By Karen Peterson / May 14, 2003 -- Identity theft is an even more sophisticated – and expensive – crime than previously believed, according to a year-long study conducted by ID Analytics and 13 industry representatives, including Citibank, Diners Club, Discover Financial Services, First North American National Bank and Sprint.
Calling it the nation's "first-ever cross-industry identity theft research," the study involved analysis of identity information from credit, debit and wireless phone applications as well as confirmed and suspicious fraud account records.
Results from the study, according to San Diego-based ID Analytics, which offers fraud-detection software, found that identity-theft schemes are "highly complex, evolve continually and routinely cut across the wireless, credit card, banking and online markets."
The most significant finding, said ID Analytics, is that "the magnitude of identity fraud losses is enormous. ... While there was variation by industry and channel, losses were found to be as high as $100 per approved account."
The research also determined that 60 to 80 percent of the fraud losses were originally classified as bad debts.
Also notable is the use of mobile phone carriers as the foundation for fraudulent activities. Based on its work with law enforcement, ID Analytics determined that identity thieves routinely begin their crime sprees by defrauding mobile phone providers. The resulting accounts allowed them to establish accounts with other companies.
Fraud Software Tracks 'Anomalies'
ID Analytics used the study and its findings to help fine-tune its patent-pending pattern recognition technology called Graph Theoretic Anomaly Detection (GTAD).
The software, said ID Analytics, "dynamically detects" unusual patterns based on the identity data elements included on an application, such as name, address, phone and social security number.
The resulting graphic patterns are identified as "high probability frauds" or "likely legitimate applications." The fraudulent anomalies identified by GTAD are used to create analytic scores that assess the risk of identity theft.
ID Analytics said its cross-industry research has allowed it to gain "insight into hundreds of fraudulent behavioral identity patterns and suspicious identity relationships" that have not been identified with current fraud detection methods.
"By working with our network of customers and analyzing their information, we've spent the last year building identity fraud detection models that allow us to understand and score fraudulent behavior patterns," said Allen Jost, chief technology officer for ID Analytics.
Law Enforcement Trend Analysis
Also helping ID Analytics: Law enforcement. Said CEO Bruce Hansen, "As a result of our work with the law enforcement community, we've gained astounding insights into the behavior of identity thieves, recognizing incredibly consistent patterns of activity across the board."
"For instance," Hansen said, "the typical identity thief initiates the crime by defrauding a mobile phone provider, and moves from there to establishing any number of fraudulent accounts with credit card companies, retailers and so on. Ultimately, an accomplished 'fraudster' can bring in hundreds of thousands of dollars in 12 to 18 months' time. Until now, these behavioral patterns have gone undetected."
Cost of Fraud Rising
Market-research firm Financial Insights, of Framingham, Mass., estimates that losses related to identity theft among U.S. financial institutions will rise to $8.8 billion by 2006 from $4.4 billion this year.
"Without adequate attention and due diligence, identity theft will continue to spiral upwards, becoming so costly that the only valid mitigation of the risk will involve withholding certain customer-demanded services, or passing on losses to consumers in the form of higher fees," said Dennis Behrman, retail financial analyst for Financial Insights.
Businesses Are the Line of Defense
Linda Foley, founder and executive director of the Identity Theft Resource Center, said it is "timely and appropriate" for credit-granting businesses to shoulder the epidemic problem of identity theft.
"Consumers are not, and cannot be, the first line of defense," said Foley. "Typically, identity theft doesn't start with an action taken by a consumer. In most cases, the root is in the business community and that's where the next battle must be fought.
"When identity theft strikes, a victim is left with a ruined credit history and the time-consuming and complicated task of regaining financial health."
The Identity Theft Resource Center estimates that 700,000 consumers became victims of identity theft during 2002.
For more information on consumer fraud, visit www.idtheftcenter.org. For information on the study or GTAD software, visit ID Analytics at www.idanalytics.com.
