What Is and How to Spot Synthetic Identity Fraud?
One of the financial crime categories with the fastest rate of growth in North America is synthetic identity fraud. Synthetic identity fraud combines fake and real information to create a new, false identity, in contrast to traditional identity theft, which involves stealing the information of a real person. Even the strongest compliance frameworks are put to the test by this new threat, especially in the FinTech, banking, and digital financial services industries. AML Incubator, your trusted partner in regulatory excellence, equips businesses with practical tactics to fight fraud—including this increasingly sophisticated type of identity theft.
Synthetic Identity Fraud: What Is It?
The Structure of a Synthetic Persona
An identity that is created by combining authentic (often stolen) and fraudulent information is called a synthetic identity. Typical elements consist of:
- Real Social Security Numbers (SSNs) or Social Insurance Numbers (SINs) — frequently taken from deceased people or children.
- False name and birthdate — information that doesn't belong to a real person.
- Falsified contact information and address — used to create a profile that looks authentic.
These fake profiles are used by scammers to:
- Open credit cards or bank accounts
- Apply for government assistance or loans
- Launder money using ostensibly "clean" identities
Why Is It So Difficult to Spot Synthetic Identity Fraud?
Conventional Approaches Frequently Fail
The majority of AML and KYC systems are designed to identify irregularities using static identifiers, such as name, address, and birthdate, under the assumption that they belong to a single, authentic person. By seeming authentic on the surface but avoiding closer examination, synthetic identities take advantage of this weakness.
Low Level of Initial Activity
Before carrying out extensive fraud, synthetic identities frequently begin with low-risk activity to establish their creditworthiness or transaction history. They are able to stay under the radar thanks to this "grooming period."
Industries at Risk
- FinTech and Digital Banks
- FinTechs and neobanks are popular targets because of their remote onboarding and speed.
- Exchanges for Cryptocurrencies
- Because of pseudonymity and lax KYC in some jurisdictions, cryptocurrency platforms are at increased risk.
- Financial Establishments
- Over time, scammers may create fictitious credit scores that allow them to obtain large, unrepaid loans.
Warning Signs and Detection Strategies
How to Spot False Identity
To avoid serious financial and reputational harm, early detection is essential. Here's how to improve your protocols for detection:
1. Use Behavioural Biometrics and Device Fingerprinting
Examine more than just static data. Keep an eye on:
- Timing rhythm
- IP history of the device
- Geolocation irregularities and session behaviour
2. Make Use of Machine Learning and AI
Use AI-powered tools to spot trends like:
- Several identities connected to the same IP address or device
- Identical documents or profile pictures
- Transactional irregularities over time
3. Use External Databases for Cross-Reference
Check identity components against third-party sources or government-issued ID databases to identify data that is inaccurate or fabricated.
4. Keep an Eye on the Fragmentation of Credit Files
Synthetic identity activity may be indicated by multiple profiles with the same SSN but distinct names and addresses.
5. Use Enhanced Due Diligence (EDD)
EDD Services should be taken into consideration in high-risk situations to confirm identity veracity, business legitimacy, and wealth sources.
Learn more: EDD Services
The Regulatory Imperative
The effect of synthetic fraud on financial integrity is being noted by regulators:
- FINTRAC places a strong emphasis on stringent KYC/ID verification procedures.
- Canada’s Retail Payment Activities Act (RPAA) will make digital payment platforms subject to more scrutiny. Learn more: RPAA Registration
Maintaining compliance entails taking proactive measures to mitigate the risks of identity fraud through sophisticated systems, strong regulations, and recurring evaluations such as an AML Effectiveness Review.
The Benefits of Outsourcing Compliance
Startups and smaller businesses frequently lack the internal knowledge and resources required to detect synthetic identity fraud. Institutions can scale their compliance defences without compromising agility by onboarding with Regulatory Remediation or outsourcing CAMLO/MLRO functions.
Conclusion
More than just a financial annoyance, synthetic identity fraud poses a structural risk to the legitimacy of compliance frameworks and financial systems. Organizations can identify and prevent this invisible enemy by staying ahead of the curve in terms of technology, data verification, and expert-led reviews.
Does your company have the tools necessary to identify fake identities? Allow AML Incubator to assist you. Our services guarantee that you stay proactive and safe, regardless of whether you require a complete compliance overhaul or improved due diligence for clients who pose a greater risk.
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