Synthetic Identity Theft

What Is Synthetic Identity Theft?

Synthetic identity theft is a type of fraud in which a criminal combines real and fake information to create a new identity. The real information used in this fraud is usually stolen. This information is used to open fraudulent accounts and make fraudulent purchases.

Synthetic identity theft allows the criminal to steal money from creditors including credit card companies who extend credit based on the fake identity.

How Synthetic Identity Theft Works

Fraudsters who commit synthetic identity theft steal information from unsuspecting individuals to create a synthetic identity. They steal Social Security numbers (SSNs), and couple that with false information like names, addresses, and even dates of birth. Because there is no clearly identifiable victim in this kind of fraud, it often goes unnoticed.

People who commit synthetic identity fraud can use multiple identities simultaneously, and may even keep accounts open and active for months — even years — before the fraud is even detected. They may open accounts, use them responsibly for a certain period of time in order to build up the credit score and history. The higher credit score allows the fraudster for a bigger windfall down the road. In some cases, criminals rack up fraudulent charges, then use real information used to create their fake identity to pose as a fraud victim and get their credit line restored. Then, they use the additional credit to commit further theft.

Some forms of synthetic identity fraud are not motivated by a need to steal money. There are some cases involving undocumented immigrants who use invented or stolen SSNs to obtain financial services. While still a form of fraud, these synthetic identity thieves aren’t looking to steal money from financial institutions, they just want access to bank accounts and credit cards that facilitate getting paid and making payments and purchases.

Detecting Synthetic Identify Theft

Synthetic identity theft is one of the most difficult types of fraud to detect — and protect against. Filters employed by financial institutions may not be sophisticated enough to catch it. When the synthetic identity thief applies for an account, it may seem like a real customer with a limited credit history.

Financial institutions can’t even tell synthetic identity theft has occurred. This is because the criminal establishes a history of using the fraudulent account responsibly before it becomes delinquent to make it look like a real person experiencing financial problems and not a criminal who racks up charges and becomes delinquent on the account at the first opportunity. This type of fraud is called bust-out fraud.

Synthetic vs. Traditional Identity Theft

Synthetic identity theft is quite different from traditional identity theft. As mentioned above, the person behind the synthetic variety uses both real and made-up information in order to create a new identity, thus making it harder to track.

With regular identity theft, on the other hand, consumers' personal information is stolen or sold on the black market and used without their knowledge. This includes names, addresses, dates of birth, SSNs, and employer information. Fraudsters use other people's real identities to their advantage, opening accounts and making purchases. These people are usually in the dark about the fraud until it either shows up on their credit file or they are notified by their bank, financial institution, or a collection department.

Victims are able to flag and freeze their credit files and may authorize investigations into the fraud. In most cases, identity theft victims are not held responsible for accounts if it can be proven that they were opened fraudulently.

Costs of Synthetic Identity Theft

Synthetic identity theft is now one of the most common types of identity fraud, resulting in huge losses for consumers and financial institutions. According to a report from the Federal Reserve, it is the fastest-growing financial crime in the United States. It cost lenders $6 billion in 2016, with the average charge off amounting to $15,000.

Who Bears the Responsibility?

Banks can fall prey to synthetic identity theft since much of the information criminals provide them with is legitimate. For example, a criminal may get away with applying for a credit card using a fake name but a real, stolen Social Security number (SSN). The criminal racks up charges with no intention of repaying them, and the credit card company loses because it can’t collect payment from the fake identity that established the account.

The exponential growth of synthetic identity theft — and especially its impact on children’s identities — will have unfortunate ramifications for young individuals in the future. A study performed by Carnegie Mellon’s CyLab found that children’s SSNs are 51 times more likely to be used in a synthetic identify theft. The Fed's report cited one million children who were identified as victims of synthetic identity fraud in 2017.