Gift cards have become a mainstay in retail as a convenient and practical way to provide a gift, deliver a message of appreciation, manage company returns, or for other reasons that serve the convenience of the customer and the needs of the retail business. The gift card market has seen steady growth in recent years, providing a promising business stream that can increase revenue and build a strong customer base.
Unfortunately, there is also a dark side to the gift card industry. Due to their frequent use as a form of currency and the way the retail consumer manages them, the gift card market has become a lucrative target for fraudsters, with gift card fraud becoming a growing concern across the country and around the world.
Birthdays and Beginnings
Recently, the gift card celebrated thirty years in retail. Until the mid-1990s, retailers preferred paper gift certificates, typically in the form of handwritten or pre-printed vouchers used for store credit. While often clumsy and difficult to manage, the use of paper gift certificates had been common practice dating back to the late nineteenth century. However, advancements in color copier and printer technology, along with the accessibility of this technology to everyday consumers, made these vouchers much easier to counterfeit, and there needed to be a change. A plastic card became the vehicle of that change, and the rest, as they say, is history.
In late 1994, Neiman Marcus introduced the first gift cards, but early on, they didn’t advertise or display them for purchase. Blockbuster Entertainment quickly followed this as the first company to widely test and launch gift cards to their customer base in early 1995. The early 2000s saw the rise of gift cards from various brands, covering everything from gas cards to restaurants and retailers across the country. The market has since exploded with research showing that 90 percent of people consider physical gift cards an appropriate item to gift, with the global gift card market currently exceeding $984 billion and growing. By 2030, gift card sales are expected to reach more than $3 trillion.
However, the innovation of plastic cards is not without its flaws. As we are well aware, innovation is not exclusive to those with honest intentions, and there are those who search for ways to exploit gift card use for illicit gains.
Crocodile Tears
While on routine patrol, Detective Jeff Stadnicki with the Alachua County, Florida Sheriff’s Office pulled over a vehicle during a traffic stop. Upon approaching the vehicle, he found that both the male driver and female passenger were acting very suspiciously, providing conflicting and confusing answers to simple questions they were asked. While both suspects were Chinese and appeared to speak little English, their answers still appeared purposely evasive and perplexing. Further, when the driver was asked questions, the female passenger would always attempt to answer for him or control his response. As part of their story, they claimed they were making a trip from New York to Florida ‘to see a crocodile’ in Orlando.
As the investigation continued to unfold, a narcotics canine was brought in and alerted on the vehicle. During the subsequent search, a large number of Target gift cards were observed in plain view inside the car, along with a thermal pad and scanner. Stopped near a Target location in the Gainesville area, the vehicle’s GPS system was already set to another Target store location nearby, further adding suspicion to the situation. A container loaded with nearly 1,800 gift cards was found in the trunk, along with additional tools that led Detective Stadnicki to believe there was some illegal operation involving the gift cards rather than a quest ‘to see a crocodile.’
“I knew we had come across something big and wanted to make sure it was handled correctly, so I immediately contacted Detective Parsons, our subject matter expert on financial crimes, for guidance and support,” said Stadnicki.”
Detective Travis Parsons heads the Property Crimes Bureau, Financial Crimes for the Alachua County Sheriff’s Office. “We determined very quickly that we had a gift card scam on our hands,” he explained. “In total, 1,764 cards were recovered along with a backpack containing a laptop, a bar code scanner, a thermal pad (used to reseal the packaging for gift cards), scraping tools, three cell phones, and an iPad. Many of the cards had signs of being defaced or altered.”
“We had to bring in a Mandarin translator to interview them,” he continued. “But they still weren’t able to provide a consistent story.” As the case mounted, an elaborate scheme with international implications started to emerge. The phones recovered detailed a sophisticated operation that appeared to have its base in mainland China. There were text messages and calls in Mandarin Chinese, photographic evidence that included gift cards, numbers, and ledgers, ‘on-the-job’ training information, and a large number of financial transfers.
“GPS data for the rental vehicle helped build the case, showing us the physical routes and the stores where they stopped during the entire trip. In total, thirty-eight different Target stores were visited.” That was when Parsons decided to contact the asset protection team at Target to assist in the investigation. “I wouldn’t have had half a clue on how to develop this case without the retail AP team at Target,” he said. “It was absolutely pivotal to get these partners involved. It made the investigation so much easier.”
Video evidence was gathered in the stores that captured specifically how the plot unfolded. It showed the suspects taking cards from the gift card kiosks and replacing them with other cards as many as eight separate times in some locations.
“With the reach and sophistication of the case, we then decided to contact Homeland Security Investigations,” Parsons revealed.
Project Red Hook
“Through Operation Boiling Point, we began talking to law enforcement and retail partners dealing with bad actors stealing gift cards,” claims Assistant Special Agent in Charge Adam Parks with Homeland Security Investigations. “We learned of cases impacting different retailers and their customers that in each case resulted in hundreds of millions of dollars in losses, quickly adding up to more than a billion dollars.”
In November of 2023, leadership from approximately ten major retail companies met with leaders from Homeland Security Investigations to address the dilemma of gift card fraud across the country, leading to Project Red Hook’s development. Spearheaded by Parks, the program is primarily focused on Chinese-based organized retail crime enterprises with hundreds of Chinese nationals crisscrossing the United States taking part in massive gift card fraud operations.
Gift card fraud certainly cannot solely be attributed to any one group or organization. However, Project Red Hook targets Chinese organized crime groups due to the cross-border nature of the crime and the extensive reach of the criminal operation, supporting the illicit activities of Chinese organized crime groups to the tune of hundreds of millions of dollars.
While the foot soldiers of the operation are traveling across the country, many of those involved in the command and control of the scheme are actually based in mainland China, using Chinese language-controlled apps such as WeChat—a Chinese instant messaging, social media, and mobile payment app—to manage the illicit operations. “There can be hundreds of people in each of these chat groups, with command groups in China controlling operations here in the States,” he claims.
“I recall one recent incident where, over a thirty-day period, an individual was hitting ten to fifteen stores per day, removing 100-300 cards per store. It’s not unusual to have 10,000 cards involved in these scams. When you consider the potential fraud is the face value of each card, it becomes very clear how lucrative these crimes can be.”
“Our objectives are education, detection, disruption, and dismantlement,” said Parks. “We want to educate retailers on vulnerabilities and provide information and awareness of the fraud opportunities directly to customers. We also work directly with law enforcement and loss prevention teams to investigate the crimes and thwart the operations. When faced with our biggest challenges, we can be successful—especially when we work together. In the year since Project Red Hook was founded, we’ve made more than 150 arrests and recovered millions in seizures.”
How the Fraud Unfolds
Let’s take a closer look at how these card-draining schemes typically unfold in retail stores:
The first step is determining what stores and cards to target. This may be influenced by how the cards are displayed, where they are displayed, what cards are offered for sale, and the ease and accessibility to remove and return them. Offenders may make their own decisions on which cards to target. However, more sophisticated groups will actively communicate with team leaders using a cell phone or other devices to view and determine which cards to remove. The takers/placers will often wear earbuds and take direct orders from someone offsite or even overseas. Fraudsters often function in teams, with many operations targeting multiple stores every day, involving planned routes that may cover several states.
The takers/placers will need to have a way to store the cards on their person. Keep an eye out for individuals wearing large coats or clothing, cross-body bags, fanny packs, or large purses. Those involved will typically spend an unusual amount of time at the gift card kiosk, often ten to fifteen minutes to remove or replace cards. This may also involve a lookout or distraction to cover when the cards are taken. Takers/placers may note or photograph where cards are located on the kiosk and how many cards are on each peg hook before being removed.
Tampering will occur after the gift cards have been removed from the location and will involve accessing the relevant information printed on the cards used when the card is sold to a customer and loaded with a currency value. This data is typically located behind a tear strip or other tamper-resistant mechanism. The information is then recorded so the balance can later be checked and the gift card value accessed by the fraudsters. The packaging is then manipulated or restored so that it is difficult to detect that the card has been tampered with.
The gift cards are then replaced on the kiosk peg hooks to be sold to customers. Fraudsters will attempt to replace cards in the exact location they were originally found to avoid suspicion or place them at or near eye level, as these cards are typically the first to be chosen for purchase by unsuspecting customers. Additional cards may be removed as the tampered cards are replaced. Cards are removed and replaced very quickly with limited opportunities for detection based on the experience and expertise of the fraudsters, who may access and replace hundreds of cards in a single day.
Once returned to the store, IP balance checkers use bots to monitor the cards and determine balances so that once the funds assigned to the cards by unsuspecting consumers are sold, they can be accessed and taken by the fraudsters. The stolen gift card information is transferred and stored on a smartphone, and assigned group members will then use the funds to buy large quantities of products in high demand in China. That merchandise is then shipped to China for quick sale.
“It actually results in a money laundering operation, creating ‘clean money’ in the process,” said Parks. “The stored value is taken from the consumer, converted to product, exported to China, and sold. Funds are used to bankroll all kinds of organized crime needs while supporting all means of nefarious activity, including fentanyl production and smuggling, illegal immigration, and human trafficking.”
A Complex Deception
There are a number of obstacles that make gift card fraud a more challenging problem to manage.
Just a piece of plastic? When displayed on the gift card kiosks, gift cards are primarily perceived as plastic cards having no real value until activated. Lacking an understanding of how gift card fraud is carried out, store employees will not typically see those handling the cards as a potential threat. Why would someone take cards with no value? Why would anyone add additional cards to the kiosk? However, with card-draining schemes, the dollars can escalate very quickly and result in substantial losses. “The potential fraud should be considered as the face value of each card,” Parks said. “The goal of these fraudsters is to maximize their gains and drain as much value out of each card that they can.”
Who is the victim? The gift card industry is designed to ensure easy transactions but has historically lacked strict consumer protections. As a result, the gift card companies and the retailers that sell them still collect the funds from the sale of the cards with limited risk on their part. Both retailers and gift card companies will assume some responsibility, offering refunds to consumers if fraud is detected and reported soon after purchase. However, oftentimes, the consumer never contacts the companies or waits too long to report the incident.
“When fraudsters steal the funds, the final recipient of the gift card is the primary victim and the most impacted, ending up with a gift that doesn’t work and has no value,” explained Cory Lowe, PhD, director of research with the Loss Prevention Research Council. “It’s a costly problem, but the victim is primarily the consumer. Branding and the impact on the customer experience has traditionally been the primary cost of gift card fraud for retailers.”
The waiting game. To compound the problem, many gift cards are not immediately used, and the victim may not know that the card has been compromised for extended periods of time. “One of the primary issues is that victims are not good self-advocates,” adds Lowe. “Cards may sit in a drawer for months or even a year or more without being used, and when the victim attempts to use the card, the value is no longer available.”
It’s not difficult to see why. Research shows that 47 percent of American adults have unused gift cards, and the total value of these unspent funds in the US is around $23 billion. In fact, while most consumers use a gift card in its entirety within one month, 71 percent of people admit that at some point, they have held onto a gift card for at least one year after receiving it before attempting to use it.
What’s the crime? Further complicating the problem is the need for law enforcement to recognize the criminal act involved and determine how perpetrators should be charged. “For law enforcement officers, the primary problem is recognizing and understanding what crime has been committed,” said Lowe. “It can be a lot of work to build the case, generating the breadcrumbs to realize the specific crime that has been perpetrated, and how to approach it as part of the investigation.”
However, pursuing prosecution may not be as difficult as some believe. “While law enforcement may often be unclear on the best way to approach these cases, under most state laws, gift cards are treated like credit cards for the purposes of the fraud,” said Parks. “Charges can include tampering, counterfeiting, money laundering, wire fraud using the internet, and other statutes based on the individual situation. There are a variety of ways law enforcement can approach it.”
Considering the hurdles, it’s easy to see how gift card fraud operations can become highly lucrative for fraudsters, with cases regularly resulting in multi-million-dollar investigations.
The Search for Solutions
“Retailers and gift card companies are currently working on a number of countermeasures to stop or slow down fraudulent activity and deter gift card fraud,” said Lowe. Here are some current steps that can be taken to deter gift card fraud in retail stores:
- Employee awareness and education. Make sure that store associates are aware of the problem and common ways that gift cards can be manipulated. Looking for the warning signs of card tampering at the point of purchase can deter many potential incidents.
- Placement of gift card kiosks. Place kiosks in plain view of register areas. Greater awareness of customer activity at the card kiosks and the power of customer service will deter many in-store incidents.
- The use of physical security measures. Signage and camera systems can help deter and detect incidents in the stores.
- Pay closer attention to the appearance of the cards. “Whether an employee or customer, treat gift cards like you treat produce,” said Parks. “Inspect the cards for signs of tampering, damage, or discoloration.”
- Buy online gift cards directly from the retailer. This limits opportunities for tampering and abuse.
- Redesign gift cards with new security features. Retailers and gift card companies are working together to redesign cards to mitigate opportunities for tampering. For example, some new cards feature a blank space where a cashier will apply a sticker with the access code once the card is purchased. Without those codes stuck to the gift cards, there will be nothing for a scammer to steal.
The Power of Cooperation
The Alachua County investigation set a standard in the state of Florida, successfully concluding with convictions of both suspects. In the same respect, it also underscores the essential importance of networking, teamwork, and cooperation when building and managing these sophisticated cases. “There was communication and cooperation every step of the way,” shares Parsons. “The importance of networking, understanding the resources available to you, having a plan, and working together makes these cases possible. They helped us determine what we should be looking for, what was needed to build the case, and how we needed to follow up and maintain persistence to follow through.