By Derek Nowek
For a growing number of U.S. merchants and exporters, credit card fraud is a serious concern in cross-border electronic commerce, particularly in transactions with the NIS. Anecdotal evidence suggests that, over the past four years, credit card fraud in international transactions originating in Russia and Belarus has increasingly become a problem. In 1997, for example, America Online had to cut direct access to its users in Russia because too many people were using stolen or counterfeit credit card data to sign on for email and Internet services. More recently, Belarus has originated a rash of attempts to defraud U.S. vendors of computer systems, peripherals, and other high-tech components. In a February 1999 incident, for example, a Florida-based computer reseller shipped $40,000 worth of computer parts to Belarus before the credit card fraud was discovered.
Knowing how to spot credit card fraud and what precautions to take can significantly reduce a merchant’s exposure and potential loss in international transactions originating from the NIS region and, indeed, the entire world.
Technology’s Two-Way Street
With the latest technology at their disposal, credit card crooks can counterfeit entire credit cards, along with their magnetic strips, or use sophisticated programs to generate mathematically correct credit card numbers that will register as “valid” when run through an electronic swipe terminal. They can also simply steal credit card data from unsuspecting cardholders.
Although the methods of credit card fraud in foreign sales transactions can vary widely, the recent wave of fraud attempts targeting U.S. computer companies in Northern Virginia and California have much in common. All of the U.S. merchants received an authentic-looking fax or email from a company in Belarus requesting a quote on computer parts. The company claimed to be a manufacturer or a retailer of computers and components looking for U.S. suppliers that could replace orders from financially stricken Russia. The Belarus company was interested in large purchase orders with volume discounts and fast deliveries. In further correspondence, U.S. merchants were often asked to underdeclare the invoice value of the shipment to help the company offset high import taxes. The Belarus company then provided up to 10 credit card numbers and requested the shipment be sent via UPS or a similar carrier without the company’s name on the invoice and without freight insurance.
Chris Slade, account manager at Boost Peripheral Systems (Sacramento, CA, www.boostsystems.com), received such a purchase order. He became suspicious after two of the four credit cards he was given were declined and the Belarus company promptly sent a batch of new numbers. “I don’t want to see any American companies getting ripped off, especially ours,” said Slade, after eventually tracing the credit card information to a bank in Stockholm and discovering it was bogus.
Unfortunately, some merchants with no prior credit card fraud experience believe they are in the clear when they key in the numbers electronically and are given a transaction approval code. In fact, all the verification does is to check that the number is valid and sufficient funds are available for the purchase. However, under the rules of most credit card merchant account agreements, merchants bear the full cost of fraudulent credit card transactions that take place via mail order, the telephone, or the Internet.
How to Minimize Credit Card Fraud
U.S. companies can take a number of precautions to protect themselves from credit card fraud, especially in cross-border transactions. These precautions can range from simple, do-it-yourself steps to validate each order, to sophisticated antifraud software, to automated verification services offered by specialized providers. The method or methods used should depend on the company’s experience in foreign sales in the NIS region, knowledge of the local market, and the number and size of transactions.
Antifraud experts recommend taking the following steps for each foreign sales order:
1. Examine the email address on the purchase order. If the order came through a free email service provider, such as hotmail.com, juno.com, and europe.com, consider declining the order. Experts agree that a high rate of credit card fraud occurs through these anonymous, untraceable email addresses. A convenient way to determine if an order comes from a free email service is to substitute “www” in front of the domain portion of the address and look up the provider’s website. Another way to check for free email services is to browse a list maintained by Antifraud.com (www.antifraud.com/redflag.htm), an Internet-based service that helps companies protect themselves against online credit card fraud.
2. Request the name and phone number of the bank that issued the credit card, including the exact name of the cardholder and the exact billing address.
3. Get the transaction approval code from your merchant account vendor. Then, call the customer’s credit card bank to verify the credit card data.
4. Call the cardholder to reconfirm the purchase order. Often, the telephone number on the otherwise authentic- looking purchase order will be bogus.
5. Pay extra attention to large orders with multiple credit card numbers and different “bill to” and “ship to” addresses.
6. Insure the shipment with a freight forwarder or an independent insurance company and do not underdeclare the invoice or shipment value.
7. Stay informed. A number of Internet-based resources are available to help merchants spot credit card fraud.
“There is usually very little that law enforcement agencies can do for you in international fraud cases,” according to Dr. Audri Lanford, an authority on Internet fraud and a co-editor of Internet ScamBusters (www.scambusters.org), a web-based newsletter and compendium of tips and resources on Internet fraud issues. “The best way to reduce the risk of credit card fraud is to implement sound verification procedures and stay up-to-date on the current scams,” she said.
In the end, if you suspect credit card fraud, insist on a wire transfer payment before processing and shipping the order. This is the only safe way to ensure you receive payment for your exported merchandise.
Derek Nowek covers customs for BISNIS in Washington, D.C.