Synthetic Identity Fraud: Dissecting a Bust-Out

Technology and better security measures are making it more difficult for card counterfeiters to beat the system. So today’s criminals are turning to another method of fraud: synthetic identity. The Aite Group estimates synthetic identity credit card losses in the U.S. will reach $1.25 billion in 2020.

Synthetic identity fraud is “a problem that is rising to epic proportions,” -- the Aite Group.

Synthetic identity fraud requires a “long game” approach that makes it difficult to detect – until it’s too late. Fraudsters piece together information from real and fictitious sources to create non-existent identities. Then, they use the identities to apply for credit, make purchases or take other actions. In general, criminals follow three steps to exploit synthetic identities that then lead to a bust-out.

1. Fabrication: How synthetic identities are created

The fraudster’s first step is to make up or steal a social security number and fabricate a name, date of birth, mailing address, email account and phone number associated with that SSN. The next step is to apply for a low-limit credit account using the new identity. The bank or retailer will probably deny the request because a profile matching that person does not exist with the credit reporting agencies. Even so, as required by the Fair Credit Reporting Act, the credit inquiry generates a credit profile in reporting agencies’ databases — and that’s a win for the fraudster. In some cases, fraudsters are able develop identity with entirely fictitious PII or a blend of real and forged PII.

2. Legitimization: How fake identities gain the appearance of real people

To gain real traction on the fake identity, the fraudster will pay a real person to add the synthetic identity as an authorized user to an account. As long as timely payments are made on this account, positive information is sent to credit reporting agencies about the real cardholder, as well as any authorized users. This scheme enables the synthetic identity to inherit the benefits of a real person’s good credit profile. Once the fraudster established a positive credit history, he or she can apply for lines of credit using the synthetic identity.

3. Action: The fake identities bust-out and bilk lenders

The fraudster will nurture this fake identity, so it looks real to lenders and credit reporting agencies. The false identity becomes legitimized. This allows the fraudster to charge the maximum on accounts, take out loans, and enroll in plans with cell phone carriers and utilities – with no intention of making payments. Typically, five months after becoming an authorized user, but often much longer, the bust-out occurs. Creditors are left with significant losses with no responsible party to chase in their collection and recovery processes.

Fighting Synthetic Identity Fraud

The conventional fail-safes for detecting fraudulent accounts are rarely effective with synthetic identity fraud. Yet, there are ways to fight back. For example, with advance identity verification techniques, data analytics and machine learning, businesses can uncover striking evidence of suspicious activity and fraud before a bust-out occurs. In addition, organizations can enable a layered fraud defense throughout an account’s lifecycle – from opening through collections/recovery.

Learn more about how criminals form synthetic identity fraud rings – and ways to combat their tactics. Download our white paper, Synthetic Identity Fraud: A Look Behind the Mask.