Synthetic identify fraud is an increasingly serious problem, but one whose reach many retailers may not be fully aware of. The activity usually does not affect day-to-day vendor business, but its practice can be precipitated by customer information stolen at the point of sale.
The illegally taken information, usually pulled from multiple individuals, is pieced together to create fake identities which criminals use to open lines of credit. According to a recent report from Auriemma Consulting Group, synthetic identity fraud cost credit card companies $6 billion in 2016 just from fraudsters amassing standard card debt. The total amount in losses is higher when auto loans and retail store credit is taken into account.
How it works
"Synthetic identity fraud cost credit card companies $6 billion in 2016."
According to a report from Equifax, this type of fraud usually begins with a criminal obtaining a stolen Social Security number. Based on this, supplemental information including a name, birthday and address are either fabricated completely or copied from other unsuspecting victims and used to build a new identity around the stolen SSN.
A recent report from Bloomberg said the SSNs of children and other people with virtually no credit history were the most sought after targets because they are essentially blank credit slates.
Criminals then use these fake identities to apply for credit cards. Once approved, they slowly and responsibly build a credit history, which can take years to do. Once the bank gives the nonexistent person a high credit limit, the fraudsters bust out and max the credit accounts out with purchases that will not be paid back. According to the Auriemma report, the average charge-off for each occurrence of this type of fraud is $15,000.
"In the last two months, I've talked to three large credit card issuers, two large telecommunication firms, a large retailer, a large auto lender, and a large fraud consulting company – and every one has had huge synthetic fraud concerns," said Paul Bjerke, vice president for fraud and identity at LexisNexis Risk Solutions Inc., to Bloomberg.
A growing problem that's tough to stop
Catching criminals committing this type of fraud is difficult because activity on the fake identity's accounts is virtually identical to that of a real person.
"Commonalities between customers in financial hardship and synthetic identities make distinguishing between the two loss classifications extremely difficult," said Ira Goldman, director of ACG's Synthetic Identity Fraud Working Group and Credit Operations Roundtable, in the company report.
Instances of this fraud are expected to increase by 44 percent between 2014 and 2018, according to Equifax. To mitigate this problem as much as possible, retailers should ensure their POS systems are secure to prevent theft and illegal use of customer data.
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