Synthetic Identity Fraud

What is Synthetic Identity Fraud?

Synthetic identity fraud occurs when fraudsters create a fake identity by combining real and fictitious information. This synthetic identity is used to open accounts, apply for credit, or engage in other financial activities. Unlike traditional identity theft, where an existing person’s full identity is stolen, synthetic identity fraud involves the creation of a new, fictitious identity that is partially based on real data, such as a valid Social Security number (SSN) or address.

How Synthetic Identity Fraud Occurs?

1. Data Gathering
   1. Social Security Numbers (SSNs): Fraudsters often use SSNs that belong to minors, deceased individuals, or other vulnerable groups. These SSNs are either stolen through data breaches, purchased on the dark web, or fabricated.
   2. Additional Personal Information: The fraudster adds fabricated details such as a fake name, birth date, and address to the real SSN to create a synthetic identity.
2. Credit Building
   1. Establishing Credit: The fraudster applies for credit using the synthetic identity. Initial applications might be denied, but they help establish a record with credit bureaus.
   2. Piggybacking: Sometimes, synthetic identities are added as authorized users to legitimate credit accounts, which helps build a positive credit history.
3. Account Application
   1. Opening Accounts: Once a synthetic identity has a credit record, the fraudster can open bank accounts, credit cards, and apply for loans using the synthetic identity.
   2. Gradual Activity: Fraudsters often start with small transactions and gradually build up the synthetic identity’s credibility over time.
4. Exploitation
   1. Bust-Out Fraud: After building a good credit score and gaining access to higher credit limits, the fraudster maxes out credit cards and loans without the intention of repaying, disappearing with the funds.

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What are the Impacts of Synthetic Identity Fraud on Businesses?

1. Financial Losses
   1. Credit Losses: Banks and financial institutions suffer significant losses when synthetic identities default on loans, credit cards, and other financial products.
   2. Increased Charge-Offs: Accounts created using synthetic identities often result in charge-offs when the credit is not repaid, directly impacting the institution’s bottom line.
2. Operational Costs
   1. Investigation and Resolution: Identifying and resolving cases of synthetic identity fraud requires substantial time and resources, including forensic analysis and customer support.
   2. Fraud Detection Systems: Investing in advanced fraud detection and prevention systems can be costly but is necessary to combat sophisticated synthetic identity fraud schemes.
3. Regulatory and Compliance Issues
   1. Regulatory Scrutiny: Financial institutions are subject to regulatory scrutiny and may face penalties if found to have inadequate fraud prevention measures.
   2. Compliance Costs: Ensuring compliance with regulations such as Know Your Customer (KYC) and anti-money laundering (AML) laws requires ongoing investment and operational changes.
4. Reputational Damage
   1. Loss of Trust: Repeated incidents of synthetic identity fraud can erode customer trust and confidence in the institution’s ability to protect their information and manage risk.
   2. Negative Publicity: High-profile cases of synthetic identity fraud can attract media attention and damage the institution’s reputation, making it harder to attract new customers.
5. Impact on Credit Markets
   1. Distorted Credit Data: Synthetic identities can skew credit reporting data, making it difficult for lenders to assess the true creditworthiness of applicants.
   2. Higher Risk Premiums: Increased risk from synthetic identity fraud may lead to higher interest rates and stricter lending criteria, affecting legitimate customers as well.

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