You’re given a gift card, but when you attempt to use it, you find it has zero balance. While you might be the butt of a bad joke, you and the card’s purchaser could be the victims of an increasingly prevalent form of gift card fraud called “card draining.”
Bad actors visit retailers and pilfer gift cards. They remove the packaging to access the card’s number and pin, which they either record or alter. Then they repackage the gift card and return it to the rack. When the card is legitimately purchased and loaded, fraudsters can easily siphon off the funds.
Initially considered to be a small-scale problem, card draining scams have spiraled into an epidemic that has drawn the attention of federal law enforcement. The U.S. Department of Homeland Security just launched a massive operation targeting a card draining ring with ties to Chinese organized crime. In the past 18 months, the Homeland Security task force has arrested 100 individuals involved in card draining. The agent in charge of the task force, Adam Parks, estimates there are still another 1,000 people involved. Parks speculated that scammers have drained hundreds of millions of dollars to date.
A Change in Regulations
As hard as it is to apprehend card drainers, it can be even harder to prosecute them. Jordan Hirschfield, Director of Prepaid for Javelin Strategy and Research, discussed those difficulties in his recent report, Mitigating Risk in Prepaid Card Programs. “Federal authorities utilize any existing statutes they can to investigate and prosecute organized criminal rings,” he noted. “These statutes are often adjacent to the actual payments, and fall under unauthorized computer access, once balances are drained online.”
That lack of relevant statutes is another stumbling block to shutting down card draining schemes.
A Steep Cost
One victory for the Homeland Security team came in late 2023, when a Canadian man was convicted for running a card draining scheme valued at $22 million. While it was a win for law enforcement, it underscores the massive dollar amounts card scammers have been able to drain.
Gift card fraud impacts both companies and consumers. Target leadership estimated that $300 million has been stolen from its customers in card draining scams. Walmart and Apple have both been sued after customers found their gift cards drained. Apple agreed to a $1.8 million settlement in January after a class-action lawsuit.
“Moving forward, regulations should be updated to reflect the technological advances of prepaid cards, both physical and digital, to keep up with criminal activity,” Hirschfield noted.
