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In recent years, a disturbing trend has emerged in the world of economic crime: the rise of synthetic businesses. This sophisticated form of fraud combines synthetic identities, fake personas created by stitching together real and fabricated personal information, with the establishment of seemingly legitimate companies. The result is a potent tool for defrauding businesses and financial institutions on a massive scale.
Synthetic business fraud begins with the creation of synthetic identities. Fraudsters combine stolen personal data with fabricated information to create "Frankenstein" identities that can pass initial credit checks and verification processes. These synthetic identities are then used to establish fake businesses, complete with all the trappings of legitimacy: business registrations, bank accounts, and even credit histories. The power of this approach lies in its ability to exploit the gaps in traditional fraud detection systems. Most organizations' existing defences are ineffective against synthetic identities because they appear as normal, good customers until the fraud is committed.
The scale of this problem is staggering. According to a study by LexisNexis Risk Solutions, there are nearly three million synthetic identities already in circulation in the UK alone. The volume of high-risk synthetic identities increased by a shocking 527% between 2020 and 2023. In the United States, where synthetic fraud is already a major issue, businesses report an average loss of $15,000 per confirmed synthetic fraud case. Extrapolating from these figures, experts estimate that synthetic fraud could cost the UK economy around £4.2 billion by 2027 if left unchecked.
Perhaps most alarming is the evidence of "synthetic farms" and "synthetic factories" operating across the country. These operations mass-produce synthetic identities on an industrial scale.
For example:
The consequences of synthetic business fraud are far-reaching. Banks and other financial institutions face significant losses from loans and credit extended to these fake entities. Legitimate businesses suffer from unfair competition and damaged reputations when synthetic businesses operate in their sectors, in addition to supplier and customer financial fraud issues. Moreover, the success of synthetic business fraud undermines trust in the entire financial system. As Jeffrey Huth, a senior vice president at TransUnion, notes, "Anytime a benefit is granted, even a state-related benefit, there can be fraud attempts there, because someone may be receiving a benefit that they're not entitled to from the state".
Addressing this growing threat requires a multi-faceted approach. Financial institutions and businesses must implement more sophisticated identity verification processes, including omnichannel verification that vets individuals through multiple methods.
Government agencies also play a crucial role, as they are often the first point of contact for these synthetic entities. Improved coordination between public and private sectors is essential to identify and prevent synthetic business fraud at its source. As we move forward, it's clear that the fight against synthetic business fraud will be an ongoing challenge. However, by raising awareness and implementing robust detection and prevention measures, we can work towards mitigating this significant threat to our financial ecosystem.
References:
https://www.bankinfosecurity.com/silent-surge-synthetic-business-fraud-a-24822
https://www.europeanpaymentscouncil.eu/sites/default/files/kb/file/2024-12/EPC162-24%20v1.0%202024%20Payments%20Threats%20and%20Fraud%20Trends%20Report_0.pdf
https://risk.lexisnexis.co.uk/about-us/press-room/press-release/20240612-synthetics
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Co-Founder and CEO
With over 15 years in digital forensics and cyber investigations, Oliver has seen countless small businesses crippled by preventable fraud. Oliver co-founded Meysey to use the data within accountancy software to reduce fraud for small businesses, and provide an early warning sign of potential fraud risk.
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