Tis the Season for Gift Card Fraud

John Merchant, CPA, CFE

As holiday shopping escalates during the period between Thanksgiving and New Year’s Day, so does the potential for gift card fraud.  Gift cards have become a convenient and popular method of gift giving in recent years and sales of these cards are clearly on the rise.  While there is absolutely nothing wrong with purchasing gift cards, you must be careful to avoid being defrauded if you do.

Most gift cards carry both an identification number and a pin number.  The identification number is often clearly displayed, but the pin number is normally hidden beneath a light coating that can be scratched off to reveal the number.  When you purchase the card, a store employee activates the card by entering the identification number into the store’s computer system.  Then anyone who physically possesses the card can use it for purchases.  And, they can even make purchases over the internet by entering both the identification number and the pin number.  And this creates the opportunity for fraud.

A fraudster can enter a store and pick up multiple gift cards from display racks.  These cards are of course useless because no one has paid for them and they have not been activated.  However, the fraudster has no intention of using them at that time.  He or she takes the cards home, scratches off the coatings covering the pin numbers, and makes a list of identification numbers and the related pin numbers.  The fraudster then takes all of the cards back to the store and returns them to the rack.  After that the fraudster checks the store’s website each day to verify whether someone has purchased and activated any of the cards.  Once a card is activated, the fraudster can go on-line and make purchases up to the value of the card by entering the identification number and pin number from the list.  Then, when the legitimate owner tries to use the card, there is little or no value remaining.  And the fraudster has probably had the purchased items delivered to a post office box rented under a false name so that he or she cannot be tracked down.

So, what is our advice?  Always check a gift card before purchasing it.  If the coating has been scratched off and the pin number revealed, do not buy it.  Also, do not buy cards that show any other evidence of tampering. Take those cards to the store clerk and point out the problem.  You may save some other unsuspecting person from becoming the victim of fraud.

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