Fraud Awareness for Small Businesses: Synthetic and Stolen Identity Fraud

"The strongest passwords in the world won’t protect you if your identity is already stolen." – Unknown

In today’s digital world, fraudsters don’t always need to create fake identities—they can also steal real ones. Synthetic and stolen identity fraud are two of the fastest-growing financial crimes, costing businesses and lenders billions of dollars each year. Whether criminals fabricate entirely new identities by combining real and fake data or hijack an existing identity for financial gain, both forms of fraud pose a serious threat to financial institutions and small businesses alike.

What is Synthetic and Stolen Identity Fraud?

Synthetic Identity Fraud

Synthetic identity fraud occurs when criminals piece together bits of real and fake personal or business information to create a new, seemingly legitimate identity. This identity is then used to open bank accounts, secure loans, and commit financial fraud.

Stolen Identity Fraud

Stolen identity fraud, on the other hand, involves fraudsters taking over an existing person’s or business’s identity to conduct unauthorized transactions, secure credit, or make fraudulent purchases. This can happen through data breaches, phishing schemes, or compromised personal/business information.

How They Work

Synthetic Identity Fraud

1. Creating the Identity – Fraudsters use a mix of real Social Security numbers, fake names, and manufactured addresses to establish credibility.

2. Building Creditworthiness – They apply for small loans or credit cards, make timely payments, and slowly build a credit profile over months or even years.

3. Cash Out and Disappear – Once the synthetic identity has enough credit history, they apply for large loans or high-limit credit cards, max them out, and vanish—leaving banks and businesses with the losses.

Stolen Identity Fraud

1. Data Breach or Theft – Criminals gain access to personal or business information through hacking, phishing, or leaked databases.

2. Identity Takeover – Fraudsters use stolen credentials to apply for credit, open accounts, or impersonate legitimate businesses.

3. Financial Damage – The real owner may discover unauthorized transactions, drained accounts, or false debts in their name.

Why Small Businesses Should Care

Both synthetic and stolen identity fraud can significantly impact small businesses. Fraudsters may use fake or hijacked business identities to:

• Open accounts with suppliers and never pay the invoices.

• Apply for business loans using fabricated or stolen financial records.

• Target legitimate businesses by impersonating trusted vendors.

If your business unknowingly interacts with a fraudulent entity, you may face chargebacks, unpaid invoices, or even legal scrutiny if the fraud involves financial institutions.

Red Flags to Watch For

Criminals often use stolen or synthetic identities in ways that may seem counterintuitive. You may notice a small, seemingly insignificant purchase as they test the new identity, or in some cases, they might sign up for a credit monitoring service to keep an eye on their fraudulent profile. However, the real danger comes when they decide to "burn" the identity—maximizing damage by taking out large loans, making high-value purchases, or transferring funds as quickly as possible before anyone catches on.

• Mismatch in Business Details – If a business application contains inconsistent or unverifiable information, it could be a sign of fraud.

• Unusual Credit Profiles – If a newly established entity suddenly has a high credit limit or long credit history, it may be synthetic.

• Unexpected Account Changes – If your business or personal financial accounts show unauthorized changes or requests, stolen identity fraud could be at play.

How to Protect Your Business

• Monitor Your Business and Personal Presence – Regularly check your credit reports, business records, and other third-party data sources to ensure your identity or business is not being misused. If someone is impersonating you or your business, early detection can help minimize damage and allow you to take corrective action.

• Verify Identities – Use third-party data sources to confirm a business’s legitimacy before extending credit or services.

• Monitor Transactions – Be cautious of unusual purchasing behaviors, such as large orders from new customers with no prior history.

• Secure Business and Personal Data – Use multi-factor authentication, regularly update passwords, and train employees to recognize phishing scams.

• Report Suspicious Activity – If you suspect fraud, notify financial institutions or fraud prevention agencies immediately.

Final Thought:

Synthetic and stolen identity fraud are difficult to detect but not impossible to fight. By understanding how they work and taking proactive measures, small businesses can protect themselves from financial losses and reputational damage.

Stay tuned for the next post in our Fraud Awareness series, where we’ll discuss First-Party vs. Third-Party Fraud and how each impacts small businesses differently.