Credit Card Fraud

Credit card fraud is a form of identity theft in which an individual uses someone else’s credit card information to charge purchases, or to withdraw funds from the account. Credit card fraud also includes the fraudulent use of a debit card, and may be accomplished by the theft of the actual card, or by illegally obtaining the cardholder’s account and personal information, including the card number, the card’s security number, and the cardholder’s name and address. Policing agencies from the local police department, to the U.S. Secret Service are on the job enforcing fraud laws as they related to credit card fraud. To explore this concept, consider the following credit card fraud definition.

Definition of Credit Card Fraud

Noun

1. The unauthorized use of an individual’s credit card or card information to make purchases, or to remove funds from the cardholder’s account.

Origin

1887     The concept of the “credit card” was first discussed in Edward Bellamy’s utopian novel, “Looking Backward.” Many believe modern day credit card fraud to be the natural progression of theft from check fraud.

What is Credit Card Fraud

The crime of credit card fraud begins when someone either steals a credit or debit card, or fraudulently obtains the card number and other account information necessary for the card to be used successfully. While the actual physical theft of credit cards does happen, modern technology has seen a steep rise in the incidence of intercepting account information electronically. The owner of the account, the merchant from whom card information was stolen or intercepted, and even the card issuer may be unaware of the compromise until the information is actually used to make purchases.

As online shopping and bill paying has skyrocketed in popularity, there is no longer a need to possess a physical credit card or debit card to make purchases, and it is possible even to open a financial account, and obtain credit cards solely through online transactions. Because of this, criminals able to obtain enough personal information about other individuals may use that information to commit credit card fraud by opening new accounts, or having new cards sent to them on existing accounts.

Elements of Credit Card Fraud

The term credit card fraud is broadly used to refer to the use of a credit card, debit card, or any similar form of credit, to make purchases, or to obtain financial gain with the intention of avoiding payment. This includes identity theft, identity assumption, and fraud sprees. In the eyes of the law, certain elements are required for a financial or identity theft crime to be classified as a form of credit card fraud. These include:

• Credit Card Theft: the taking of a credit card, or credit card number, from another person, without the cardholder’s consent, with the intent of using or selling it.
• Credit Card Forgery: the purchasing of something of value using a credit card, by someone other than the cardholder, or an authorized user, with the intent of defrauding the card’s issuer.
• Credit Card Fraud: the taking of a credit card, or credit card number, from another person, with the intent to use, sell, or transfer it to another person, or using the credit card or card number to purchase something of value, with the intent to defraud.

Credit Card Fraud Investigation

Credit card fraud investigation most often begins when a consumer makes a report to local police of the theft or unauthorized use of his credit or debit card. Reporting the crime, or the suspicion that an individual’s account has been compromised, may require the cardholder to sign a sworn statement detailing the disputed transactions, and declaring under penalty of perjury that he did not make the charges he is disputing. Immediately reporting suspected credit card fraud is highly recommended by the banking and credit agencies, as well as the Federal Trade Commission, and law enforcement agencies.

Review of Disputed Transactions

During its credit card investigation, the card issuer will then review all of the disputed transactions, looking closely at when and where they were made, and whether any of them required a signature. If so, the signature will be compared to the cardholder’s signature on file. Signatures that do not match make quick work of proving a transaction is fraudulent.

Professional Credit Card Fraud Investigators

Professional investigators of credit card fraud are trained in “electronic backtracking” of electronic and online transactions. These experts in information technology, financial security systems, and forensic accounting use high-tech methods to determine whether stolen card information has been used, either to make purchases, or to open new accounts. Such fraud investigators can often stop the opening and using of secondary accounts, minimizing the damage to the cardholder and card issuer.

Federal Government Investigators

Both the Federal Trade Commission (“FTC”) and the U.S. Secret Service play significant roles in the prevention and prosecution of credit card fraud. Because of the high incidence nation wide, however, these agencies primarily provide oversight and legal support for state, local, and corporate fraud investigations. The type of action taken by these federal authorities depends on the amount and magnitude of the crime. For example, the FTC takes complaints of criminal credit card activity, connects victims with the applicable consumer protection agencies, and refers the cases to the appropriate law enforcement agencies. If the case involves fraud over the amount of $2,000, however, the FTC will initiate a credit card fraud investigation directly.

Albert Gonzalez Hack of TJX Companies

American computer hacker Albert Gonzalez is said to have masterminded the hack of 45.6 million credit and debit card number from the TJX Companies (doing business as “TJ Maxx”) in 2006 and 2007. Gonzalez claims a breach of 40 million consumer records stored by CardSystems Solutions, the now-defunct credit card processing company, as well as a host of other high-tech credit card fraud schemes. Albert Gonzalez was finally arrested in May 2008 on charges related to his hacking of the Dave & Buster’s corporate network, which garnered another 5,000 credit card numbers, from which fraudulent transactions resulted in $600,000 in fraudulent transactions.

In 2009, Gonzalez entered into a plea bargain in which he plead guilty to 19 charges against him in the “TX Maxx case,” for which he received a 20 year sentence to federal prison. Two years later, Gonzalez attempted to withdraw his guilty plea, claiming that, at the time of the crimes, he had been officially assisting the U.S. Secret Service in drawing out international cybercriminals. The Secret Service failed to back up his story, however, and Gonzalez is serving out his sentence in Leavenworth prison, with an expected release date of 2025.

Credit Card Fraud Statistics

Credit card fraud statistics show that, although credit card fraud affects less than one-half of one percent of all credit card/debit card transactions in the U.S., it weighs heavily on the minds of American consumers. This is thought to be due to the media hype of the worst case scenario. Many consumers are unaware that they are protected from liability due to credit card fraud by both federal law and the credit issuers. The reality is that financial institutions and card-accepting merchants bear the financial burden of financial losses due to credit card fraud. For instance, according to Nilson Reports, in 2012, card issuers shouldered a 63 percent share of the fraudulent losses, with merchants taking on the remaining 37 percent.

Other credit card fraud statistics break down as follows:

• 2012 credit/debit card fraud losses amount to $11.27 billion: primarily due to use of counterfeit cards at point of sale transactions, and card-not-present transactions done online, through a call center, or through mail order.
• 2012 credit/debit card fraud gross losses amount to 5.22 cents per $100.
• As of 2012 retailers spend $6.47 billion annually on credit card fraud prevention, while still incurring $580.5 million in losses.

Computer data breaches account for a large percentage of the information used in committing credit card fraud. The largest credit card data breaches since 2005 include:

Company	Year	Number of Accounts Affected
CardSystems Solutions	2005	40 million
TJX Companies, Inc.	2006	94 million
U.S. Veterans Affairs	2006	17.5 million
Certegy	2007	8.5 million
Fidelity National Information Services	2007	3.2 million
Heartland Payment Systems	2008	134 million
Bank of New York Mellon	2008	12.5 million
Hannaford Bros. Supermarket Chain	2008	4.2 million
Sony	2011	12 million
Global Payments	2012	1 million
Source: CSO Online

 

The Nation’s Stress Over Credit Card Fraud

In 2012, the top three stressors to American consumers were (1) identity theft, (2) credit card/debit card fraud, and (3) national security related to terrorism. Nearly 60 percent of American consumers were very worried about the possibility that someone might obtain their credit or debit card information, and use it to make fraudulent purchases. In addition, 39 percent of American consumers distrusted online security for purposes of banking or shopping.

Related Legal Terms and Issues

• Fraudulent Transaction – Purchases or transfers made by one individual using another individual’s credit card, debit card, or bank account.
• Plea Bargain – An agreement by which a defendant pleads guilty to a lesser criminal charge, usually to avoid a lengthy and costly trial, as well as to gain a more favorable sentence.