Fraudsters lie low, ready to pounce again

New research reveals that instances of synthetic fraud and outstanding credit balances on suspected synthetic accounts at U.S. financial institutions have fallen significantly since COVID-19 was declared a pandemic last March. The bad news, however, is that the cost of synthetic fraud could rebound to reach new highs post pandemic.

“These folks are getting more and more sophisticated,” Julie Conroy, research director at Aite Group, said in an interview with The Green Sheet.

Synthetic fraud involves the creation of fictitious identities by piecing together real identity attributes with fake information, and using that combination of information to create new bank and card accounts and lines of credit. Synthetic frauds are difficult to detect. In fact most companies don’t realize the full extent of their exposure, because synthetic attacks are often written off as credit losses, Aite noted in a new report, Synthetic identity fraud: diabolical charge-offs on the rise.

Aite estimates synthetic identity fraud for unsecured credit products reached $1.8 billion in 2020 and will grow to $2.42 billion in 2023. “The U.S. is one of the hotbeds of synthetic identity fraud, given the historical lack of a centralized source of truth for consumers’ identity,” Conroy wrote in the report.

The good and bad of Covid

Lee Cookman, TransUnion's director of product strategy of global fraud and identity solutions, explained during an interview that both incidents of synthetic identity fraud and dollar exposures have been falling since last March, when COVID was declared a pandemic. One reason: financial institutions and nonbank lenders have been relying more on digital tools at the point of origination. “That added more data points that allowed them to better analyze applicants,” Cookman said.

COVID relief measures, like the CARES Act, also contributed by encouraging lender forbearance. “There’s a certain amount of synthetic fraud perpetrated by distressed consumers,” Cookman stated. Some consumers, feeling financially squeezed, see this as a way out. Sometimes they are lured by websites that offer to help them by falsely claiming to provide credit repair services. “It’s billed as the fastest way to repair your credit, but it’s actually a fraud,” he said.

In fact, an analysis by TransUnion found that in the second and third quarters of 2020, the percent of new auto loans and credit card accounts linked to synthetic fraud fell to their lowest levels since the company began tracking this type of fraud in 2016. But while synthetic fraud in auto loans and credit card accounts fell, ecommerce and iGaming sites saw some of the highest synthetic fraud amounts last year, TransUnion said.

Looking ahead to what happens once the pandemic subsides and lender forbearance policies fall by the wayside, Cookman said “We could face a rebound of this type of fraud.” A lot of fraudsters have created synthetic identities and are lying in wait, “curating” the identities with bogus email accounts and occasional credit report inquiries, he added.

New tool for IDing synthetic fraud

“Synthetic fraud is an extremely difficult problem to solve,” said Conroy. Evidencing this, a survey of North American fraud executives, conducted last fall by Aite, found 72 percent of firms consider synthetic identities to be far more challenging to identify and address than identity thefts.

Aite also found that a majority of financial services firms have uncovered significant gaps in their application fraud control frameworks, with 78 percent of executives surveyed planning to make substantial changes to those frameworks over the next two years. Addressing needed changes will not be an easy task. “Synthetic fraud is transforming and becoming more difficult to identify on the surface,” Cookman said.

“With almost every consumer’s information for sale on the dark web, today’s fraudsters are extremely adept at creating synthetic identities with fabricated or compromised identity elements,” said Bala Kumar, vice president of product management for global fraud solutions at TransUnion. “Most consumer-facing businesses rely on a variety of identity and digital verification methods to assess initial fraud risk. None of these are adequate to truly identify suspected synthetic identities since they can behave like legitimate accounts.”

To help businesses do a better job of ferreting out synthetic frauds, TransUnion is enhancing its synthetic fraud tools, the company stated on Feb. 9. For example, it has added a non-credit synthetic fraud algorithm to its synthetic fraud services, which historically relied heavily on data regulated under the Fair Credit Reporting Act. The company also is working with the Social Security Administration to become an Electronic Consent Based SSN Verification (eCBSV) service provider.

The TransUnion TruValidate Synthetic Fraud Models detect potential synthetic identities by analyzing consumer behaviors and uncovering anomalies or suspicious risks, providing real-time indicators of threat levels before frauds are actually committed, the company said. Once eCBSV capabilities get integrated, it will further improve detection, TransUnion added. TruValidate unites personal and digital data into “one of the most comprehensive data identity platforms in the world,” the company said.

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