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Jan 16, 2006

The Legal Line

Ed Maldonado

Dear Ed:I was wondering if Legal Line had any information or case studies on prepaid gift card fraud. [My company] manages and provides gift card programs to independent retailers, malls and restaurants targeted for customer incentives, refunds, and general use mall cards. We are constantly bombarded with information on fraud and scams from various restaurant and retailer associations, but this information tends to be more of a warning and not really constructive for our platform policies. [Our company] views most of these issues to be more related to traditional retailer “shrink” than the cards themselves or our platform. We work with our retail and restaurant customers to train their supervisors on card issuance and theft, and, we have been successful in keeping incidents low. [My company] now wants to be more proactive on this issue and establish a general policy related to our platform. I was wondering if you had any information that might help.Best Regards and Happy Holidays,T’is Gift-Card Season. Dear TGCS:Undoubtedly, January and February will be the months to be keenly aware of gift card fraud as a result of the 2005 holiday purchasing season. The best numbers I have seen for gift cards in 2005 was during the holiday season, with consumers spending an estimated $18 billion. This was a marked increase from 2004. Gift Card programs are a form of closed-loop stored value cards and, in general, tend to have less incidents of fraud associated with them. While the occurrence of this type of fraud tends to be lower than other forms of fraud against stored value products, the creativity and pervasiveness of gift card scams is not to be treated lightly. The recent trend in “e-fencing” misappropriated gift cards and refund cards online has spurred a great interest by organized shoplifters to target the gift cards over hard product theft. [Def. e-fencing: the sale or fencing of stolen or misappropriated goods online through internet auction clearing houses (such as e-bay, and etc.)]. In part, this is because gift card anti-fraud efforts have traditionally focused on loss prevention strategies based on employee theft in a physical location. The use of the Internet in relation to such scams is on the rise and is now changing the way the gift card are monitored. The primary problem in monitoring this type of fraud at this time is that there are no real hard numbers, or data, as to dollar amounts of loss or the most prevailing modus operandi of gift card scam artists.I think that the perspective of your company, that fraud issues tend to gravitate around traditional retail “shrink” loss, is a good starting point for your policies. Retail “shrink” is a catchall category in the industry that encompasses everything from monitoring vendor theft of cards, to hacking databases, to issuance theft. From the loss prevention side of retail “shrink”, the weight of monitoring fraud generally falls back to the retailers themselves. However, I am not clear as to exactly how your platform works or what specific services your company provides, and would encourage that you consult your legal counsel as to the particulars.Although focusing on supervisory training is a good starting point, I believe that feedback from your client’s loss prevention group is the best starting point for any gift card provider. By first determining what type of fraud is of concern to your clients, or actually occurring with them, you can assess the types on activities that your company may wish to monitor in connection with your service. Your client’s loss prevention staff will also be aware of what types or methods of fraud were attempted and caught, and which ones got away. This feedback, in combination with your own knowledge of your system, should square off the general policy areas you may wish to address. It could also address gaps in your current training programs and policies. An area of increasing interest right now is that of monitoring “e-fencing” being conducted through online auction websites. Since gift cards are a closed-loop stored value product that will generate specific data upon issuance (employee that issued the card, date of issuance, place of issuance, initial value, refund or prepayment, internal tracking and batch numbers), confirming that this is one on your client’s cards that was misappropriated may become easier during an online auction. It really boils down to a matter of logistics on what information is available through your system - or in this case platform. Sometimes the provider can plant tracking markers into the card to know that it is theirs and support that with flagging the card immediately once identified as suspicious by their client’s loss prevention team. Your technology will really be the determining factor in this type of activity. Based upon it, you may wish to expand or limit your responsibility to monitor the cards through your company’s policies. It depends entirely on your company and the service offering.A place I would recommend that you visit is It is a good clearing house for information about credit card and stored value card fraud and anti-fraud legislation. Likewise, sit down with your legal counsel from the beginning and have him or her research the issues related specifically to the functionality of your system or platform. As gift cards are regulated on a state-to-state basis, there may not be a “generic” policy that you should adopt. It really does depend on the particulars. Since you are working with both restaurants and retailers, this could be important - so make sure that you are covered regarding any state requirements. Good Luck and Success in the IndustrySend your questions

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