How New Account Fraud WorksThe Fake Account Fraudster’s Playbook
How Does New Account Fraud Work? A Primer on Basic Scam Tactics
Think of new account fraudsters as methodical criminals. Instead of randomly mashing keys to create fake accounts, they use and re-use a well-honed set of tactics to exploit your systems, most of which begin with synthetic identity theft.
In this chapter, we talk about how scammers carry out new account fraud attacks, so that you know what you’re up against.
New Account Fraud
In this guide, we’ll take a closer look at new account fraud. We’ll talk about what it is, how it works, and how prevalent it is. We’ll also provide real-life case studies and examine how you can detect and prevent your business from falling victim to account creation scams.
How Does New Account Fraud Work?
New account fraud almost always begins with some form of synthetic identity theft. Scammers may take bits and pieces of real identities and mash them together into new “Frankenstein” identities. Or, scammers can take a stolen identity and alter several key details.
In both instances, what results is a new identity that contains traces of real, stolen personally identifying information (PII). The fraudster uses this fake individual profile to sign up for new accounts with merchants and financial institutions.
Step 1
Fraudsters steal personally identifying information (PII) from one or more victims
Step 2
Fraudsters manufacture new identities using a mix of stolen and synthetic information
Step 3
Fraudsters open accounts with financial institutions using synthetic identities
Of course, the end goal of new account fraud isn’t simply to open bogus accounts. Rather, scammers use these accounts to commit financial crimes like credit card fraud or bust-out fraud.
Who Pays for New Account Fraud?
Obviously, if a fraudster is making money, that money has to come from somewhere. In cases where an account was set up in a real person’s name, any purchases would go against that person’s credit history… At least until the valid user reports the scam.
That leaves either banks or merchants to foot the bill. Traditionally, fraud costs have been absorbed by financial institutions. But, with the increase in fraudulent activity – especially friendly fraud – bank liability is not a given. Certain circumstances may allow the bank to shift responsibility to the merchant.
Some fraudsters use a variation of new account fraud known as “bust out” fraud. Instead of immediately maxing out cards, the criminal uses the faux account to build a credit rating, apply for additional credit cards, and increase their credit limits. They may wait months or years before “busting out” by spending all their available buying power and absconding.
New Account Fraud
Bank at Fault
In many cases, the fault will lie with the bank that issued the line of credit. Using the example we outlined above, if a fraudster creates a fake profile to secure a new account and line of credit, the bank would be held liable. They were unable to perform due diligence and detect the impersonator; as such, they bear responsibility for the losses.
New Account Fraud
Merchant at Fault
If a fraudster uses stolen cardholder credentials to create a fake profile on a merchant’s site, the retailer in question can be held liable. This depends on whether the bank can make a compelling case that the merchant should’ve been able to detect the new account scam. For instance, if the merchant fails to adhere to proper validation protocols, or makes transaction errors, the bank may initiate a chargeback to recover funds.
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Fraud schemes are often aimed at consumers, but it is banks and merchants who end up footing the bill
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