Paper warns of rising use of phony ‘synthetic identities,’ which hide fraudsters until they ‘bust out’

Fraudsters using phony identification – but which has elements of real information within it – to develop “synthetic identities” for payments is documented as an increasing problem for financial institutions, government agencies and individuals in a new white paper released Tuesday by the Federal Reserve.

The paper, “Synthetic Identity Fraud in the U.S. Payment System,” notes that “synthetic identities” are created using a combination of real information (such as a Social Security number) with fictional details (such as a phony 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,” the Fed said in a release announcing the paper. “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.”

The Fed said that, because the identity was not real to begin with, “there is limited recourse in tracing the perpetrators and holding them responsible for their debts.”

The impact of the use of the hybrid, fake credentials, the Fed indicated, extends to consumers whose Social Security numbers are used fraudulently, and who then face the burden of correcting their credit reports. Other consequences, the Fed said, include those beyond the payment system, including denial of disability benefits, rejection of tax returns, and inaccuracies in health records.

Federal Reserve Paper: Synthetic Identity Fraud in the U.S. Payment System (PDF)

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