Despite the massive ramifications in the financial industry, synthetic identity fraud isn’t very well known to most consumers. The financial industry has been the most hurt by this. In the United States, synthetic fraud is one of the fastest-growing categories of financial crime. It has been perpetrated by unscrupulous individuals and large crime syndicates alike. These crimes cause significant losses to organizations, but the trickle-down effects can be felt by ordinary individuals as well.
The government and private organizations have been teaming up to combat this highly sophisticated form of crime. One example is how an open banking solution provider and AU10TIX collaborate on identity verification.
Prime Trust is an API-enabled B2B open banking financial solutions provider, whereas AU10TIX is a global ID verification and authentication platform. Together, they are working on digital trust in the financial services industry. Their collaboration will speed up identity verification results, especially synthetic fraud detection.
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The Low Awareness of Synthetic Identity Fraud
Synthetic identity fraud cases cost organizations billions of dollars every financial year. As mentioned before, individuals get hurt by this too. They face major damage to their credit histories, reputations, and personal finances.
So many people are unaware of this crime because it is often hidden under the guise of credit loss. The crime never gets highlighted at the organizational level but is miscategorized as a credit loss. As a matter of fact, until very recently, there was no standardized agreed-upon definition of the crime. That made it even harder to fight against it.
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The Official Definition of Synthetic Identity Fraud
The Federal Reserve established an industry group of fraud experts. They came up with the official definition of synthetic identity fraud in April 2021.
The definition states that synthetic identity fraud uses combined personal identification data from various sources. It is done to engage in a crime for personal benefit.
In an attempt to create a new ID, real and fake information are combined. Social security numbers and other government-issued identification numbers are also combined with fake information. Fraudsters might also use fictitious names or dates of birth and addresses. This combination makes it hard to distinguish fake IDs from real ones.
How Are the Frauds Executed?
The payments industry gets subjected to this fraud in multiple ways.
When synthetic IDs are used to register for goods, services, or loans, the user has no intention of paying. It is almost impossible to retrieve payments from these users since they do not exist technically.
Fraud as a Livelihood
Using synthetic IDs to Apply for bank accounts, housing, and utility services is common. Again, there is no intent to pay for these services, and they can keep moving from one ID to another.
Hiding Credit History
Fraudsters create synthetic IDs to hide bad credit records and debt histories. It will make the person applying for the loan seem more credible.
The activities described above can be used for other, more sinister objectives. These can include human trafficking, money laundering, and funding terrorism.
The Harmful Effects
The impact of synthetic IDs is widespread and deep-reaching. Criminals use them frequently since they are easy and cheap to create. It affects governments, financial services, health care, and insurance bodies. It can ruin the entire credit history of a private citizen. They could be forced to pay for medical and tax bills that don’t belong to them. They could even get blocklisted from the job market.
Problems With Detection
During the initial customer onboarding process, many organizations use limited data points. It would be prudent to follow this up with a more thorough identity verification process, but many companies don’t do it.
The fraudster behaves like an upstanding customer during the initial transactional period. That makes it hard for conventional fraud detection models to separate them from other genuine customers.
How to Combat It
One single company can’t fight this alone. Thus, collaboration is the only way. Organizations must work with each other both inside and outside.
Fraudsters tend to use a single synthetic ID to target multiple organizations. These different companies can work with each other and match anonymized data points to zero in on the fraudster.
Finally, note that statutory bodies need to facilitate this collaboration. The Federal Reserve has taken a positive step in this direction by recognizing this problem. It must now put in frameworks and guidelines for detection and mitigation while protecting the common citizen.