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• Dec 4, 2019

Banks are in a real-world battle with a new version of identity fraud

Imagine John Smith comes into a store and fills out an application for a credit card. He has a driver's license. He has a social security card. He even has a credit report on file. Seems legit, right?

Dig a little deeper into his credit report and you'll find that, though he gives his age as 45, he has only been building credit for about five years. Could that possibly be true? Maybe; but it's more likely that John Smith only exists on paper and that the person filling out the application is pretending to be him.

If so, Mr. Smith would be the latest example of synthetic identity payments fraud, reportedly the fastest-growing type of financial crime facing the United States, according to the Federal Reserve.

Synthetic Fraud is when fraudsters create identities in our financial system using a combination of real and fake data and nurture this phony persona over a period for financial gain, according to Krista Wrona, newly appointed Head of Policy, Governance & Training in Fraud Risk Management.

It differs from identity theft in two important ways: one, the fraudster isn't taking over a real identity to commit a crime; they are building a fake person mostly from scratch, but also with some specific stolen real information. Two, it may take many months or even years to build a persona before the fraudster uses it to "cash out," said Krista.

No matter your age – you need to have your credit report monitored

Since some of the synthetic person's identity must be real, a vulnerable group are the elderly and the very young, who could have their credit profiles taken over without anyone noticing until it's too late.

"As a mom I've been pulling my daughters credit reports since they were infants," said Krista. "That's where these issues may show up. Monitoring your children's credit report is the best defenses, as well as that of folks like your grandparents."

Brian Housler, Head of US Fraud Management within the Financial Crimes and Fraud Management Group, says some fraudsters also pose as credit repair agencies, attempting to lure legitimate customers into creating synthetic identities to strengthen their access to credit.

If you can get someone to run a simple credit inquiry on a person, fake or real, it creates a profile that can be used to eventually secure credit. Once you have a credit report, then you may convince an accomplice to let your persona become a registered user of one of your credit cards. They charge some things, pay it all off, or possibly allow it to revolve a little to create a pattern of human behavior. This is all in preparation for a big score, which can come after years of work on the fraudster's part.

Banks are losing billions due to synthetic fraud

Often, however, the true victims of synthetic fraud are the financial institutions that unknowingly extend credit to these fake people. Auriemma Group, which provides information and advisory services for the payments and lending industry, estimates that synthetic identity fraud cost U.S. lenders $6 billion and accounted for 20% of credit losses in 2016.

"Synthetic fraud continues to be an area of focus for our industry," said Brian. As banks have continued to improve our identity theft prevention capabilities, threat actors are looking for new ways to bypass these controls."

In response to the threat, the Financial Crimes and Fraud Management Team at TD Bank is doing a tremendous amount of work to combat this fraud. While we can't go into details about actual strategies, employees who accept applications and who are responsible for approving credit should be on the lookout for the depth and age of a credit report as a tip that synthetic fraud may be at play.

"If you see a 40-year-old with only 2-3 years of credit history, that's a tip," said Krista. "Also seeing multiple surnames and different cities associated with a report is a giveaway."

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