What Is Synthetic Identity Fraud?

Synthetic identity fraud is one of the most intricate types of identity theft, making it particularly difficult for organisations to detect and prevent. It accounts for over 80% of all new account fraud, and as cybercriminals continue to evolve, their techniques for creating and exploiting synthetic identities have become increasingly sophisticated. This emerging threat poses significant financial risks, especially for industries like banking and finance, which depend heavily on accurate identity verification

What is Synthetic Identity Theft?

Synthetic identity theft is a type of fraud where criminals combine real and fake information to construct a new, fraudulent identity. Typically, they use real data, such as stolen Social Security Numbers (SSNs), and blend it with fabricated details like fake names, addresses, and dates of birth. Since this synthetic identity isn’t tied to any actual person, it becomes challenging to detect through traditional verification methods.

Criminals exploit these synthetic identities for financial gain by opening credit accounts, securing loans, and engaging in various other forms of financial fraud, often causing significant losses to financial institutions and other organisations.

How Does Synthetic Identity Theft Work?

Synthetic identity fraud typically begins with obtaining real identity components, often through data breaches or purchases on the dark web. The most commonly used real information is a Social Security Number (SSN), especially those belonging to children, the elderly, or individuals who do not regularly monitor their credit. Once they have the SSN, fraudsters fabricate other details, such as names, dates of birth, and addresses, to construct a new, synthetic identity.

After creating the fake identity, the fraudster applies for credit. Although the initial application may be rejected due to a lack of credit history, this action is sufficient to establish a credit file for the synthetic identity. Over time, the fraudster continues to build credit for this identity by applying for more accounts and making small payments to appear legitimate. Eventually, they max out the credit lines and vanish, leaving financial institutions to bear the financial losses.

Traditional vs. Synthetic Identity Theft

The primary difference between traditional and synthetic identity theft lies in the nature of the identity being exploited.

In traditional identity theft, a criminal steals and uses a real person’s entire identity to commit fraud. Victims often discover the theft quickly, as they may notice unauthorised charges or receive alerts from their financial institutions, allowing for a relatively swift response.

In contrast, synthetic identity theft is more complex because the identity being exploited is partially or entirely fabricated and not tied to a single real person. As a result, there is no immediate victim to report the fraud, allowing the fake identity to go undetected for a longer period. This delay often gives the fraudster ample time to cause significant financial damage before the fraud is discovered.

Moreover, synthetic identities can be carefully developed over time, creating a facade of legitimacy. This gradual buildup of credit and trust increases the potential rewards for the fraudster, making synthetic identity theft a particularly challenging and damaging form of fraud.

How Much Does Synthetic Identity Theft Cost Your Business?

According to the Federal Reserve, the average charge-off balance for synthetic identity fraud is $15,000 per case. Deloitte projects that synthetic identity fraud will result in at least $23 billion in losses by 2030. These losses extend beyond direct financial costs, with several key factors contributing to the overall impact:

1. Direct Financial Losses: Unpaid credit balances and loans that cannot be recovered directly impact an organisation’s finances.
2. Operational Losses: The costs associated with investigating and addressing fraud, including labor and resources, can be substantial.
3. Reputational Damage: Synthetic identity fraud can erode customer trust and lead to lost business opportunities due to perceived security vulnerabilities.
4. Legal and Regulatory Costs: Businesses may face penalties or increased compliance costs if they fail to prevent or adequately address synthetic identity theft.

Synthetic identity theft can significantly affect a business’s bottom line. Since synthetic identities lack a direct victim to report the fraud, losses can go unnoticed and accumulate over time, making the damage even more severe. This underscores the importance of implementing strong identity verification and fraud prevention measures to protect against such threats.

How to Detect Synthetic Identity Fraud?

While detecting synthetic identity fraud can be difficult, companies can effectively identify potential cases using the following strategies:

1. Monitor Unusual Behavior: Watch for new accounts with perfect payment histories that suddenly engage in large transactions or request significant credit line increases. Pay attention to accounts that build credit slowly and then quickly max out their credit limits.
2. Implement Document Verification: Verify that identity documents match the information provided, as fraudsters often lack genuine documentation for synthetic identities.
3. Cross-Check Identity Details: Use databases to verify identity details, such as ensuring Social Security Numbers (SSNs) align with the correct age or region. Leverage identity verification tools to authenticate SSNs, addresses, and phone numbers.
4. Detect Synthetic Identity Patterns: Be on the lookout for identities with minimal credit history, especially when linked to high-risk behaviors. Monitor for multiple accounts or applications with similar details, like slight variations in names or addresses.
5. Use Biometric Verification: Implement biometric verification methods, such as facial recognition or fingerprint scanning, to confirm the person’s identity and detect potential fraud.
6. Leverage Fraud Detection Technology: Employ advanced analytics, machine learning, and AI to identify patterns and anomalies typical of synthetic identities. Real-time monitoring can flag suspicious activities as they occur.
7. Collaborate with Credit Bureaus: Partner with credit bureaus to share and analyse data, as they often have insights that can help identify synthetic identities early on.
8. Educate Employees and Customers: Train employees to recognise signs of synthetic identity fraud and encourage customers to monitor their accounts regularly and report any suspicious activity.

By implementing these techniques, businesses can improve their chances of identifying synthetic identity fraud early and reducing its impact.

How to Prevent Synthetic Identity Theft?

Businesses are attractive targets for cybercriminals due to the large amounts of sensitive customer information they hold. Preventing synthetic identity theft requires a comprehensive approach, including robust security practices, monitoring systems, and employee education. Here’s how companies can protect themselves:

1. Implement Strong Data Security Practices: Ensure the secure storage of private data by using tokenisation, anonymisation, and encryption for sensitive customer information, including SSNs and personally identifiable information (PII).
2. Enhance Customer Identity Verification: Strengthen identity verification processes with multi-factor authentication (MFA) and Know Your Customer (KYC) protocols, incorporating ID checks and biometrics to secure customer accounts.
3. Monitor Transactions and Customer Behavior: Use fraud detection systems powered by machine learning and behavioral analytics to identify unusual patterns. Set real-time alerts for suspicious activities and require additional verification for large or unusual transactions, especially for new accounts.
4. Implement Data Minimisation and Retention Policies: Collect only the necessary data to reduce risk. Establish data retention policies to determine how long information is kept and securely delete outdated or unnecessary data regularly.
5. Educate Employees on Security Best Practices: Regularly train employees on data security, phishing, and safeguarding customer information. Promote security awareness and encourage reporting of suspicious activities. Ensure staff are prepared with incident response protocols for swift action during breaches or fraud.
6. Conduct Regular Security Audits and Assessments: Regularly perform security testing to identify vulnerabilities, maintain effective protections, and ensure compliance with regulations like GDPR and CCPA.
7. Protect Against Insider Threats: Conduct thorough background checks on employees with access to sensitive data, monitor for unauthorised activity, and enforce separation of duties to reduce insider fraud risk.
8. Use Third-Party Solutions Wisely: Carefully vet third-party vendors to ensure they meet stringent security standards. Include security requirements and breach notification procedures in service level agreements (SLAs) and perform regular assessments.
9. Implement a Robust Incident Response Plan: Create a dedicated incident response team to handle breaches and fraud cases. Regularly update response protocols for customer notification, investigation, and remediation, and coordinate with legal and compliance teams for regulatory reporting.
10. Engage in Industry Collaboration: Join fraud prevention networks and collaborate with government agencies to stay informed on regulations and emerging threats. Participate in cross-industry information sharing to learn from others’ experiences in combating synthetic identity theft.
11. Educate and Support Your Customers: Inform customers about the risks of synthetic identity theft and provide guidance on prevention. Offer clear support channels for fraud victims and be transparent about your data protection and fraud prevention measures.

Conclusion

Synthetic identity fraud poses significant financial risks to businesses and individuals. As fraudsters continue to refine their methods, organisations can protect themselves by adopting advanced fraud detection technologies, enhancing identity verification processes, and staying informed about emerging threats. By implementing these strategies, companies can mitigate the impact of synthetic identity fraud and safeguard their operations against future risks.