Growing Threat of Synthetic Identity Fraud

Fraud never sits still—and synthetic identity fraud (SIF) is the latest reminder of that. Unlike traditional identity theft, where a criminal simply hijacks someone else’s information, synthetic fraud is part real, part fake, and completely dangerous. By stitching together legitimate details (like a real Social Security number) with fabricated data, bad actors can create “brand new” identities that look convincing enough to pass through front-line checks.

This isn’t a fringe problem—it’s one of the fastest-growing financial crimes in the U.S., with the Federal Reserve estimating that up to 85% of identity fraud cases involve synthetic identities. For payments companies, banks, credit unions, MSBs, and fintechs, it’s becoming one of the toughest compliance challenges to solve.

What Is Synthetic Identity Fraud?

Synthetic Identity Fraud involves creating a fictional identity by piecing together legitimate data, such as a real Social Security number (SSN), with fabricated or stolen personal information. Criminals use these synthetic identities to open bank accounts, apply for loans or credit cards, and make large purchases before disappearing—leaving businesses and financial institutions with significant losses.

The deceptive nature of synthetic identities often allows fraudsters to operate undetected for months or even years, causing widespread financial damage by the time their activity is uncovered. According to the Federal Reserve, synthetic identity fraud accounts for up to 85% of all identity fraud cases in the U.S. and continues to rise as fraudsters develop more sophisticated techniques.

Why Synthetic Identity Fraud Is So Dangerous

Synthetic identities often pass through standard KYC (Know Your Customer) checks because they blend real and fake information. Financial institutions may unknowingly grant access or extend credit to these fraudulent identities, increasing the risk of default on loans or unpaid balances.

Targeting the Underbanked: Many fraudsters focus on individuals with limited or no credit history, such as minors or recent immigrants, making it difficult for companies to spot discrepancies in credit reports or personal details. This allows synthetic identities to slip through traditional fraud detection systems.

Regulatory Pressure: In the face of growing fraud risks, regulators are putting increased pressure on businesses to adopt stricter verification processes. Regulations like the Fair Credit Reporting Act (FCRA), Payment Card Industry Data Security Standard (PCI DSS), and various AML (Anti-Money Laundering) laws require businesses to take extra steps to verify identities and monitor transactions for suspicious behavior.

The Impact on Payments Compliance

Synthetic identity fraud poses a significant risk to payments compliance. Here’s why:

AML and KYC Compliance: Financial institutions are required to verify the identity of customers as part of AML laws. However, synthetic identities can bypass these checks by appearing legitimate, leading to potential non-compliance with AML regulations and hefty fines for businesses.

Fraud Detection: Companies are increasingly under pressure to implement robust fraud detection systems to detect unusual account behavior, including synthetic identities. Failing to catch fraudulent activity in time can result in financial losses, reputational damage, and regulatory scrutiny.

Increased Operational Costs: As fraud increases, so do the operational costs for businesses, from handling fraud investigations to tightening security protocols and ensuring regulatory compliance.

How to Combat Synthetic Identity Fraud

Despite the growing threat of synthetic fraud, there are steps businesses can take to protect themselves and remain compliant with evolving regulations:

1. Strengthen KYC Procedures

Layer verification with biometrics, database cross-checks, and third-party identity services.

2. Leverage AI & Analytics

Machine learning can pick up on subtle behavioral patterns that human review or legacy systems often miss.

3. Collaboration with Credit Bureaus

Credit bureaus are often the first to spot “new identities” with no history. Close coordination helps prevent fraudsters from building fake credit footprints.

4. Regular Audits and Transaction Monitoring

Regular audits of customer accounts and transaction monitoring are critical in identifying fraud. Compliance with AML laws requires businesses to continuously monitor for suspicious activity, such as unusual account behavior or attempts to withdraw large sums of money.

5. Customer Education

Remind customers that protecting their personal data is part of the fight—less available real data means fewer opportunities for fraudsters.

How We Can Help

At Frauditor, we’ve spent our careers living in the gray space between fraud prevention and compliance obligations. We know the frustration of chasing fraudsters who always seem one step ahead—and we also know how to build compliance programs that can withstand regulatory pressure and real-world threats.

Final Thoughts

Synthetic identity fraud is only going to get more sophisticated. But the right mix of strategy, technology, and compliance expertise can keep your business out of the headlines and ahead of regulators.

If your organization is looking to shore up its defenses and tackle synthetic fraud head-on, we are ready to help.