Synthetic identities - The new frontier in money laundering

As technology evolves, so do the tactics of financial criminals. Synthetic identities, a mix of real and fabricated information, are becoming the tool of choice for evading detection in financial systems. Unlike stolen identities, these are meticulously engineered, making them harder to trace and disrupt.?

Synthetic identity fraud has already cost financial institutions billions, but its implications for anti-money laundering (AML) efforts are even more alarming.?

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What are synthetic identities??

Synthetic identities are created by combining real data (e.g., a legitimate Social Security number) with fake details (e.g., a fabricated name and address). These identities are used to:?

• Open bank accounts.?

• Secure loans or credit lines.?

• Funnel illicit funds through legitimate-seeming financial activities.?

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How they evade AML systems?

Traditional AML measures like Know Your Customer (KYC) and transaction monitoring systems rely on patterns and historical data. Synthetic identities exploit these systems by:?

1. Blending In: They mimic low-risk customer profiles, avoiding detection.?
2. Building Credibility: Over time, these identities develop a credit history, making them appear legitimate.?
3. Bypassing Alerts: Fraudsters use small, frequent transactions to stay below the radar.?

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Why this is a growing concern?

1. Accessibility of Data: Data breaches have provided criminals with a treasure trove of personal information to construct synthetic identities.?
2. Advanced Technology: Machine learning tools are being leveraged to craft identities that fit seamlessly into financial systems.?
3. Global Reach: Synthetic identity schemes can cross borders, making investigations and enforcement more complex.?

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AML implications?

The rise of synthetic identities challenges traditional AML frameworks in several ways:?

• Strain on Resources: Detecting synthetic identities requires advanced analytics and expert intervention.?

• Delayed Detection: Fraud often remains unnoticed until significant financial damage is done.?

• Compromised Investigations: These identities can obscure the trail, making it difficult to trace the origin of illicit funds.?

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How financial institutions can respond?

1. Invest in Technology:?

• Utilise AI and machine learning to detect anomalies and unusual patterns.?
• Deploy real-time identity verification tools.?

2. Collaborate Across Industries:?

• Share insights and data on synthetic identity trends.?
• Engage with government agencies to improve detection mechanisms.?

3. Enhance KYC Procedures:?

• Implement multi-factor authentication.?
• Regularly update customer records to ensure accuracy.?

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Synthetic identities are more than a fraud risk; they represent a fundamental challenge to financial system integrity. To combat this growing threat, financial institutions must innovate, collaborate, and strengthen their AML frameworks.?

By staying one step ahead, we can close the gaps that criminals exploit—and protect the financial ecosystem from being manipulated by “ghosts” in the system.?

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Author Sarita Sitaraman