Synthetic Identity Fraud: How to Detect and Prevent it

Key takeaways

Synthetic identities, created by combining real and fake data, have become one of the biggest threats to businesses, causing millions in losses and reputational damage.

To create synthetic identities, scammers obtain real personal data through security breaches or the black market, and combine it with fictitious information, taking advantage of the latest technologies.

Detecting synthetic identities is a challenge, but there are warning signs such as inconsistencies in information, suspicious activity patterns, and the use of data from vulnerable individuals.

Implementing robust identity verification processes with advanced technologies, continuously monitoring suspicious activities, and training employees are key to preventing synthetic identity fraud.

Synthetic identities have become one of the biggest threats to businesses today. This type of fraud, which combines real and fake data to create fictitious identities, has experienced alarming growth in recent years. Scammers use these synthetic identities to deceive companies and gain access to products and services fraudulently.

The impact of synthetic identity fraud on the business world is significant. According to recent studies, economic losses from this type of fraud exceeded $3 billion in 2023 in the United States alone. But the costs are not limited to just monetary losses; reputational damage and increased operational costs also negatively affect organizations.

To help the various industries affected by this type of fraud, we will define what synthetic identities are, how they are created, and what warning signs businesses should look out for to prevent and detect this illicit activity.

How are synthetic identities created?

Synthetic identities are created by combining false and real information obtained from various sources. Scammers obtain authentic personal data, such as social security numbers, addresses (postal or email), or dates of birth, through security breaches, identity theft, or purchasing data on the black market (mainly the Dark Web). Then, this real data is mixed with fictitious information, such as names, jobs, or banking history, to construct an apparently legitimate and real identity.

The process of creating synthetic identities has become increasingly sophisticated thanks to advances in technology. Fraudsters use algorithms and automated tools to generate large amounts of fake identities quickly and efficiently. Moreover, the amount of personal data available on the internet and the ease of accessing it has driven the exponential growth of this type of fraud.

What are these synthetic identities used for? Usually, to apply for loans, open bank accounts, take out insurance policies, or apply for credit cards. It is even common for scammers to work on these identities for a while, generating credibility with a positive banking history, in order to increase loan limits or access more beneficial financial products.

Types of synthetic identities

We can mainly identify two types of synthetic identities: manipulated and fabricated.

1. Manipulated synthetic identities: This type of synthetic identity is created from the real information of an existing person, to which certain data is added or modified. For example, a scammer may use a real person's social security number and date of birth but change their name and address. These identities are very difficult to detect since part of the information is true.
2. Fabricated synthetic identities: In this case, fraudsters create a new, apparently real identity but using false data. They can generate a random social security number, make up a name and date of birth, and create a false resume and banking history. These identities created from scratch are not associated with any real person.

Warning signs of synthetic identities

Detecting synthetic identities can be a real challenge for many companies, as they appear legitimate at first glance. However, there are some warning signs that businesses should be aware of to detect potential manipulated or fabricated synthetic identities.

One of the main warning signs is the presence of inconsistencies in the information provided. For example, if the contact details, such as the phone number or email address, do not match the person's geographic location, or if the declared age does not match the date of birth. In addition, discrepancies between the information provided and available public data (such as an address that does not exist) may also indicate the presence of a synthetic identity.

Another factor to consider is suspicious activity patterns. If an identity shows strange behavior, such as applying for multiple loans, opening accounts indiscriminately, or taking out different insurance policies in a short period of time, this can also be a warning sign. Scammers try to maximize their profits quickly before their fraud is discovered. Moreover, if several identities share similar characteristics (address, phone number...), it may mean they were created by the same scammer.

Scammers often take advantage of vulnerable individuals to create their synthetic identities. They may use data from deceased persons, children, or individuals with limited banking history, as they cannot detect the misuse of their personal information. Therefore, companies should pay special attention to requests or transactions involving people from these vulnerable groups.

How synthetic identities impact businesses and individuals

Synthetic identity fraud has a significant and global impact on businesses and individuals. Beyond the obvious direct economic losses, this type of fraud can affect an organization's reputation, customer trust, and operational costs.

The financial impact is the most evident. When scammers use synthetic identities to purchase products or services (loans, credit cards, insurance policies...), companies suffer a direct economic loss. According to various studies, synthetic identity fraud generated up to 44 billion euros in losses worldwide in 2023, a significant increase from the estimated 20 billion in 2018. These losses can be considerable and can be devastating for SMEs.

The company's reputation can also be affected. If customers find out that an organization has been a victim of fraud, they may lose confidence in its ability to protect their personal and financial information. The results are evident: a decrease in customer loyalty and a loss of business in the long run. Moreover, if this problem were to become public, covered by news media, it can result in negative publicity, which can further damage the company's reputation.

Another significant impact of synthetic identity fraud is the increase in operational costs. To prevent and detect this type of fraud, companies must invest in advanced identity verification and KYC solutions, have staff to monitor transactions, and dedicate resources to optimizing their anti-fraud processes.

Furthermore, synthetic identity fraud also affects individuals. Victims of identity theft must face a long and complex process to financially recover from the losses caused by this crime.

Best practices for preventing synthetic identity fraud

Preventing synthetic identity fraud requires companies to redefine their identity verification (KYC) processes, as well as continuously monitor suspicious activities and train employees (as part of the corporate culture).

It is essential for companies to implement robust identity verification processes, enhanced with the latest technologies. We are talking, for example, about KYC software capable of verifying the legality of an identity document and extracting information, and that works with facial recognition to avoid deepfakes and verify people's identities. The combination of both developments allows validating and verifying a person's identity: that they are really who they claim to be.

Another fundamental approach is ensuring regulatory compliance. Companies must ensure that their verification processes comply with identity verification (KYC) and anti-money laundering (AML) regulations. Failure to comply with these regulations, in addition to reputational damage, can result in very high penalties.

In this article, we explain what the KYC and AML regulations are in Spain.

Another fundamental practice is the continuous monitoring of suspicious activities. It is not enough to simply verify the customer's identity and ensure regulatory compliance (detecting Politically Exposed Persons, for example); it is necessary to constantly monitor transactions and behaviors to detect possible signs of fraud.

Finally, employee training and awareness are essential. Having an anti-fraud policy and corporate culture will avoid cases like those of TD Bank, Canada's second-largest bank, which is being investigated for breaches in its anti-money laundering systems. Some employees facilitated money laundering, and the group reported losses of $181 million during Q3.

Didit: the identity verification solution to combat synthetic identities

Didit is a free and unlimited identity verification (KYC) solution specifically designed to help companies prevent and detect synthetic identity fraud. Our platform combines advanced technologies such as identity document verification, biometrics, and facial recognition to ensure that people are really who they claim to be.

With Didit, companies can strengthen their identity verification processes without incurring additional costs. Our solution validates the authenticity of identity documents, extracts relevant data, and uses facial recognition to confirm that the person attempting to verify themselves is the same one who appears on the document. This multilayered approach is especially effective in detecting and preventing synthetic identities.

In addition to our free identity verification solution, Didit also offers an optional anti-money laundering (AML Screening) service that provides companies with greater security and helps them comply with relevant regulations.

If you want to learn more about how Didit can help you combat synthetic identity fraud and strengthen your KYC and AML processes, click on the banner below. Our team will be happy to answer your questions and show you how our solution can be adapted to your company's specific needs.