How 'synthetic' identity fraud costs Canada $1B a year

Thousands of driver's licences with fake names are circulating in Ontario, with many being used in a new type of fraud that’s plaguing the financial industry, growing exponentially and costing Canadians up to a billion dollars a year, experts say.

These licences are an integral part of what’s known as synthetic identity fraud — a scheme that procures new and genuine credit and identification cards using false names.

"The term we've been using is infinite mischief,” says Toronto Det. Const. Mike Kelly, who, along with his partner, has been investigating synthetic IDs for about four years. “There's literally no limit to the types of things, the amounts of things, the amount of damage that can be caused to each sector that you can possibly think of — banks, government bureaucracies, police agencies, insurance, car lenders. Everybody.”

Kelly said driver’s licences give fraudsters “unique abilities” when used in conjunction with other fraudulent identification to obtain Canadian passports, register businesses or get large business loans. 

“Those types of things, we believe that’s [what] the ultimate point was.”

• Synthetic identity fraud: Alarming trends
• Synthetic identity fraud: The anatomy of a scam

As for the number of licences with fake names out there, Kelly said the estimates vary.

“If you talk in hushed corners and ask people honestly what they think, people will give you numbers from the tens of thousands to the hundreds of thousands.

“Some will even say as high as a million. In my experience it’s always somewhere in the middle," Kelly said, adding he estimated the number to be around 200,000.

In Orangeville, one driver's licence office issued licences to over 100 synthetic identities, and to some of them more than once. Police suspected an inside job at the Orangeville office and charged two employees. But a judge disagreed, saying it could have been an oversight owing to a heavy workload.

Identities created out of thin air

Unlike identity theft crimes, in which someone’s personal information such as their name or credit card is used to steal money or purchase goods under that person’s name, synthetic identity fraud creates new identities out of thin air.

“The difference is, I exist. The fictitious identity doesn’t,” says John Russo, vice-president and legal counsel for Equifax, a consumer credit reporting agency. “So I’m able to complain to the police. I’m able to look at my credit report and see something suspicious is on my credit report that doesn’t’ belong to me.

“Whereas the fictitious identity is more lucrative because there’s no one there to complain."

Russo estimates the schemes potentially cost a billion dollars a year in losses for his company's customers.

And synthetic identity fraud is growing exponentially, he says. About three years ago, there may have been 100 to 200 synthetic identity fraud investigations a month. Now it’s thousands.

Five years ago, synthetic identify fraud was barely on the radar, now it’s the “top one thing to worry about,” Russo said.

“Number 1. Number 1 on our hit list. We have to work with banks, work with the institutions, work with law enforcement to stifle it.”

It was about five years ago that synthetic identity fraud came to the attention of Det. Kelly. In June 2009, a quick-thinking teller at a downtown west Toronto bank contacted police after noticing something peculiar about a client. 

Wallet contained 20 genuine ID cards

A man had opened up a bank account under one name, and a month later, tried to open up another account under a different name at the same branch. When he was arrested and confessed to the fraud, police discovered his wallet contained 20 genuine identification cards under two fake names, including four credit cards, two debit cards, a driver's licence, a social insurance card and a citizenship card from the government of Canada.

He told police that he was approached by another man to participate in a scheme. He said his “handler” took him to a number of driver’s licence facilities where he applied and received driver's licences in false names. Those licences were then used to open up bank accounts in the Toronto area, he said, adding that he had been promised $5,000 for each account opened.

His arrest led to a five-month investigation called Operation Mouse. Kelly and his colleague discovered synthetic identities were responsible for $25 million in fraud losses in which credit card bills and mortgages were never repaid. 

Quite often, the process of establishing a synthetic ID begins with a fraudster applying for a department store credit card. With no identification, the fraudster’s application will most likely be rejected.

But, ironically, the application is recorded, meaning the fraudster’s fake name is now on file, and the identity has been "validated."

So if the fraudster attempts to obtain a credit card at another store, there will be a record with the credit agency that shows the individual does exist. And for some stores, that alone may be enough to procure a store credit card.

Identity fraud schemes are usually quick hits, with the criminal looking to make a fast score. But synthetic identity schemes can take years to come to fruition.

This means that the fraudster will make purchases on the card, under the fake name, and dutifully pay off the bills, all to build up better credit, in order to get more cards and make the fictitious cardholder seem real.

“If they’re patient and they wait, particularly years, and get a really good credit rating, the better [their] credit gets, more opportunities [they] have to borrow from lending institutions and acquire assets.”

“The longer that it remains untouched and undisturbed and unused, suspicion reduces.”

Russo said that just recently, working with law enforcement, they identified 2,000 synthetic identities, totalling $10 million in fraud over a three-year period. 

“So they sat on these IDs, they built them. They mimicked a real person … looked like somebody was applying for credit, paying their bills on time. 

"Everything was good. Then all of a sudden, they bust out on all their lines of credit, all their key locks, all their loans, all their credit cards and disappear.” 

Meet 'Server Froze'

Even obviously suspicious names fail to trigger red flags.

In one case, Kelly suspects the person used in the scheme had poor English skills and, through miscommunication, wrote down what he believed was the fake name he was supposed to use, which was apparently flashing across his computer screen

This fake identity went on to have an effective credit rating, a driver’s licence, bank accounts, a telephone and an apartment (with renter’s insurance).

And all under the name: Server Froze.

“There is no Server Froze. There was nobody named Server Froze,” Kelly said. “There never was somebody born into this world named Server Froze. 

Server Froze wasn’t born in Ontario. He never came to Canada. But Server Froze existed on records. 

The picture used for the Server Froze driver’s licence was also used for eight other fake driver’s licences — meaning nine different identities, all with the same face. 

“[This] tells us this was being done on an industrial scale,” Kelly said.

In another case, synthetic identities were able to obtain bank loans and insurance to purchase cement trucks through a synthetic company.

The fraudsters made a couple of payments, Kelly said, and then reported the trucks stolen. 

In fact, the fraudsters had shipped the trucks to Dubai where they were sold on the black market. 

The fraudsters, who walked away from the bank loan, were then able to collect the insurance money and whatever they made from selling the trucks.

So when the police go looking for the person who ran the business, or the company, “there's nothing that exists. Again, we use the analogy of a puff of smoke. 

"That's about all that you're ever going to find.”