What is Synthetic Identity Fraud?

Synthetic Identity Fraud

Synthetic identity fraud is a sophisticated type of identity theft where fraudsters create entirely new, fictitious identities by combining real and fake personal information. Unlike traditional identity theft where criminals steal and use an existing person’s complete identity, synthetic identity fraud involves creating « Frankenstein » identities that don’t belong to any single real person initially. This makes it particularly dangerous because there is often no immediate victim to report the fraud.

The process involves using a combination of genuine personal details such as Social Security numbers (often from children or deceased individuals), real addresses, and fabricated information such as names, dates of birth, and contact information. The purpose of this type of fraud is to establish a legitimate-appearing credit record and use it to obtain credit products, loans, and other financial services before ultimately defaulting on obligations.

Types and Categories of Synthetic Identities

Synthetic identities fall into several distinct categories:

Manufactured Synthetic Identities

• Created entirely from scratch using completely fabricated information
• May use invalid or non-existent Social Security numbers
• Often harder to detect initially but may fail basic verification checks

Manipulated Synthetic Identities

• Built using a real Social Security number (typically from children, elderly, or deceased individuals) combined with fake personal details
• More likely to pass initial verification systems
• Account for the majority of synthetic identity fraud cases

Credit Privacy Number (CPN) Variants

• Use legitimate but misappropriated Social Security numbers marketed as « credit privacy numbers »
• Often target individuals seeking credit repair services
• Technically illegal when used to obtain credit

How Synthetic Identity Fraud Works

To execute synthetic identity fraud, fraudsters typically follow a multi-stage process:

Identity Creation Phase

1. Data Collection: Fraudsters obtain real Social Security numbers from vulnerable populations (children, elderly, deceased individuals)
2. Profile Building: They create fake names, addresses, phone numbers, and email addresses
3. Digital Footprint: Establish social media profiles and online presence to add legitimacy
4. Initial Applications: Apply for credit using the synthetic identity

Credit Building Phase

Fraudsters often target the synthetic identities toward individuals with limited or no credit history. They apply for credit using these synthetic identities and, over a period of months or years, establish a credit history by:

• Making small purchases and timely payments
• Gradually requesting credit limit increases
• Adding authorized users to build account history
• Maintaining accounts in good standing to build creditworthiness

Bust-Out Phase

Once a satisfactory credit record is built, fraudsters exploit it by:

• Applying for multiple large loans or credit lines simultaneously
• Maxing out all available credit
• Eventually defaulting on all obligations
• Disappearing, leaving financial institutions with significant losses

Detection Challenges and Warning Signs

Synthetic identity fraud presents unique detection challenges because:

• No Immediate Victim: Unlike traditional identity theft, there’s often no real person monitoring the fraudulent activity initially
• Legitimate Credit Building: The gradual credit-building phase mimics normal consumer behavior
• Fragmented Data: Information may be scattered across different systems and databases
• Time Factor: The fraud can take years to develop, making patterns harder to detect

Warning Signs for Businesses

• Inconsistent personal information across applications
• Limited or unusual credit history patterns
• Social Security numbers associated with multiple identities
• Addresses linked to numerous unrelated individuals
• Unusual velocity of credit applications

Impact, Costs, and Real-World Consequences

According to the Federal Reserve, synthetic identity fraud is the fastest-growing type of identity theft in the United States. The financial impact is substantial:

• Financial Institutions: Losses exceeding $6 billion annually in the U.S. alone
• Credit System Integrity: Compromised credit reporting and scoring systems
• Regulatory Compliance: Increased scrutiny and compliance costs for financial institutions
• Consumer Impact: Higher costs passed on to consumers through increased fees and interest rates

The consequences extend beyond immediate financial losses, resulting in:

• Compromised credit system reliability
• Increased operational costs for verification and fraud prevention
• Legal and regulatory challenges for affected institutions
• Long-term damage to the integrity of identity verification systems

Since synthetic identities combine real and fake information and often lack an immediate victim to report suspicious activity, detection and prevention remain challenging, resulting in significant financial and legal consequences for both individuals and institutions.