Why manufactured spend activity looks suspicious to others

There’s an interesting article in BusinessWeek about how criminals are using identity fraud and fake tax returns to scam the government (and taxpayers) out of millions of dollars. It’s relevant to some of us in the points and miles community as it shows how innocent behavior that’s part of accumulating credit card rewards can look incriminating to somebody trying to stop fraud.

Here’s how the article begins:

The white Cadillac on NE 167th Street in North Miami Beach had darkly tinted windows. In Florida opaque car windows are illegal, so North Miami Beach Gang Detective Craig Catlin, on patrol in an unmarked car, ran the Cadillac’s plates, wondering if it was owned or rented by gang members. The Cadillac bore Temporary Tag AIP5923, which connected it to Frantz Pierre, 33, a known member of the West Side gang. Following protocol, Catlin radioed headquarters to request a stop by officers in a marked patrol car. He also called for backup.

When the Cadillac was pulled over, Catlin and three other officers in flak jackets approached the car. Frantz Pierre was inside, and so was his brother Terry. There were two women in the back seat. Catlin’s partner, Rocky Festa, asked if there were guns or drugs in the car. “No,” came the prompt reply. Strewn across the center console were a handful of prepaid debit cards, marked with the name Tax Professors. The Pierre brothers said they did not know who owned the cards, so the detectives, again following protocol, impounded the plastic.

Has anybody else ever found themselves with a handful of prepaid debit cards before? Possibly at OfficeMax in the past week?

It was June 1, 2010. The next week, according to investigators and court documents, Catlin and Festa learned that the cards had been issued by Las Vegas-based PayCard USA. The actual “cardholders”—the names and personal information initially provided to the issuer—were four inmates at prisons throughout Florida. Tax Professors was a tax preparation company run by the Pierres. Its business was filing bogus tax returns using stolen identities. An investigation ultimately uncovered an operation involving hundreds of fraudulently obtained tax refunds totaling about $1.9 million.

The PayCard USA cards mentioned above seem to be underwritten by First California Bank, though I’m not clear as to how you actually obtain them. I’m guessing the “Tax Professors” fraud group did a partnership with them to direct bogus income refunds onto their cards.

The article continues:

With stolen or even legally obtained identity data, thieves file for multiple refunds using various names, inputting fictional information about topics like employment, income, and dependents. They request that the money be deposited directly into a bank account, often opened with a fake name, or they have the funds loaded onto prepaid cards. Victims may not figure out something fishy has occurred for months. The identities of prisoners are especially useful, as prisoners are often not on top of their tax situation or activity in their bank accounts.

To cash out, the crooks use the prepaid cards to withdraw cash at ATMs. Alternatively, they spend the money on gift cards at major retailers like Wal-Mart or Target. To skirt ATM daily withdrawal limits, they use Western Union to wire money to themselves. “If you have $5,000 on a pre-loadable debit card, you want to get all the money out of the account that day,” explains Catlin. Otherwise, a bank may notice it’s a bad account and freeze the funds. You don’t want to be found with the cards, either. “These guys leave the house with cards hidden in their shoes, wire the money to themselves until the account is empty, then throw the card in the trash.” Because gang members know that the IRS loads refunds onto cards on Friday mornings, they will often spend that day of the week taking money off the cards—and that night partying.

Then they do it all over again and again and again. A sting in Tampa in 2011 dismantled an operation involving $130 million in fake claims and laundered funds. Last summer, police near Miami responding to reports of a home invasion found more than 500 prepaid TurboTax (INTU)-issued Visa (V) cards, each loaded with thousands of dollars in fraudulent refunds.

Cashing out at ATMs, buying gift cards at major retailers like Walmart, buying money orders to pay oneself, hoarding prepaids, rinsing and repeating–does any of this sound familiar to you? Of course, you’re obeying the law and using your own money, credit cards, and identity, but given the fraud that goes on it’s hopefully understandable that this hobby might arouse suspicion with people who don’t understand it.

In fact, somebody on Fatwallet reported an unfriendly encounter with law enforcement last year at Walgreens:

I am a Citi TYP card holder and have been churning GCs since I got it. My normal “run” is 4 drug stores and one grocery store. I usually walk away with about 7K in GCs each run. This past Thursday however, went very different. Here is the series of events.

#1: Stopped at the grocery store. Picked up $1500 in GCs.
#2: Stopped at Walgreens and bought one $500 PayPal MyCash card.
#3: Stopped at Rite Aid and bought one $500 Vanilla Visa.
#4: Was pulling into Rite Aid #2 and was pulled over. Turns out Walgreens called the police on me for suspicious activity. The police officer questioned me about why I was stopping at all the drug stores and why I was buying so many GCs. I was honest with him and he checked my CC that I used with my ID to make sure they matched. After everything checked out, he was puzzled on why I was stopped in the first place, but said he had to keep me until the detective arrived to talk to me. When the detective arrived (with the K9 unit as well), he explained all the bad things GCs can be used for (which I already knew) and that is why I was stopped. He said he had called the Secret Service to confirm my identity and that everything checked out. After about 30 minutes of being questioned, I was on my way and told I can continue doing what I do, as it is not illegal.

And on a similar note, if you ever peruse the MS forum at FT you may have read references to grumpy Walmart employees as well. Obviously that stinks for those of us just looking for a good deal, but I can’t blame the employees too much–there are, in fact, people trying to scam them out of significant amounts of money, and it is no small task to set up a system that stops bad guys while simultaneously letting credit card hobbyists through to earn points and miles with ease.