Synthetic identity theft is a growing threat to credit unions—costing financial institutions billions of dollars. It’s a type of fraud in which a criminal uses fake information, sometimes combined with real (usually stolen) data, to create a fictitious identity. This made-up identity is used to open fraudulent accounts and make fraudulent purchases.

Credit unions and other financial institutions often fall prey to synthetic identity theft since much of the information criminals provide them with is legitimate. Synthetic identity theft allows the criminal to steal from lenders by opening credit card, auto loan and other accounts. In January, Accenture PLC listed synthetic-identity fraud as one of the biggest threats facing financial institutions in 2018.

Synthetic identity theft may account for five percent of uncollected debt and up to 20 percent of credit losses, or $6 billion in 2016, according to some industry analysts. The problem is even more acute with auto loans. TransUnion says a record $355 million in outstanding credit-card balances was owed by people who it suspects didn’t exist in 2017, up more than 8x from 2012.
Synthetic identity fraud exploits a weakness in America’s consumer-credit system. Lenders often consider a loan applicant legitimate if the applicant has a credit report at one of the three credit bureaus. But a new “credit file”—essentially a precursor to a credit report—often gets created when someone simply applies, even if the loan gets denied. If one lender approves a loan for the fictitious individual, that information can make the file a full-fledged credit report.

How a “Phantom Borrower” is Born:

• Scammer applies for loan using fake identity
• Query to credit-reporting firm reveals no borrowing history. Applicant likely gets rejected
• Query results in a new 'credit file,' a precursor to a credit report. Suddenly, a new identity has been born
• Scammer applies for more loans, expanding credit file, giving lenders perception that applicant is real
  
  

TransUnion and Experian say it is difficult to distinguish between a “phantom borrower” and a real borrower who’s applying for credit for the first time and has identifying information that isn’t on file.

One of the reasons that more criminals are using the synthetic identity scam is because lenders have gotten better at protecting against traditional identity theft, which often involves using stolen data about real consumers. When bypassing actual consumers, scammers send fewer “red flags.”

While individuals probably won’t get a high-spending-limit card or large loan without a repayment history, some identity scammers pay bills promptly to qualify for higher limits, then default on larger loans or when credit card has been “maxed out”. It then costs financial institutions a myriad of hours to track down individuals who don’t exist.

Fortunately for lenders, synthetic identity fraud detection and prevention strategies have evolved, as well. Digital technology, neural networks and predictive analytics powered by machine learning and artificial intelligence are helping to more quickly scan large databases like those generated by data-furnishing front companies.
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Protecting Your Credit Union from Synthetic ID Theft
Synthetic identity can cost a credit union thousands of dollars and numerous unrecoverable hours. Protecting your credit union from synthetic identity requires strong security and recovery programs.

1. Implement Strong Security Processes 
   The use of biometrics and cross-referenced background checks for identity verification can help stop synthetic identity thieves. Take extra precautions when applicants have no credit history.
   
   
2. Provide Fully Managed ID Recovery 
   Give account holders the right tools and support to keep them safe from synthetic identity theft. In the event their information is ever compromised, they’ll want to know that their credit union is there to help. Implement a Fully Managed Recovery (FMR) program that puts members’ service first and will act on their behalf during the entire identity restoration process.

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Having greater cybersecurity preparedness needs to be the top priority for credit unions. This will help credit unions avoid becoming victims of synthetic identity fraud, as well as will create the basis for the ultimate response to any data breach or identity theft when it happens. Strong cybersecurity preparedness isn’t cheap, so credit unions must search and find solutions that also generates new income streams while delivering cybersecurity preparedness.

Source: "The New ID Theft: Thousands of Credit Applicants Who Don’t Exist” WSJ, 6 March. 2018.

Despite a heightened understanding and awareness of the importance of strong cyber security by everyone, the trend of data breach attacks continues to increase - impacting thousands of businesses and millions of individuals.  Last year, there was a 40% increase over 2015 in the number of businesses that were impacted by data breaches. Businesses of all sizes were hacked by criminals that used techniques such as ransomware and non-malware attacks to steal data.
 
No organization is safe from a data breach.  It’s no longer a question of “if”, but “when” a business will have its data compromised…per retired FBI special agent
  
Over the last five years, data breaches have recurrently made headline news as large businesses such as; Yahoo, Target, Home Depot, Dropbox, Ebay, JP Morgan Chase, Anthem and Living Social, were hit by hackers. Thousands of credit union cardholder members were impacted by these hacks.  Yahoo’s 2013 and 2014 hacks took 2-3 years to discover; allowing the criminals and black market even more time to devastate the victims’ identities. Most recently, restaurant chain Arby’s was hacked by malware that affected 1,000 restaurants and even more credit union members – very much like Wendy’s ’16 breach.
 
Although there are steps that organizations can take to help make themselves less vulnerable to a data breach, it is impossible for any organization to guarantee it won’t happen. 
 
Nearly two-thirds of Americans (64%) have personally been victims of data breaches. And 65% of US Consumers are terrified of experiencing an ID theft.
 
According to Pew Research Center’s most recent survey:

• 41% of Americans have encountered fraudulent charges on their credit cards.
• 35% have received notices that some type of sensitive information (like an account number) had been compromised.
• 16% say that someone has taken over their email accounts, and 13% say someone has taken over one of their social media accounts.
• 15% have received notices that their Social Security number had been compromised.
• 14% say that someone has attempted to take out loans or lines of credit in their name.
• 6% say that someone has impersonated them in order to file fraudulent tax returns.

 
To make matters worse, coinciding with the rise of data breach victims, there is now the new threat of Civil and Class-Action Lawsuits facing the businesses from these victims – driving new legal and settlement costs.
 
The aftermath of big company data breaches is almost always characterized by class-action lawsuits.  While not every litigation makes its way to the public eye, it is becoming more and more common for organizations of all sizes to face a civil or class-action lawsuit after a data breach.  The best way that credit unions and other organizations can protect themselves against litigation is to have a trusted Fully Managed Recovery System in place, such as Vero's IDProSelect.

The majority of Americans expect cyberattack on the nation’s banking and financial systems.
 
Many Americans lack confidence that various public and private institutions will be able to protect their personal information from bad elements.  While Americans often first turn to their financial institution after finding out that they’ve been a victim of a data breach, the majority of them also fear that a major cyberattack will occur on the nation’s banking and financial systems within the next five years.  Organizations that have implemented a Fully Managed Recovery System often have clients and members that have greater peace-of-mind.
 
Having programs in place for cyber security and data breach response is no longer just an option for credit unions.  For the second year in a row, the NCUA’s Supervisory Priorities have mandated that credit unions have a plan for 1) cyber security 2) member response and 3) fraud prevention.  Vero’s IDProSelect helps credit unions address these areas of NCUA's 2017 Supervisory Priorities. 
 
For more information on how your organization can protect itself from the ramifications of a data breach or to receive more information on Vero’s  IDProSelect, please contact Jim McCabe at jmccabe@veroproducts.com or call (480) 748-0403.

This is the time of year when criminals are most actively plotting and scheming, and credit union members are exposed and vulnerable.  Tax scammers are preying on members’ social security numbers for tax-related identity theft and other crimes.  In fact, nearly 50% of identity thefts are a result of unauthorized government documents, which include tax filings.

Tax season may just be starting, but these scammers have been hard at work. They’re waiting for an opportunity to steal members’ personal information for fraudulent tax refunds and other transactions.  Members that become victims of tax-related identity theft become a high target for other identity crimes since hackers use their same information to sell to the black market, get loans and impersonate the victims in a multitude of other matters. 

Being a victim of a tax crime can be a harrowing experience for members.  The resolution process with the IRS often takes between 12-24 months.  During this time and after, members’ personal information may be used for other crimes.  Once the tax-related case has been resolved, IRS will employ measures to help ensure that members’ tax accounts are not compromised again.  However, this does not fully protect your members from being victims of other forms of identity theft.
 
While the tax community must stay on top of security systems to protect taxpaying individuals and their businesses, financial institutions are also being counted on to protect their account holders’ identities and financial account information.  Credit unions that offer identity theft recovery and restoration services are best equipped to do this.  Victimized members that have been provided with identity theft recovery protection by their credit union can recover and protect their exposed identities easier and more quickly than those that do not have any identity recovery protection.  For example, members that are covered by Vero’s IDProSelect through their credit union, are assigned a personal advocate immediately upon confirmation or suspect of any form of identity theft.  When members become notified that their social security number has been compromised for tax-related theft, they need only to contact their ID theft advocate, who will handle all resolution steps for the member, as well as will have communication with the member throughout the entire process. 
 
Credit unions should advise their members to:

• Use the credit union’s identity theft recovery and restoration service (if one is provided).Vero’s IDProSelect provides complete case resolution, no matter how long it takes or how complicated the case becomes.
• Look out for IRS imposters. The Federal Trade Commission (FTC) has gotten thousands of complaints about one kind of scammer in particular — IRS imposters. They call members saying they owe taxes, with threats that they may be arrested if they don’t pay right away. They might know all or part of their Social Security number, and can rig caller ID to make it look like the call is coming from Washington, DC.
• File tax returns early in the tax season (before identity thieves do).
• Use a secure internet connection if filing electronically. Don’t use unsecure, publicly available Wi-Fi hotspots at places like coffee shops or a hotel lobby.
• Mail tax returns directly from the post office.
• Shred copies of tax returns, drafts, or calculation sheets that are no longer needed.
• ​Respond to all mail from the IRS as soon as possible. Let members know the IRS won’t contact them by email, text, or social media. If the IRS needs information, it will first contact by mail. Don’t give out Social Security numbers (SSN) or Medicare numbers unless necessary. Check their credit report at least once a year for free at annualcreditreport.com. Members can report IRS imposter scams to the Treasury Inspector General for Tax Administration (TIGTA) online or at 800-366-4484, and to the FTC at ftc.gov/complaint.  

​Sources:
February 2016 Federal Trade Commission Consumer Sentinel Report