Synthetic identity fraud is one of the most complex types of identity theft, which is especially challenging for organizations to detect and prevent.
Synthetic identity fraud accounts for more than 80% of all new account fraud, and as cybercriminals continue to innovate, the methods used to create and exploit synthetic identities have grown more sophisticated. This new threat has serious financial consequences, particularly for sectors like banking and finance that rely heavily on identity verification.
Let’s delve into the nuances of synthetic identity theft, explore how it differs from traditional identity theft, and uncover strategies to detect and prevent it.
What is Synthetic Identity Theft?
Synthetic identity theft is a type of fraud where criminals combine fake and real information to create a new identity. To create synthetic identities, criminals use real components such as stolen Social Security Numbers (SSNs) and mix them with fake names, addresses, and dates of birth. This identity is not associated with any real person, which makes it difficult to detect.
Criminals use synthetic identities for financial gain by opening credit accounts, obtaining loans, and committing other forms of financial fraud.
How Does Synthetic Identity Theft Work?
Synthetic identity fraud begins with gathering real identity components. This is usually done through data breaches or purchases on the dark web. The most commonly used real information is the Social Security Number (SSN) belonging to children, the elderly, or individuals who do not monitor their credit regularly. Then, the fraudsters fabricate other details, such as names, dates of birth, and addresses, to create a new identity.
Once the fake identity is created, the fraudster applies for credit. The initial application may be rejected due to a lack of credit history, but this action is enough to create a credit file for the synthetic identity.
Over time, the fraudster continues to build credit for the synthetic identity by applying for more accounts and making small payments. Eventually, they max out the credit lines and disappear, leaving financial institutions with losses.
Traditional vs. Synthetic Identity Theft
The main difference between traditional and synthetic identity theft lies in the nature of the identity being exploited.
In traditional identity theft, a criminal uses a real person’s entire identity to commit fraud. Victims usually discover the theft quickly, as they may notice unauthorized charges or receive alerts from their financial institutions.
Synthetic identity theft is more complex because the identity is not tied to a real person, and there is no immediate response from a victim reporting the fraud. This allows the fake identity to remain undetected for a long time, often after the fraudster has already caused significant harm to someone’s finances.
Additionally, fake identities can be developed over time, giving the impression of legitimacy and thus increasing the fraudster’s potential reward.
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 estimates that synthetic identity fraud will generate at least $23 billion in losses by 2030.
These losses are not limited to direct financial costs, the key cost factors include:
- Direct financial losses: unpaid credit balances and loans that cannot be recovered.
- Operational losses: costs associated with investigating and addressing the fraud, including labor and resources.
- Reputational damage: loss of customer trust and potential business opportunities caused by perceived security vulnerabilities.
- Legal and regulatory costs: Penalties or compliance costs if businesses fail to prevent or address synthetic identity theft effectively.
Synthetic identity theft can severely impact a business’s bottom line. This makes it essential to implement strong identity verification and fraud prevention measures. Additionally, because synthetic identities do not have a direct victim to report the fraud, losses can go unnoticed and accumulate over time, making the damage even greater.
How to Detect Synthetic Identity Fraud?
Although detecting synthetic identity fraud can be challenging, companies can use the following techniques to identify potential cases effectively.
1. Monitor unusual behavior: watch for new accounts with perfect payment histories followed by sudden large transactions or credit line increases. Pay attention to accounts that build credit slowly and then quickly max out.
2. Implement document verification processes: Implement document verification to ensure identity documents match the provided information, as fraudsters often lack genuine documents for synthetic identities.
3. Verify identity details: cross-check identity details across databases for mismatches, like SSNs that don’t align with age or region. Use identity verification tools to authenticate SSNs, addresses, and phone numbers.
4. Watch for synthetic identity patterns: watch for identities with little or no credit history, especially if linked to high-risk behaviors. Monitor for multiple accounts or applications with similar details, like slight name or address variations.
5. Implement biometric verification: use biometric verification, like facial recognition or fingerprint scanning, to confirm the person’s identity.
6. Use fraud detection technology: implement advanced analytics, machine learning, and AI to detect patterns and anomalies typical of synthetic identities. Employ real-time monitoring to flag suspicious activities as they occur.
7. Collaborate with credit bureaus: collaborate with credit bureaus to share and analyze data, as they often have deeper insights that can help identify synthetic identities early.
8. Educate employees and customers: train employees to spot signs of synthetic identity fraud. Encourage customers to regularly monitor their accounts and report any suspicious activity.
By using these techniques, businesses can improve their chances of identifying synthetic identity fraud early and minimizing its impact.
How to Prevent Synthetic Identity Theft?
Businesses are often targeted because they hold large amounts of sensitive customer information, making them attractive to cybercriminals. Preventing synthetic identity theft involves implementing robust security practices, monitoring systems, and educating employees.
Here’s a comprehensive approach for companies to prevent synthetic identity theft:
1. Implement strong data security practices: ensure secure storage of private data through tokenization, anonymization, and encryption of all sensitive customer data, including Social Security numbers (SSNs) and personally identifiable information (PII).
2. Enhance customer identity verification processes: Implement MFA and strengthen KYC protocols with multi-point identity verification, including ID checks and biometrics, to protect customer accounts.
3. Monitor transactions and customer behavior: use fraud detection systems with machine learning and behavioral analytics to spot unusual patterns. Set real-time alerts for suspicious activities, and impose transaction limits or require extra verification for large or unusual transactions, especially for new accounts.
4. Implement data minimization and retention policies: collect only necessary data to minimize risk, establish retention policies to determine how long data is kept, and securely delete outdated or unnecessary information regularly.
5. Educate employees on security best practices: regularly train employees on data security, phishing, and safeguarding customer information. Foster security awareness and encourage the reporting of suspicious activities. Ensure staff are trained in incident response protocols for swift action during breaches or fraud.
6. Conduct regular security audits and assessments: regularly conduct security testing to find vulnerabilities and maintain effective protections, and ensure compliance with regulations like GDPR, CCPA, and others.
7. Protect against insider threats: conduct thorough background checks on those with data access, monitor for unauthorized activity, and enforce separation of duties to reduce insider fraud risk.
8. Use third-party solutions wisely: thoroughly vet third-party vendors, ensuring they meet strict security standards, undergo regular assessments, and include security requirements and breach notification procedures in SLAs.
9. Implement a robust incident response plan: Create a dedicated incident response team to handle breaches and fraud, 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, collaborate with government agencies for updates on regulations and threats, and engage in cross-industry sharing to learn from others in combating synthetic identity theft.
11. Educate and support your customers: educate customers on synthetic identity theft risks and prevention, provide clear support channels for fraud victims, and be transparent about your data protection and fraud prevention measures.
Conclusion
Businesses and individuals face severe financial risks from the sophisticated and growing threat of synthetic identity fraud. As fraudsters continue to evolve their methods, organizations can protect themselves from its damaging effects by adopting advanced fraud detection technologies, enhancing identity verification processes, and staying informed about emerging threats. These strategies can help companies mitigate the impact of synthetic identity fraud and safeguard their operations against future risks.
