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Unreal Identities Leading to Real Crimes

Criminals use synthetic identities to commit multiple types of fraud and increase illicit profits

February 4, 2019 by Verafin

Synthetic identity fraud has become a vehicle for fraudsters to commit a host of financial crimes, such as account fraud, loan fraud or online banking fraud.

Criminals combine real and fabricated identification information to create synthetic or fake identities which can pass a financial institution’s identity validation processes, and then successfully apply for various financial products with their synthetic identities.

The US Federal Trade Commission has reported that synthetic identity theft has surpassed “true-name” identity theft and is now “the fastest growing type of ID fraud.”

A study published by ID Analytics identifies two categories of fraudulent synthetic identities:

  • Manipulated Synthetic Identities are based upon a real identity, with limited changes made to the SSN, such as a single digit change or several digits transposed. Other identifying information such as a birth date may be altered. Manipulated identities may be created to hide previous credit histories and access new credit.
  • Manufactured Synthetic Identities assemble identifying information from multiple identities to create fake identities. The information used to create the identity does not belong to any one consumer, making the manufactured synthetic identity difficult for financial institutions to catch.

Collecting Your Data

Synthetic identities are created with data originating from a wide variety of sources, but individuals who do not monitor their credit history or score may be at greater risk from fraudsters looking to exploit or purchase personal identification information. Individuals with a clean credit history, such as the deceased or children, can be lucrative targets for a synthetic identity fraudster.

Data breaches provide a significant amount of identifying information, such as SSNs, birthdates, credit card accounts and mailing addresses. Millions of records are compromised by data breaches each year, and the identification information collected is often made available for purchase, in part or in full, on the dark web.

A Market Ripe for Fraud

Financial institutions, not consumers, are more often the ultimate victims of synthetic identity fraud. Once the fraudster has manipulated or fabricated an identity, such that the identity no longer belongs to a real individual or customer, the loss and liability falls solely upon the institution. As financial institutions continue to expand their consumer products and services, including loans and accounts with online opening applications, synthetic identification fraud becomes more of a risk.

Fraudsters use these fabricated identities to open accounts at financial institutions, apply for products such as credit cards or automobile loans, and exploit immediate access to credit and funds availability. Often these criminals will build strong credit through a synthetic identity, behaving as regular customers by making regular purchases, submitting timely payments, and maintaining the account for months or years before exploiting funds and busting out.

It is estimated that synthetic identity fraud accounts for 80—85% of all identity fraud, and ID Analytics estimates that 20% of loan charge-offs and 80% of credit card losses can be attributed to these synthetic identities.

A Growing Concern

Fraudsters can claim identity theft or employ fraudulent credit repair companies to clean the credit histories of synthetic identities, allowing the criminals to use the identity over and over again.

Furthermore, fraudsters may use synthetic identities to create synthetic identity fraud rings; when a small number of manufactured identities are combined to share names, birth dates, phone numbers, addresses, or SSNs, the number of synthetic identities grows at an exponential rate.

As Julie Conroy, research director at the Boston-based Aite Group explains:

The creation of fake identities for criminal activities has been around as long as bad guys have been looking to escape authorities. However, modern criminals have been able to take synthetic identity fraud to a whole new level.

Typical synthetic identity syndicates operate with hundreds of thousands of synthetic identities, which may exist for months or years before executing theft and disappearing.

Protect Yourself

Financial institutions must protect themselves from synthetic identity fraud through education, robust controls for online accounts and applications, and innovative financial crime management tools.

Fraud solutions must innovate faster than fraudsters evolve, and BSA/AML and fraud teams must work together to strengthen investigations. Real-time fraud detection systems, providing multi-channel fraud analysis, alerts for risky data elements, and cross-institutional analysis allowing for 314(b) collaboration, must be the cornerstone of a successful fraud mitigation strategy.

To learn more about synthetic identity fraud, watch our on-demand webinar, Synthetic Identity Fraud: Unreal Identities Result in Real Fraud Losses.

Verafin is the industry leader in financial crime management, providing a cloud-based cross-institutional FRAMLx software platform for Fraud Detection, Anti-Money Laundering and High-Risk Customer Management, with a customer base of 1800 financial institutions across North America. Powered by cloud technology, Verafin significantly reduces false positive alerts, offers advanced data visualization, and enables collaborative investigations to help customers stay a step ahead of crime, as well as the BSA/AML compliance landscape.