“Synthetic fraud differs from traditional identity fraud in that instead of assuming the identity of a real person using their credit, it creates a new identity using a real social security number with a fictitious name, driver’s license and address.
Traditional identity fraud is usually detected and reported relatively quickly because there is a real victim who is being affected. To create a synthetic identity, a scammer simply needs an unused social security number, often from a child. With this fresh social security number, they can establish a new identity with the credit bureaus.”
According to Forbes, success for synthetic identify thieves is in the persistence of their efforts:
- Applying to loans repeatedly, creating a credit profile base
- Building credit through full repayment of small purchase
- Publicizing the false identify to give it legitimacy
“The Federal Reserve reported that the largest synthetic ID ring detected to date caused $200 million (or more) in losses from 7,000 synthetic IDs and 25,000 credit cards. Synthetic fraud costs lenders more than $6 billion annually, and the average loss is estimated at $10,000 per account.”
Forbes recommends banks can fight this emerging risk by:
- Adding more verification and authentication steps
- Looking beyond credit reporting to confirm an individual’s identify
- Increasing KYC requirements with document verification
- Biometric screening
Until the financial system diminishes the importance of social security numbers in establishing financial footprint, no one is immune from abuse.
McKinsey claims synthetic ID fraud is the fastest-growing type of financial crime in the U.S. LexisNexis Risk Solutions (via Yahoo Finance) found that "61% of fraud losses for [large] banks stem from identity fraud [and] 20% of the identity fraud incurred by these larger banks is synthetic identity fraud."