Synthetic Identity Theft: Understanding Its Mechanics, Costs, and Safeguarding Measures

Synthetic identity theft is a multifaceted form of fraud that involves the fusion of genuine and fabricated information to construct a new identity. This deceptive practice often employs stolen personal details, such as Social Security numbers (SSNs), combined with fictitious names, addresses, and birthdates. The resultant synthetic identity is then used to open fraudulent accounts and make unauthorized purchases, specifically targeting creditors like credit card companies that extend credit based on the created identity.

Fraudsters perpetrating synthetic identity theft are meticulous in their approach. They pilfer information from unsuspecting individuals, obtaining crucial details like SSNs, and augmenting them with false information. Unlike traditional identity theft, synthetic identity theft often goes unnoticed initially, as there is no identifiable victim at the onset.

The complexity of this fraud is underscored by the fact that criminals can use multiple synthetic identities simultaneously. Accounts may remain open and active for extended periods—sometimes years—before detection. To evade suspicion, criminals may use these accounts responsibly, gradually building up credit scores and histories. In some instances, they strategically accumulate fraudulent charges, only to exploit the real information used to create their synthetic identity, posing as a victim of fraud to restore their credit line. This deceptive maneuver allows them to access additional credit and perpetrate further theft.

Synthetic identity theft presents a formidable challenge for detection. Traditional filters employed by financial institutions may not be sophisticated enough to discern the synthetic nature of these identities. When a synthetic identity thief applies for an account, their limited credit history may resemble that of a genuine customer, further complicating the identification process. This intricate form of fraud, known as bust-out fraud, involves establishing a history of responsible use before intentionally defaulting on the account. This deliberate strategy aims to mimic the financial struggles of a real person rather than the actions of a criminal.

Comparing synthetic identity theft to traditional identity theft reveals distinctive characteristics. Synthetic identity theft, as previously outlined, combines both real and invented information to create a new identity, making it challenging to track. In contrast, traditional identity theft involves the unauthorized use of solely real personal information, often stolen or sold on the underground market. Victims of traditional identity theft can usually detect and mitigate the impact by flagging and freezing their credit files.

The impact of synthetic identity theft is profound, causing significant losses for both consumers and financial institutions. According to a report from the Federal Reserve, synthetic identity theft emerged as the fastest-growing financial crime in the United States. In 2016 alone, lenders faced staggering costs amounting to $6 billion, with an average charge-off of $15,000.

Financial institutions, particularly banks, often find themselves vulnerable to synthetic identity theft. The information provided by criminals is, in many cases, legitimate, adding a layer of complexity to detection. For instance, a criminal might successfully apply for a credit card using a fake name but a genuine, stolen SSN. As the criminal accumulates charges with no intention of repayment, the credit card company incurs losses because it cannot collect payment from the synthetic identity that initiated the account.

Moreover, the exponential growth of synthetic identity theft, particularly impacting children, holds concerning implications for the future. A study conducted by Carnegie Mellon’s CyLab revealed that children’s SSNs are 51 times more likely to be used in synthetic identity theft. The Federal Reserve’s report highlighted one million children identified as victims of synthetic identity fraud in 2017.

Given the complexity and prevalence of synthetic identity theft, prevention is crucial. Individuals can take proactive steps to safeguard their personal information, such as monitoring their credit reports regularly and promptly reporting any suspicious activities. Financial institutions need to enhance their fraud detection mechanisms, employing more sophisticated filters that can identify patterns associated with synthetic identity theft.

Individuals can protect themselves by monitoring their credit reports regularly, promptly reporting any suspicious activities, and implementing security measures such as strong passwords.

Synthetic identity theft is challenging to detect because the criminals establish a seemingly legitimate credit history before engaging in significant fraud. This deliberate strategy makes it appear as though the account holder is a real person experiencing financial difficulties.

Yes, children are more susceptible to synthetic identity theft. A study by Carnegie Mellon’s CyLab found that children’s SSNs are 51 times more likely to be used in synthetic identity theft.

While challenging, financial institutions can enhance their fraud detection mechanisms by employing more sophisticated filters. However, complete prevention may be difficult due to the evolving tactics of synthetic identity thieves.