Cash advance credit card

"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fraud schemes devised by those seeking to capitalize on newfound criminal opportunities, dated security measures, and outdated laws.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.