Detecting synthetic identity fraud can be a tough challenge, even though “Know Your Customer” processes and other tools provide financial institutions with information about their customers’ identities. The Federal Reserve recently published the second white paper in its Payments Fraud Insights series, Detecting Synthetic Identity Fraud in the U.S. Payment System (Off-site), to inform industry professionals about the characteristics and behaviors that indicate potential synthetic identities in the account application, “sleeper” and “bust-out” phases.

Some industry experts consider synthetic identity fraud to be the fastest-growing type of financial crime in the United States, one that cost U.S. lenders an estimated $6 billion and accounted for 20% of credit losses in 2016. Synthetic identity fraud occurs when fraudsters combine fictitious and/or real information to create new identities with the intent of defrauding financial institutions, government entities and individuals. Because synthetic identities can behave like legitimate accounts, traditional fraud detection models may not flag them as suspicious or fraudulent. A financial institution may not identify an account holder as synthetic until after the perpetrator busts out and the collections team is unable to locate a real person to pay the debt. Common characteristics of synthetics include multiple identities with the same Social Security number and accounts created using the same Internet Protocol (IP) address, physical address or phone number.

The Federal Reserve began raising awareness and encouraging action on the growing problem of synthetic identity payments fraud in late 2018. Through primary and secondary research and industry dialogue, we seek to improve understanding of the issue, create a greater sense of urgency about addressing it and promote industry action to both identify and mitigate this type of fraud. The final installment in our Payments Fraud Insights series will describe mitigation approaches to address this type of fraud.