The Federal Reserve looks
at ways to counter what is thought to be the fastest-growing type of financial
crime in the country
The United States’ Federal
Reserve has published advice for financial institutions located in the US on
how to mitigate risks of synthetic identity payments fraud. Citing an analysis
by the Auriemma Group, the Fed noted that synthetic identity fraud cost US
lenders around US$6 billion and was responsible for 20% of credit losses in
2016.
Scammers usually create synthetic
identities by piecing together bits and pieces of real and fake information,
which includes Personally Identifiable Information (PII), such as names, Social
Security Numbers (SSN), and addresses. They frequently target individuals who
are less likely to check their credit information often, such as children, the
elderly, or even homeless people. The upside of utilizing this method for
fraudsters is that synthetic identities act like legitimate accounts, which
means they evade conventional means of fraud detection.
“This affords perpetrators
the time to cultivate these identities, build positive credit histories, and
increase their borrowing or spending power before ‘busting out’ – the process
of maxing out a line of credit with no intention to repay,” warns the Federal
Reserve.
The guidance, entitled “Mitigating Synthetic Identity Fraud
in the U.S. Payment System”, is the
third publication in a series of white papers dedicated to synthetic payments fraud; the
previous two instalments were published last year and focused on defining and
identifying this type of fraud.
In its newest whitepaper,
the Fed points out that institutions shouldn’t rely on only one screening method
to combat what a recent McKinsey report called “the fastest-growing type of financial
crime” in the US. Instead, implementing a multi-layered approach that weds
manual and technological data analysis places organizations in an optimal
position to identify and mitigate cases of synthetic identity-related fraud.
While looking at the basic
PII, such as SSNs, names, dates of births and addresses, is a good starting
point, experts say that broadening the scope to include additional data sources
affords institutions the best chance of success in identifying fraudsters.
Looking for common denominators, such as multiple users using the same SSN or
checking for multiple accounts that were created from the same IP address,
could help in identifying more cases.
It is important to point
out that there is no pixie dust that’ll make synthetic identity payment fraud
disappear; there are many hurdles to overcome ranging from regulations on the
state level to fraudsters switching up tactics. However, specialists think that
a holistic approach consisting of a consistent definition of synthetic identity
fraud, technological innovation, data solutions, and cooperation between the
private and government sector could be the best way to mitigate this type of
fraud in an effective manner.