Synthetic Identity Theft: How to Prevent it?

Gabija Stankevičiūtė

With the modern age growing upon us, it becomes increasingly difficult to adjust to the acceleration of technology and the various challenges it brings with it. Traditional mediums are quickly being replaced by their digital counterparts, and various companies, as well as institutions, are struggling to catch up to the rising needs of cybersecurity. A perfect example of this is synthetic identity theft. What and how big of a problem is it?


Traditional Identity Theft VS Synthetic Identity-Theft

Although many individuals and institutions define synthetic identity theft differently, a Federal Reserve-convened group of fraud experts addressed this issue to create a universal and clear definition. As of 2021, they recommend the official definition to be as follows: 

Synthetic identity theft is the use of a combination of personally identifiable information to fabricate a person or entity in order to commit a dishonest act for personal or financial gain.

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Comparison to Identity Theft

Traditional identity theft involves stealing someone’s identity as a whole. It’s usually achieved by purchasing the victim’s personal information (name, social security number, date of birth, etc.) via the black market and is most frequently used to open credit card accounts. On the other hand, synthetic identity fraud is a method that uses both real and fabricated information, which results in the creation of a new identity.

The Core Issues in ID Verification

The Cor Issues in ID Verification

This type of theft is most rampant in the United States. The prevalence of Social Security Number (SSN) as the core identifier of one’s identity is among the most crucial factors for this. Person’s SSN generally remains the same throughout their lifetime. It creates a medium for it to be used universally as an identifier by both the private industry and various government agencies.

Useful and convenient as it may be, SSNs have become a prime tool in committing fraud. On the dark web, where fraudsters generally find personally identifiable information for a purchase, SSNs are sold for as cheap as 1$. Generally, those are the SSNs of children, homeless people, or elderly – people who are least likely to check their credit information regularly. In fact, according to a 2018 study by Al Pascual and Kyle Marchini, more than one million children have fallen victim to synthetic identity theft in 2017!

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The Scheme of the Fraud

The Scheme of the Fraud

After acquiring the data, fraudsters generally follow a step-by-step scheme:

1. Fraudsters create a Definitionentire identity using the newly acquired SSNs, consisting of both real and fictional data. Even though it is then used for various fraudulent activities, the most common among them are applying for credit cards.

2. Most financial institutions will reject the application, but the credit bureau will automatically create a new profile nonetheless, which then becomes proof of existence for the false identity.

3. After many attempts at getting credit, the fraudster finally finds an institution that accepts the application. More often than not, it is a high-risk lender. The fraudster uses the account to build a decent credit score by making timely payments, resulting in him becoming a trustworthy person in the eyes of various lenders, now including those of low-risk. It also allows the fraudster to access higher credit limits, which furthers his needs. This process can go on for years before it’s detected, allowing them to build up the trust of institutions in their synthetic identity.

4. It is estimated that nearly 50 percent of these fraudsters use a process called “piggybacking” to speed up the process of building good credit. It’s a process of becoming an authorized user to an account with good credit history and results in compensation for this account’s holder. To achieve this, fraudsters employ a variety of tactics, which include: 

  1. Falsifying identification documents
  2. Establishing social media presence on fake accounts
  3. Creating fake businesses
  4. Using drop addresses to receive/forward credit cards to alternate locations

5. With excellent credit history achieved, fraudsters maximize all of their credit lines and vanish. Ironically, some even double the payout, claiming identity theft, which results in all of the charges being removed. Other times, fraudsters use fake checks to restore the balances in their accounts and max out on credit once more before finally disappearing for good. However, only the fake identity is gone, and the fraudster synthesizes a new one to repeat the process all over again. The institutions are then left chasing ghosts, as the, now deeply in debt, identity never existed in the first place – contrary to the traditional identity theft.

Impact of Synthetic Identity Theft

The Federal Reserve reports that synthetic identity fraud cost lenders $6 billion in 2016 alone. Fraudsters target children’s SSNs disproportionally, and it might result in them having to jump through hoops in order to prove in the future that fraudsters compromised their credit history. 

The era of the digital age sets the stage for synthetic identity fraud to become the fastest-growing type of financial crime in the United States. Although it’s not as prevalent in Europe, more than half of fraudsters apply for credits online, and the gaps in identity verification systems worldwide are exploited immensely by synthetic identities.

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Solution is Identity Verification

For this reason, various businesses have a responsibility to implement more sophisticated strategies for identity verification – both to minimize their losses to fraudulent activity and to build trust among their clients. 

iDenfy can become a great solution to this problem. It employs a 4-step verification process and combines Liveness Detection, ID Verification, and Facial Recognition. The automatic ID document detection verifies whether the documents are not forged or tampered with in any way and if it meets security requirements. Combined with human supervision, our AI algorithms detects fraudulent identity documents and ensures a much safer process, stopping fraudulent activity in its’ tracks. We are currently supporting 1300 different documents from more than 200 countries and territories are striving to achieve the best results in what we do.