How to avoid gift card fraud this holiday season
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Auditing fraud risk during a pandemic

How to avoid gift card fraud this holiday season

Dec 20, 2018 · 5 min read · AICPA Insights Blog

Everyone has a friend or relative that is difficult to purchase a gift for. I’m sure you’re thinking of one after reading that sentence! That’s why gift cards are so popular –the person gets to pick out something they know they’ll like. It’s really a win-win situation. However, in recent years, scammers caught wind of the lucrative gift card market and have come up with schemes to target consumers.

AICPA Insights reached out to Howard M. Silverstone, CPA/CFF, a forensic accountant and member of AICPA’s Fraud Task force to learn how Americans can protect themselves from gift card fraud this holiday season.

AICPA Insights: I only recently heard about gift card fraud a few weeks ago. How long has this scam been around?

Howard Silverstone: The gift card scam is fairly new. Gift cards have been around for a while, but as online shopping has really taken off it seems the gift card market has grown a great deal. Outside of the retailers offering their own gift cards, it seems like every pharmacy chain has racks and racks of them on the shelves. But it’s important to note that gift card scams are not really different than any other kind of fraud – it’s more of an innovation on a number of old scams than a new invented fraud.

AI: How does the typical gift card fraud scam work?

HS: The majority of gift cards come with a specific code and pin on the back and until they are scanned at the register and the customer pays for them, they are inactive. Using the code and pin number, it’s then possible to go online and check your balance and make purchases. What the crooks are doing is going into the stores, taking the card off the rack and scratching the strip off the back that conceals the number and pin. They’ll then write that information down and replace the strip. The strips are surprisingly easy to obtain online, which is essential to this fraud. Then the scammer will periodically enter the account and pin number and once they see it has been activated, they’ll make purchases against it as soon as they can. Unsuspecting shoppers think they’re giving someone a $100 gift card, but by the time the recipient goes to make a purchase nearly the entire balance has been drained.

AI: What can people do to avoid being victimized by this scheme?

HS: First of all, when you’re purchasing the card, check the back and see if anything feels off. The replacement strip may not be applied as cleanly as the original one. Secondly, if you’re purchasing a gift card off the rack, never buy the one in the front. It’s a better idea to grab one in the middle or back. Most of these fraudsters are only doing one or two each time they visit a store and they want to get in and out before anyone notices them – so they’re likely to just grab the first card in the rack and replace it once they have the number.

Another strategy is to only buy gift cards that are behind the checkout counter. However, this isn’t foolproof because, while unlikely, it’s possible that the cashier could be colluding with someone else pulling off the scam. As a deterrent, a growing number of companies are putting gift cards in sealed packages. The cashier then has to go through an activation process with the money you want to put on it. It’s different than a pre-loaded card and none of the identifying information is available until the card company gets notification that you have paid for it.

And for those receiving gift cards this holiday season, when you activate the card online you may have an option to create a unique password. If you’re able to, you should definitely do this.

AI: You mentioned earlier that criminals targeting gift card owners combined it with other, existing scams. What are some examples of that?

HS: One that comes to mind is business email compromise. Someone in a financial or HR position will get an email from the CEO that says they want to give out some cards to customers or friends of the business. They’ll ask the employee to run out and buy a bunch of gift cards and scratch off the backs and then email back the card number and PIN, so they can pass them along to the people, so they don’t need to have the actual card in the mail. However, that email is not actually from the CEO. With requests like these, urgency is a major red flag. It always needs to be done “right now”.

If you ever get an email like this, look at the email address of the sender very closely, make sure it’s 100% accurate. And ask yourself if this makes sense and is in line with what the company has done in the past. Don’t worry about questioning the ‘authority’ of a senior leader – call the person who purportedly emailed you, to confirm with them over the phone. They’ll appreciate you doing your due diligence.

Fraudsters will often reach out directly to people by phone or email and tell them they owe federal or local taxes and they need you to pay with a gift card. And the person goes along with it and they lose their entire payment.

There is also a variation of the ‘grandchild’ scheme, were someone impersonating a grandchild will call and say they’re in a jam – maybe they got arrested and need to make bail. And they need you to give them a few hundred dollars on a gift card, so they can get out of it – and “please don’t tell mom and dad”, they can’t find out. Of course, it is important to know that the IRS does not take gift cards as payment and your local police station or courthouse does not take them for bail payments.

AI: Any other tips for our readers?

Beware of anyone offering discounted gift cards online – you’ll see them posted on various auction sites. People will see the discount and hope they can get a $50 gift card for $20 dollars and come out ahead. However, they are often counterfeit or stolen and there is usually no money on them.

Unfortunately, it’s been a bad year for natural disasters in the US with high profile hurricanes and wildfires displacing many Americans. And scammers have seized the opportunity to reach out to people directly and ask them for gift card donations. In almost all cases, these are frauds. Credible charities that accept donations via gift cards will have that information online. You should only donate to a charity that is known and can be verified.

You might have someone posing as a retail store calling a customer who just purchased a gift card and ask them to confirm the information so that they can ensure it’s for the right amount. When the person unwittingly provides that information, the criminal then uses it to make purchases online. No one from a store is ever going to call and ask for this type of information.

As with many crimes, people can take common sense steps to protect themselves. Exercise caution when purchasing gift cards this holiday season and if you receive one, register it, check the balance right away, change the PIN and don’t wait too long to use it. The AICPA’s FVS section publishes Eye on Fraud quarterly to help CPAs keep their clients abreast of, and safe from, new schemes.

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