What Is Synthetic Identity Fraud?

“Identity fraud” typically elicits thoughts of malicious individuals leveraging existing identities or fabricating new ones from scratch. However, innovative fraudsters employ devastating blends of both to fool even the most scrutinous expert—either making minor changes to real identities or spinning entirely new, fake identities based on pieces of legitimate information.

This “synthetic identity fraud” method is becoming one of the most troubling and prevalent types of fraud in banking across North America. 

In April 2024, for example, Canadian authorities finalized “Project Déjà Vu,” making 12 arrests and bringing 102 charges against an infamous ring that preyed on banks and financial institutions since 2016 by using over 680 unique and synthetic identities.

Below, we’ll explain this kind of fraud, its dangers, and what banks and financial services providers can do to prevent its impacts.

How synthetic identity fraud works

Identity fraud happens when a criminal uses a fake identity—or a real identity that is not their own—to make a fraudulent financial transaction. In synthetic identity fraud or synthetic identity theft, the criminals use synthetic identities of their own creation.

There are two main tactics used, per Experian’s synthetic identity fraud 101:

  • Compilation: Attackers combine real information, such as a social security number (SSN), with fake information to create a new identity just for fraud.
  • Manipulation: Fraudsters take real information (e.g., an SSN) and alter certain details about or associated with it to create an alternate, illegitimate identity.

However, these strategies just cover how identity thieves create a synthetic identity.

With the synthetic identities in hand, the real threats open up. Attackers can create bank accounts, apply for loans, make purchases, and otherwise commit financial fraud under their aliases. In turn, banks and account holders bear the consequences.

The consequences of synthetic identity fraud

When fraudsters use synthetic identities to steal money from banks and financial institutions, those institutions bear much of the harm. In the Canadian case noted above, the group of 12 attackers accounted for an estimated $4 million in losses.

And, per Forbes, smaller banks are disproportionately impacted by fraud. The upshot is that some of the biggest victims in these cases are institutions least equipped to deal with the implications of financial strains on them—or their customers.

Because synthetic identity fraud utilizes real personally identifiable information, it also impacts banks’ customers. If a person’s name or SSN is used in such a scheme, rectifying their true identity with credit bureaus can be time-consuming and costly. Per an Equifax briefing on synthetic identity fraud, customers’ credit reports and overall credit history can be permanently scarred.

Maybe worst of all, information used in the scheme can wind up on the dark web and be re-used by other fraudsters in the future, leading to a vicious cycle of harm.

Challenges in detecting synthetic identity fraud

Unlike other forms of identity theft, synthetic identity fraud almost always combines real and fake information. When synthetic identity theft occurs, attackers pass off something partially real. 

Or it’s closely based on real-world documentation. That means it either contains or closely mimics real-world imperfections and details that the best-trained eyes (human or otherwise) look for.

Additionally, tools readily available make fake IDs and documentation easy to generate for any willing participant, whether they have a history or training in a criminal enterprise or not. For example, Fake ID Solutions offers this exact service.

This is why, even for financial institutions that are aware of identity verification trends, synthetic identity can be harder to detect and prevent than traditional identity theft.

Detecting and preventing synthetic identity fraud

Given how harmful fake identities can be and how hard synthetic identities, in particular, are to catch, the importance of fraud detection cannot be overstated.

Avoiding synthetic identity theft comes down to two steps, per a legal expert:

  • Initial authentication: First, banks need to authenticate users, ideally by requiring official government documentation and a biometric identifier.
  • Continuous verification: Banks need to continue verifying that individuals are who they say they are whenever actions are initiated. One effective method is comparing documents provided against public records.

Importantly, banks and other financial services industry stakeholders should leverage breakthrough technologies to automate and otherwise streamline these processes. Real-time fraud detection in banking is one of the absolute best solutions.

Microblink’s role in fighting synthetic identity fraud

Understanding how synthetic identity theft works is just the start of the battle. Leaders need to use effective technological solutions to authenticate and verify their users over time to reduce the risks it poses to a bank and its customers.

That’s where Microblink comes in.

Our BlinkID Verify solution verifies identity documents utilizing sophisticated predictive models that outpace criminals’ attacks. We prevent document fraud, photo tampering, and other common forgery tactics by leveraging the power of artificial intelligence (AI) and machine learning (ML).

Contact us today to learn more about how we can help you prevent fraud!

May 30, 2024

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