Eighteen people based in New York and New Jersey were charged in federal court in early 2017, alleged to have stolen at least $200 million in what could be the largest credit card fraud ring in U.S. history. The complaint, brought by U.S. Attorney Paul J. Fishman, alleges an extensive, complicated credit fraud scheme in which tens of thousands of credit cards were obtained, using more than 7,000 false identities.
The perpetrators were alleged to have enhanced the credit scores of the bogus identities by providing fabricated information to credit bureaus, enabling the identities to qualify for large loans and lines of credit that they turned into cash and never repaid.
Complicating the fraud scheme, Fishman said the accused fraudsters created “dozens” of sham companies that applied for and received credit card acceptance services, including merchant accounts and credit card terminals. They then ran the fraudulent cards through the terminals, pouring money from the fake purchases into the merchant accounts which they raided. When processors caught on to the fraudulent activity and shut the accounts down, the defendants simply created new companies and moved on to new merchant services providers.
The alleged credit fraud criminals also leveraged several existing businesses that were complicit in the scheme, according to the U.S. Attorney’s office in Newark, N.J. Several jewelry stores in Jersey City, N.J. allowed the defendants to use the fake credit cards to run fake transactions on their equipment. Law enforcement officials said these businesses operated multiple merchant accounts simultaneously, enabling more fraudulent transactions to be processed before all the accounts were shut down.
Establishing identities of this kind, and “nurturing” them to the point where they could be leveraged to secure loans and lines of credit, is an uncommon form of identity fraud to begin with, according to Dr. Stephen Coggeshall, CTO of Risk Management Solutions Provider ID Analytics and Director of the Council for Identity Protection. Doing so on a scale the defendants allegedly did is “astonishing,” he said.
Identity theft (appropriating the real identity of an existing person) and identity manipulation (changing one’s own identity to perpetrate credit card fraud) are fairly common, Coggeshall indicated. But creating what he calls “synthetic identities” (fictitious identities that don’t exist but are plausible due to a real social security number and address) is a much more sophisticated crime. It requires applying for credit cards, and probably getting rejected a few times.
“If they persist, they may get one through on an institution that doesn’t do the extensive checks that some of the larger banks might do, and be able to establish an identity,” Coggeshall explained. “But I’ve never seen an organized fraud on that scale, creating and establishing that many thousands of these synthetic identities and nurturing them carefully. They had to keep track of who’s who, what credentials they were using, what they had applied for, and what credit they had gotten in order to establish and nurture these identities to get them up to good credit ratings, so they could steal a reasonable amount of money using those identities. The level of care and effort and precision these thieves achieved is astonishing.”
Coggeshall also said catching fraudsters that successfully establish synthetic identities is much more difficult than nabbing those using stolen or manipulated identities. He said the fact that the defendants in this case created more than 7,000 identities, but used only 1,800 addresses, is likely one of the factors that led law enforcement to the perpetrators, as commonalities like the same address on multiple cards is a red flag that most anti-fraud systems catch.
Coggeshall said that creating the identity for a business that doesn’t exist is, if not easy, at least straightforward. Getting a merchant account, however, shouldn’t be. How the “dozens” of fictitious businesses involved in this scam were able to slip through the risk management cracks of processors, acquirers, ISOs, and other merchant services providers speaks to overworked underwriters and the natural tension that exists in these companies between diligent risk management and the pressure to onboard merchants, according to Matthew Parker, Executive Advisor at ContractPal, a New York City software provider that automates part of the underwriting process for merchant services companies.
“Merchant processors have to strike the balance between being too strict and blocking potentially good customers, and not being strict enough and letting fraud happen,” Parker said.
Good due diligence to prevent such credit fraud takes time and effort in a manual underwriting environment, Parker noted. Some of the things an underwriter might need to do when evaluating a potential merchant client include matching addresses to actual locations, seeing if a company has readily apparent privacy or delivery policies and terms of service, a Better Business Bureau record, complaints on file, a working Website, and other factors.
“All this takes a lot of time,” he said. “And, frankly, most underwriting departments are swamped. They’re underfunded. The marketing departments have these big pushes, and all of a sudden you have tons of applicants signing up and the bottleneck is the underwriting department at a merchant processor.”
The merchant processor may think, ‘We spent the money on the marketing, we have to book the business.’ And the pressure to cut corners in the underwriting process mounts, Parker indicated, resulting in a situation where entirely fabricated businesses receive merchant accounts and the ability to accept credit card payments, ultimately resulting in a large-scale credit and identity fraud.
Losses May Grow
Law enforcement agents from the FBI’s Cyber Division and the U.S. Secret Service, postal inspectors, representatives of the U.S. Social Security Administration, and various financial institutions and merchant services providers were involved in the 18-month investigation. According to U.S. Attorney Fishman, the massive scope of the conspiracy, which began in 2007, may result in the final loss figures eclipsing the $200 million confirmed losses. Each defendant was charged with one count of bank fraud, which could result in a maximum penalty of 30 years in prison and a $1 million fine.
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