Federal Reserve Releases Synthetic Identity Fraud Mitigation Toolkit
On February 15, 2022, the Federal Reserve (“Fed”) released a “synthetic identity fraud mitigation toolkit” to assist financial institutions, consumers, and businesses identify, assess, and mitigate identity fraud.
What is Synthetic Identity Fraud?
Synthetic identity fraud occurs when an individual or organization uses a combination of government issued personally identifiable information (“PII”) and falsified information to fabricate a person or entity. Synthetic identities are often used to commit dishonest or manipulative acts for the creator’s personal or financial gain.
Common examples of uses for a synthetic identity include:
payment default schemes – the falsified identity is used to receive funds and payment is highly unlikely, leaving the financial institution at a loss
fraud for living, where the falsifying party applies for utilities, housing, or a banking account with the intent to make payment and not default on the obligation
credit repair scheme, in which a falsified identity is created to hide bad debt to receive opportunities not previously available to that person
laundering money
facilitating human and narcotics trafficking
financing terrorism
Why is Synthetic Identity Fraud a Concern?
According to the Fed, synthetic identity fraud is “one of the fastest growing forms of financial crimes in the U.S.” and is responsible for causing billions of dollars in losses to organizations in 2021 alone. In addition, individuals who become the target of these types of fraud are faced with threats to their reputation, financial status and wellbeing.
Although synthetic identity fraud is prevalent in the financial industry, there is a history of organizations incorrectly categorizing the behavior as a mere credit loss, failing to identify the bad acts occurring. An organization’s failure to detect the fraud is understandable considering the challenges to detection:
Standard initial account onboarding requires only basic information from an individual and many organizations do not follow up for a more in-depth analysis of the applicant, thereby allowing the fraud to go undetected;
The individual creating the falsified account often acts like a legitimate client or customer after the onboarding process, causing detection programs to be unable to detect the fraudulent identity;
Most traditional fraud programs are built upon the understanding that the person being monitored is real, not synthetic, causing these falsified programs to go undetected; and
Once created, a synthetic identity can be used to defraud multiple organizations and industries at once.
How the Toolkit Can Help
The toolkit stores substantial resources for organizations to build a better understanding of the risks their organizations face and assist in the process of establishing policies and programs to detect, mitigate, and prevent this type of fraud.
Current resources available in the toolkit are:
Synthetic Identity Fraud: The Basics (Off-site) – explains what synthetic identity fraud is, why you should care and why fraudsters commit this type of fraud.
How Synthetic Identities are Used (Off-site) – describes what is hiding in your portfolio and how fraudsters use synthetics to commit fraud and increase their payouts.
When Synthetics Become a Reality (Off-site) – outlines examples of common synthetic use cases.
Detecting a Synthetic Identity (Off-site) – provides tools to help colleagues and consumers identify and prevent synthetic identity fraud.
The toolkit is expected to grow and will be enhanced each year to ensure organizations receive the most current guidance.
Considerations for Organizations
Businesses should review the toolkit and of their current fraud detection programs and policies to ensure that they are best protected against these types of threats.