What Is a Synthetic Identity and How Are They Created?

Synthetic identity fraud already accounts for four out of every five cases of fraud involving newly opened accounts, and it’s the fastest-growing type of financial crime in the United States. It’s also costly. MasterCard estimates the loss to businesses will total almost $5 billion in 2024.  

With data breaches exposing over 19 billion records yearly, a staggering amount of personal information is readily available for the fabrication of synthetic identities that can pass verification checks.

It’s clear that your business needs an effective method to accurately verify customer identities, prevent financial losses, and protect data. However, identifying the correct solution requires a clear understanding of how synthetic identity fraud works. 

Read on to learn how synthetic identities are created and discover how to protect your business from this growing threat.

What Is a Synthetic Identity?

A synthetic identity is a partially fabricated identity that does not correspond to a real person. It is created by combining elements of Personally Identifiable Information (PII) from real individuals with false details. This results in a fabricated or manipulated identity that can then be used for fraudulent purposes.

Synthetic identity fraud differs from traditional identity theft, where someone steals and misuses the complete, genuine identity of a real individual. Since synthetic identities are fake, there is no actual victim to report the unauthorized use of their information, making this a tough threat to detect successfully. Synthetic identity fraud often goes unnoticed until the bad actor ends their “bust-out” scheme and defaults on their borrowing, at which point it’s often misidentified as a credit loss. Synthetic identities also pose a serious challenge for credit checks, because, while the identity and its data might be fake, standard checks may not work because there is  a credit history.

How Is a Synthetic Identity Created?

The multistep synthetic identity endeavor is quite a departure from how traditional fraudsters immediately misuse a victim’s genuine details. Synthetic identity fraudsters may spend years establishing and building up credit histories to validate the synthetic identity and gradually raise their credit limits. Only after such a lengthy period is the identity used to commit financial crime. 

Let’s take a detailed look at the typical process for creating a synthetic identity:

Phase 1: Collect and access PII

This phase involves obtaining personal details using a variety of sources and methods, including:

• Direct cyberattacks on systems to steal records
• Leaked files shared online without encryption
• Information purchased from unlawful data brokers
• Publicly available records
• Profiles on social media networks
• Non-digital means such as lost or stolen IDs or mail 
• Social engineering online or in-person

There are two main types of personally identifiable information collected:

• Primary: This information conclusively establishes identity according to government requirements. It includes highly specific data points, such as full legal name, date and place of birth, social security details, driver’s license particulars, taxpayer identification codes, passport specifics, and biometric records.
• Supplemental: This information cannot establish an individual’s identity but serves as additional evidence of an identity. Associated addresses, contact numbers, email addresses, internet identifiers, and device IDs fall into this category.

Phase 2: Synthesize PII and false information to create a fake identity

Next, the collected personal information is merged with fabricated details to generate a synthetic identity. For example, a real SSN may be combined with a fictitious name and date of birth.

The degree of real versus fake information varies in each synthetic identity. Core identifiers like Social Security numbers are sometimes valid, while supplemental details are untrue. This blending of accurate and invented information is a hallmark of synthetic identity schemes.

Phase 3: Establishing and building credit

In this phase, fraudsters use the synthetic identity to apply for credit cards or open new accounts. They start submitting applications and continue applying until a provider accepts them.

Some bad actors try to speed up the process by piggybacking. This involves linking the synthetic identity as an authorized user to another person’s existing positive credit line to co-opt their payment history and high credit scores.

For example, a fraudster who knows someone with a long-standing credit card with a high spending limit might look for an opportunity to steal or copy relevant paperwork that will allow them to add a synthetic identity as a second user of an account. They can then use this identity to apply for new cards or accounts, piggybacking off their target’s positive credit history to quickly get approved. Synthetic identities can also piggyback on other, already built-up, synthetic identities. 

Phase 4: Developing and substantiating the synthetic identity

At this stage, fraudsters seek to further reinforce the validity of the synthetic identity. One method is to open additional Demand Deposit Accounts (DDA) or credit accounts, which fleshes out the synthetic identity over time. Other strategies include building an online persona through social platforms, setting up accounts with utilities providers, using fake IDs, submitting further applications, and joining online rewards programs. Scammers can build up the creditworthiness of a synthetic identity by carrying out small transactions and paying their debts promptly. This substantiation process can continue for years to gain more trust from financial institutions and receive more access to credit.  

Phase 5: Fraudulent activity

This is the “bust out” stage, when the fraudster attempts to capitalize on the positive standing they have built up thanks to the synthetic identity.

Common examples of the final bust-out include:

• Taking out a personal loan: A loan application is filed and the loan approved, but the funds are kept with no intention of ever being repaid.
• Cashing out line of credit: All available credit lines are maxed out as funds are withdrawn and never returned.

Third parties may then be used to move the fraudulently acquired money and obscure the original source. These money mules open accounts for deposits and later transfer the money elsewhere. To avoid detection, many money mule accounts themselves also belong to synthetic identities.  

In other cases, the aim of a synthetic identity is not strictly financial but intended to obscure poor credit history or criminal activity. In these situations, the synthetic identity is intended to be maintained long-term. 

Examples include:

• Rebuilding credit reputation: Some individuals use synthetic identities to hide unfavorable credit histories or outstanding debts. Presenting a more favorable financial image potentially enables them to secure loans or credit cards and receive better rates.
• Lifestyle: In certain situations, people may use synthetic identities to access essential services such as employment, utilities, or housing. This often occurs when they are either reluctant or unable to use their authentic identity, though without the intention of defaulting on payments.
• Illicit activities: Synthetic identities may be used to enable various criminal activities. These can include evading legal restrictions, money laundering, trafficking of illegal substances, or providing financial support to extremist organizations.

Types of Synthetic Identities: Manipulated and Fabricated

To effectively combat synthetic identity fraud, it’s crucial to understand the two primary types of synthetic identities: manipulated and fabricated. By recognizing these distinct categories, you can better tailor your security measures and verification processes to protect your organization and your customers effectively:

1. Identity manipulation

Manipulated synthetic identities involve altering real PII to create a seemingly legitimate but fraudulent identity. This manipulation combines authentic details with subtle falsifications, making the fraud difficult to detect. 

Manipulators start with real PII, such as a name and date of birth and tweak other elements like an SSN. For instance, a real person’s name can be combined with their real address and phone number but a totally new SSN. This technique exploits systems that rely on multiple consistency checks between the PII and will not flag or detect a discrepancy on only the SSN.

Identity manipulation is often used in the following ways:

• First-party fraud: Individuals may create manipulated versions of their own identities to improve their creditworthiness or obtain loans they would not otherwise qualify for. This includes altering one’s SSN but also one’s age or income slightly to meet eligibility criteria.
• Third-party fraud: Criminal organizations use manipulated identities to commit large-scale fraud, such as opening multiple credit accounts, applying for disaster relief programs or securing loans they have no intention of repaying, leading to significant financial losses for institutions.

2. Identity fabrication

These identities are built from scratch using invented details designed to convincingly mimic real personas. 

Fabricated identities are particularly challenging to detect and block because they are completely fictitious, generated by fraudsters to follow legitimate data patterns without being tied to any legitimate PII or actual victims. 

For example, a fake SSN may be created that fits issuance rules but does not belong to a real person. This makes the fabricated identity difficult to catch and block as fraudulent since no authentic data or victims are directly linked to the transactions.

Fabricated synthetic identities can be used in the following ways:

• Credit fraud: Fabricated identities are often used to build credit histories and apply for loans or credit cards. After establishing a credible profile, fraudsters make large purchases or cash withdrawals before disappearing, leaving financial institutions to absorb the losses.
• Concealment of criminal activity: These identities help hide the activities of individuals involved in illegal operations, such as money laundering or terrorism financing, because they leave no paper trail linking the actions to real people.

Challenges Created by Synthetic Identities

Unlike traditional identity theft, synthetic identities present a unique challenge and often slip through standard safeguarding measures, leading to significant financial losses and operational challenges. 

Here are some of the specific risks synthetic identity fraud presents:

• Difficult to detect: Synthetic profiles resemble typical credit defaults, deceiving institutions into viewing losses as a credit-worthiness issue rather than caused by bad actors posing as non-existent customers. 
• Inconsistent patterns: No unambiguous traits clearly identify synthetic identities since they incorporate diverse elements. Developing standard detection methods can be challenging without consistent signals.
• Low awareness: Many organizations do not fully recognize the risks of synthetic identities and lack strategies to identify and mitigate the associated fraud, allowing it to flourish unchallenged.
• Victimless fraud: Since synthetic identities are not real people, there are fewer reports of suspicious activity. Traditional methods relying on consumer alerts tend to be less effective without a direct victim to flag issues.
• Already exist in credit bureau data: These identities often establish themselves within credit bureau records, creating credible histories. Financial institutions rely heavily on these records for identity verification, but when synthetic profiles are embedded within, it undermines the reliability of credit records and complicates the verification process.
• Impact on younger and immigrant population: Younger individuals and new-to-country individuals typically have limited credit histories and can be mistakenly identified as synthetic identities. Their thin credit files appear similar to those of fabricated profiles, making it harder for them to access financial services, resulting in potential denials of credit or other financial products.

Synthetic Identity Fraud in Action

Here is a step-by-step example of how synthetic identity fraud plays out and leads to significant financial losses.

1. John Smith, born in November 1983, starts with his legitimate personal Social Security Number (SSN), which has a bad credit history. 
2. To escape his credit troubles, John decides to create a manipulated synthetic identity. He retains his real name, birthdate, address, email, and phone number but pairs them with a carefully chosen SSN that exists but has no credit file attached.
3. John applies for credit using his manipulated synthetic identity. Most of his details match his real ones, except for the SSN. He provides a photo of his driver’s license when asked to verify his identity. Since the license doesn’t display his SSN and the institution isn’t using an effective step-up mechanism, he passes this verification step without issues.
4. Encouraged by his success, John creates a fabricated synthetic identity named Maria Smith. He uses his address and generates a new, entirely fictitious SSN for Maria. However, instead of applying for credit directly under this new identity, John adds Maria as an authorized user on his account. This move bypasses Maria’s need for document verification, allowing this synthetic profile to establish a new credit file.
5. John continues this piggybacking process, using the same method to create 20 more synthetic identities. Each new identity matures over time, gradually gaining access to credit lines. As these synthetic profiles accumulate credit, John continues until each has at least $5,000 available.
6. Once all these synthetic identities are well-integrated into the financial system, John maxes out the credit on each account. In total, he secures over $100,000 in fraudulent credit. After draining these funds, John vanishes, leaving behind a trail of financial devastation for the lending institutions involved.

Tackle Synthetic Identity Fraud Successfully With Socure

Synthetic identity fraud is a rapidly growing and costly form of financial crime, accounting for the overwhelming majority of new account fraud cases. Because synthetic identities are partially or fully fabricated, they’re much more difficult to detect and combat using standard security measures.

As this risk continues to evolve and grow, you need a robust solution to accurately verify customer identities to protect yourself from financial losses. Understanding the intricacies of this type of fraud is crucial for developing effective countermeasures and safeguarding against this pervasive threat.

To effectively combat synthetic identity fraud and address its unique challenges, it’s essential to choose a partner that specializes in advanced identity verification and fraud prevention solutions. 

Socure offers cutting-edge technologies and expertise to help you detect and prevent synthetic identity fraud, protecting both your organization and your customers from financial losses and reputational damage. Learn how to stay ahead of fraudsters and ensure the integrity of your identity verification processes with Socure’s Identity Fraud Solutions.