TEA Blog


E-Commerce Fraud

Remember the big buzz in the media about Internet fraud? One of the biggest concerns was the threat of credit cards being stolen through the online purchase procedure. It is not surprising to me that these fears have not been totally realized. While there is always an opportunity for this to occur, it is definitely not the overwhelming disaster that the experts forecasted. The systems that have been put into place to combat this have been remarkably successful. Interestingly enough, the frauds occurring on the Internet are simple variations of standard consumer fraud and simple mail or telephone order (MOTO) fraud. In other words, the same old wine in a new and improved bottle.

Internet fraud is a fair reflection of basic fraud statistics. The highest numbers of incidents are frauds against consumers such as pyramid schemes, stock schemes, and work-at-home schemes. Online cons seem to favor Internet auctions where it is most definitely caveat emptor buyer beware! Internet auctions and bartering sites are simply Internet flea markets with the extra-added bonus of anonymity for the fraudster. But my big question is, what about caveat seller beware? Where are all of the headlines about consumers defrauding merchants? It's certainly not as sexy as an arrest of over 100 Wall Street con artists defrauding consumers out of hundreds of millions of dollars. Still, the fact remains that e-commerce fraud is a hot issue for both cyber and click and mortar merchants.

Crunching the Numbers

Have you ever done the math on fraud in your business? Fraud can be very costly, but a laid back approach to the issue can be even costlier. If an e-merchant regularly lets go of losses or fails to prosecute thieves the word soon spreads through various networks until, finally, that e-merchant becomes a favored target. The costs can be calculated in merchandise or services lost, shipping and handling, time to process the order, processing chargebacks ($15-$25 per transaction on average fraudulent or not), processing fraudulent checks, and your time and effort to investigate the fraud. According to research conducted by Meridien Research, e-merchants lost $1.5 billion in 1999. That's 10% of the total estimate of $15 billion in sales in 1999. Small e-commerce businesses cannot afford 10% shrink due to theft. It will be interesting to watch these statistics as databases like the UCR (Uniform Crime Report) better digest and organize cyber crimes reported by merchants. And now, credit card companies have made the move to address the rise in . For example, MasterCard sent notice to its merchants that it intends to fine merchants $25,000 and up for chargebacks that are 2.5 percent or higher of total sales volume for two consecutive months. Be ready for this trend to take us all to new and interesting places.

The Criminal

I just love the media's portrayal of e-commerce criminals. According to the news services, the cyber criminal is 18 to 25, extremely intelligent, and normally a hacker with something to prove. Before I began investigating external cyber crimes, I envisioned my nemesis as a twenty- something, male, possibly a computer programmer with an attitude. In reality, my nemeses have ranged in age from 11 years old to 60 something, more male than female (but not by much). Most had no past criminal histories. Occupations range from grade school student to housewife, and nearly all had average to below average knowledge of a personal computer. Most surprising is what the reasons given have been. I was bored. I didnt think Id get caught. I wanted to see if I could do it. It's the same reasons shoplifters give .

Tracks of a Cyber Thief

E-merchants are beginning to recognize the warning signs that indicate possible fraud. Here are some tracks of a cyber thief.

1. Late night orders. A large percentage of my fraud orders occurred late in the evening or early morning. E-commerce fraud increases at night. In one of my investigations, I found that 9 out of 10 orders were made between midnight and three in the morning.

2. Orders placed outside the country. I've read many statistics on this issue and there have been some discrepancies on which countries produce the highest fraud numbers. Russia, West African, and South American countries seem to produce consistent high numbers. The problem with out of country deliveries is that once it's gone, its gone. We currently do not ship merchandise out of the country. Beware, too, of intermediary drop boxes. We had an incident where a large volume of merchandise was shipped to a "warehouse" in Florida where it was then sent overseas.

3. addresses. Set a policy of not shipping to P.O. boxes, suites, or drawers. Intermediary addresses never look like drop boxes because they use physical addresses to give the illusion of security. Intermediaries will set off warning bells when you follow the rule of reviewing large quantities of merchandise sent to a single address. This is how we found hours before we lost too much money.

4. Free/Anonymous e-mail services. While I dont agree that every order made with a free/anonymous e-mail service is fraudulent, I can say that approximately 95% of all fraudulent orders I investigated were made with these types of services. Ive found that all of these fraudsters using these e-mail services had legitimate ISPs, but they used the free e-mail service for added anonymity. These services will not give information to e-merchants or the police without a subpoena.

5. Express shipping. Online need time to get away. Many are in a rush to get the goods and then close shop. They dont care that the cost of shipping almost equals or exceeds the cost of goods because they arent paying for either. In one instance, a fraudster purchased three swimming pools. The cost of the express shipping exceeded the cost of the pools!

6. High quantity orders. Cons will attempt to order large quantities of the same item. Examples Ive personally run across have ranged from ten 1-carat engagement rings to six VCRs in one order.

7. High dollar orders. Money is no object when its not to begin with. This one is fairly self-explanatory.

8. Ship to differs from . This one can be a difficult track to follow, especially around Christmas. Most e-commerce has been built on convenience and the ease of having gifts sent the customer. Still, this can be a key indicator of a possible fraudulent order. Heres a quick check: the telephone number given should match the "Bill to" not "Ship to" address. If the telephone number matches the "Ship to", do yourself a favor and call the issuing bank.

9. E-mail address. The e-mail address itself can give some clues. The e-mail address, in most cases, will match something in the customers name. But, cons may use extremely crude or cute e-mail names, i.e. Imathief@domainname.com, getbent@domainname.com, etc.

10. Repeated attempts to order on the same card. There are computer programs that generate credit card numbers for online thieves, but they still require some finessing. It is not uncommon for a con that has generated a credit card number or stolen one to make numerous attempts on the same credit card keying in different expiration dates. Review all of your repeated and failed order entry attempts.

11. Frequent calls from customers. I really enjoy this one because you have a chance to record and trace the call. Fraudsters can be really anxious people. Remember that they may want to close the deal fast so they can close up shop before being caught. They may call in repeatedly to check on the status of orders. In one case, a schemer called in over thirty times in one day! She was absolutely giddy with greed. Some fraudsters call simply to bully and can be extremely obnoxious. I recommend you tape all incoming calls, but Ill discuss this more lately in this article. I would like to make it absolutely clear that none of these signals are an absolute identifier of fraud. They are indicators of possible fraud.

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