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Federal Reserve warns U.S. payments ecosystem of synthetic identity fraud risk

Synthetic identity fraud is a serious and growing problem in the U.S., and can only be dealt with through a collaborative effort by all payment industry stakeholders, according to a white paper published by the Federal Reserve.

Synthetic identity fraud is the fastest growing financial crime type in the U.S., by some accounts, and the whitepaper on “Synthetic Identity Fraud in the U.S. Payment System, A Review of Causes and Contributing Factors” attempts to define the issue and raise awareness of it.

According to the report, fictitious identities take advantage of gaps in the credit process to commit fraud. A criminal actor can create a synthetic identity with stolen or fabricated personally identifiable information (PII), apply for credit using the synthetic identity, repeat applications until approved, develop a positive credit history, and then “busting out,” or spending the full amount available in credit before vanishing.

Synthetic identities are generally created with real Social Security numbers stolen from real people, often the very old or very young, who are less likely to notice fraudulent activity from their credit history. PII can be found, with increasing ease, from breached information available on the dark web, and post office boxes and social media accounts can be used to simulate additional personal information.

The whitepaper details a ring of 18 conspirators who were arrested by the Department of Justice in 2013 after carrying out at least $200 million, and possibly as much as $1 billion, in fraud with synthetic identities.

The total cost to U.S. lenders of synthetic identity fraud in 2016 was $6 billion, the Fed estimates in the report.

Biometrics have been pitched as a means of stopping synthetic identity fraud, but BioCatch argued in late-2018 that all static identity elements are ineffective against synthetic identity fraud, with behavioral biometrics offering more effective protection.

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