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Thieves use synthetic identity fraud to defraud state and federal programs as well as consumers’ credit.
In the fall of 2020, 43-year-old Adam Arena and a dozen alleged accomplices were charged in New York with trying to defraud banks of more than $1 million through a scheme known as “synthetic identity fraud.”
They combined real Social Security numbers with mismatched or fake names to create new identities, according to the researchers. Prosecutors began the investigation in 2018, charging them with 108 counts of illegal financial activity, mostly borrowing huge amounts of money that they never intended to repay, according to investigators.
The fraud was so successful that in May 2020, according to prosecutors, Arena apparently did it once more.
This time, according to investigators, Arena and a partner used synthetic identities to defraud the federal government of nearly a million dollars from the Paycheck Protection Program (PPP), designed to help people who had lost their businesses or jobs due to the pandemic. The duo used a fake ID to obtain a $954,000 loan and spent it on two vehicles, spa services, clothing, restaurant meals and gym memberships, according to prosecutors.
In the first fraud case, Arena pleaded guilty and was sentenced to between four and 12 years in prison. Arena also pleaded guilty to Payroll Protection Program fraud and is awaiting sentencing.
Synthetic identity fraud has proliferated in recent years, becoming the nation’s largest form of identity theft, according to financial firm FiVerity, which in a report last year pegged losses at some $20 billion in 2020. five years, the Federal Reserve estimated losses at $6 billion.
In addition to Payroll Protection Program scams, fraudsters used synthetic identities in many unemployment benefits scams, leaving states scrambling to try to recover erroneous payments. This type of fraud has also been used in more prosaic crimes, according to police authorities, such as the purchase of cars or furniture.
With tax filing season in full swing, the IRS is warning taxpayers to be on the lookout for documents regarding unemployment benefits they never received. Those documents may indicate that someone else applied for unemployment insurance using their information.
In a warning on its website, the IRS said there has been an “increase in fraudulent unemployment claims … by criminal networks using stolen identities. Criminals are using these stolen identities to fraudulently collect benefits at various state”. The agency urged anyone who receives an IRS form that erroneously indicates that they have received money to contact the Department of Labor.
Except for unemployment fraud, synthetic identity crimes are often not confined to a single state, forcing law enforcement to cooperate, according to former Suffolk County, New York, prosecutor Tim Sini, who led the part of the county in Arena’s research, who lived in both New York and California.
“It was a collaboration between the Suffolk County District Attorney’s Office, the Suffolk County Police, Social Security and the Secret Service,” he said in a recent telephone interview. “Often, it’s the financial institutions that are hooked on the liabilities, but make no mistake, those costs are passed on, at least indirectly, to the consumer in the form of higher interest rates and fees.”
In addition, he said, consumers whose Social Security numbers have been stolen may be affected, even years later, when they apply for credit. Most synthetic identity schemes steal Social Security numbers from people who don’t use credit, such as children, recent immigrants, or low-income seniors who may not have credit cards.
The theft may not be discovered until a person—perhaps a student applying for a college loan or their first credit card—is turned down because of a prior record of default. In the intervening years, the scammer may have constructed a “persona” with a real Social Security number and a false name, address, and other identifying information.
Sometimes the criminal lets these fake accounts cook for years before “popping” them, a term law enforcement officers use for when they pull the trigger on the fake person’s account and charge a credit card to the limit, for example, and then stop paying.
“They don’t exist anywhere except on a credit profile,” said Sini, now an attorney in private practice with the Nixon Peabody firm.
One reason the scheme is popular is that it’s “very lucrative,” as evidenced by the huge amounts involved, said Eva Velasquez, executive director of the Identity Theft Resource Center, a nonprofit group that helps banks and to individual victims of identity theft.
Thieves resort to what she calls the “long scam. They create synthetic IDs and then take care of them and feed them. Then they use up all available credit and don’t pay the bill.”
Arena and a dozen other people created the synthetic identities using the Social Security numbers of children, recent immigrants, the deceased, the elderly and people in prison, according to the Suffolk County District Attorney’s office.
Prosecutors said Arena and his partners had amassed hundreds of millions of dollars worth of false credit limits.
They applied for fake phone and email accounts, as well as reward and library cards to “legitimize” fake identities before taking out loans, mostly through credit cards. Then, prosecutors say, Arena created sham corporations that reported the phony individuals to credit reporting agencies as trustworthy borrowers, predating the reports to make it appear they had years of excellent credit.
A federal law enacted in 2018 designed to curb the problem had little effect, Velasquez said. One reason is that financial institutions have been slow to enroll in the program specified by law.
Another challenge has been how to define the term “synthetic identity fraud.” The Federal Trade Commission defined it in 2021 as “the use of a combination of personally identifiable information (PII) to fabricate a person or entity to commit a dishonest act for personal or financial benefit.” Law enforcement now uses that definition to pursue theft.
The new law only covers the financial sector, not government benefits such as COVID-19-related funds or unemployment insurance. “It’s a good start,” Velazquez said. “As with all things related to identity, there is no easy solution.”
According to the National Conference of State Legislatures, all 50 states have security breach notification laws that require businesses or governments to notify consumers if their personal information is hacked. This year, at least 17 states have introduced or considered measures that would change those laws, the NCSL notes in a blog post, but none appear to directly address synthetic identity fraud.
Jason Kratovil, director of public policy for SentiLink, a financial firm that helps banks and institutions deal with identity fraud, said fake identity fraudsters are more likely to apply for credit from card companies within the first year. card signature, and that the average loss per card for high credit limit accounts is $13,000. “Identity theft is ‘blitz robbery,'” he said. “They take advantage of the identity as quickly as possible.”
Kratovil said the federal law, once it’s fully in place, should put a dent in the fraud.
“Certainly, the [ley] it will make it much more difficult once it is used more frequently by the financial industry; the program is now opening up for all comers. The challenge for the financial sector is awareness.”
That’s the challenge states face as well, and many attorneys general have hotlines or tip sheets for consumers who believe their identity may have been compromised or who are trying to avoid it.
New Mexico Attorney General Hector Balderas, a Democrat, said in a phone interview that in his state identity thieves often use false identities to obtain car loans. Fraudsters often smuggle cars across the border, and by the time dealers find out, the vehicle is gone.
In addition to uncovering fraud, Balderas said his office is focused on helping consumers who have been victimized. The state, along with at least nine others, issues “identity passports” that allow victims to confirm that they are the true holder of their own identity. This helps prevent false stops, she said, such as when a victim is pulled over for speeding and the officer finds an outstanding warrant once morest the identity thief.
He advised consumers to carefully protect their personal information. “Your purse and bag can be the scene of a crime any day of the week,” she said. “All consumers need to hone their skills to play defense.”
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