Financial institutions are working tirelessly against fraud, from fraudulent checks, ACH and even identity. Synthetic identity fraud is a complicated area to tackle but in this article, Marie-Christine Diaz, Business Development Manager/Payments-EU at Eastnets, shares their insights for fighting against this ‘shadow’.
Imagine fighting an enemy that doesn’t exist but appears very real and can certainly cause actual damage. How can you tell apart this shadow, made up of many fragments of information, from an actual person?
This is the challenge financial institutions worldwide are grappling with, and it’s known as synthetic identity fraud. Criminals are mixing genuine and stolen information to create identities that can easily get past account setup and know-your-customer (KYC) checks.
The amalgamation of multiple identities into one synthetic identity makes this type of fraud particularly insidious. Often, it goes unnoticed until it reaches a point of substantial financial loss. Now imagine this is happening in the era of instant payments, where transactions occur in the blink of an eye.
How can financial institutions protect their customers and themselves from this threat?
The synthetic conundrum
Synthetic identities that blend stolen legitimate information with fabricated details serve as powerful tools for criminals. They use them to open accounts with a fake identity and gradually build up a credit history over months or even years.
Once they have established creditworthiness, fraudsters exploit these identities, maxing out credit limits and vanishing without repaying – leaving financial institutions with substantial losses.
Estimates suggest that financial institutions miss a staggering 95% of synthetic identity fraud cases during the account setup process. This statistic underscores the urgency of finding effective solutions. Losses attributed to synthetic identity fraud are estimated to range from US$20 billion to US$40 billion annually, with the figures steadily climbing.
Regulators are formulating new rules that require the validation of username and account information to fight this type of fraud. But in many countries, these solutions are not yet available and fraudsters remain ahead of the curve.
Taking a whole-system approach
Addressing synthetic identity fraud requires an in-depth strategy that looks at customer behaviour from the start. It needs to check the validity of customers’ identities and keep a constant watch for risks. This includes:
Deepening customer understanding
Financial institutions must invest in tools and technologies that help them know their customers. This involves scrutinising synthetic ID information, such as addresses, emails, and phone numbers, and cross-referencing with a wide range of non-financial data sources.
Additionally, the integration of face and voice biometric recognition can enhance the accuracy of identity verification. Inconsistencies in the information gathered should trigger additional verification steps, including in-person document verification.
KYC enhancement
KYC procedures need to evolve from fragmented, rule-based solutions to more robust and dynamic models. Financial institutions should develop synthetic ID risk models based on a combination of internal and external data sources.
These models should enable real-time customer risk assessment and scoring. Frequent checks of the validity of customer information should be scheduled. The system should also support timely rescoring to detect and deter synthetic identity fraud more effectively.
Given the evolving nature of fraud, the chosen KYC solution should offer the flexibility to create and customise KYC forms, allowing for the incorporation of specific risk categories related to fraud.
Connecting the dots
‘Joining the dots’ is essential in identifying synthetic identity fraud. Financial institutions should implement tools capable of detecting and scoring fraudulent identities by correlating demographic identity information with various contextual and historical data sources.
These sources may include profile information, account activity and credit profiles. Detecting duplicates or mismatches in key identity fields like name, address, or birthdate across different sources is critical. Such inconsistencies could be indicative of synthetic fraud.
Using advanced technologies
As synthetic identity fraud becomes more sophisticated, financial institutions must harness advanced technologies to stay ahead. Artificial Intelligence (AI) and Machine Learning (ML) can be pivotal in fraud detection and prevention.
Despite the lack of historical synthetic fraud cases, AI and ML can analyse data from various sources and identify anomalies. These technologies can significantly reduce false positives, enhance-risk scoring accuracy, and streamline data-driven investigations.
Integration is key
Addressing synthetic identity fraud requires a multifaceted approach. One key component is eKYC, a tool that serves as the foundation for authentication. This involves various digital identity verification methods to ensure the person is genuine.
Complementing this is sanctions screening, operating in real-time to cross-reference individuals against sanctions lists and blacklists, acting as a crucial barrier to stop fraudsters from slipping through the cracks. AML transactions monitoring provides ongoing scrutiny of customer information, offering a vital line of defence by tracing potentially illicit money transfers via mule accounts.
Fraud detection is indispensable, especially in the context of instant payments, as it swiftly identifies transactional or customer behaviour anomalies in real time. Together, these integrated solutions create a comprehensive strategy to combat synthetic identity fraud.
Compliance and data privacy
It’s essential to ensure that any solution or method used to fight fake identity fraud follows data privacy regulations, respecting people’s right to have their information deleted. However, financial institutions must ensure they can still spot fraud in the future through unique identity markers even when information is removed.
The battle against synthetic identity fraud is a tough one that financial institutions cannot afford to lose. By adopting a holistic approach that combines technology, data analysis, and a deep understanding of customers, the sector can stay ahead of fraudsters.
As the threat of synthetic identity fraud continues to grow, a comprehensive strategy is not just an option – it’s a necessity.