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KYC Best Practices23 Jun 2024

Complete Guide to Combating Synthetic Identity Fraud in 2024

Emmanuel Agwu

From the content creation to software development, the invention of AI technology has arguably redefined traditional processes in key industries today. Today, good-quality videos and images can be created using word prompts, making it much easier for creators to make better content. However, with the emergence of generative AI, the banking sector and other businesses are facing a new and more complex risk: synthetic identity fraud (SIF).    


This article discusses the rising danger of synthetic identity fraud, explaining the risks it poses and how businesses can spot and prevent it today for AML compliance. 

What is Synthetic Identity Fraud?

Synthetic identity fraud is a growing concern in today's digital world. This type of fraud involves creating fake identities using real personal information. These fake identities are then used for various illegal activities, causing significant financial losses.


Synthetic identity fraud involves taking bits of real personal information and combining them to create a fake person or entity. The information used can include:

  • Name
  • Date of birth
  • National Identification Number


For example, a fraudster might use a real national identity number but pair it with a fake name and date of birth. The purpose behind this is usually to gain financial benefits. This might include opening credit card accounts, taking out loans, or even applying for government benefits.


Fraudsters often build a legitimate-looking credit history over time. They might start with small loans and credit lines, paying them back to appear trustworthy. Once they have a good credit score, they can take out larger loans and disappear with the money.

Why is Synthetic Identity Fraud a Growing Concern?

Synthetic identity fraud has become a significant issue due to several factors that make it both complex and dangerous. Understanding why this type of fraud is growing helps to grasp its impact on society and the economy.

i. Increasing Sophistication of Fraudsters

Fraudsters are continually improving their techniques, making synthetic identity fraud harder to detect. They use advanced methods to create fake identities that appear legitimate:

  • Data Breaches: Personal information from data breaches provides fraudsters with the raw materials to create synthetic identities.
  • Technology: Use of sophisticated software to generate realistic fake identities.
  • Social Media: Gathering additional details to make synthetic identities more convincing.

ii. Building Legitimate Financial Histories

Fraudsters often take their time to build credible financial histories for synthetic identities. This long-game strategy involves:

  • Opening Small Accounts: Start with minor credit lines or secured credit cards.
  • Timely Payments: Make regular payments to build a positive credit history.
  • Increasing Credit Limits: Gradually apply for larger loans and credit lines.

This process can take years, making the synthetic identity seem entirely legitimate by the time fraudsters decide to commit major fraud.

iii. Facilitating Serious Illegal Activities

Synthetic identities aren't just used for financial scams. They can also facilitate serious illegal activities such as:

  • Money Laundering: Fake identities can be used to move money across borders without detection.
  • Terrorist Financing: Funding illegal activities under the guise of a legitimate identity.
  • Human Trafficking: Creating fake identities to exploit vulnerable individuals.

iv. Heavy Financial Losses

The financial repercussions of synthetic identity fraud are vast and affect various sectors:

  • Consumers: Victims may face damaged credit scores and financial losses.
  • Organisations: Banks and businesses suffer from unpaid debts and increased fraud prevention costs.
  • The Payment System: The overall integrity of the payment system is at risk, leading to increased regulatory scrutiny and higher costs for fraud prevention measures.

How to Spot a Synthetic Identity

The process of spotting synthetic identity fraud can be categorised into indicators and possible red flags.

1. Key Indicators

Detecting synthetic identity fraud requires keen observation of certain key indicators. Financial institutions and consumers need to be aware of these signs:

a. Large Amount of Unsecured Debt:

  • Less Documentation: Synthetic identities often apply for unsecured debt that requires minimal documentation. This makes it easier for fraudsters to obtain credit without thorough verification.

  • Sudden Increase: A notable increase in unsecured debt in a short time can be a red flag, especially if the individual has no substantial credit history.

b. High Number of Recent Credit Inquiries:

  • Quick Credit Building: Fraudsters frequently attempt to build credit quickly by applying for multiple credit lines. A spike in credit inquiries within a short period suggests efforts to create a robust credit profile rapidly.

  • Suspicious Activity: While some credit inquiries are normal, an unusually high number can indicate synthetic identity creation.

c. Mismatch Between Accountholder's Age and Duration of Credit History:

  • Age Discrepancies: A synthetic identity might show an accountholder with a credit history that doesn't match their age. For example, a 20-year-old with a 15-year credit history is highly suspicious.

  • Inconsistent Data: Such mismatches are often overlooked but can be crucial in identifying synthetic identities.

2. Red Flags

Beyond key indicators, certain red flags provide additional clues to synthetic identity fraud:

a. Unusual Geographic Patterns in Transactions:

  • Location Anomalies: Transactions occurring in geographically diverse locations within short periods can signal synthetic identity use. For example, purchases made in New York and Los Angeles on the same day.

  • Pattern Deviations: Frequent changes in transaction locations from the account's usual patterns may indicate fraud.

b. Mismatched Transaction Descriptions:

  • Inconsistent Details: Transaction descriptions that don't align with known spending behaviours or business names can hint at synthetic identity activity. For instance, a grocery store purchase is labelled as a car rental.

  • Verification Gaps: Mismatched details often occur when fraudsters use synthetic identities for various transactions without thorough verification.

c. Rapid Cycling of Funds:

  • Quick Fund Movement: Rapid and frequent transfers of funds between accounts can be a sign of synthetic identity fraud. Fraudsters may cycle funds to create a façade of legitimate activity.

  • Cash Flow Irregularities: Unusual patterns in fund movements, such as large deposits followed by immediate withdrawals, should raise suspicion.

How to Prevent Synthetic Identity Fraud

Here are some of the ways to prevent synthetic identity fraud for businesses today: 

1. Enhancing Identity Verification

Preventing synthetic identity fraud starts with strengthening identity verification processes. Here are practical steps:

a. Implement Robust Identity Verification Processes:

  • Government KYC Checks: this refers to the process of extracting and verifying the information contained in a customer ID from government databases. 
  • Document Verification: Request original documents for identity proof and verify their authenticity using specialised tools.

b. Use Multi-Factor Authentication and Biometrics:

  • Multi-Factor Authentication (MFA): Enforce MFA, requiring users to provide two or more verification factors to gain access. This includes something they know (password), something they have (security token), and something they are (biometric verification).
  • Biometric authentication: Implement biometric authentication checks such as fingerprint scanning, facial recognition, or liveness detection. Biometric data adds a layer of security that is difficult for fraudsters to replicate or bypass.

2. Monitoring and Detection

Keeping a vigilant eye on transactions and using advanced technologies can significantly reduce the risk of synthetic identity fraud:

a. Configure Transaction Monitoring Systems to Detect Red Flags:

  • Automated Alerts: Set up systems that automatically flag suspicious activities such as large transactions, unusual geographic patterns, or rapid fund cycling.
  • Behavioural Analysis: Monitor transaction behaviours for inconsistencies with the account holder’s usual patterns.

b. Utilise Advanced Fraud Detection Models Focusing on Identity Rather Than Payment Behavior:

  • Identity-Centric Models: Shift from models that focus solely on payment behaviour to those that analyse identity information. This includes checking for inconsistencies in identity elements used during account creation or transaction approval.
  • Machine Learning Algorithms: Deploy machine learning algorithms to analyse vast amounts of data and identify patterns indicative of synthetic identities. These models can adapt and improve over time, becoming more effective at detecting fraud.

3. Industry Collaboration

Collaborative efforts across the industry can create a unified front against synthetic identity fraud:

a. Share Data and Insights with Industry Peers to Improve Detection and Prevention Strategies:

  • Data Sharing: Participate in data-sharing initiatives where institutions share information about fraudulent activities and synthetic identities. This collective knowledge helps develop better detection techniques.
  • Industry Forums and Workshops: Engage in forums and workshops where industry members discuss emerging threats and share best practices. This can lead to innovative solutions and more cohesive industry standards.
  • Regulatory Support: Work with regulatory bodies to establish guidelines and frameworks that support data sharing while protecting consumer privacy.

Preventing Synthetic Identity Fraud with Smile ID

As technology advances, so do the tactics of fraudsters. Staying ahead of synthetic identity fraud requires a proactive and adaptive approach. Investing in cutting-edge technologies, fostering collaboration, and continuously educating consumers and employees are crucial steps businesses must take to safeguard against this pervasive threat.


Smile ID offers the most effective solution for preventing synthetic identity fraud. With our cutting-edge technology, including advanced document verificationAI-powered biometric authentication, and real-time monitoring systems, we provide unparalleled protection against fraudulent activities. Our solutions ensure compliance with regulatory standards while streamlining user verification processes, making Smile ID the ideal partner for businesses looking to safeguard their operations against synthetic identity fraud. 


Choose Smile ID to protect your business, maintain compliance, and enhance security in the fight against synthetic identity fraud. Book a free demo to learn more today.

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