’t immediately max out the account and disappear.

This approach:

• Builds credibility over time
• Creates a façade of a legitimate customer
• Makes it challenging to distinguish between genuine accounts facing hardship

The delayed nature of the fraud and the carefully crafted illusion of authenticity make synthetic identity theft particularly difficult for financial institutions to identify and prevent.

Prevention Strategies for Synthetic Identity Fraud

While preventing data leaks is largely out of individual control (beyond limiting personal information shared with third parties), other vulnerabilities can be addressed through practical security measures.

Synthetic identity fraud has emerged as a growing threat, with incidents increasing each year. To effectively combat this challenge, businesses must adopt more sophisticated identity verification processes that go beyond traditional methods.

The proliferation of data breaches and the ease of accessing compromised personal identifying information (PII) on the dark web have rendered traditional tools, such as relying solely on Social Security numbers and credit bureau checks, insufficient in detecting synthetic identities. These fabricated personas, which combine real and fictitious data, can often bypass these conventional verification measures.

Key protective steps include

• Creating robust, unique passwords for each account: You can use a password manager or a browser feature to generate complex passwords that are difficult to guess. It’s crucial to avoid reusing the same passwords to minimize risk.

• Be suspicious of digital/phone communications:  Always exercise caution, whether you’re using a dating app, selling items on an online marketplace, or making a payment to a new online store for the first time. It’s unfortunate, but any online interaction with strangers can potentially lead to social engineering attacks.

• Implement robust cybersecurity measures for fraud detection: Antivirus software, two-factor authentication (2FA), and encryption are easier to use than you might think, even for those who are not very tech-savvy.

• Review your credit reports consistently: One of the first indicators of identity theft is suspicious financial activity. Credit monitoring can help detect inaccuracies and prevent further damage before it’s too late.

• Be cautious about your personal information: Any interaction, online or offline, that requires you to provide personally identifiable information (PII) should be approached with caution. It includes submitting your social security number (SSN), a copy of your passport, or even sharing your full name on social media.

Preventing synthetic identity theft involves safeguarding your personally identifiable information, particularly your SSN. Keep your Social Security card in a secure place at home, and avoid speaking your SSN aloud when others can hear. Shred or redact the documents containing personally identifiable information, such as bank statements, tax forms, and government notices.

• Recognize the signs of phishing scams: Some identity theft victims knowingly provide sensitive information under pretenses. Stay alert for phishing attempts, which use emails, texts, and phone calls that appear to come from legitimate sources to steal personally identifiable information. Be cautious of any unexpected communications from government agencies, banks, or other financial organizations that lack specific details, such as your name and account number. Carefully check the phone number or email address for misspellings or character substitutions. Avoid clicking on hyperlinks, as they may install malicious software that can access your information and record your keystrokes.

Businesses should invest in advanced identity verification methods, such as document verification and biometric verification powered by AI algorithms. While synthetic identities, which combine a real SSN with fake data, can bypass credit bureau checks, they are less likely to pass a document check. Additionally, fraudsters are unlikely to associate their face with a fake identity during a biometric check.

Role of Financial Institutions and Businesses

The financial services industry is particularly susceptible to synthetic identity fraud due to its heavy reliance on personal data for digital transactions. Fraudsters can easily manipulate this data and use it to create seemingly legitimate fake identities, which can bypass traditional fraud detection systems. 

Alarmingly, it is estimated that a staggering 95% of synthetic identities are not detected during the onboarding process at financial institutions. Once these fabricated personas have passed the initial detection barriers, they are used to open bank accounts, take out loans, apply for credit cards, and engage in various other fraudulent activities. As a result, financial institutions face substantial yearly losses from this type of fraud, not only through the direct impact of fraudulent transactions but also from associated indirect expenses.

Businesses must implement robust fraud prevention strategies. When dealing with synthetic identity fraud, relying on a single method to detect fraudulent identities is insufficient. A combination of document verification, biometric identification, passive fraud signal analysis, and database verification is necessary for effective detection.

These indirect costs include extensive manual labor for resolving fraud cases, filing reports, and conducting employee training to combat this growing threat. The ease with which fraudsters can create and exploit synthetic identities within the financial services industry highlights the urgent need for more robust and sophisticated fraud detection measures. By adopting advanced technologies, such as AI-powered analytics and biometric verification, financial institutions can enhance their ability to identify and prevent synthetic identity fraud, safeguarding their operations and protecting their customers from the devastating consequences of this evolving threat.

Businesses should invest in advanced identity verification methods, such as document verification and biometric verification powered by AI algorithms. While synthetic identities that combine a real SSN with fake data can bypass credit bureau checks, they are less likely to succeed with document verification.

Conclusion

Synthetic identity frauds can have serious consequences for businesses. They need to stay vigilant and adopt effective techniques to combat it. AI driven tools can be very useful to counter such fraudulent activities as traditional credit bureaus can fail to detect synthetic identities like combining real Social Security numbers with fabricated information—document verification presents a more formidable barrier.

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