Compliance Blog

Jul 08, 2019
Categories: BSA

A Case Involving Synthetic Identity Fraud, Credit Card Bust-Out Scheme and Money Laundering

Written by Shari R. Pogach, Regulatory Paralegal

Late last month, the U.S. Department of Justice (DOJ) U.S. Attorney’s Office of the Eastern District of New York announced eleven defendants had been charged with defrauding banks to the tune of approximately $3 million.  How?  By using fake or “synthetic” identities to get credit cards, running up charges and not repaying the issuing financial institutions.  Three of the defendants then laundered the proceeds to conceal the source of the funds.

Synthetic identity fraud happens when a criminal creates an identity instead of stealing a real person’s identity.  It generally involves mixing real and fake personal identifier information such as names, dates of birth, addresses and social security numbers to create an entirely new identity.  For example, the synthetic identity could have a legitimate address and the social security number could appear valid, but the social security number, name and date of birth combination do not match with any one person.

A bust-out scheme is generally when someone applies for credit (credit cards, retail cards, home equity) using a synthetic identity.  They build good credit by making timely payments, obtaining credit line increases and with increasing usage. They then max out all available lines of credit, with no intention of repaying and drop the account. These then go into collections and turn into charge-offs and a loss for the financial institutions.

In the complaints filed with the court, the credit card bust-out scheme was described as when persons take counterfeit or unauthorized credit cards to cooperative merchants who make fraudulent charges on the cards.  Although the charges are supposedly for merchandise or services, nothing is actually exchanged and the merchants and the cardholder know the card issuer will never be paid.  The merchant generally gets a 10 to 25 percent cut of the money.  In order to pay the cardholder his share, the merchant must pay by check from a collusive bank account or withdraw cash, which is preferable to the cardholder because there is no paper trail.    However, frequent cash withdrawals raise red flags for banks so it is not uncommon for co-conspirators to use both methods.  In addition, the credit card holder will often make fraudulent payments on the account in order to inflate the available credit limit on the credit card by the amount of the payment.  The cardholder and the merchant can then run up more charges until the card issuer learns there are insufficient funds to cover the so-called payment.

Those involved in synthetic identity fraud and credit card bust-out schemes  frequently create and/or control shell companies (with little or no legitimate business purpose) from which apparently legitimate purchase of goods and/or services are made or  charges from fraudulent credit or debit cards are sent.  These shell companies are also used to write checks to artificially inflate a credit limit on a credit card account, make fraudulent deposits into checking accounts or make the fraudulent repayments on the line of credit accounts.

The defendants in the five complaints are alleged to have used their ill-gotten gains to pay EZ-Pass bills, mortgages, car loans, airline tickets, hotel rooms and pay traffic fines.  The investigation revealed that three of the defendants were attempting to launder their money by withdrawing the proceeds in cash from accounts in the name of shell companies and depositing them into their personal bank accounts.    There was also evidence the defendants used the funds to purchase investment properties.

Synthetic identification fraud appears to be one of the fastest-growing type of identity theft and financial crime in the U.S.  Instances of this type of fraud have also been reported in other countries.  Unfortunately it is also likely there are bigger losses potentially building up behind these fraudulent identities like hidden time bombs. Here are some resources on synthetic identity fraud that folks might find useful:

The NCUA Report – Third Quarter 2018: Synthetic Identities Are One of the Fastest Growing Forms of Identity Theft.

NAFCU Services Blog: Understanding and Preventing Synthetic Identity Fraud.


NAFCU Education

About the Author

Shari Pogach, NCCO, NCBSO, Regulatory Paralegal, NAFCU

 Shari Pogach, NCCO, NCBSO, Regulatory Paralegal

Shari R. Pogach, NCCONCBSO, has served as Regulatory Paralegal for NAFCU's Regulatory Compliance and Regulatory Affairs divisions since 2007.

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