Thursday, October 14, 2010

Synthetic Identity Theft

Identity theft is a crime through which the perpetrator acts illegally to obtain the available credit of another.

An individual’s available credit represents more real value than its hard currency counterpart. The amount of total available credit an individual has can be traded for services, educational choices, social access, and access to privileges and perks not available to those with less available credit.

Available credit can be exchanged for its hard currency counterpart at any time but the cost of doing so is staggering. Currency depreciates at 7.5% per year immediately impacting the exchange. Consumer products acquired through the exchange realize additional depreciation in value and efforts to free up your available credit comes at the expense of interest and fees. The cost of making the exchange is a personal and weighty decision.

Traditional identity theft is a fraud through which the perpetrator obtains the social security number, date of birth and any other information needed to access and quickly deplete the victim’s available credit and quickly move on to another victim.

However, there is a new type of identity theft only now beginning to be noticed by law enforcement – Synthetic Identity Theft. Synthetic identity theft happens when a thief steals bits and pieces of information from different people and creates a wholly new and unique identity. This usually happens when your social security number is used with a different name, date of birth and driver’s license. Because of all of the mismatched information, detecting synthetic identity theft can be nearly impossible.

Using your social security number (“SSN”) criminals can open new bank accounts, obtain credit cards, mortgages, obtain employment and live in the plain light of day. These accounts and actions never show up on your credit report because credit reporting systems require matching information such as an SSN and name or address. All the different pieces of information confuse and pollute the existing credit reporting and law enforcement systems. In effect a new person has been created with a substantial available credit that the criminal then launders through any number of schemes seemingly with no victim.

However, it can get serious if your social security number gets into databases designed to flag criminals. Unfortunately, the fact that you were a victim of synthetic identity theft usually shows up when a typical background check is done. Your SSN can show that you are accused of the crime. Unlike traditional identity theft, here the different name attached to the number will not automatically prove your innocence and you will be accused of using an alias. You can easily be turned down for jobs, mortgages, club memberships and suddenly find yourself identified as a criminal even if you’re able to prove it wasn’t you.

Synthetic fraud is quickly becoming the more common type of identity fraud, surpassing traditional identity fraud. In 2005, ID Analytics reported that synthetic identity fraud accounted for 74 percent of the total dollars lost by U.S. businesses to ID fraud and 88 percent of all identity fraud "events" -- for example, new account openings and address changes. Unethical mortgage originators have developed this into an art form allowing them to create invisible straw buyers at arms length shielding them from prosecution.

Synthetic identity theft is a very sophisticated crime where perpetrators can spend years cultivating and building the available credit of the new identity. As the bailout of Freddie Mac and Fannie Mae continue, investigators have begun to uncover a massive amount of mortgage fraud. These new identities are being used to buy and sell properties in flipping schemes, double-selling schemes and assignment fraud. The mismatched information typically makes the criminals nearly invisible to law enforcement and, without the clear-cut victim to complain of the crime, synthetic identity fraud represents a major threat to our current economic markets.

Here is a very small example of Synthetic ID's we found from the Department of Motor Vehicles in Texas with little effort. Duplicate names were left in the list intentionally as these represent the same "person" with the same date of birth at the same address with different and current driver's license numbers - impossible in Texas without presenting 2 different SSN's. The majority of the others, regardless of the age, show that their current license is their first and original license. However, the most obvious indicator is that they all apparently reside at the same address.

Synthetic identity theft rewards the criminal at the expense of the tax payer and the economy. We see banks like Sterling Bank out of Overland Park, Kansas buying huge numbers of mortgage loans from mortgage banks in Texas, Florida and other states that turn out to be taken out under a synthetic identities. The properties were overvalued many times over their actual market value – if they existed at all. Many of the loans were simply fraudulent loan packets, the valid loan and security having been prior sold to other banks and a huge number of the loans Sterling Bank purchased immediately rolling into foreclosure. When banks like these inevitably close under the unrecoverable mortgage portfolios, the tax payer bears the cost.

Freddie Mac and Fannie Mac have yet to begin to disclose the impact of loans purchased from mortgage originators using this scheme. However, reading their last annual report makes it clear that they are expecting the worse.

We need banking and financial market regulations able to detect and stop synthetic identity fraud. Institutional self-regulation has absolutely failed and the cost of that failure is ours. Our economy and financial markets depend on the smooth and regular flow of finance. Not only does synthetic identity fraud unravel everything, but it is perhaps of greatest consequence to those who concern themselves with the certain, predictable and fluid flow of commerce – our banks and economic markets.

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