Synthetic Identity Theft: What is It & How Does It Work?

Ever wondered how people create new identities online? And why do these thieves do so? What do they want from your identity? They definitely want something, and they do benefit from it and get something out of it. Maybe they want your credit, or they want to receive a medical service under your name, or worse, they want to hide their own identity for whatever reason, that is!

Actually, out of the 5.7 million cases reported to the FTC, 1.4 million were related to identity theft, which led the FTC to treat identity theft as a distinct category, different from other types of fraud. According to synthetic identity fraud statistics, this means that the cost to victims is growing, especially as our use of digital technology continues to rise.

Taking these numbers into consideration, it means that you or any of your clients can fall victim to identity theft. So what do you do? How can you effectively combat synthetic identity fraud? First, you need to learn what synthetic ID fraud exactly is and how it works, and then you will be able to detect and prevent it.

What is Synthetic Identity Theft?

If we're looking at traditional identity theft, that is straightforward: it happens when someone steals someone else's identity to use it for personal gain. However, when we say synthetic ID fraud, these thieves don't steal your existing identity, like with traditional identity theft, but rather create a completely new one from scratch. So they might use your name but with a different Social Security number or use fake names with your other details. In other words, they blend stolen real information with made-up details to set up credit lines or make purchases.

Most of the time, their main targets are children, the elderly, or homeless individuals. You might think, why specifically these groups of people? Well, that's because these targets are the ones who are less likely to check their credit regularly. And these criminals do not create these fake identities all of a sudden. On the contrary, they carefully build these fake identities over time, as they start with establishing credit histories before finally cashing in. This not only makes it sound more real but also makes it tough to spot, so the fraud can go on for a long time without being detected.

What is A Synthetic Identity Used For?

In the previous section, we explained that criminals use synthetic identity theft for personal gain, but what type of personal gains are we’re talking about? Here are some common uses:

1. Opening Fraudulent Accounts

The first thing anyone needs when opening a bank account is an ID, so when criminals decide to open a fraudulent account, they must need to use synthetic identities. This will allow them to apply for credit cards and other financial accounts under false pretenses. It does not stop there, they then keep exploiting these fake accounts to obtain funds or make purchases without intending to repay debts.

2. Obtaining Loans and Credit Lines

After opening the fake account, these criminals start nurturing these synthetic identities over a period of time to be able to establish a good credit score, which makes their identity appear legitimate and creditworthy.

You might wonder why they would want to build the credit history for a fake identity! Well, their goal is bigger than just opening an account, they are looking forward to maybe apply for larger loans or credit lines, often with the intention of maxing out these credit facilities and disappearing without repayment.

3. Money Laundering

A common use of synthetic identity theft is money laundering and hiding the origin of illicit funds. They might use these fake synthetic identities to transfer funds between accounts or conduct transactions to disguise the trail of illegal activities.

4. Accessing Government Benefits

In some cases, criminals use synthetic identity theft to access tax refunds, healthcare services, or even welfare benefits. These synthetic identities help them manipulate the criteria for eligibility.

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Traditional Vs. Synthetic Identity Theft: What’s the Difference?

The table below explains the difference between traditional and synthetic identity theft.

How Does Synthetic Identity Theft Work?

This step-by-step example explains exactly how synthetic identity theft works. Let's assume that Noor is looking for a way to generate money. Noor decides that synthetic identity theft is the way to go, so she enters the dark web and buys a fake name, address, and date of birth accompanied by a legitimate and real Social Security Number. This is the first step in the creation of synthetic identity fraud.

Now, Noor has a new identity and a new name: Rana. She now needs to build Rana’s credit. So, Noor applies for a credit card in Rana's name, which is her new synthetic identity. She knows her application will not get accepted, so she makes small purchases here and there to build "Rana's" credit score and credit history. 

Over time, Rana's creditworthiness improved, and she seized the opportunity to apply for a small personal loan in Rana's name. She promptly repaid the loan, which built Rana's credit score even more and showed the bank or the financial institution that she had responsible borrowing behavior. 

Once Noor has Rana's credit history solidified, she applies for the bigger hit, a bigger loan maxing out the credit limit with no intention or repayment. 

In these synthetic identity theft cases, financial institutions should prioritize synthetic identity fraud management to protect sensitive data, mitigate risks, and maintain regulatory compliance. 

6 Methods Fraudsters Use To Create Synthetic Identities 

Fraudsters employ various methods to create synthetic identities, blending real and fake information to establish fraudulent personas. Here are the primary methods they use:

1. Combining Real and Fake Information

Fraudsters start with real information like stolen Social Security Numbers (SSNs) and add or mix it with fake details like names, addresses, and birthdays to create a fake identity.

2. Stealing SSNs or Purchasing Them

Where do these criminals get the real information from? They get SSNs by hacking or buying them online from the dark web. Some use information from dead people to make fake identities that are harder to catch.

3. Creating False Documents

They create fake IDs, such as driver's licenses or passports, to make their fake identities seem legitimate when they apply for credit.

4. Riding on Existing Accounts with Good Credit

Fraudsters might pay someone who has good credit to let them join their credit card account. This means the person with good credit tells their credit card company they want to add the fraudster's fake identity to their account. Once added, the fake identity can be used to access the credit card and benefit from the excellent credit history of the actual account holder to build good credit faster.

5. Creating False Credit Profiles

They start small accounts or get secured credit cards and pay on time to make the fake identity look like it has good credit. It is important to know though, that banks are implementing new technologies to detect synthetic credit fraud. 

6. Fabricating Employment and Income Information

They lie about jobs and how much money they make when they apply for credit.

What Happens If You Fall Victim to Synthetic Identity Theft?

The consequences of synthetic identity theft and synthetic credit fraud are significant for the victims, affecting them not only materially but also emotionally. Victims usually experience financial losses and damage to their credit score, which becomes very hard to build later. They also encounter difficulties in verifying their identities. They might undergo legal and administrative hassle, let alone the emotional stress and anxiety regarding the long-term impact on their financial well-being. 

Tips To Detect And Prevent Synthetic Identity Fraud

If you are a fraud professional working in a financial institution and you're looking for ways to detect and prevent synthetic identity theft to protect your customers, then you're at the right place. The following tips will help you in synthetic fraud detection and prevention:

1. Enhance identity verification

Effective synthetic identity fraud detection requires advanced algorithms and continuous monitoring, so first, you should enhance your identity verification processes. This can be implemented by using biometric authentication and document validation. 

2. Monitor credit applications 

Next, you should monitor credit applications closely, look for any signs of suspicious activity, such as multiple applications using the same social security number but with different personal details.

3. Double-check identity information 

You also need to double-check identity information against trustworthy sources like government records to be able to detect inconsistencies. 

4. Utilize advanced analytics 

The fourth tip is utilizing advanced analytics and machine learning algorithms to detect unusual spending habits or high-risk credit behaviors. 

5. Invest in a fraud detection tool

If you haven’t used a fraud detection tool already, this is your sign to invest in one. Fraud prevention tools empower you to proactively identify and prevent synthetic identity fraud. If you’re looking for the best fraud prevention solution, you might want to check out our latest article, where we compare the top 6 fraud prevention software companies and explore their unique strengths and capabilities.

6. Ensure employees report suspicious activity

As part of your efforts in synthetic identity detection, it is also important for all employees to report any suspicious activity or suspected instances of synthetic identity fraud for investigation and action. Training employees on synthetic identity fraud detection can significantly enhance a company's ability to protect against this type of fraud.

How Can FOCAL Help?

FOCAL Device Risk uses strong AI engines and threat Intelligence to identify and automatically respond to elusive fraudulent activities in the digital landscape.

1. Anomaly Detection: Device risk analysis can detect anomalies in device behavior, such as unusual device configurations, IP addresses, or geolocations associated with credit applications. These anomalies may indicate potential fraudulent activity, such as using virtual private networks (VPNs) or proxy servers to conceal the fraudster's true location.

2. Fraudulent Device Identification: By maintaining databases of known fraudulent devices or device fingerprints associated with synthetic identity fraud, financial institutions can flag suspicious devices and transactions for further investigation. This helps identify repeat offenders or coordinated fraud rings that use multiple synthetic identities across different devices.

3. Behavioral Biometrics: Device risk analysis can also incorporate behavioral biometrics, such as typing patterns, touchscreen gestures, or device usage patterns, to verify the authenticity of a user's interaction with the device. Deviations from established behavioral patterns may indicate potential synthetic identity fraud attempts.

4. Real-Time Monitoring: Implementing real-time device risk analysis allows financial institutions to monitor credit applications and transactions as they occur, enabling immediate detection and response to suspicious activity. This proactive approach helps in preventing fraudulent transactions before they cause financial losses.

5. Adaptive Authentication: Device risk analysis can be integrated into adaptive authentication systems, where the level of authentication required for a transaction is dynamically adjusted based on the assessed risk level associated with the device and user behavior. This enhances security while minimizing friction for legitimate users.

6. Cross-Channel Analysis: Device risk analysis can analyze device fingerprints across different channels and platforms, such as web browsers, mobile apps, and call centers, to identify patterns of fraudulent behavior that span multiple channels. This holistic approach helps in synthetic fraud detection schemes that exploit vulnerabilities across various channels.

Conclusion

In conclusion, synthetic ID fraud involves creating fictitious identities by blending real and fake information for various fraudulent purposes, posing unique challenges compared to traditional identity theft.

Therefore, it is important for you to implement synthetic fraud solutions and device risk analysis, which provides financial institutions and businesses with an additional layer of security in detecting and preventing synthetic identity theft by leveraging device-related information to assess the risk of fraudulent activity associated with credit applications and transactions.