The advent of new technologies has provided an avenue for fraud to evolve. Today, criminals are devising new techniques to avoid fraud detection, rendering ineffective, traditional methods of spotting these activities. Synthetic identity fraud is one of the most prominent techniques that criminals use to perpetuate crime undetected.

In this article, we looked at the rise of synthetic identity fraud, how it's executed, and the effective approach businesses should take to curtail it. 


What is Synthetic Identity Fraud?


Synthetic identity fraud refers to the type of fraud that involves criminals combining real and fake information to create an entirely new identity with the ultimate goal to commit fraud. These identities could be opened with real or fake personal identifiable information (PII) such as names, and social security numbers. The criminal usually operates this identity for a while to appear legit before proceeding to defraud an individual, or financial institution or open fake accounts to make fraudulent transactions. 


Synthetic identity fraud is difficult to detect. This is because the criminals are often patient and can lay low for years before breaking the act by bursting the credit line and exiting the system real quick after committing the crime. Victims of such crimes are most often those who have no reason to frequently access information about their credit. Some examples are children and elderly in the society. Due to the nature of the fraud, it usually goes undetected for a while and the criminal would have long exited. 

The tendency to steal large sums and go undetected for a long time is what makes this type of fraud enticing to criminals. However, it requires a high level of expertise and sophisticated planning to pull off.


Synthetic Fraud Methods Vs Traditional Fraud 


Synthetic fraud differs from traditional fraud activities in different ways. In traditional frauds, the criminal tries to impersonate someone else using their information and stolen identity. However, due to how direct it is, the criminal has to max out the victim’s credit or transfer as much cash as possible within the shortest amount of time. The downside is that the activity gets noticed more quickly and is mostly reported immediately.

On the flip side, synthetic identity fraud is more patient and plays a long-term game. It involves the criminal creating an entirely new identity which can be done by any of the following: 


  • Creates an entirely new identity from scratch without utilizing any information from a real person 
  • Slightly modifying the identity of a real person to create a new identity
  • A mixture of fake and real identity information to form a new identity 


The long-term approach makes it difficult to identify criminals utilizing this type of identity fraud. It is even more difficult when the criminal creates a fake identity using information from real individuals who don’t keep an eye on their credit. Without transaction screening, the financial institution will hardly detect the activity. Synthetic identity fraud makes digital identity verification very crucial.

Recommended - Top 6 Identity Verification Methods For Businesses Today

How do fraudsters create synthetic identities?


Here is the step-by-step approach to how fraudsters create synthetic identities:

Step 1: Create a new fake identity using their preferred method

Step 2: Proceed to apply for credit

Step 3: Continuous application for credit until they’re successful

Step 4: Fast track a positive credit history

Step 5: Break the act and commit fraud

Let’s take a look at what each step entails. 

1. Step 1: Create a new fake identity using their preferred method


For the first step, the criminal decides on the fake identity creation approach to use and executes it. Such individuals could purchase personal identifiable information on the black market or dark web or whip off entirely false information from scratch.

2. Step 2: Proceed to apply for credit


The criminal then proceeds to make use of this fake identity to apply for credit online. The goal here is not to receive credit approval right away as such an application will most likely be rejected when the financial institution submits the request to the credit bureau for validation. Instead, the goal is to create an application trail that is enough to start a credit file for the new identity.  

3. Step 3: Continuous application for credit until they’re successful


The process of credit application continues until the criminal finds a break. This is usually from high-risk lenders looking to rake in huge profit margins within a short period of time. On approval, the criminal takes credit and makes timely repayment to build up a solid record of credit history. Over time, this gives them a shiny record, eventually granting them access to lower-risk lenders with higher credit limits.  


4. Step 4: Fast track a positive credit history


The next step is to improve their credit history using a process called piggybacking. This process involves being added as an authorized user to an account with good credit history. In return, they agree on a compensation with the owner of the account. This and many more tactics are used to make the synthetic identity appear real in order to access higher payouts. Other examples include creating fake business and transaction trails, opening social media accounts, and generally expanding their digital footprint on the internet. 


5. Step 5: Break the act and commit fraud


At some point, the synthetic identity’s credit score becomes positive enough to secure high credit with a longer extension. Anytime from then, they can break the act by maxing out the credit line before disappearing, learning little or no traces behind. There are also other strategies they can use to double their final payout before maxing out the credit. 


How to detect synthetic identity fraud as a business


One of the most effective ways to detect synthetic identity fraud as a business is through the use of technology. Artificial intelligence and machine learning solutions can help monitor and understand customer transactional and behaviour patterns to sport unusual activities. Carrying out effective customer due diligence (e.g identity verification) is also key in detecting synthetic identity fraud. 

Organisations need to invest in innovative identity verification methods that incorporate document verification, address verification and biometric verification for a robust customer due diligence process. Document and address verification procedures mean the criminal needs to fabricate an ID which could rat them out as a fraud. With address verification, their physical address would need to be verified and discrepancies would surface. 

See how 100+ leading companies use YV OS for KYC and AML screening of customers for compliance and real-time risk detection. Request a demo today.