This guide describes the problem of check and card fraud, and reviews factors that increase the risks of it. It then identifies a series of questions to help you analyze your local problem. Finally, it reviews responses to the problem, and what is known about them from evaluative research and police practice.
The guide covers fraud involving (1) all types of checks and (2) plastic cards, including debit, charge, credit, and "smart" cards. Each can involve a different payment method . While there are some obvious differences between check and card fraud, the limitations and opportunities for fraud and its prevention and control by local police are similar enough to warrant addressing them together. Furthermore, some cards (e.g., debit cards) are used and processed in a similar way to checks, and electronic checks are processed in a similar way to cards, so that the traditional distinction between cards and checks is fast eroding. Table 1 summarizes the essential differences between check and card fraud.
Entry level: requires photocopier or personal computer with standard color printer
Entry level: amateur alterations easily detectable; more advanced card alteration or production requires more costly resources
Conversion to Cash
Can be converted to cash at checkout
Cannot be converted to cash at checkout (except for debit and phone cards)
Retail stores typically require additional ID; banks may not ask for ID if account number on check matches bank records
Additional ID rarely requested
Signature rarely checked, unless check-cashing card required
Signature prime means of verifying card user
Merchant submits check to bank for payment
(Highly simplified): merchant submits card charge to bank, which submits payment request to card issuer, which verifies payment to merchant's bank, which then pays merchant
If bank rejects payment, merchant carries loss and must recoup it from customer; legitimate account owner may be liable, depending on bank's policies
Negotiable: merchant may incur loss, or card issuer may agree to do so; legitimate card owner generally protected from loss
Check acquisition; check payment and cashing; check processing; and bank, business, and consumer environments
Card issuance; card acquisition; checkout; card-not-present sales (usually telephone or online sales); and after the sale (product returns)
Less common with checks, though sophisticated check- counterfeiting rings do exist
Counterfeiting and distribution of credit cards widely adopted by organized crime groups
Table 1 Common Differences between Check and Card Fraud
In 2000, Visa International estimated that the yearly cost of fraud worldwide was about 0.05 cent per every dollar spent. This small amount works out to 300 million pounds in Britain and an estimated $1 billion in the United States. Since 1995, the amount of fraud losses on payment cards has consistently risen in the United Kingdom, 1 and in the United States , the losses from online credit card fraud 2 alone are estimated to reach $3.2 billion in 2007. Over 50 percent of Britons surveyed fear they will be victims of credit card fraud. 3
Card printers and encoders are widely available
Apart from the obvious financial loss caused by check and card fraud, it is a serious crime that requires preventive action. It affects multiple victims and significantly contributes to other types of crime. At an elementary level, fraud is easy to commit, and the chances of apprehension and punishment are slight. † Thus check and card fraud is an ideal entry-level crime from which people may graduate to more serious offenses. Other crimes that either feed off check and card fraud or facilitate its commission include the following:
† In a Montreal study, the success rate with a totally counterfeit card was 87 percent, and with an altered card, 77 percent. At checkout, the average success rate was 45 percent, although in most of the cases where the sales clerk rejected the card, the offender simply walked away, without being accosted (Mativat and Tremblay 1997). [Abstract only]
† In 2002, the Federal Trade Commission reported that the main motives for identity theft were as follows:
To obtain/take over a credit card account: 53%
To acquire telecommunications services: 27%
To obtain/take over a checking account: 17%
†† A 2000 survey of identity theft victims found that less than half felt their problems had been fully resolved; all but one had gone to the police as a last resort and had received little satisfaction from doing so (CALPIRG 2000). [Full text ]
† Thefts from cars may increase as a way to get credit card and personal information if other opportunities to get such information are blocked by improved security measures in the manufacture and processing of plastic cards and checks (Levi 1998). However, in other studies, this "displacement" does not always occur, even within card fraud itself-for example, from using stolen credit cards to counterfeiting cards (Mativat and Tremblay 1997). [Abstract only]
Plastic-card technology is developing rapidly. Issuers are now offering both debit and credit services on one card, are requiring a personal identification number (PIN) for credit cards (introduced in France a decade ago, and in England in 2001), and are replacing magnetic strips with computer chips. Paperless or electronic checks are increasingly used in business-to-business transactions. Criminal use of these different products involves a wide range of skills, activities, and financial investment. The type of fraud will depend on the points of vulnerability targeted in the delivery of services , as outlined in Table 1.
In general, check and card fraud may be divided into two activities: the illegal acquisition of checks and cards, and the illegal use of checks and cards. This distinction is not absolute, since offenders may gain access to some cards (e.g., phone cards) without actually acquiring the cards (e.g., by stealing account numbers).
The following are some of the ways offenders illegally acquire checks and cards:
† Levi (1998) has noted that one in five street robbers in London obtain credit or debit cards from their victims.
Fig. 1. U.K. card fraud loss by type of fraud, 2001
Source: Adapted from Association of Payment Clearing Services (2002): www.epaynews.com/statistics/fraud.html.
The following are some of the ways offenders illegally use checks and cards:
Checkout is a crucial point for identity and card authentication
Perhaps the biggest problem for police is that people rarely report check and card fraud to them.† In one recent study, only one in four incidents of check and card fraud were reported to the police. 12 It is very likely that you have a check or card fraud problem in your area, but do not know about it. Many credit card issuers promise zero loss to the user if the card is lost or stolen and illegal are charges made. Thus, if cardholders do not suffer financially, they may have less motivation to report the offense to the police. Merchants are also reluctant to report fraud, or even to use fraud prevention techniques at checkout, for fear that it will slow down the purchasing process and negatively affect sales. 13 Thus, fraudsters think their chances of getting caught are very slim. One study reported that some 80 percent of respondents thought it was easy or very easy to carry out credit card fraud. 14
† Over 90 percent of people report their lost or stolen card to the card issuer within one day. They rarely, however, report their loss to the police, unless it results from a crime such as pickpocketing, burglary, or mugging (Levi and Handley 1998a). [Full text]
The situation with check fraud is slightly different. Some banks hold the account holder liable for loss. The merchant who accepts the check may also be held responsible, since the bank simply refuses to honor the check if it detects a forgery. (Thus, retailers-especially North American supermarkets, where check cashing is a common service-are often more willing to cooperate with police or develop their own security procedures concerning check fraud.) It is not uncommon for some conflict to arise between merchants and banks as to who should bear the loss. 15 This is a serious problem because, as we will see, cooperation among competing merchants and between merchants and banks is central to preventing and reducing check and card fraud. 16
Banks, large retail stores, and supermarket chains commonly prefer to deal with merchandise loss, employee theft, shoplifting, and check and card fraud internally. 17 There are three significant reasons for this preference:
The check and card fraud that businesses do report to the police is usually committed by repeat or "professional" fraudsters. Or, for whatever reasons, the in-house security wants to transfer responsibility to the criminal justice system.
Understanding the factors that contribute to your problem will help you frame your own local analysis questions, determine good effectiveness measures, recognize key intervention points, and select appropriate responses. You should be aware that most check and card fraud is due to factors beyond police control. Such factors include the following:
† A traditional credit card purchase goes something like this: At checkout, the customer gives the card to the sales clerk, who runs it through the computer to check whether the account is legitimate. The clerk then checks whether the customer is the person named on the card (usually by comparing signatures, which are not an especially reliable form of identification, by the way). In a face-to-face situation, the clerk can try to verify the customer's identity. However, with telephone and online purchases, there is no direct way to do so.
Although police face these and other obstacles when addressing check and card fraud, there is much that can be done.
The information provided above is only a generalized description of check and card fraud. You must combine the basic facts with a more specific understanding of your local problem. Analyzing the local problem carefully will help you design a more effective response strategy later on.
The following are some critical questions you should ask in analyzing your particular problem of check and card fraud. (Depending on the local circumstances, you may need to focus on one specific type of fraud. In general, it is best to focus on one small aspect of the problem at a time, such as a single merchant or bank.) Your answers to these questions will help you choose the most appropriate set of responses later on.
† In one study, fraudsters had worked out over 100 different ways of committing credit card fraud ( Jackson 1994). In another, offenders displayed considerable innovation in switching from one technique of check forgery to another (Lacoste and Tremblay 2003). [Abstract only]
Measurement allows you to determine to what degree your efforts have succeeded, and suggests how you might modify your responses if they are not producing the intended results. You should take measures of your problem before you implement responses, to determine how serious the problem is, and after you implement them, to determine whether they have been effective. (For more detailed guidance on measuring effectiveness, see the companion guide to this series, Assessing Responses to Problems: An Introductory Guide for Police Problem-Solvers. ) It should be emphasized that some measures will depend on merchants' providing information and establishing systematic procedures for collecting the data you need. You will need to convince merchants that the loss-prevention benefits will offset the data-collection costs, and that data collection is necessary for a cost/benefit analysis.
The following are potentially useful measures of the effectiveness of responses to check and card fraud:
Your analysis of your local problem should give you a better understanding of the factors contributing to it. Once you have analyzed your local problem and established a baseline for measuring effectiveness, you should consider possible responses to address the problem.
This section reviews what is known about the effectiveness of various practices in dealing with check and card fraud. Unfortunately, the information is severely limited because few of the common preventive practices have been evaluated. Card issuers, retailers, and bankers have been reluctant to conduct the necessary studies, or to share the results of those they do conduct. The government has funded little research in this field, generally regarding it as the private sector's domain.
The following response strategies provide a foundation of ideas for addressing your particular problem. It is critical that you tailor responses to local circumstances, and that you can justify each response based on reliable analysis. In most cases, an effective strategy will involve implementing several different responses. Do not limit yourself to considering what police can do: give careful consideration to others in your community who may share responsibility for the problem. It will be essential to work closely with local businesses and community groups. The most effective program to reduce check and card fraud reported to date involved banks, retailers, business associations, database administrators, and local, regional, and national police. 28
As noted, local police can do little on their own to prevent check and card fraud. In many cases, you will have to persuade local bankers and merchants to act. You may have to explain why police can achieve little using traditional responses such as surveillance and arrest, and why heavier court sentences are of limited value. You may want to explain to merchants that the way they process check and card payments may be contributing to the problem. You may have to convince retailers and bankers that they cannot ignore the problem, because the costs to the community are too great and, in the long run, the stores and banks themselves suffer. Finally, you will need to advise them on preventive measures they can take to reduce the problem.
It is important that responses be selective and based on a thorough understanding of the particular circumstances. For example, fraudsters often target high-priced electronic gadgets and appliances because they promise more cash. 29 Or, it might be better to concentrate on preventing check and card fraud by casual offenders, who are easier to deter, than to focus on the much smaller number of "professionals," who are harder to defeat. Again, such choices depend on your local circumstances. In framing advice, you must think carefully about the nature of the risk, which varies greatly depending on the kind of store and goods offered; the types of cards accepted; the store's check-cashing policies; and the store's or bank's marketing practices. These factors determine the nature of the remedies. Department stores with huge turnovers of expensive goods can afford to spend much more on security than small retailers can, and their corporate headquarters often dictate security procedures. † In all cases, you must appreciate stores' need to make a profit. It cannot be emphasized enough that the success of your efforts will depend heavily on how well you can convince local retailers that improved security procedures can and do increase the bottom line . In making your case, you may need to
† Most large retail stores now have standard antishoplifting technology, such as item tagging, tracking, etc. However, such technology cannot prevent card fraud at checkout. People commonly do not notice their credit cards are missing until a day or more after their loss. Unlike shoplifters, card fraudsters are in no immediate risk of being detected or of setting off alarms. Thus it may be expected that, as technology makes shoplifting more and more difficult, thieves may turn more to card fraud.
† The 2000 British Crime Survey (Home Office 2000) found that 50 percent of respondents reported being fairly worried or very worried about credit/bankcard fraud-more than for mugging/robbery or physical attack.
You can do much to inform merchants about modern verification procedures, particularly small businesses that, unlike large retail chains, may not have ready access to account and cardholder databases. Many police department websites offer lists of specific actions merchants can take to detect check and card fraud at checkout. In general, sales clerks must do the following:
Researchers have shown that adding simple security procedures can significantly reduce check and card fraud. In one U.S. study in a retail store, 32 a system that used picture IDs of customers who paid with credit cards reduced fraud by over 80 percent. Furthermore, retail stores (especially supermarkets) have found that customer databases that issue customers ID cards can also be used as an effective marketing tool to advertise special sales and promotions. A study in Norway 33 showed that legislation requiring people to show two forms of ID when cashing checks reduced check fraud by over 80 percent. †
† Since the late 1990s, U.S. retailers have increasingly required a customer thumbprint (using special invisible ink) to accept checks. Some police departments provide the ink for free to local retailers. However, unless police work closely with retailers, retailers may fear this requirement will have a negative effect on customers, who may consider it an invasion of their privacy (even though the print is used only if the check turns out to be fraudulent).
While these simple measures seem obvious and commonsense, if you visit any retail store and observe the security procedures for verifying checks or cards, you will see that sales clerks rarely or only casually use the ones described here. As noted, merchants often do not implement such procedures because they fear the negative effect they may have on sales. There is, however, no research to justify this view-although there is research that suggests that checkout delays do reduce sales. Therefore, you must take these concerns into account if you try to get local merchants to change their security procedures. Simply informing them about security possibilities is not enough. To avoid the negative effects of checkout delays, a carefully planned system has to be developed. This may require the input not only of the merchants, but also of security experts. Finally, an evaluation of the program's effectiveness must be built in to show that the savings from frauds prevented more than offset the cost of implementing the program . Without this assurance, retailers are unlikely to adopt security procedures. †
† A simple, inexpensive, and quick procedure that can be done without checkout delays is to use black light to check for counterfeit cards. All major cards (MasterCard, Visa, American Express, and Discover) contain images that are visible under black light. The Troy (N.Y.) Police Department has successfully implemented this procedure.
Thumbprint at checkout improves customer authentication
In the meantime, there are three important ways you can help businesses train staff:
As with other responses in this section, you will need to gain a considerable amount of trust from businesses-and, where appropriate, security professionals-to participate in staff training. You must make your role and goals very clear to businesses, so they know you are not out to find something amiss in their business practices. †
† Unfortunately, there are merchants who set up bogus companies to collude with co-offenders to process fraudulent purchases made with credit cards, or to defraud honest cardholders. Merchant-alert databases have been successfully used in the United Kingdom to identify fraudulent merchants and warn honest cardholders of possibly risky locations and businesses (Levi and Handley n.d.). [Full text]
Web sites and mass mailings make applying for credit cards easy
† Visa claimed card fraud reductions of up to 20 percent after it introduced software that detected unusual spending patterns (Maremont 1995).
The obvious difficulty with this response is that it does not focus as much on a specific crime as is usual in problem-oriented policing, but instead entails a more general approach of enhancing police-business relations. Thus, although it may help in implementing some of the other responses described in this section, it may be difficult to evaluate its specific effects on online credit card fraud.
In the first case, local police can do very little. But in the second, they might work with delivery companies to locally track items bought online. Tracking technology is revolutionizing retailing and many other business areas, and it is certainly at the operational core of UPS, Federal Express, and other delivery companies. Small transmitters are rapidly replacing bar coding, the most pervasive tracking technology of the late 20th century. These transmitters can be placed on retail items (they have proved particularly effective in reducing shoplifting), 37 vehicles (including delivery vehicles), 38 pets, livestock, and even people. They can be programmed to hold substantial information and to transmit location. Such devices make the recovery of stolen items much easier and can precisely track the delivery of products. Indeed, some companies already provide this service for stolen cars and trucks. 39 Because of the massive increase in online retailing, many more products are delivered to the home, creating opportunities for theft en route. The following are ways you can help businesses verify product delivery and detect possible card fraud:
The amount of card fraud committed through nondelivery claims is probably quite low, though there are no data to support this assumption. There may be high rates of product theft from delivery vehicles in some densely populated urban areas. 41 You may have to balance your delivery-monitoring efforts against competing demands on police time. But bear in mind that your responses to delivery theft may also work in reducing other crimes, such as selling stolen goods, returning stolen goods for refunds, and shoplifting.
Who should tell cardholders about these precautions? Local police do not have the ready access to customers that merchants and card issuers do: it is much easier for merchants and card issuers to provide crime prevention information along with customer bills and statements, or on ATM welcome screens. However, police do have access to two groups of customers (or potential customers): those who are typically targets of scams-senior citizens-and those who know little about banking or using credit cards-children. With the cooperation of local businesses and community groups, police could set up educational programs to give talks to senior citizen groups, and to visit schools to talk to students about responsibly managing personal information, bank accounts, and payment cards. † While it would be sensible to target high school students, as some either already use credit and debit cards, or soon will, there may be good reason to target younger students as well, as they increasingly use the Internet. Of course, the effectiveness of such a program will be difficult to measure, since it requires a broad approach directed at affecting future behavior.
One response is to publicize what is known about fraud-emphasizing its financial and human costs, and spelling out the steps people can take to avoid becoming victims. Response #2 entailed working with businesses to increase the reporting of fraud, and response #1 suggested ways of raising responsibility awareness among merchants, card issuers, and customers. The most direct and-probably-effective way to reach all those affected by fraud is through the local media, which tend to be very interested in reporting on crime victims. 46 Police could write a piece outlining the costs to both victims and police: for example, it can take victims up to three months to straighten out credit problems caused by stolen identity, and may cost police up to $20,000 to investigate a case of identity theft. 47 As usual, you must take care to ensure that any publicity is linked to a planned prevention program agreed to by local business associations and merchants.
You should be on the lookout for bogus websites, as well. (Again, not much skill is needed to set up a website. Nor does it cost much, if anything, to do so.) Fraudsters have tricked many unsuspecting web users into sending credit card and other personal information to bogus companies. There are websites that constantly monitor the Internet for such scams, so you should routinely visit these to check on the latest incidents. Again, unless you have help from an ISP or a computer crime expert, you may have difficulty determining the location of the people operating the scams. As suggested in response #6, you should keep in close contact with nearby police departments that have specialized computer crime departments, and with the relevant state and federal agencies that monitor Internet fraud. You can also check with the Better Business Bureau or other local consumer-reporting agencies, as well as pay attention to news reports, to find out if there have been scams in your area.
† If crackdowns are to work-and they do in some cases, for some crimes-they should be carefully tailored to work with the other responses described in this guide. See the POP Guide on The Benefits and Consequences of Police Crackdowns.
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The table below summarizes the responses to check and card fraud, the mechanism by which they are intended to work, the conditions under which they ought to work best, and some factors you should consider before implementing a particular response. It is critical that you tailor responses to local circumstances, and that you can justify each response based on reliable analysis. In most cases, an effective strategy will involve implementing several different responses. Law enforcement responses alone are seldom effective in reducing or solving the problem.
|Working With Businesses|
|#||Response||How It Works||Works Best If...||Considerations|
|1||Raising responsibility awareness||Local businesses and card issuers are encouraged to take more responsibility for preventing fraud||…police emphasize the community costs of fraud to merchants||Many security, card-issuing, and verification policies are dictated by national and international card issuers, bankers, and retail chains, making it difficult to change local practices|
|2||Increasing the reporting of fraud||Data collection allows police to determine the extent of the problem in their area||…it is combined with a preventive program (see response #3)||The media may portray increased reporting of incidents as a "crime wave" demanding a police crackdown, rather then an aid to planned preventive procedures|
|3||Verifying checks, cards, and users||Retailers with high check or card fraud losses are targeted, and verification procedures are established||…verification procedures are integrated into the established checkout practices, and an evaluation demonstrates cost- effectiveness||Merchants may resist spending money on verification, especially if it requires investing in new technology and changing checkout procedures|
|4||Training checkout staff||Regular staff training raises awareness about fraud prevention||…police establish a close, trusting relationship with businesses and clearly communicate goals||Merchants may distrust police attempts to participate in staff training sessions|
|5||Reducing card application fraud||Vacant residences and newly occupied residences where credit card information may be sent are identified||…police work closely with postal employees and real estate agencies to ensure that mail is not delivered to unoccupied residences, and is forwarded to the appropriate people||Vacant residences may be in several different mail- delivery areas, requiring extensive coordination with the post office|
|6||Using information to fight online card fraud||Specified websites alert users to online fraud||…police provide prevention and enforcement information to small local businesses||It is difficult to evaluate this response's effect on online fraud, since it is primarily directed at enhancing police-business relations; generally, preventing online fraud is beyond the means of local police|
|7||Tracking products||Police work with delivery companies, local retailers, and Neighborhood Watch to monitor product delivery and product returns||…manufacturers, retailers, and delivery companies use new tracking technology||Cost-effectiveness may be difficult to determine; tracking may work in reducing related crimes such as shoplifting and theft of items in transit|
|8||Raising perceptions of wrongdoing and risk||Retailers post warning signs at checkouts||…retailers keep records of check and card fraud both before and after posting signs, to measure their effectiveness||Merchants may resist this response, inexpensive though it is, for fear that it will have a negative effect on law-abiding customers|
|#||Response||How It Works||Works Best If...||Considerations|
|9||Educating cardholders||Educational programs teach people to avoid victimization by taking simple precautions||…it is combined with crime prevention education about a variety of crimes for which they may be targeted||This response requires considerable cooperation from community groups and schools|
|10||Publicizing costs of fraud||The media are used to publicize the financial and human costs of fraud||…police work with businesses and the media to craft stories that emphasize crime prevention||Stories of victimization may affect businesses negatively; media treatment of stories and information may be unpredictable; effectiveness is probably not measurable|
|11||Collaborating with colleges||Police encourage colleges to establish responsible-use policies for computing facilities, to minimize hacking||…it is combined with crime prevention education about a variety of crimes for which they may be targeted||Effectiveness is difficult to measure, and depends on colleges' willingness to invite local police to their campuses to help solve crime problems|
|#||Response||How It Works||Works Best If...||Considerations|
|12||Monitoring fencing outlets, pawnshops, and online auctions||Police work with businesses to develop strategies to track goods that may be stolen||…police acquire extensive local and regional knowledge of known fencing and pawnshop operations||Local businesses must cooperate in identifying and tracking goods|
|13||Monitoring chat rooms, bulletin boards, and bogus websites||Police conduct surveillance of crime-facilitating Internet venues||…police get help from ISPs and computer crime experts||It is difficult to determine whether online fraudsters live in your area|
|14||Targeting high- risk merchants||Police determine what stores have high rates of fraud and focus their efforts on them||…police work with business associations to collect information if incident data are not available||Information-sharing requires a long-term, trusting relationship between police and businesses|
|15||Getting help from experts||Experts on fraud provide information and skills that may help with local problems||…police network with professional security consultants and fraud squads at the local, regional, and national level||Fraud squads may be investigation- rather than problem-oriented|
|Responses With Limited Effectiveness|
|#||Response||How It Works||Works Best If...||Considerations|
|16||Conducting crackdowns||Police conduct very public, intensive campaigns to catch fraudsters||Merchants may fear that crackdowns will drive business away|
|17||Implementing business watch||Businesses set up programs similar to Neighborhood Watch||…programs are focused on specific crimes, rather than crime in general||Businesses must have clear crime-prevention goals|
|18||Handling offenders through means other than the criminal justice system||Police and/or businesses issue offenders warnings, require victim compensation, and/or require counseling rather than make formal criminal reports||This response has usually been used with juveniles who have committed other offenses; it has not been evaluated for check and card fraud|
|19||Conducting publicity campaigns||Police alone publicize fraud risks||…it is combined with the implementation of practical security measures||Research has not shown this response, alone, to be effective|
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Texas Banking (2001). "Thumbprint Signature Program Fights Check Fraud." Texas Banking 40(1):9.
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The quality and focus of these submissions vary considerably. With the exception of those submissions selected as winners or finalists, these documents are unedited and are reproduced in the condition in which they were submitted. They may nevertheless contain useful information or may report innovative projects.
Check Fraud Initiative, Scottsdale Police Department, 1995
COPS / Business Partnership Academy, Ontario Police Department, 1997
Inverness Thumbprint Signature Scheme, Northern Constabulary (Inverness, Scotland, UK), 2002
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