Setting Sights on Synthetic Identity Fraud

Amy Donaghue

By: Brian Laverdure, AAP, Director, Emerging Payments Education

Earlier this month, the Federal Reserve released the third in a series of white papers examining fraud called Mitigating Synthetic Identity Fraud in the U.S. Payment System. While people have been making fake IDs for years to buy alcohol while underage, flee creditors or assume a new life, fake IDs have become a much more sophisticated operation. Today, fraudsters can tap vast online treasure troves of stolen or public personal data to assemble thousands of new identities in the blink of an eye!

What is synthetic identity fraud?
According to the Federal Reserve, synthetic identity fraud is “a crime in which perpetrators combine fictitious and sometimes real information, such as SSNs (social security numbers) and names to create new identities” to commit fraud. Although synthetic identity fraud bears many similarities to traditional identity theft, wherein a criminal steals personal information to defraud businesses or financial institutions, there are some important differences that make it even more threatening. Criminals now leverage a wealth of information available on the dark web to construct new “people.” These fake identities can have many attributes of real people—names, birthdates, social security numbers and even active Instagram or Facebook accounts—but they only exist to serve the unlawful aims of scammers!

How do criminals use synthetic identities?
Fraudsters start by using the synthetic identity to apply for credit, such as a credit card or personal loan, at a financial institution. Since the synthetic identity is new and lacks a credit history, the initial application may be declined; however, the first rejection still establishes a credit file associated with the synthetic identity. Over time, as the fraudsters submit more applications, the credit file continues to grow with activity that may appear normal until the day they hit jackpot—an institution approves their application. The savviest criminals will then cultivate good credit, and therefore higher limits, with months or even years of on-time payments. The goal is simple: acquire and use the maximum amount of credit before “busting out” by disappearing and leaving the institution with thousands in losses! Who will the financial institution or law enforcement pursue when they find out the “person” is just a figment of criminal imagination?

How can your institution mitigate synthetic identity fraud risk?
The Federal Reserve’s white paper provides insights into steps that the payments industry can take to turn back the tide of this growing threat. Financial institutions are encouraged to use link analysis to examine multiple products, like checking accounts and mortgages, to uncover common characteristics that may flag synthetic identities. For example, link analysis can reveal several account applications originating from the same IP address or the same authorized users associated with an unusual number of accounts. Detection of these anomalies gives financial institutions critical information for more thorough investigations across the entire organization.

The report also highlights several efforts by government agencies, lawmakers and industry groups to tackle stolen personal information and synthetic identities. After years of anticipation, the Social Security Administration rolled out its electronic Consent Based SSN Verification (eCBSV) service last month. The service permits financial institutions, with written consent from individual SSN holders, to verify information associated with the number, such as name and date of birth, in real-time. The service has some notable limitations—namely, it is not accessible 24/7 and only supports new account applications—but it represents a step in the right direction and furnishes banks and credit unions with a valuable tool in the fight against fraud! More state governments are also introducing data privacy laws modeled on California’s Consumer Privacy Act to offer their citizens greater control over their information and encourage responsible data stewardship by businesses.

What is EPCOR doing to help our members?
We are always working to keep up with the latest fraud trends to help you keep up with fraudsters! We offer several avenues for you to learn about new fraud-related trends or share experiences that can help other institutions, such as:

And, for even more information on synthetic identity fraud, check out these additional white papers from the Federal Reserve: