Synthetic Identity Fraud: Understanding the New Face of Financial Crime

Synthetic Identity Fraud – Understanding the New Face of Financial Crime

In an age dominated by digital transactions and interconnected financial systems, financial crime has evolved dramatically. Among the sophisticated schemes that have emerged, synthetic identity fraud stands out as a pervasive and elusive threat. 

Unlike traditional forms of identity theft, this type of fraud involves the creation of entirely fictitious identities. It skillfully blends real and false information to deceive even the most vigilant financial institutions. As these synthetic identities infiltrate the system, they manipulate credit lines, accumulate debts, and commit fraud, leaving a trail of financial havoc.

According to KPMG, synthetic identity fraud has rapidly become one of the fastest-growing financial crimes in the United States. Banks have suffered significant losses due to it, amounting to $6 billion. The average charge-offs resulting from these crimes are substantial, reaching approximately $15,000.

This article discusses the complexities of this crime, examining its methods, impact, and the strategies employed by institutions to combat this threat.

Methods Used by Scammers

Synthetic identity fraud is a highly sophisticated and evolving form of financial crime that exploits the vulnerabilities of digital identity verification. 

This practice often begins with the theft of genuine Social Security numbers, laying the foundation for a synthetic identity. Subsequently, the scammers combine these stolen Social Security numbers with fabricated or stolen personal information to create entirely new identities.

Security Boulevard highlights that the United States’ heavy reliance on unchanging Personally Identifiable Information (PII) has rendered it susceptible to this type of fraud. Criminals invest significant efforts in crafting authentic and verifiable identities, enabling them to evade standard verification methods.

This fraud frequently remains unnoticed for prolonged periods, granting these synthetic identities the opportunity to inflict significant losses on businesses and financial institutions.

Financial Institutions and Synthetic Identity Fraud

Financial Institutions and Synthetic Identity Fraud

Synthetic identity fraud presents a significant menace to financial institutions, particularly targeting banks and credit card companies. As reported by The Louisiana Illuminator, criminals like 43-year-old Adam Arena and his associates in New York capitalize on vulnerabilities within these institutions. 

In a complex operation, Arena and his partners exploited the system using synthetic identities, aiming to defraud banks of more than $1 million. Moreover, this incident is not an isolated case. They further managed to deceive the federal government of almost $1 million from the Paycheck Protection Program during the peak of the pandemic. 

Financial institutions grapple with detecting synthetic identities due to the absence of traditional red flags. The lack of easily recognizable patterns or alerts often allows these schemes to persist undetected for extended periods. This causes substantial financial losses and reputational damage to the institutions involved.

Prevention Strategies and Industry Responses

Preventing synthetic identity fraud necessitates a multifaceted strategy rooted in innovation and cooperation. Advanced identity verification methods, including biometric authentication utilizing unique biological traits, serve as the primary line of defense. 

Additionally, continuous monitoring of customer data is essential for promptly detecting anomalies and potential fraudulent activities.

Crucially, collaborative initiatives involving various industries and regulatory bodies are pivotal. Platforms facilitating information exchange and best practice sharing empower institutions to proactively counter emerging threats. 

More importantly, AML practices are central to this approach. AML, meaning anti-money laundering, mandates thorough customer due diligence and transaction monitoring, establishing a strong foundation for identifying suspicious activities.

Integrating AML practices into their strategies enables financial institutions to strengthen their defenses against this kind of fraud.

According to AU10TIX, the collaboration between cutting-edge technology and AML protocols constructs a robust defense, safeguarding the financial world from these fraudulent schemes. This partnership ensures the protection of businesses and consumers, shielding them from the far-reaching consequences of synthetic identity fraud.

Impact on Businesses and Consumers

Impact on Businesses and Consumers

For businesses, the financial implications are staggering. Direct losses stem from fraudulent transactions where criminals exploit vulnerabilities within the system, leading to significant monetary drain. Moreover, businesses incur elevated costs in implementing stringent fraud prevention measures. 

Investments in cutting-edge technologies, employee training, and cybersecurity protocols become imperative, amplifying operational expenses. These financial burdens erode profitability and divert resources from essential business functions, hindering growth and innovation.

Conversely, consumers bear the brunt of the aftermath. Their credit scores suffer substantial damage due to these fraudulent activities, impacting their ability to secure loans or make crucial financial decisions. 

The process of resolving identity theft issues is labyrinthine, involving extensive paperwork, communication with credit bureaus, and legal procedures. Victims face emotional distress, financial instability, and a pervasive loss of trust in financial institutions, significantly impacting their overall well-being. 

Furthermore, the time-consuming nature of resolving these issues often results in missed opportunities and strained relationships, exacerbating the personal toll.


As we conclude this exploration, one thing remains abundantly clear: the fight against synthetic identity fraud is ongoing, dynamic, and demanding. It calls for continuous adaptation, informed vigilance, and the collective intelligence of industries working together to protect financial systems. 

By integrating advanced technologies and AML practices, we forge a formidable shield. The one that promises to safeguard businesses and consumers from the far-reaching and enduring impacts of fraud. 

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Mark is a cyber security enthusiast. He loves to spread knowledge about cybersecurity with his peers. He also loves to travel and writing his travel diaries.