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Fraudsters have used fake identities made from real information to steal billions from governments and businesses, including unemployment insurance and PPP loans.
Lexington, Kentucky, recovered almost $4 million intended for federal rent assistance and transitional housing funds that had been stolen by criminals who inserted themselves into communications between city officials and the local Community Action Council.
Lexington was a victim of a form of synthetic identity fraud, where criminals use stolen personally identifiable information to fabricate either a fake identity or another version of a real identity to steal money. It is one of the fastest growing types of financial crimes and has resulted in billions of dollars being stolen from state and local governments, as well as businesses.
The scheme is one of the ways criminals have infiltrated government programs like unemployment insurance with fraudulent claims. Some states have lost millions of dollars as a result of this and other types of fraud.
But a new report from identity verification company Socure found that synthetic identity fraud can be stopped by 2026 if governments work closely with businesses and the financial institutions who service the transactions to educate themselves about it, stop synthetic identities before they infiltrate programs and systems, and label fraudulent accounts and share them widely.
“When we say we can eradicate synthetic fraud by 2026, what we mean by we, it's our customers, the industries and the government,” said Mike Cook, Socure’s vice president of fraud solutions. “The biggest thing I think we can do is educate. I still talk to people about synthetic products being around for 20 years, and people still call it a new fraud vector.” While it’s not a new fraud vector he said, “people still don't know how to stop it.”
In the last 20 years, synthetic fraud has evolved from being a way for criminals to open new credit card accounts and run up large charges or acquire cell phones that could be resold overseas – all in the name of making money fast.
Then, fraudsters started setting up demand deposit accounts as well as saving and investment accounts using synthetic identities so they then can transfer funds quickly.
Lexington officials declined to give specific details on the full nature of the criminal activity that hit them, but Finance Commissioner Erin Hensley said the city has reviewed its financial procedures and is “taking additional steps to prevent fraud, from inside or outside the government.” She said that includes training to keep cybersecurity “a central focus,” while outside auditors conduct independent tests of city procedures and will recommend improvements.
The report found that the second wave of Paycheck Protection Program (PPP) loans during the COVID-19 pandemic had an impact on the growth of synthetic fraud, while there was also a “sharp spike” in fraudulent account openings between March and November 2020. Total losses from synthetic fraud are estimated to be at $4.88 billion from deposit accounts and credit cards alone, with that number expected to climb if more sectors are included.
Cook said those findings should shock governments into acting to prevent further fraud against their own programs.
“I just want to light a fire,” Cook said. “We want a lot of fire so that they know. They're paying attention to this but we want to light a fire and show them with this data that there really is a need to move now,” he said. “We can put this to bed by 2026 if we work together.”
While some states are investigating their losses during the COVID-19 pandemic, the federal government has forgiven swaths of PPP loans, which may include some phony ones wrought by synthetic identity fraudsters. Jordan Burris, Socure’s vice president for public sector strategy, said that means the potential fraudsters “won at the end of the day, in terms of their ability to pull the wool over the government's eyes.”