Crooks Also Like Merchant Gift Cards

  Product popularity can be a good thing financially. Unfortunately, when there is money to be made, expect crooks to be lurking nearby.
  Merchant prepaid debit cards are no exception.
  Prepaid gift cards have become so lucrative-sales this year are expected to reach $68 billion for retailers that sell cards for use solely in their own stores-they have spawned new types of fraud.
  Employees account for most incidents of card theft. But crime rings, which often steal cards and sell them through online auction sites, make far more money off of their heists, experts say.
  While retailer gift card sales reached $47.1 billion in 2004, losses to theft amounted to about $7 million, says Tim Sloane, an analyst at Mercator Advisory Group of Waltham, Mass. He expects the theft total has risen since then, though figures are not yet available.
  At the same time, merchants and retailers are fighting back.
  The National Retail Federation, a trade group of U.S. retailers, has established a Gift Card Working Group Loss Committee composed of retailers and gift card providers. The group investigates fraud activity and spreads the word to merchants when new schemes are discovered. It also works with law-enforcement groups and federal agencies.
  Gift card fraud is a problem, says Joseph LaRocca, federation vice president. "But whether we're dealing with a mouse or an elephant is unclear at this point," he says.
  The key to combating fraud, says Bob Skiba, general manager and executive vice president of gift card processor Stored Value Systems, is to keep one step ahead of the criminals. "The thing to do is be proactive, measured in your approach, be thorough, and partner with law enforcement, retailers and the associations," he says.
  Retailers have taken a number of steps to outfox the thieves and scam artists. For example, merchants and card producers have been removing gift cards from display cases, changing the way magnetic stripes are positioned on cards, making cash registers more secure, and appealing to eBay and other online auctioneers to limit sales of retailer gift cards.
  But whenever retailers plug up one weak point, the crooks seem to find another. "Fraud is still relatively small," says Cheryl Blake, vice president of Bloomington, Minn.-based Aspect Loss Prevention. "But it is picking up as people are learning tricks of the trade."
  A common way clerks rip off their employers is to sell a gift card to a customer for, say, $100, but not activate the card. The employee then can put the $100 value on another card and either spend the value or sell it to a customer who pays cash, which the employee pockets.
  To monitor and prevent such inside thefts, loss-prevention experts say, retailers should keep balance reports on gift card activity. If there is a discrepancy between the dollar amount and the number of cards activated versus the number and amount of card redemptions,employees likely are committing gift card theft.
  Customer-service departments should notify a retailer's fraud team when customers report that their cards have no value on them or have less stored value than they anticipated. That could be a sign that fraud is occurring.
  A greater threat is the growth of outside crooks moving into the closed-loop gift card arena. One reason, says LaRocca, is that thieves with experience in pilfering credit cards have learned that issuers can deactivate credit cards within 30 minutes of their theft being reported. Once the credit card is canceled, it cannot be used. On the other hand, says LaRocca, "The gift card has a prolonged life. The gift cards are used to make purchases at a later time."
  Some thieves now are stealing credit cards and are using them immediately to purchase gift cards. Often those gift cards find their way onto auction sites.
  Gift cards that have yet to be activated often are displayed in cases or on racks in stores. Thieves steal the valueless cards and use easily obtainable software that sells for as little as $5,000 to copy mag stripes from one card to another.
  They then return the original cards to the store display cases. By calling the toll-free number listed on a retailer's cards, they can learn when the cards have been activated. At that point, a counterfeit card made from the copied mag stripe can be used to make purchases at stores.
  One way to prevent such mag-stripe skimming, according to Skiba, is to put a four-digit PIN on the back of cards obscured by a seal. When a customer buys the card, the seal is scratched off, the PIN is recorded and the card is validated. The thief who picks a card off the rack and copies it at home cannot read the PIN without removing the seal. If the seal is removed before the customer brings the card to the register, the clerk knows the card has been compromised.
  Some stores are keeping gift cards off the sales floors. And some manufacturers are producing perforated cards with mag stripes in the middle. The cards must be snapped along the perforation to be activated, making it difficult, if not impossible, to copy the mag stripe, says Skiba.
  Stored Value Systems also monitors calls to retailers' toll-free numbers and sends reports to the merchants when there is an unusually high volume of queries from one caller or number.
  While eBay has altered its regulations to limit the sale of stored-value cards to no more than three per month, with a total value of no more than $500, the policy is not regularly enforced, say loss-prevention experts. Retailers complain that eBay, claiming it merely serves as a conduit between sellers and buyers, has been slow to respond to their concerns And, of course, gift card sellers can use aliases to circumvent the restrictions.
  "The cooperation of the online sites has been minimal at best," says LaRocca. EBay could not be reached for comment.
  Another ploy used by both outside thieves and store employees is to find an unattended register in a store. If swindlers know how the register works, they can ring up a cash sale for perhaps a $1,000 gift card, activate the card, walk away without paying, and use or sell the card.
  "Some companies have gotten hurt very badly by that," says Blake.
  Retailers have reacted by tightening their control of registers. Stores that previously did not require clerks to sign in to use registers are now beginning to do so. Several rings of gift card crooks have been arrested, notably in Maryland and Florida, after reaping tens of thousands of dollars through counterfeiting, stealing, misusing and auctioning fraudulent cards.
  Providers are working with retailers to prevent thefts before they are made by looking at transactional data and the processing system, says LaRocca.
  "This is so new, it's a wide-open field," he says. "And every time we close a hole, the crooks find a new way to creep in."
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