Learning Objectives:

  • Define synthetic identity fraud and understand how it is created.

  • Analyse the role of AI in enabling synthetic identity fraud.

  • Identify the risks to central bank operations from synthetic identity fraud.

  • Understand defensive strategies for detecting and preventing synthetic identity fraud.

3.1 What is Synthetic Identity Fraud?

A synthetic identity is assembled, not stolen. An identity is cobbled together from real, lifted, and invented details, then used to open accounts . Real personal data, such as an ID number, can be used with a fabricated address and name to create a fake person. Generative AI can create valid-looking documents, including passports and driver’s licenses .

A report by BNY found that 61% of fraud/risk executives at financial institutions say synthetic identity will be the fastest-growing fraud threat over the next 12 months . A report by Sumsub found that fraud operations are increasingly designed for higher success rates, higher financial impact, and greater resistance to traditional controls, and that attackers are moving from volume to precision .

The evolution of synthetic identity fraud reflects the broader trend of AI-enabled fraud. While fraud detection focused on volume in the past, attackers now execute multi-step, coordinated attacks that combine several advanced techniques within a single verification attempt . This “sophistication shift” means that fraudsters now need far fewer attempts to carry out a successful attack .

3.2 The Role of AI in Synthetic Identity Fraud

Generative AI is a key enabler of synthetic identity fraud. AI can create realistic-looking identity documents, including passports and driver’s licenses, at scale and low cost. The technology is continuously improving, making it more difficult to detect fraudulent documents.

Agentic AI fraud has stripped out the red flags and errors of old, making it more difficult for traditional fraud detection systems to identify synthetic identities . This underscores the need for more advanced detection techniques, including AI-powered identity verification.

3.3 Risks to Central Bank Operations

Synthetic identity fraud poses significant risks to central bank operations. It can be used to:

  • Open Fraudulent Accounts: Synthetic identities can be used to open accounts at financial institutions, including those that have accounts at the central bank.

  • Launder Money: Synthetic identities can be used to launder money, including through accounts at the central bank.

  • Evade Sanctions: Synthetic identities can be used to evade sanctions, by creating identities that are not associated with sanctioned individuals or entities.

  • Access Central Bank Services: In extreme cases, synthetic identities might be used to attempt to access central bank services.

3.4 Defensive Strategies

Financial institutions must adapt their defensive strategies to counter synthetic identity fraud:

Enhanced Identity Verification: More robust identity verification, including biometrics and document verification, is essential.

AI-Powered Detection: AI-powered fraud detection can identify patterns and anomalies that may indicate synthetic identities.

Cross-Institutional Information Sharing: Sharing information about synthetic identity patterns across institutions can help detect and prevent fraud.

Public Awareness: Public awareness campaigns should educate individuals about the risks of synthetic identity fraud.

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