Synthetic ID Payments Fraud Won't Die Anytime Soon, Fed Whitepaper Says

A new whitepaper from the Federal Reserve has predicted no end in sight for synthetic identity fraud, which is now the fastest-growing type of financial crime in the United States.

The crime will continue to plague consumers because it is hard to detect, has a high payoff for the fraudsters and because so few victims come forward to report the crime, the Fed said. Increased digitization of the financial system has compounded the problem, it noted.

The “near-universal use” of Social Security numbers as identifiers, gaps in the credit process and data breaches that are exposing more personally identifiable information (PII) are big reasons that more criminals are turning to synthetic identity payments fraud, according to the report.

“Fraudsters are more sophisticated and organized, crime rings are run as lucrative businesses, data breaches are frequent and the availability of PII on the dark web is staggering,” it noted.

Criminals create synthetic identities by combining legitimate information about consumers with fake information (such as combining a real Social Security number with a false address). The result is an identity that can escape detection by identity-verification or credit-screening processes. Criminals build up the creditworthiness of the synthetic identities over time and then “bust out” by making large purchases on credit before disappearing, the Federal Reserve explained.

Even when financial institutions reject credit applications, credit bureaus automatically create new credit profiles for the “new’ applicants. A new credit profile becomes a fake person’s “proof” of existence, according to the report, and the fraudster then applies for credit at different financial institutions until one approves an application. The credit bureau then assumes the applicant is legitimate, and the criminal works to increase the identity’s credit availability as quickly as possible so that he or she can cash out.

“It is often difficult to differentiate synthetic identity payments fraud from traditional identity payments fraud and legitimate financial activities. As a result, subject matter experts indicate that the number and volume of synthetic identities in financial portfolios are underestimated,” the report said.

Criminals often use synthetic identities to facilitate drug trafficking, human trafficking and terrorism, it added.

“Crime rings see attractive opportunities in synthetic identity payments fraud,” said Ken Montgomery, who is Federal Reserve System payments security strategy leader and chief operating officer at the Federal Reserve Bank of Boston. “Law enforcement officials, financial institutions, and other organizations recognize it as a growing concern. But unfortunately, many consumers don’t realize how it can hurt their access to credit or how to protect themselves.”