Steaming Turd

I recently read the news reports about Bank of America losing a substantial amount of personally-identifiable information, including that of several members of Congress. This, combined with both the recent ChoicePoint fiasco and the rising trends of identity theft (especially perpetrated by organized crime rings overseas), makes identity security a tremendous concern for Americans. Below, I have a proposal for a method of reducing the impact of identity theft on our nation’s citizens, which I call an “identity clearinghouse”.

There are two main ways that identity theft affects Americans: first, their credit card and bank information are used to make fraudulent credit card charges against existing accounts; one might argue that because most credit card companies assume most of the liability in this case, this is of lesser concern. Second is that this information, combined with other personal information like Social Security number, birthdate, etc., is used to open new accounts in the name of the identity theft victim, which ruins that person’s credit history and leaves them in financial shambles, potentially for years to come.

I wish to propose an idea which would help to reduce the impact of identity theft. The federal government should establish an “identity clearinghouse”, which financial institutions would be required to consult before establishing any new loan, line of credit, or bank account.

How does the identity clearinghouse work?

The identity clearinghouse works by providing a governmentally- established, not-for-hire (that is, independent of the influence of commercial interests) center for identity verification, which financial institutions would be required by law to consult before establishing any new loan, line of credit, bank account, or any other financial account customarily included in a person’s “credit rating”.

How do financial institutions consult the identity clearinghouse?

When a consumer wishes to establish a new financial account, he or she provides certain “contact information” to the financial institution. Such information commonly includes name, address, and phone number, but may also need to include a personal identification number such as one’s Social Security number to resolve ambiguities. When the financial institution receives this information from the consumer, the financial institution then contacts the identity clearinghouse and provides that contact information to the clearinghouse. If the clearinghouse verifies the identity of the consumer based on the contact information, then the clearinghouse grants the financial institution permission to open the account on behalf of the consumer.

How does the identity clearinghouse verify the identity of the consumer?

The identity clearinghouse keeps a database of contact information for consumers, completely separate from the database information which companies might keep on their customers. When the identity clearinghouse receives a request for identity verification, it takes two steps: one, it compares the contact information in the request with the contact information already stored in the clearinghouse’s database; and two, it uses the contact information stored in the clearinghouse’s database to contact the consumer and verify that the request is valid. If both of these checks are valid, then the identity of the consumer is verified, and the financial institution is given a simple “yes” or “no” as to whether permission is granted to open the new account.

How do consumers who wish to participate in the identity clearinghouse program establish or change their contact information with the identity clearinghouse?

Consumers who wish to participate in the identity clearinghouse program would need to make a personal appearance in a local office to establish their contact information. Picture ID would need to be presented.

Is the identity clearinghouse program optional?

Yes. Consumers who do not wish to participate merely do nothing - when the clearinghouse is contacted for verification, its response would indicate that the consumer has not established a record with the clearinghouse. The financial institution would then be permitted to open the account without the clearinghouse’s verification of identity.

How does all of this help to prevent identity theft?

We have seen recently that some of the major methods by which identity theft starts are through the mass theft of personally identifiable information (such as with the ChoicePoint and Bank of America situations); through so-called “phishing” scams, where people are encouraged by fraudsters to give up their personal info, by phone, e-mail, or website; or through keylogging spyware surreptitiously installed on their computers relaying personal info over the Internet.

The identity clearinghouse makes these methods of mass identity theft impractical, by preventing a person’s identity from being misused remotely. That is, while the clearinghouse does not make identity theft 100% impossible, it does make it far more difficult, by requiring that the identity thief make a personal appearance to change the clearinghouse records or personally intercept their victim’s mail and/or telephone service.

Does this program put an undue burden on financial institutions, consumers, or the federal or state governments?

No. The vast majority of the transactions executed by financial institutions do not involve the opening of new accounts. In addition, verification requests can be submitted to the clearinghouse electronically.

The system is optional for consumers. While there is a delay involved between the consumer applying for, say, a credit card, and having the clearinghouse verify their identity, the consumer makes this choice willingly, and so it does not present an undue burden to those consumers. In addition, those consumers who do wish to participate could enroll at, for example, their local Department of Motor Vehicles office.

The clearinghouse also does not unduly burden state governments. Local DMV offices are an ideal place for allowing consumers to enroll in the clearinghouse program, and the small increases in state expense could be offset with federal tax dollars.

Finally, while the clearinghouse has its greatest burden upon the federal government to establish and maintain the clearinghouse, a very large benefit results in terms of lessened costs of investigation and prosecution for the Department of Justice. There is a substantial impact on organized crime (both domestic and foreign) from this program. In addition, the decreased theft and fraud claims against taxes would increase tax revenues.