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Federal Reserve publishes white paper on synthetic identity payments fraud

Some industry experts consider synthetic identity fraud to be the fastest-growing type of financial crime in the United States – and it’s a crime that cost U.S. lenders an estimated $6 billion in 2016. The Federal Reserve recently published the first in its Payments Fraud Insights (Off-site) series of white papers to serve as a resource for industry professionals.

A synthetic identity (Off-site) is created by using a combination of real information, such as a legitimate Social Security number, with fictional information, which can include a made-up name, address or date of birth. Fraudsters increasingly use synthetic identities to commit payments fraud, which can escape detection by today’s identity verification and credit-screening processes. Over time, fraudsters build up the creditworthiness of the synthetic identity, then “bust out” by purchasing high-value goods and services on credit and disappearing. Because the identity was not real to begin with, there is limited recourse in tracing the perpetrators and holding them responsible for their debts.

Crime rings see attractive opportunities in synthetic identity payments fraud. Law enforcement officials, financial institutions and other organizations recognize it as a growing concern. The white paper provides information on the current state of synthetic identity fraud, including the scope of the issue, causes, contributing factors and its impact on the payments industry.

Ken Montgomery Federal Reserve System Payments Security Strategy Leader
Chief Operating Officer, Federal Reserve Bank of Boston

The Federal Reserve began raising awareness and encouraging action on the growing problem of synthetic identity payments fraud in late 2018. Through primary and secondary research and industry dialogue, we seek to improve understanding of the issue, create a greater sense of urgency about addressing it and promote industry action to both identify and mitigate this type of fraud. Subsequent installments in our Payments Fraud Insights series will describe potential gaps in detection and mitigation approaches, as well as ideas and best practices to address the issue.

Action Item:

Be sure to read the Federal Reserve’s white paper, Synthetic Identity Fraud in the U.S. Payment System (Off-site). For more information on synthetic identity fraud, you can: