Synthetic Identity Theft: The Fastest growing crime in the Financial Sector today

Thanks to investments in technology, the prevention of many types of fraud have become more effective. Still, criminal activity has adapted to this change, making using fictitious or synthetic IDs a new trend for fraudsters. According to figures, synthetic ID fraud is currently one of America's most common financial crimes, representing 10-15% of charge-offs in an unsecured lending portfolio. It is projected to cost businesses nearly $2.5 in 2022, and research suggests that the number could double to nearly $5 billion by 2024.

Similarly, occurrences have been reported in other places as well. Even more concerning is that behind these false identities are concealed losses that could eventually cause great harm.

What is Synthetic Identity Fraud?

Synthetic IDs are created when a fraudster applies for credit using a mix of genuine and false, or even entirely bogus, information. Typically, this application is unsuccessful as the credit bureau has no record of the name provided. Despite this, a credit file in the synthetic ID's name is automatically created by applying for credit, allowing the criminal to start up accounts in their new identity and develop a good credit score. Seeing as the newly created file resembles those of people simply trying to build their credentials - in other words, there is no or limited credit history - these scams are practically impossible to uncover.

The Current State of Fraud Cases & Identity Theft - India & US

In the financial year 2022, the Reserve Bank of India (RBI) reported around 9,103 bank fraud cases across India. This increased compared to the previous year and turned around the last decade's trend. The total value of bank frauds decreased from 1.38 trillion Indian rupees to 604 billion.

The global fraud detection and prevention market is exhibited to grow from USD 30.65 billion in 2022 to USD 129.17 billion in 2029, exhibiting a CAGR of 22.8%

In the US, almost 1.7 million consumer identity theft complaints were received by the Federal Trade Commission in 2021, accounting for 29.4% of all consumer complaints. Identity fraud has been on the rise for the past five years and has increased notably. In 2021, identity theft cases caused $56 billion in losses, up 79% from 2020, according to Javelin Strategy & Research.?

84,000 Americans were victims of new account bank fraud. Additionally, 8% and 5% growth was found for fraud involving debit cards and existing accounts, respectively.

As a result of synthetic ID fraud, financial institutions lose between $6 billion and $20 billion annually. Still, no one knows exactly how much they lose because it is difficult to detect and rarely reported. Banks often write off a credit loss after a loan default or unpaid credit card bill serves as the only evidence they have of being defrauded.

Synthetic ID scams: how they work?

Due to an increasingly digital and mobile financial landscape that remains relatively easy to exploit, synthetic identity fraud is a relatively new phenomenon.

In synthetic identity theft, some real identity information is combined with made-up information to create a fake, new identity (sometimes called a Frankenstein identity). For example, a thief requires a Social Security number not documented by credit bureaus to initiate a synthetic identity, typically sourced from someone underage. They supplement this with an invented name, date of birth, and an address they can access. In addition, they could construct fake social media profiles with images and posts to make them appear even more genuine. Then, when applying for loans or lines of credit, success will kick-start the fraud.

However, it is difficult to detect synthetic ID fraud because scammers are just as familiar with Know Your Customer (KYC) protocols as banks are. The practice is the criminal class's evolution in response to the fact that banks have become better at detecting other types of fraud, such as stolen credit cards and actual identities.

Synthetic ID scammers work hard to appear legitimate to bypass KYC protocols. This scheme often involves establishing a fake credit score over time by making small purchases and payments on time. It could be years before the fraud is revealed, as the supposedly good customer would have been granted further credit or an auto loan by then. That is until one day, and they suddenly vanish with their gains.

What can banks do to protect themselves from synthetic ID fraudsters?

Due to the lack of a way for the federal government to determine whether a social security number, date of birth, or name belongs to a real person, synthetic ID fraud is so difficult to prevent. To avoid adding too much friction to the onboarding process and alienating legitimate new customers, financial institutions sometimes are reluctant to implement more thorough KYC protocols.

It is also possible that banks are operating with a false sense of confidence in their existing systems and protocols because they are unaware that this type of fraud has victimized them. Essentially, some banks do not feel the need to protect themselves because they don't seem to have anything to protect themselves against.

Cases of synthetic identity theft

In 2020, four Florida men were charged with fraud conspiracy for allegedly defrauding banks and stealing $24 million from government COVID economic aid payments. Synthetic identity theft can cause millions of dollars in criminal damage. According to prosecutors in 2021, the men used fake identities and fake companies to receive millions from the Payroll Protection Program.

It has been reported that fraudsters and rings create multiple synthetic identities - or hundreds - in the media in many other cases. Because they extend credit and funds to criminals who use synthetic identities, lenders are usually the victims. However, individuals can also become victims if their real information is included in a synthetic identity involved in fraud crimes.

What can banks & other businesses do?

The impact of synthetic identity fraud in the US is immense; according to estimates, losses totaled $820 million in 2018 and are projected to reach a staggering $1.25 billion by 2020.?

Not only do businesses incur financial losses, but victims also endure countless hours of frustration and stress. Consequently, it is becoming increasingly important for companies to invest in more thorough screening processes and onboarding methods to identify potential cases of synthetic identity fraud. With the scale of data breaches and the advent of the dark web, traditional tools that try to reduce identity fraud can no longer solely be relied upon. Businesses must take a proactive approach to protect their customers from falling victim to this crime. They must invest in more sophisticated identity verification methods, such as document verification powered by AI technology.?

By mining the growing number of third-party data sources available, banks can gain a deeper understanding of their customers, even as fraud evolves to evade detection. As a result, banks can enhance risk controls and stem losses associated with synthetic ID fraud without burdening honest customers with ever-more intrusive and time-consuming ID checks.

Visit www.signzy.com for more information about us. You can also reach out to our team at [email protected]