Holidays are prime time for gift card scams

By Gina Bliss The Daily Record Newswire My husband used to coach youth soccer. At the end of each season, the parents would plan a party for the team and collect money for coaches' gifts. One year my husband received a gift card from the soccer players and their families as a thank you for coaching. When he tried to use the gift card, it had a zero balance. My husband didn't want to embarrass anyone, so he never said anything. After all, he loved coaching and didn't expect anything for doing it anyway. At the time, I assumed the problem was just a mistake. Looking back at it now, it could have been gift card fraud. Gift card fraud is one type of retail fraud. It's very attractive to fraudsters because it's anonymous. Gift cards spend like cash without having any customer information on them. The gift card scam that's been in the news lately is gift card stripping. The fraudster takes a stack of gift cards from a retail rack, finds a quiet place in the store, and uses a handheld scanner (available online) to read the code behind the magnetic or scratch-off strip on the back of the card. Armed with that information and the number on the front of the card, the fraudster can call the phone number on the card or go online to check its status. Once the card is purchased and activated, the fraudster can use the card for online purchases before the recipient has a chance to spend it. During the holiday season there is usually plenty of time after the gift giver purchases the card and before the gift recipient attempts to spend the balance on it. Stripping is the rarest form of gift card fraud. It's estimated that well over 50 percent of gift card fraud can be attributed to store employees. Store clerks have access, and unwitting customers make it easy for them. If the customer says, "I'm not sure how much is left on this card," the clerk knows there is an opportunity to understate its value. Employees can pretend a card is empty and offer to throw it away for the customer, but pocket it instead. When an employee activates a card for a customer, the employee could swap a worthless look-alike card for the activated one. They can also clone cards from discarded or duplicate receipts. Receipts usually show a card's value and account number. Additionally, since gift cards are so desirable, they're often purchased with stolen credit cards and then sold for cash. Recently, Christopher Edwin Hefner was arrested in Florida for gift card fraud. He had an ingenious scheme that required months of investigation by police before his arrest. The American Express fraud department had no previous experience with this scam. Here's how he did it. Hefner would spend $2 on a beer, use an American Express $25 gift card to pay for it, and leave a big tip. He'd say he wanted to tip $2 but ask if he could make out the slip for $15 or $20 of tip and get the difference in cash for the jukebox or video games. Hefner knew that American Express requires a second swipe of the card to authorize a tip of more than 20 percent. He targeted bars and restaurants that did not follow that procedure. He could hit several bars in a day and his scheme lasted seven months. Police sources say he scammed more than $20,000 in this way. It took American Express months to tell the bars that the tips were not authorized. If Hefner had just left the area before American Express and police unraveled the scheme, he might have gotten away with it. Despite these issues, annual sales of gift cards continue to rise. People love to give them, and receive them. Retailers love to sell them. Since gift cards are like found money, cardholders tend to be less price-sensitive and will often spend more than the value of the card. If you take some precautions, there's no reason this holiday gift card season can't be merry and bright. For example, always check the packaging for signs of tampering. Only buy cards from reputable sources (not online auctions). Keep your receipt as proof of purchase until the card's value has been used. If the cashier prints a second receipt for any reason, make sure you take them both. Have the cashier scan the card at the time of purchase to ensure that it's valid and has the correct balance. All these strategies will help ensure that the gift cards you give will be worth their full value. Retailers have added safeguards to protect consumers as well including security codes, better packaging, and "exception reports" to track prolific users. For example, a prolific user might have inquiries on five cards from the same computer. Access might be denied as a result. I'll be buying some gift cards for Christmas gifts, and I'll follow the precautions and hope for the best. I've never had any problems giving gift cards before. At least, I don't know of any problems. I wonder what percentage of gift card fraud is never reported because the recipient doesn't want to embarrass the gift-giver? ---------- Gina Bliss, CPA, CFE, is a senior manager at EFP Rotenberg LLP, Certified Public Accountants and Business Consultants, who specializes in internal audit, fraud audit and forensic accounting. She may be reached at (585) 295-0536 or by email at gbliss@efprotenberg.com. Published: Thu, Dec 15, 2011