DEFINITION of 'Synthetic Identity Theft'

A type of fraud in which a criminal combines real (usually stolen) and fake information to create a new identity, which is used to open fraudulent accounts and make fraudulent purchases. Synthetic identity theft allows the criminal to steal money from any credit card companies or lenders who extend credit based on the fake identity.

BREAKING DOWN 'Synthetic Identity Theft'

Banks can fall prey to synthetic identity theft since much of the information criminals provide them with is legitimate. For example, a criminal might get away with applying for a credit card using a fake name but a real, stolen Social Security number. The criminal racks up charges with no intent of repaying them, and the credit card company loses because it can’t collect payment from the fake identity that established the account.

Sometimes financial institutions can’t even tell that synthetic identity theft has occurred because the criminal will establish a history of using the fraudulent account responsibly before becoming delinquent in order to look like a real person experiencing financial problems and not an outright criminal who racks up charges and becomes delinquent on the account at the first opportunity. This type of fraud is called “bust-out fraud.”

Synthetic identity theft is by far the most common type of identity fraud and is a major source of losses for financial institutions. It’s difficult for banks to detect because their fraud filters aren’t yet sophisticated enough to catch it. When the synthetic identity thief applies for an account, they might just look like a real customer who has a limited credit history.

In some cases of synthetic identity theft, the criminal will rack up fraudulent charges, then use the real pieces of information used in creating their fake identity to pose as a fraud victim and get their credit line restored. Then, they use the additional credit to commit further theft.

In another form of synthetic identity theft, illegal immigrants will use Social Security numbers that they’ve invented or that belong to someone else to obtain financial services. While still a form of fraud, these synthetic identity thieves aren’t looking to steal money from financial institutions, they’re just looking for access to bank accounts and credit cards that facilitate getting paid and making payments and purchases.

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