Can there be any method for capturing a thief who doesn't exist? The 'non-existent thieves' referred to here are so-called Synthetic Identity Fraudsters (SIF), who are the ones responsible for cases of identity theft. These fraudsters create a new identity by combining real and fake details, beginning with one genuine piece of information, which is a difference from traditional identity fraud. Synthetic Identity Fraud is a major concern for companies, particularly in the financial industry.
Although it is not known exactly how much money has been lost to synthetic identity scammers, a study by the Aite Group showed that US credit card accounts suffered losses of $820 million due to SIF in 2018. Moreover, according to FiVerity's 2021 Synthetic Identity Fraud Report, fraudsters—whose numbers are increasing day by day and who have become a major threat—have caused banks and financial institutions in the United States an estimated loss of $20 billion in 2020.
What is meant by synthetic identity fraud?
The fact that there are many different definitions of SIF and that there are a number of methods for detecting it makes it hard to identify and combat this type of fraud, which is frequently linked with identity theft. That is why the Federal Reserve has set up a group consisting of 12 fraud experts in order to establish a specific definition. The definition they have come up with is this: 'Synthetic identity fraud (SIF) is the use of a combination of personally identifiable information (PII) to create a person or organisation with a view to carrying out an dishonest act for personal or financial benefit.' Moreover, the Federal Reserve has issued three white papers in order to increase awareness within the industry and reduce the risks of SIF.
Synthetic identity fraud is not only committed in order to steal money; it is also used so that drugs and people can be trafficked without being detected. Immigrants can use false personal details in order to live, work and make use of the advantages offered by the country in a different country, and at times their aim is to get access to bank accounts, which in turn makes it easy for them to pay and buy.
Synthetic identity thieves are able to steal your Social Security number, bank account number, credit card details, email address, and medical records most easily. With advances in technology, fraud is now carried out in numerous ways.
Synthetic identity thieves cause serious losses to lenders; for this long-term planned fraud they obtain a large amount of credit and then disappear without repaying the loans they have collected.
How do criminals use synthetic identity fraud to obtain financial gain?
Creation of a fake ID
Scammers begin by obtaining the social security numbers of individuals who do not use loans in order to carry out synthetic identity theft, typically targeting children and homeless people. Another method involves creating Frankenstein IDs, which are identities put together using personal information taken from a number of different people. For instance, a synthetic identity can be created by using one person's social security number, another person's bank account number, and a third person's email address. It is unfortunately not very difficult for scammers to steal information from discarded documents, buy it from the dark web, or get it from a data breach.
Application for loans
Thieves begin by applying for loans online with the synthetic IDs that they have made up. Since the synthetic ID has no previous credit history, the first application is generally turned down. The most important aspect of the operation is establishing a credit history. The scammer then applies for a loan until one is approved and eventually secures his first approval from a high-risk lender who offers a small credit limit.
Building a positive credit track record
To improve their credit ratings and establish a strong credit history, they begin by using the credit limit and making regular payments. Eventually, they may be able to obtain more generous credit limits and access credit from other lenders as well. After a period of months or even years, the scammer will appear exactly like any other ordinary credit user. Furthermore, sophisticated criminal gangs can set up fake companies and use real addresses in order to give a more authentic appearance of their identity, enabling them to get higher payments.
Disappearance
Scammers manage to increase the amount of credit they can access and then vanish. Some of them set up new accounts after using a false ID, while others use a number of counterfeit IDs. It is difficult to locate scammers who have disappeared since there is no means of contacting them; the only thing they leave behind is the person whose social security number was used, and it is also hard to prove that this person is innocent.
How can synthetic identity fraud be prevented?
Synthetic identity theft is a form of fraud which is among the most difficult to detect and to protect against. The filters employed by financial institutions may not be strong enough to pick out fraudulent activity. Synthetic identities appear to be those of genuine customers but have a credit history that lasts only for a short period of time. Yet there are still a number of measures we can take in response to this serious scam.
Institutions
- Financial institutions ought to cut down on losses by making use of the biometric features of their customers, for example by employing facial recognition and fingerprinting.
- Companies ought to use artificial intelligence algorithms and machine learning to pick up on unusual customer behaviour.
- People should enhance the measures which they have in place for storing and sharing personal information.
Individual customers
- You should regularly check both your own and your children's credit reports in order to spot any unusual activity which could be a sign of identity theft.
- Make sure that the documents which contain your personal information are kept safe.
- Be careful about scams that involve social engineering; you can read our article which will enhance your awareness of social engineering.
- Should you believe that you have been cheated by identity scammers, you should freeze your credit so that you can stop the scammers from causing you any more harm until they have been got rid of.
- You should never give your social security number to any organization or individual who is unsafe.
- You can be protected from many scams by using multi-factor authentication.
- The fact that you're receiving irregular emails is a major sign that your data might have been compromised. Make it a habit to frequently check your email.
The Role of AML/CFT Compliance in Synthetic Identity Fraud
Scammers are able to conceal the origin of the money by opening new accounts using the synthetic identities that they make up; they can use the money to deposit illegal funds and also to buy and send goods. Because of the information that is gathered and analysed as part of the Know Your Customer (KYC) process, it is possible to identify unusual behaviour. In organisations, customer information should be known in full. On this basis, it can be determined whether a transaction was carried out by a real customer or by a fraudster who had obtained the information. It is also finally possible to establish whether the identity in question is synthetic or not.
Financial institutions are required to follow AML and KYC regulations in order to stop fraud. Scammers are able to carry out money laundering using synthetic identity theft and in this way make money laundering untraceable. Although fraud is not the responsibility of financial institutions and banks, they do have an obligation to carry out due diligence. If the government determines that the institutions have not taken the necessary steps to detect fraud, it could impose heavy AML/KYC compliance fines.
The state-of-the-art AML software offered by Sanction Scanner enables your financial institution to combat fraud through its Know Your Customer (KYC), Customer Due Diligence (CDD), Transaction Screening, and Transaction Monitoring features.
