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Plastic payments: trends in credit card fraud.

"The future, my boy, is in plastics." When Dustin Hoffman's neighbor uttered this line in The Graduate, little did he know how prescient the statement would be, at least as it applies to the credit card industry. Although, the character was not referring to credit cards back when the film was released in 1967, no one can deny that the credit card market has been booming during the past 30 years.

Industries that expand at such a rapid rate often are vulnerable to fraud schemes devised by those seeking to capitalize on newfound criminal opportunities, dated security measures, and outdated laws. The credit card sector is no exception.

Approximately 124 million of the 193 million adults in the United States owned at least one credit card in 1994.(1) Experts expect this gap to narrow over the next 6 years at a rate of about 2.8 million new cardholders per year, as credit card companies inundate prospective customers nationwide with more than 2.7 billion mailings and pitches.(2)

The New York Times noted that "...the sheer pace of this growth raises the question of whether credit card lending is following in the checkered tradition of loans to third world countries and speculative real estate developers."(3) Indeed, recent statistical data indicate that credit card fraud is growing in proportion to industry advancements.

Around the world, bank card fraud losses to Visa and MasterCard alone have increased from $110 million in 1980 to an estimated $1.63 billion in 1995.(4) The United States has suffered the bulk of these losses - approximately $875 million for 1995 alone. This is not surprising because 71 percent of all worldwide revolving credit cards in circulation were issued in this country.(5)

Law enforcement authorities continually confront new and complex schemes involving credit card frauds committed against financial institutions and bank card companies. Perpetrators run the gamut from individuals with easy access to credit card information - such as credit agency officials, airline baggage handlers, and mail carriers, both public and private - to organized groups, usually from similar ethnic backgrounds, involved in large-scale card theft, manipulation, and counterfeiting activities. Although current bank card fraud operations are numerous and varied, several schemes account for the majority of the industry's losses by taking advantage of dated technology, customer negligence, and laws peculiar to the industry.

CREDIT CARD FRAUD SCHEMES

Visa and MasterCard account for approximately 65 percent of all outstanding revolving credit, and most substantive fraud cases involve schemes centered on one or both of these bank cards.(6) Law enforcement authorities repeatedly encounter certain ethnic groups - particularly Asian and Nigerian - and organizations involved in multilevel bank card fraud operations.

Notably, nearly one-fifth of all U.S. credit card losses occur in California, an amount close to the combined total for the other five identified problem areas worldwide: Florida, Texas, New York, Asia, and Great Britain.(7) While losses to Visa, MasterCard, and the financial institutions issuing these cards continue to mount, several basic schemes have been identified as most prevalent throughout the nation.

Mail/Credit Bureau Theft

One of the simplest ways to obtain account information or actual bank cards is through postal theft. Numerous Nigerian fraud rings operate sophisticated theft operations throughout the eastern and southern regions of the United States. Having illegally obtained legitimate bank cards or account information, the group then creates portfolios of fictitious identification, including driver's licenses, social security cards, and other materials, to support the purchasing power behind those cards. At the direction of group leaders, "runners" purchase merchandise from a variety of sources until the legitimate owners report the cards as stolen or confiscated.

These organizations also take advantage of contacts within the various credit bureaus to obtain legitimate bank card account information for counterfeiting or telephone order purchasing. The groups commonly mail stolen cards and information via overnight courier to other factions located throughout the country. For this reason, the U.S. Postal Inspection Service has implemented the Express Mail Label Profiling Program to identify packages likely to contain contraband. The profile flags suspicious packages based on mail quantity, delivery frequency, destination, label and packaging material characteristics, etc. The profile was developed initially to identify packages containing drugs. Postal inspectors in the drug unit forward profiles to the credit card fraud unit if they believe that non-drug criminal activity is occurring.(8) Through this program, postal inspectors can trace the illicit mail to both its source and its destination, thus identifying members of the fraud rings.

Advance Payment Schemes

Federal consumer credit regulations require credit card issuers to credit a customer's account as soon as payment is received, i.e., before the payment instrument has cleared the bank. While this regulation is intended to protect consumers, it also creates what a member of the California Bankers Association calls a "window of opportunity for fraud."(9)

The scheme is simple. Using a counterfeit or stolen credit card, the group either makes an advance payment on the card or overpays an existing balance using a bogus check. Because the account is credited upon receipt of payment, cash advances immediately can be drawn against the bank card before the payment check has cleared. Through hundreds of like payments, a criminal organization can realize profits in excess of $1 million within a relatively short period of time.

Counterfeiting

The fastest growing type of bank card fraud, in both frequency and severity, involves the illegal counterfeiting of Visa and MasterCards. New technology has aided criminals in producing exact replicas of existing cards and in creating fictitious cards from scratch. Illegal counterfeiting is primarily responsible for the overall upsurgence in credit card fraud, particularly in California, a hotbed for Asian gang counterfeiting activity. Credit card fraud in the state jumped from $60 million in 1991 to $282 million in 1993, a 370-percent increase in just 3 years.(10)

THE COUNTERFEITING PROCESS

To understand the complexity and nature of this fraud, it is important to review the methodology used by counterfeiters in their operations. Until recently, most counterfeit credit cards were manufactured using a silk screening process that duplicated the card logo and background onto a plain white plastic card. With improvements in technology, however, counterfeiting a credit card has become a multi-step process, often using desktop computer systems and peripherals, including embossers, laminators, and tipping foil, to produce a more realistic looking card, complete with a hologram and fully encoded magnetic strip. Most of the supplies used to manufacture counterfeit bank cards, including the white plastic cards and Visa/MasterCard holograms (the Visa dove and the MasterCard interlocking globes), are smuggled into the United States from the Far East.

The magnetic strips and holograms used to counterfeit bank cards represent a distinct sub-market within the criminal community. Currently, there are 87 firms worldwide legally approved to manufacture cards with holograms for members of Visa and MasterCard, and only two companies, De La Rue (Great Britain) and American Bank Note Holographics (New York) authorized to manufacture actual card holograms.(11)

Credit card companies started using holograms in 1981 as a safeguard against fraud; since then, however, large-scale hologram counterfeiting operations have developed in Taiwan, Hong Kong, and China. A separate market emerged for holograms, which usually sell for between $5 and $15, depending on their quality.

Smugglers bring holograms into the United States and Canada regularly. During April, 1994, the Canadian Combined Forces Special Enforcement Unit and Combined Forces Asian Investigation Unit arrested members of a Chinese syndicate that produced approximately 300,000 counterfeit holograms, of which 250,000 already had been distributed. Based on the quantity delivered and using an estimated loss of $3,000 per card, Visa and MasterCard anticipated losses approaching $750 million caused by this group alone.(12)

Often, the key to quickly identifying a counterfeit card lies in an examination of the hologram. On legitimate cards, the hologram is actually embedded in the plastic upon manufacture; counterfeit credit cards commonly contain a hologram decal purchased from an illegal distributor. These holograms are affixed to the top of the card, rather than embedded in the card, and can be seen or felt to rise slightly above the card face.

Counterfeiters sell magnetic strips for credit cards piecemeal. The strips contain names, account numbers, credit limits, and other identifying information for legitimate or contrived Visa/MasterCard card holders. Using a computer system, source materials, and peripheral equipment, a counterfeiter can compile a fraudulent bank card with relative ease.

TECHNOLOGICAL DETERRENTS

To combat the problem of fraud, credit card manufacturers plan to employ a series of security features, most of which are designed to enhance customer identification and authorization requirements. Due to the shortcomings of holograms as a fraud deterrent, credit card manufacturers currently are modifying magnetic strip coding to include a number of additional personal identifiers, such as customer photographs, fingerprints, and personal histories.

Photographs on the face of credit cards have been used by financial institutions for the past 25 years, but their value as a true fraud deterrent has been questioned because such photos can be altered easily. Eastman Kodak, Xerox, Gemplus and other companies have developed systems to digitally encode a customer's photo within the magnetic strip, enabling verification through specialized processing terminals at the point of sale.(13)

The next generation of credit card technology involves the so-called Smart Cards, which will feature computer chip technology in lieu of holograms. Specifically, each card will contain a microprocessor memory chip, as well as data encoded on the magnetic strip. In addition to providing extra security benefits, the chip will allow customers to authorize off-line transactions, store prepaid values, and conduct secure transactions from remote locations. The chip will store more personal information about the cardholder than that currently available through the magnetic strip and will require the customer to verify the personal identification number (PIN) encoded on the microchip.

Although advancements in security technology are encouraging, Smart Cards are unlikely to become commonplace until after the year 2000. Neither Visa nor MasterCard have yet been able to justify the estimated $7.4 billion required over the next 5 years alone to establish the necessary infrastructure to issue and accept such cards worldwide.(14) As a result, bank card fraud will remain an omnipresent concern for white-collar fraud investigators well into the next century.

LAW ENFORCEMENT EFFORTS

Undercover operations and cooperative efforts among various federal, state, and local investigative agencies have generated positive results in the fight against credit card fraud. Investigators have succeeded in dismantling several high-profile rings involving airline baggage handlers, postal service employees, and other organized criminal groups.

In one case, Joseph Nuzzo, a former crew chief at Logan Airport in Boston, Massachusetts, led a credit card mail theft ring consisting of 10 airline baggage handlers and 25 other subjects who routinely invaded passenger luggage in search of bank cards and identification that could be easily counterfeited. This group made more than $1 million in fraudulent credit card charges, cash advances, and casino advances prior to their arrests by U.S. Postal Service Inspectors.(15)

In Seattle, Washington, Julius Camarillo Campo, several associates, and at least three postal employees stole credit cards from the U.S. mail and conducted fraudulent transactions in excess of $2.5 million. This successful investigation led to a 3-year prison sentence for Campo and the termination and prosecution of the postal employees involved.(16)

With the rise in west coast Asian counterfeiting activities over the past several years, authorities in California increasingly have concentrated their efforts on gathering intelligence and investigating gang credit card fraud activities. On March 16, 1994, law enforcement officers from the Bureau of Investigation of the California Department of Justice; the Antioch, Oakland, and San Francisco Police Departments; the U.S. Customs Service; the U.S. Secret Service; and the Drug Enforcement Administration raided several residences in Antioch and Oakland and uncovered a counterfeit credit card ring operated by members of the Chinese gang Wo Hop To. Officers arrested numerous gang members and confiscated counterfeiting equipment and fraudulently obtained merchandise.

As important as these arrests were, the intelligence information gathered from the raids has proven even more valuable, providing insight into the general structure of Asian organizational counterfeiting operations. This framework has been supported by other investigations throughout the state and is outlined as follows:

* One member imported all credit card counterfeiting materials - including plastic, holograms, and magnetic strips - from sources in Hong Kong;

* Another member transported cash to Hong Kong in exchange for counterfeiting paraphernalia;

* Two members handled the actual counterfeiting operation, using computers, laminators, and tipping foil to create and encode credit cards with account information obtained from local trash bins. They also re-embossed and re-coded valid information onto older stolen cards;

* Two members created counterfeit parallel forms of identification to use in conjunction with the bogus credit cards;

* One member tested each card by making small purchases at local grocery stores, gas stations, and restaurants;

* A host of low-level members, or runners, were recruited to make purchases and withdraw cash against the cards, as directed by the gang's leaders. The runners traveled with the cards throughout the western United States, purchasing fine jewelry, leather goods, and electronics equipment before returning to their home base in California.(17)

In one of the largest joint credit card fraud investigations, authorities from the FBI, U.S. Secret Service, and local police departments in Orange County, California, combined resources for "Operation Repayment." This case targeted ringleader Minh C. To, also known as "Big Ming," and 41 others involved in massive credit card fraud operations.

In his scheme, To recruited legitimate cardholders to overpay their credit card accounts using counterfeit checks. Upon receipt by the bank, the customer's account was immediately credited and To and the recruit would make purchases throughout southern California. In turn, To would fence the ill-gotten merchandise and split the profits with the recruit. The scheme ended with To instructing the cardholder to file for credit protection under federal bankruptcy law to avoid future bank liability. One participant in the scam personally made $615,000 in fraudulent purchases over a 1-year period. In all, parties to this organization caused in excess of $100 million in Visa and MasterCard fraud losses through more than 100 financial institutions.(18)

THE FUTURE OF BANK CARDS

Within the next several years, the term "credit card," as we know it, will become antiquated, likely to be superseded by such terms as "banking card," "electronic payment card," or "check card." The industry foresees a time when bank customers will be able to use a single card to accommodate a variety of transactions, including automatic teller machine (ATM) withdrawals, credit purchases, direct bill payments, and purchases against predetermined stored value levels.

Several companies are currently working with Visa and MasterCard on these services, and prototypes of stored value and debit/credit combination cards are being test marketed and issued throughout the country. The goal is to create a single card through which customers can administer all their financial needs, from paying bills via electronic transfer of funds to buying and trading securities over the New York Stock Exchange. During 1995, Visa added 9.3 million debit/credit Check Cards to its portfolio, while MasterCard added 2.5 million of its counterpart MasterMoney Cards.(19)

In addition to these services, financial institutions have begun to establish automatic loan machines (ALMs), which can be accessed by customers or potential customers using their bank cards. These machines offer individuals the opportunity to obtain various types of financial loans without having to meet personally with a bank representative. Although the system is still in its infancy, bank officials envision ALMs becoming as commonplace as current ATMs in this country.

CONCLUSION

If the past is any indication, these fast-paced advances in technology likely will create previously unseen fraudulent opportunities for criminals and criminal organizations, as well as new challenges for law enforcement. Despite some anticipated advances in security through the use of Smart Cards and improved encoding, it remains unlikely that security concerns will keep pace with marketing and customer convenience technologies across the broad market. By the year 2000, gross bank card volume is expected to total $9.9 trillion. Based on current fraud ratios, cumulative credit card fraud losses between 1993 and 2000 will exceed $14 billion, almost three times the accumulated loss of the previous 7 years.(20)

As bank card companies continue to develop their own internal anti-fraud strategies, law enforcement agencies must prepare for the challenges of investigating complex fraud schemes. Spiraling industry growth need not lead to spiraling crime rates.

Endnotes

1 "Credit Cards in the U.S. - Year 2000," The Nilson Report, No. 587, January 1995, 6.

2 Saul Hansell, "A Shaky House of Plastic With No Quick Fix in Sight," The New York Times, December 28, 1995, D1.

3 Ibid.

4 "Future of Bank Cards - Part I (Fraud)," The Nilson Report, No. 568, March, 1994, 6.

5 Sharon Walsh, "Cracking Down on Fraud With Credit Cards," The Washington Post, December 5, 1995, C1.

6 Supra note 4.

7 "Counterfeiting in California," The Nilson Report, No. 601, August 1995, 9.

8 Credit Card Mail Theft Newsletter, U.S. Postal Inspection Service, Office of Criminal Investigations, Vol. IV, No. 1, November 1995, 3; see also Mark T. Langan and Gerald Vajgert, "Profiling Postal Packages," FBI Law Enforcement Bulletin, February/March 1996, 17-21.

9 Supra note 5.

10 "Asian Gangs Involved in Credit Card Fraud," Intelligence Operations Bulletin, prepared by the Office of the Attorney General, California Department of Justice, Vol. 47, December 1994.

11 "Card Manufacturers Worldwide," The Nilson Report, No. 606, October 1995, 1.

12 "Counterfeit Hologram Manufacturing in the People's Republic of China," A/P Regional Security & Risk Management, prepared by Mastercard International, Inc., November 1, 1994.

13 New York state driver's licenses currently use this same technology, which is under consideration in a number of other states, as well. In this way, police officers will be able to reproduce digital photos on computer screens installed within their patrol cars. See, "Digital Photo/Encryption Systems," The Nilson Report, No. 596, May 1995, 6.

14 "Smart Bank Cards," The Nilson Report, No. 586, December 1994, 1.

15 Supra note 8.

16 Ibid.

17 Supra note 10.

18 Supra note 5.

19 "Debit Card Results," The Nilson Report, No. 609, December 1995, 9.

20 Supra note 4.
COPYRIGHT 1997 Federal Bureau of Investigation
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1997, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Slotter, Keith
Publication:The FBI Law Enforcement Bulletin
Date:Jun 1, 1997
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