Synthetic identity payments fraud is a fast-growing but little-understood problem that affects individuals, financial institutions, government agencies, and private industry.
The severity of this type of fraud is documented in a new white paper (PDF) released today by the Federal Reserve System.
A synthetic identity (PDF) is created by using a combination of real information (such as a legitimate Social Security number) with fictional information (which can include a made-up name, address or date of birth). Fraudsters increasingly use synthetic identities to commit payments fraud, which can escape detection by today's identity verification and credit-screening processes. Over time, fraudsters build up the creditworthiness of the synthetic identity, then "bust out" by purchasing high-value goods and services on credit and disappearing. Because the identity was not real to begin with, there is limited recourse in tracing the perpetrators and holding them responsible for their debts. Consumers whose Social Security numbers have been used for fraud face the time-consuming process of correcting their credit reports. Other consequences of synthetic identity fraud extend beyond payments fraud to include denial of disability benefits, rejection of tax returns, and inaccuracies in health records.
"Crime rings see attractive opportunities in synthetic identity payments fraud," said Ken Montgomery, Federal Reserve System payments security strategy leader and chief operating officer at the Federal Reserve Bank of Boston. "Law enforcement officials, financial institutions, and other organizations recognize it as a growing concern. But unfortunately, many consumers don't realize how it can hurt their access to credit or how to protect themselves," he said. "The white paper provides information on the current state of synthetic identity fraud, including the scope of the issue, causes, contributing factors, and its impact on the payments industry."