Any smart business knows to set aside time and resources for identity fraud detection and prevention. As AI technology evolves, fraud attempts grow more complex, requiring innovative tools to counter them.
Thanks to the higher sophistication of modern AI tools, fraudsters today can produce hyper-realistic images and videos in just a few minutes. This way, they can create fake ID documents capable of deceiving even trained professionals.
So, what exactly does the prevention of such scams entail? What should your strategy for fighting identity fraud look like in the age of realistic deepfakes and synthetic identities?
Below, we introduce you to the fundamentals of identity fraud prevention and detection, as well as the most common schemes you may run into. Here is how you can safeguard your business and prevent identity fraud.
What Is Fraud Prevention and Detection?
Identity fraud prevention includes the full scope of processes that make using false or synthetic identities as difficult as possible. This includes detecting suspicious behavior before it affects you and implementing steps to accurately identify the person or organization trying to access your services.
The detection of fraud, on the other hand, is a momentary action that occurs when your website or app spots someone is actually trying to violate your policies and commit fraud.
Fraud detection may happen at the same time as the fraud attempt or after the event, letting you know it occurred. In the latter case, you may still have time to react and reduce losses, if any were incurred.
Key Differences
Prevention is more concerned with creating hurdles for fraudsters to keep them at bay. On the other hand, fraud detection identifies when someone seems to be jumping over those hurdles.
The two systems work together to keep your organization as safe as possible. Nevertheless, they are two separate processes, and you may have to use a combination of solutions to develop a well-rounded defense strategy.
To better understand how these processes differ, consider the following examples:
Prevention:
- Identity verification
- Multi-factor authentication
- Regular risk assessments
Detection:
- User behavior analysis via machine learning
- Suspicious activity notifications
- Analysis of suspicious behavior instances
As you can see, the two approaches don’t overlap and are instead complementary.
How Does Preventing Identity Fraud Work?
To counter identity fraud and protect your customers, you need to invest in the appropriate protection measures. What is more, you have to train your staff to follow safety policies and learn how to protect users’ data.
Based on information by the Identity Theft Resource Center, businesses invest in the following tools and practices in their fraud prevention strategies:
- Security software solutions
- Staff training (IT and non-IT)
- Dedicated security employees
- Other safety measures
More specifically, here are a few methods to shield your business and customers from identity fraud.
Identity Verification
Source: Freepik
First and foremost, you must be able to identify the customer accurately. You cannot prevent identity fraud if you do not know someone’s identity.
A proper electronic identification process should include scanning an official identification document (ID card, passport, driver’s license) and checking its validity. Ideally, your system should be able to compare the document against local registries to confirm it is genuine.
Moreover, you should perform a liveness check – a video selfie procedure that asks the user to follow real-time directions to confirm they are actually there. The liveness check should also help rule out the possibility that the user is being coerced into going through the verification.
Where an automated liveness check is not available, a manual video interview can also work. However, from a user experience perspective, the faster, simpler automated check is better.
Multi-Factor Authentication
It’s recommended to combine several authentication methods when users log in to ensure the right person is accessing the account.
MFA typically includes a combination of a secret question or PIN, a one-time password (OTP), and biometric data, e.g. a fingerprint or face scan. This way, you can confirm that the user is the account number and is logging in from an approved device.
Protect Sensitive Information
On your end, you should make sure your entire organization has data protection measures in place. All software you use should be up to date and all security certificates must be valid.
In addition, you must protect data with antivirus and anti-malware software. These steps are the bare minimum for ensuring data safety.
As for your staff, limiting access on a need-to-know basis can further bolster security. It will ensure that employees only view the information they need, while the rest of the user’s data stays hidden.
Furthermore, encrypting all data will make it even more difficult to hack. It should be part of your data leak prevention strategy.
Monitoring User Behavior
Your business should be using tools to study user behavior. Such software will help you identify what is normal for each user. For instance, how often they log in, at what times, from what locations, etc.
While this may sound a bit invasive, it is invaluable as a way to help you spot abnormal actions.
For instance, let us assume you are a bank that has issued a credit card to the person X. By monitoring X’s behavior, you have learned they typically log in from Vienna and spend no more than 1,500 EUR on consumer goods each month.
Suddenly, your systems register X’s credit card is used in Brazil to add 5,000 EUR to an online casino account. Your monitoring indicates that there have never been gambling-related expenses on X’s credit card before, nor any charges anywhere in South America.
In such cases, you could send X an email or push notification to confirm the charge. You can even check through an old-fashioned phone call. There is a possibility X might be traveling, and this could be a legitimate charge.
However, on the off chance that it isn’t, the risk of the potential financial loss for X (and your bank, if you issue a refund) outweighs the minor inconvenience of additional authentication.
The most important detail here is that none of this would be possible if you don’t monitor user behavior. You cannot spot high-risk outlier situations without knowing what the baseline for each customer is.
KYC Compliance
Knowing your customer is mandatory as per each country’s legislation. The exact selection of data needed for thorough KYC may vary, but you must adhere to the regulations.
One important intersection of KYC compliance and identity fraud prevention and detection occurs when people that should not have access to certain services try to commit identity fraud to circumvent that.
For instance, in most cases, blacklisted individuals may not be allowed to open bank accounts, apply for loans, etc. This happens in cases where they are suspected of money-laundering, funding terrorism or other crimes involving money.
In this case, the sanctioned person may attempt to fake their identity and open an account under a different name.
Doing due diligence when it comes to KYC and AML regulations ensures that you don’t provide services to someone you shouldn’t.
Employee Training
Businesses and organizations should also educate their employees about identity fraud and data protection.
Firstly, all staff responsible for customer onboarding should be familiar with common signs of identity fraud. Moreover, they need to know how to use the software tools for fraud prevention and detection, provided that keeping an eye on that is part of their work.
Furthermore, all employees should be instructed on how to keep the company systems safe. Keeping their work computers compliant, not opening suspicious links, not exporting work information onto personal devices are just some of the things staff need to be instructed to do to not compromise internal data.
If data breaches do occur, hostile parties may steal enough information to commit identity fraud and unlawfully access users’ accounts.
Additional Features for User Protection
You can also give your customers the option to further secure their accounts. For instance, you might be able to let them curate lists of allowed devices or IP addresses. These features will further limit unauthorized access to their accounts.
Popular Types of Identity Fraud
According to an identity theft report by Experian, imposter scams are the leading type of fraud. As for crimes involving stolen personal data, bank, loan and lease fraud are in the top 5 of the most common issues, with credit card fraud unsurprisingly taking the first spot.
Let us take a more detailed look at some of the most frequently occurring types of identity fraud that businesses and governments run into. More importantly, we’ll discuss methods for addressing each kind.
Credit Card Fraud
Source: Freepik
The most widespread form of financial abuse with stolen personal data is credit card fraud. In this case, the criminal uses a card that doesn’t belong to them.
This impacts the credit card issuer when the rightful owner informs them of the fraud. Then, the bank has to issue a chargeback to return the client’s money to their account. Needless to say, these situations cause significant financial damage to banks.
One method to fight credit card fraud is to implement 3D security protocols for card use. These would require the end user to use an OTP or authenticate themselves in the bank’s app for each transaction, for example. This measure allows the bank to confirm the user’s identity before approving the transaction.
Having such additional security in place ensures that even if a criminal has stolen someone else’s credit card details, they will not be able to use the card without the rightful owner’s consent.
ATO (Account Takeover)
Just like the name implies, this type of fraud involves the criminal getting access to another person’s profile. This could be a user’s online banking account, for instance.
If the account is not secure enough, fraudsters may be able to get in with only an email address and password. For this reason, it’s recommended that businesses implement more robust security measures during login.
Multi-factor authentication through one-time passwords (via text message) and biometric data scans (fingerprint or facial recognition) are solid options here.
Synthetic Identity and Deepfake Fraud
This scheme is all about creating accounts under somebody else’s name or an entirely nonexistent identity.
In the first case, the fraudster may have stolen a person’s identifying information, such as their name, date of birth, address, etc., and be able to provide scans of their ID to register.
The latter case may use completely fabricated identities. Especially considering the advancements in AI, criminals today have the ability to create highly realistic images of both the person they’ve invented and their fake ID document.
Synthetic identities are a blend of both real and fabricated info. Usually, they combine real and fake data to create a brand-new identity. For instance, the photo might be of a real person, even a real ID card, but some of the details on the document may have been altered. Alternatively, details such as the ID card number may be true, but the name or photo might be fake.
Similarly, deepfake imposter scams are driving a new wave of fraud attempts. They rely on highly sophisticated AI tools to create realistic images and even videos. They imitate real people to pose as them.
The evolution of Midjourney, the leading AI tool for image generation.
Preventing synthetic identity fraud is quite challenging. Companies need to use secure identity verification solutions that can confirm the user’s identity accurately and rule out AI use with a high degree of assurance. Comparing the data validity against government registries is also important.
Moreover, the addition of AI-assisted liveness checks with facial recognition can further lower the possibility of the fraudster presenting themselves as someone they are not.
Biometric Hacking (Presentation Attacks)
Source: Freepik
Also known as biometric spoofing, this scam occurs when the criminal fakes the user’s biometric data, such as fingerprints, facial features or voice.
To get access to this kind of information, the fraudster may need to be in physical contact with the victim (e.g. to copy their fingerprint off a smooth surface) or use high-quality images and videos of them (if available online) as samples for recreating later during the identity verification.
Especially when it comes to using software to recreate someone’s image (which ties back to deepfake fraud), businesses must stay adaptable. They need to regularly evaluate whether their identity verification practices can detect deepfakes.
Liveness checks are quite helpful here. It’s crucial that the check is not predictable, so that the fraudster cannot use a pre-recorded video to pass it. The identity verification software must also be sensitive enough to notice even the slightest inconsistencies in the image that may be undetectable to the naked eye.
Identity Fraud Detection and Prevention in Banking
The banking sector is among the most vulnerable ones when it comes to identity fraud. Financial information is quite the attractive prey to identity thieves, so naturally they target bank accounts and credit cards the most often.
So, is there anything additional that financial institutions should know or do differently when it comes to identity fraud prevention and detection?
Banking-Specific Regulations
The banking sector naturally needs to comply with even tighter regulations, aside from strict KYC and AML legislation.
For instance, banks in Europe must follow the Payment Services Directive 2. They also need to adapt to the European Banking Authority’s guidelines.
Then, there is eIDAS 2.0, which touches upon remote identity identification and trust services. A sure way for banks to prevent identity fraud is to pick an eIDAS-certified solution because that guarantees built-in compliance.
In addition, from January 2025 financial institutions in the EU must also comply with the Digital Operational Resilience Act (DORA). This law expounds on the IT security measures for the financial sector and should result in better protection against data breaches.
Such legislation is instrumental in establishing safe banking practices, especially as the EU and the world at large move towards a greater reliance on digital identities.
High Degree of Assurance
Not all transactions are created equal. Simply checking one’s account balance, for instance, is very different from applying for a loan online.
For this reason, banks need to use tools with the highest degree of assurance possible in more high-risk processes. Applying for a loan or a new credit card, or sending money via a bank wire might require the use of a qualified certificate for electronic signing, the issuance of which includes a robust identity verification process.
Extra Care in Customer Onboarding
As previously mentioned, one of the main ways in which banks need to fight identity fraud is by limiting access to their services for any individuals restricted by AML and CFT regulations.
That is why the customer onboarding process is a key area to focus your efforts on. With the demand for digital services skyrocketing, many banks allow clients to register accounts and use their products entirely online.
But while digital onboarding is quick, convenient, and can help you expand your business more quickly, it also comes with certain security risks. Simply put, committing identity fraud online is easier today, thanks to all of the advanced software available to criminals.
That is why a huge portion of your identity fraud prevention and detection efforts must go towards your onboarding practices. You must consider:
- Implementing secure and accurate identity verification procedures;
- Doing your due diligence with all documentation needed for account registration;
- Bolstering the security for subsequent logins with MFA and/or qualified electronic signatures.
Together, these measures will ensure you know who is opening and accessing accounts and services at your institution. This way, you can keep money launderers, PEPs, and other high-risk individuals and fraudsters out.
Final Thoughts
As technology gets more and complex, so do the possible identity fraud attempts. Aided by artificial intelligence and other software, criminals have more tools than ever at their disposal.
On the upside, these advancements also mean that businesses have more options for identity fraud detection and prevention. There are equally robust and continuously evolving methods of defense organizations can rely on.
Don’t wait until trouble comes knocking on your door. Implement eIDAS-certified qualified trust services with a high level of assurance to protect your systems now and stay ahead of possible danger.
