By Paramita Bhattacharjee
Recently, I had the pleasure of participating in an American Banker panel discussion with representatives from the American Banker Association, and TCF Bank to discuss the new account onboarding process and the latest fraud trends impacting it. We had a lively discussion on the top fraud trends as well as how financial institutions can ensure a smoother account onboarding experience without sacrificing security.
Per Bankinfosecurity, 85% of FIs experience fraud in the account opening processes1. With the increase in the digital account opening because of COVID-19, fraud trends at account opening has manifested in various ways.
One trending topic we addressed with our panel was the pervasive and elusive problem of synthetic identity fraud. According to Aite Group, 72% of the financial service firms surveyed believe that synthetic identities are a much more challenging issue to identify and address than identity theft2.
Our audience agreed as well, which was evident from the polls presented during the webinar.
There were so many questions on synthetic identity fraud during the webinar we wanted to continue the conversation here with our top three most asked questions about synthetics:
What is it?
How can it be detected?
How can it be prevented?
What is synthetic fraud?
I’d like to first define synthetic identity fraud, first-party fraud, and mule accounts to set a foundational baseline to help with understanding the differences.
Synthetic identity fraud, created from a combination of real and fabricated personal information, is a form of identity fraud, and the resulting identity is not of a “real” person. There are two types of synthetic identity fraud:
Manipulated synthetics – These identities are created with mostly “real” information and slightly manipulated to avoid detection or to hide from previous credit history.
Manufactured synthetics – These are truly fake identities built from bits and pieces of real PII which result in the creation of a completely “new” person.
Fraudsters invest in creating a synthetic identity that appears harmless on the surface as a victimless crime because the identity is not “real”. Potential bad actors who commit synthetic identity fraud can use multiple identities simultaneously, and may keep accounts open and active for months, even years before the fraud could be detected. They may then invest the resources to create a legitimate mule account where they perpetrate first-party fraud.
First-party fraud is typically a “real” fraudster using deceptive tactics such as misrepresenting their identities or using false personal information to obtain funds - and a form of it includes mule accounts and credit ‘bust-outs’.
Money mule accounts, according to Aite Group, enables a fraudster to “move illicit money to accounts that are safely under criminal control, and in such a way that conceals the nature of the funds and that protects those funds from law enforcement and bank security.3” They bank for three to six months and suddenly their activity starts and there is money coming in and out. The elderly, children or recent 18-year-olds are falling prey to this kind of activity and to this kind of fraud.
Credit ‘bust-outs’ is where an individual applies for a credit card (or several credit cards), establishes a pattern of activity and a solid repayment history, then maxes it out with no intention of paying the bill(s)4.
Because all these types of fraud can be interwoven and the industry definitions can vary, it can be challenging to even understand the extent of the problem.
How can synthetic identity fraud be detected?
Synthetic identity fraud can be either a manipulated or manufactured identity as we described above. With the lack of a clear victim, synthetic identity fraud can go undetected for years. One of the fundamental issues in fighting synthetic fraud is that there are multiple definitions being used by the industry and this can lead to inconsistent categorization, reporting and mitigation of this type of fraud.
Fraudsters committing synthetic fraud are playing the long game or “bust-out” scheme. To a financial institution, a synthetic identity looks like a “good” identity – until it doesn’t. It can occur months or even years into the “customer” journey. The fraudster uses their synthetic identity to open an account and they may even open other related accounts to help build up credit or pay bills. So, when they do bust-out and stop paying their bills, the financial gains are maximized.
How can it be prevented?
The best way to detect any type of fraud, no matter how complex, is to be vigilant. Early Warning® provides new account opening solutions to provide confidence that the person is who you think they are. Through our contributed and acquired data, we are able to provide insights into synthetic and manipulated identities.
Learn more about our identity verification solutions.
Watch our on demand webinar.
1Account Opening Fraud: How to Uncover When New Customers Are Not. Bank Info Security, March 11, 2021.
2Synthetic Identity Fraud: Diabolical Charge-Offs on the Rise, Aite Group, February 2021.
3Mule Activity: Find the Mules and Stop the Fraud, Aite Group, April 2020.
4Bust-out, Investopia, Nov. 21, 2020.