Court documents called it the largest credit card fraud in U.S. history: A team of thieves in Florida set up a phantom company that ultimately caused $10 million in chargebacks for merchant banks.
That scam-exposed last year-and others pointed to a blind spot in the defense against fraud. Merchant-acquirers were not alerting one another when criminals collected on credit card payments through fake shops.
In response, banks and independent sales organizations have created a clearing house for fraud activity. The Merchant Acquiring Committee gathers information from its 150 members, which have relationships with more than 500,000 merchants, and distributes relevant fraud data in monthly reports.
Funded informally by several of the members, the committee also works with law enforcement agencies to bring cases to trial.
"What we are trying to do is to establish a network where information can be shared freely for everyone's benefit," said Robert Aguirre, who oversees the committee's western region. He is special investigations unit manager at Cardservice International, Agoura Hills, Calif.
The group says technology has helped this kind of fraud grow.
"We are seeing a lot more of the criminal organizations setting up fake merchants," said Jeffry A. Beene, vice president of risk management at First Savings Bank of Des Plaines, Ill. "It's a much larger problem than three or four years ago. Criminals are getting much more sophisticated."
In the Florida scam, Unique Gems International Corp. was selling $3,000 jewelry-assembly kits, according to a receiver's report filed in 11th Circuit Court in Miami, and it promised handsome returns. Early investors in this pyramid scheme did get paid.
Many victims charged the $3,000 to their credit cards. At least three merchant banks were affected. When the Miami court closed Unique Gems in March 1997, most of the money had been diverted to overseas accounts, and the chargebacks began flowing.
To thwart such scams the Merchant Acquiring Committee has worked with the bank card associations to introduce a new designation on credit reports. The goal is for merchant acquirers to attach code letters to credit report inquiries when researching a new merchant. The code, ACQ, will show up on subsequent credit checks, helping merchant banks distinguish acquirer inquiries from ones for mortgages or car loans.
If a lot of ACQs show up on a credit report, it would signal that the person has set up merchant relationships with multiple banks, which could be aberrant. The designation "should be another tool in the arsenal acquirers have to identify fraud on the front end," said John J. Shaughnessy Jr., a vice president at Visa.
Mr. Aguirre said most anti-fraud efforts have focused on the card- issuing part of the business. "Over the years it became apparent to me that the acquiring side is almost an afterthought," he said. "We need to do something to give us a stronger voice."