The Biggest Fraud Risk Credit Union Executives Aren't Considering

Terrence DeFranco
June 5, 2007

Synthetic identity fraud is a credit union killer. Here's what you need to know to prevent an attack.

It's instant and under the radar. A criminal systematically manipulates parts of an identity--usually a letter in a name or a Social Security number digit--and creates multiple new, fake identities. The crooks use these identities to open bank accounts and create new credit histories.

Welcome to the world of synthetic identity fraud.

Of all the monetary losses from identity fraud, 73% are due to synthetic fraud, according to the 2003 study by ID Analytics, San Diego.

The stakes are particularly high when synthetic fraud affects credit-union members. Like banks, credit unions face loss of business, member notification costs, loss of members' funds, and potential lawsuits. On top of that, credit unions risk losing member and affiliated-company trust.

But that doesn't mean credit unions are powerless to prevent or catch synthetic fraud. With the right tools and safety nets, these fraudsters can be stopped--before it's too late.

The Name Game

To successfully execute a synthetic fraud scam, criminals craft new credit records using manipulated identities. They can apply for mobile phones or magazine subscriptions with these identities because little or no background checks are performed. The crook uses these new versions of an identity to open a utility or telephone account and makes a few payments, and the identity ends up in a credit bureau's database.

The crook then applies for a credit or checking account with an altered version of the identity. The bank approves the crook because the bank seeks the "best match" within the credit bureau databases. As long as there's a match along various data points, the identity is considered verified and the account is opened.

Credit unions are just one stop along the crook's way. Once a criminal infiltrates the organization, synthetic fraud is difficult to detect. Most victims never know their identities are being manipulated because the altered combinations may not match a particular person, or this fraud can result in a brand new identity. In either event, the credit union absorbs the loss.

If there's no victim, there's no crime. Eventually the fraudulent account becomes delinquent, and credit unions write off the account as a credit loss.

However, if the fraud is discovered, credit unions must notify members their identities have been compromised. Not only can this instill security fears in members, but the risk to individual reputations can be insurmountable.

Managing Risk

The good news is that credit unions can avert potential disaster by understanding their role in the equation.

There are two ways credit unions become susceptible to synthetic fraud. First, they accept nonemployees of the affiliated company as members. Employees are already vetted by the human resource department, and credit unions rely on the company's approval to accept new members.

But when credit unions open their doors to nonemployees, they don't know if identity information is authentic or synthetic. Many credit unions aren't equipped with the most robust identity verification tools to weed out fraudulent identities.

Another way credit unions increase their synthetic fraud risk is by offering online banking services. Today's savvy cyber crooks can hack into bank systems and siphon millions of dollars with a few mouse clicks. Criminals then disappear into cyberspace--with the member and credit union left holding the bill.

That doesn't mean credit unions should eliminate these practices. But to do them safely, they must confirm identities are genuine before proceeding with business. Robust identity verification and authentication tools are the most effective way to vet identities.

Tools such as Edentify's IDScreen can rapidly confirm that identity data aligns with the intended person--the actual owner of the identity. It scrutinizes all information attached to identities (including related identities), and analyzes the relationships between the group of matching identities.

Identity fraud protection can pay dividends. Executive management can more comfortably expand their business knowing they have a tight identity security system in place. They can trust that new members are law-abiding citizens who won't comprise the organization's data, funds, public image, and business.

And that's the best fraud insurance any credit union executive could ask for.

Terrence DeFranco is CEO of Edentify, a Bethlehem, Pa.-based provider of identity management solutions. Contact him at 610-814-6830. This story was published by Credit Union Magazine at www.creditunionmagazine.com and is reprinted with permission.