Synthetic identity fraud — where scammers create fake personas to steal and launder money — has been on the rise for years, but the pandemic followed by the recent economic crunch are complicating efforts to stem it.
During the pandemic, fraudsters used fictitious identities to
"Once pandemic-related government program fraud was drained, fraudsters got back to making new accounts with synthetic identities online as a result of the ramp-up of digital interactions," said Jim Mortensen, a strategic advisor for fraud and anti-money-laundering at the research and consulting firm Aite-Novarica.
Now the economic downturn threatens to drive more cash-strapped consumers into the clutches of fraudsters who sell
Despite an array of technology solutions that banks and credit unions are deploying and developing, synthetic identity fraud is spiking, on track to rise to $2.94 billion in the next five years, up from $1.8 billion in 2020, according to Aite-Novarica.
While incremental progress to battle synthetic fraud continues, efforts to fully wipe it out will likely require broad cross-industry and government collaboration — or even the creation of a new national ID system, Mortensen said.
Fraudsters now use machine learning and artificial intelligence to test and create fake identities from scratch, or by using combinations of actual consumers' personally identifiable information, to open accounts that look legitimate enough to fool financial institutions.
Unethical "credit repair" operators also use synthetic IDs to create a nine-digit credit profile number they sell to consumers with bad credit, or to undocumented immigrants, to create fresh records and new credit lines, Aite-Novarica said in a report released earlier this year.
In an economic downturn, the use of synthetic fraud to give consumers with sketchy credit new lines of credit is primed to soar, according to Socure, a 10-year-old firm that uses predictive analytics for digital identity verification of consumers.
At this point, up to three of every 100 bank accounts opened within the last couple of years in the U.S. belongs to a synthetic identity, said Mike Cook, Socure's vice president of fraud commercialization, in a recent report.
Apart from the solutions Incline Village, Nevada-based Socure is developing to counter synthetic ID fraud at the account level, Cook also sees the need for support and collaboration from cross-industry participants and government over the long term.
A key starting point is getting financial institutions to recognize the scope of the problem and the role synthetic ID fraud plays in the broader financial crime ecosystem, Cook said.
"Some banks may think their losses from synthetic fraud are zero, because it plays an indirect role in other specific losses. But adding up synthetic fraud's role in losses across the spectrum from all participants in deposit accounts, credit cards and investment accounts, it's very substantial," he said.
Increasingly, fraudsters use fake identities to create bank accounts that act as "digital mules" to hide the trail of stolen funds, including in scams where consumers are tricked into authorizing payments to scammers, Cook said. He noted that synthetic-ID accounts play a role in the illegal financial ecosystem driving some
Determining liability for harm involving fictitious accounts is tricky. But forcing financial institutions to reimburse more consumers burned by such authorized payment scams — a controversial option the
Socure recently introduced Socure Account Intelligence, designed to help prevent payments from being made from a stolen bank account or a closed account, protecting against fraud leveraging government or corporate disbursements.
"It's not uncommon for a bad actor to steal an individual's identity, apply for benefits and then have the funds disbursed to an account they control," said Kevin Kupiec, Socure's senior vice president and head of DocV and Consortium.
Randomly-generated Social Security numbers are a core tool fraudsters use to create fake IDs, according to Socure. Adopting a national policy to freeze credit reports for Social Security numbers the government randomly generates for newborns — until families specifically authorize credit report activation at about age 17 — is another way to help reduce synthetic ID fraud, Socure said.
Expanding and improving the
The eCBSV rolled out this year, enabling financial institutions to perform real-time verification of an applicant's name, Social Security number and date of birth. If other industries including telecommunications, auto finance and other sectors gained access to eCBSV, it would expand overall bulwarks against synthetic ID fraud, Socure said.
Payment companies, fintechs, merchants, processors and data providers for years have also explored
"There is continual innovation from fraud solution providers, credit bureaus and financial institutions to combat synthetic ID fraud," Mortensen said, "but fully eliminating it will require multiple strategies and probably the involvement of the U.S. government or an industry consortium created a true digital identity system."
