Decades-old payment technology is reportedly helping scammers steal hundreds of millions of dollars from the welfare system.
It’s part of an operation led by Romanian organized crime groups in the U.S., who rely on magnetic stripe-based payment systems to carry out their thefts, The Wall Street Journal (WSJ) reported Sunday (Sept. 20).
According to the report, investigators say these gangs rely on “builders” who construct skimming devices easily missed by merchants, stealing benefits from customers who swipe government-issued debit cards at stores.
The criminals use stolen funds for luxury purchases and to send money back to Romania in the form of cryptocurrency.
While the White House has been cracking down on public benefits fraud, investigators told WSJ that criminals have been expanding their tactics, using bots to guess welfare recipients’ account numbers. In other cases, scammers run phony transactions with people’s food-stamp accounts through cloned credit card machines, transferring the funds to their own bank account.
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“Sadly, business is booming,” said Michael Peck, head of the Secret Service’s Global Investigative Operations Center, which combats financial crime.
Magnetic strip technology, invented in the 1960s, helps make this happen. These strips are found on the cards most low-income Americans use to obtain aid, with very few states having switched over to chip cards and tap-to-pay systems for their electronic benefit transfer (EBT) systems, WSJ added.
While any type of magnetic stripe payment card is at risk, authorities say EBT cards are the easiest target.
“The insanity of letting people continue to use a glorified hotel-room key is akin to donating money to the Romanians,” said Haywood Talcove, CEO of LexisNexis Risk Solutions’ government business, which works with public-sector clients to stop fraud.
This trend is happening as a considerable number of card issuers say that fraud is driving up their costs, as recent PYMNTS Intelligence research shows.
“Fraud used to sit in the back office,” PYMNTS wrote in July. “Now it has a front-row seat in the issuer growth strategy. Every blocked purchase, failed dispute or scam that slips through can weaken the cardholder relationship. That makes fraud prevention more than a risk-control function. It’s now one of the clearest ways for card issuers to protect trust, reduce churn and build stronger customer lifetime value.”
According to the report “The Issuer Risk Playbook: Building Trust, Fueling Growth,” top issuers say they are speeding up their scam-prevention efforts, with 45% of issuers with high customer lifetime value saying they planned to invest in scam detection and prevention in the next 12 months.
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