By ID Analytics - The Long Con: An Analysis of Synthetic Identity

Introduction

Fraudsters continue to find increasingly sophisticated means to perpetrate crimes despite advances in technology and stricter regulations designed to reduce fraudulent behavior. Notably, the advent of digital technology and the anonymity it provides has contributed to the rise of the creation of fictitious credentials known as synthetic identities. Synthetic identity fraud is a significant and growing problem for multiple reasons. A major contributing factor is that social security number (SSN) randomization, introduced in 2011 and intended to provide higher safeguards for the public, has been exploited by fraudsters to help create and use false identities. The availability of identity information for use by fraudsters in generating synthetic identities is also growing with each new, massive data breach. Additionally, the shift to the Europay MaterCard Visa (EMV) standard for point-of-sale transactions in 2015, which requires merchants to accept both magnetic strip and chip and PIN transactions, is expected to force fraudsters to adopt new account fraud strategies.

In the midst of this changing landscape, it is reasonable to assume that synthetic fraud will continue to be a persistent and significant problem. Avivah Litan, Gartner Inc., estimates that “synthetic schemes constitute at least 20% of credit charge-offs and 80% of losses from credit-card fraud”.1 The true danger of synthetic fraud is that, unlike third-party fraud where an entire identity is stolen and used to defraud enterprises and victims, synthetic fraud frequently has no specific consumer victim. The lack of a clear consumer victim often allows a synthetic fraudster to remain undetected for months, only to “bust out” (suddenly use the remainder of a credit line). This long-term “con” or fraud is particularly dangerous because criminals employing this technique for financial gain can often nurture the synthetic identity into generating larger credit limits and larger loss amounts for the lender than the average identity theft scenario.

This white paper explores 1) the definition of synthetic fraudsters and the algorithm used to identify them, 2) the estimated size of the synthetic fraud issue, 3) various regulatory and financial issues that lenders and wireless carriers face when it comes to synthetic fraudsters, and 4) possible solutions for reducing synthetic fraud.