29 Apr What is Synthetic Fraud? Threat to Financial Systems

What is Synthetic Fraud – In today’s digitally driven economy, fraudsters are becoming increasingly sophisticated. One of the most complex and dangerous forms of identity fraud is synthetic fraud. It’s a silent threat that continues to impact banks, fintech firms, e-commerce platforms, and even government institutions. But what is synthetic fraud, how does it work, and why should businesses across the UK and beyond take it seriously?

Let’s explore the key components of synthetic fraud, how it differs from traditional identity theft, and what steps organisations can take to prevent it—starting with comprehensive Anti-Money Laundering (AML) training from accredited providers like KYC Lookup.

What is Synthetic Fraud?

Synthetic fraud is a type of identity fraud where criminals create a fake identity using a combination of real and fictitious information. This fake persona is then used to open financial accounts, secure credit lines, or perpetrate further financial crimes.

Unlike traditional identity theft—where someone’s personal details are stolen and misused—synthetic fraud doesn’t rely entirely on one person’s identity. Instead, fraudsters may use a legitimate national insurance number (NINO) paired with a fake name, address, and date of birth. This makes detection significantly more difficult for banks and compliance teams.

How Does Synthetic Fraud Work?

Here’s a step-by-step breakdown of how synthetic fraud is typically carried out:

1. Creation of the Synthetic Identity: Fraudsters use partial real data—such as a genuine NINO from a child or deceased person—and fabricate the remaining details (name, address, date of birth).
2. Establishing a Credit History: The synthetic identity is used to apply for a credit card or loan. The first few attempts may be denied, but this helps to plant the identity in credit bureaus’ systems.
3. Building Credibility Over Time: Once a low-limit credit card is granted, the fraudster makes regular payments, slowly increasing their creditworthiness and trust with lenders.
4. “Bust-Out” Phase: Once the synthetic identity has built strong credit, the fraudster maximises borrowing limits across multiple accounts, then disappears without repaying the debts.

This long game approach can span several years, costing financial institutions millions.

Why Is Synthetic Fraud So Hard to Detect?

Traditional fraud detection systems are designed to flag suspicious activity on real accounts. Since synthetic identities are often completely new to the system and carefully nurtured to appear legitimate, they slip under the radar. In some cases, synthetic fraud accounts are even treated as “new-to-bank” clients with little or no red flags.

Moreover, because these identities don’t belong to real people (or use details from unmonitored profiles like children), victims often don’t report the crime until it’s too late—if ever.

The Cost of Synthetic Identity Fraud

Synthetic fraud is now considered the fastest-growing financial crime in the UK and globally. According to industry reports, it accounts for up to 85% of all identity fraud in some financial institutions.

The cost isn’t just financial. Synthetic fraud is also:

• A gateway for money laundering, often used by criminal networks to funnel illicit funds through the financial system.
• A challenge for regulatory compliance, especially under the UK’s Money Laundering Regulations.
• A reputational risk for firms that fail to detect and stop it.

What Industries Are Most at Risk?

While any business dealing with financial transactions or customer data is vulnerable, the following industries face a particularly high risk:

• Banking and financial services
• Online lenders and fintech companies
• Telecommunications providers
• Healthcare providers (for patient record creation)
• eCommerce and retail

In all of these sectors, synthetic fraud can result in significant monetary losses, penalties for weak compliance, and operational disruptions.

Combating Synthetic Fraud with AML Training

An effective way to combat synthetic fraud is by raising awareness among frontline staff and compliance teams. That’s where AML training becomes essential.

KYC Lookup, a UK-based, fully accredited AML training provider, delivers high-quality AML courses designed to equip corporate clients with the tools to identify, report, and prevent financial crime—including synthetic identity fraud.

Key Benefits of AML Training from KYC Lookup:

• Understand how synthetic identities are constructed.
• Learn to spot suspicious account activity and red flags.
• Stay up to date with UK regulations and global standards.
• Empower teams to respond effectively to fraud scenarios.
• Strengthen internal controls and compliance culture.

Whether your team is in banking, lending, or digital services, KYC Lookup’s video tutorials and online courses offer flexible, scalable training that ensures every employee is prepared.

Techniques to Detect and Prevent Synthetic Fraud

Preventing synthetic fraud requires a multi-layered strategy that combines technology, policy, and human training.

1. Identity Verification Tools: Use biometric verification, document verification, and database cross-referencing to ensure a new customer’s details are genuine.
2. Behavioural Analytics: Monitor account behaviour over time. Unusual patterns—such as consistent payments followed by maxing out credit—can be early warning signs.
3. AML and KYC Programmes: Integrate AML training into onboarding and ongoing development. Educated staff are your first line of defence.
4. Collaborate with Industry Networks: Sharing information across banks, credit bureaus, and regulatory bodies can help detect patterns of synthetic fraud across institutions.
5. Implement Stronger Onboarding Policies: Don’t rely solely on credit scores. Verify multiple data points, conduct enhanced due diligence where required, and flag inconsistencies.

The Regulatory Perspective: Why Compliance Matters

In the UK, under the Money Laundering Regulations 2017 and amendments through the Fifth and Sixth Anti-Money Laundering Directives, firms must take reasonable steps to verify the identity of clients, detect suspicious activity, and report it to relevant authorities.

Failing to detect synthetic fraud could result in:

• Fines and enforcement action
• Suspension of licences
• Loss of customer trust

This is why ongoing AML training is not just a “tick-box” exercise—it’s a regulatory and ethical imperative.

To summarise, what is synthetic fraud? It’s a calculated and growing financial crime that uses fake identities to manipulate institutions and move illicit funds. As fraudsters become more advanced, the need for awareness, vigilance, and education becomes more critical than ever.

For corporate clients in the UK looking to enhance their fraud detection and AML capabilities, KYC Lookup offers trusted, fully accredited training solutions that keep your team informed, compliant, and prepared to tackle threats like synthetic fraud.