Synthetic Identity Fraud Risk Skyrockets

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Synthetic identity fraud, which occurs when a fraudster fabricates a new and false identity that is not associated with a real person—is having more of an impact. While the number of synthetic identities is decreasing, the average fraud rate for synthetic identities has increased more than 100% since 2010, according to ID Analytics.

Fraudsters use this technique for financial gain, often nurturing the synthetic identity to generate larger credit limits and therefore larger loss amounts for financial services companies and organizations like wireless carriers than the average identity theft scenario, according to the firm.

“Additionally, fraudsters can also use this technique to mask other types of criminal activity,” ID Analytics noted in its whitepaper, which examined new account applications in the financial services and wireless industries over a three-year period to determine the size of the synthetic identity pool and the risk level to companies. It added, “The absence of a victim may enable synthetic fraud to remain undetected for months.”

The heightened risk associated with synthetic identities corresponds with the implementation of Social Security number (SSN) randomization, the Social Security Administration’s new approach to SSN issuance that took effect in July 2011. While this new approach was designed as a way to deter fraud, it is also difficult for legacy fraud detection systems to detect a fictitious SSN. ID Analytics’ study noted that another factor leading to the increased risk is the proliferation and availability of identity information due to a rise in the number of data breaches.

“Synthetic identity fraud is a significant and growing problem as fraudsters continue to find new ways to commit crimes despite technological advances,” said Stephen Coggeshall, chief analytics and science officer at ID Analytics. “Our latest research in this area shows that although the number of synthetic identities is decreasing, the riskiness of those synthetic identities is on the rise. One possible reason is that fraudsters are exploiting SSN randomization to help create and use false identities. Not only are synthetic identities used for financial gain, they can also be used to launder money and to support terrorist and other criminal activities.”

The study found that synthetic identities are four times riskier than the overall population, and that the average fraud rate for synthetic identities increased 125.9% from 2010 to 2013. And ever since the third quarter of 2011, the average bad rate for synthetic identities has been 8.2% higher than the fraud rate of the overall population.

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