[Dave Birch] I was thinking that it might be fun to have a section on fraud at next year's Digital Money Forum, so that led to me to wonder about how card fraud is going at the moment and, more particularly, to wonder about the dynamics. Are consumers put off of e-commerce because they are worried about card fraud? It seems that it's not their priority.

Online consumers care more about convenience than card fraud,

[From Online card fraud not our problem? — Retail Fraud]

This is exactly what I told American Express when they phoned to offer me identity theft insurance yesterday. As I told the chap who called, I love my Amex BA card, but if someone steals the number and starts using it at Bolivian porn sites, I don't care, because it's Amex's problem and not mine. That's the beauty of credit cards. But does it lead to what economists term "perverse incentives" (which are nothing to do with Bolivian porn sites)? In other words, are people like me careless with their card details, thereby leading to more fraud, because we don't bear any responsibility for it? I certainly wouldn't pay for much in the way for fraud protection either.

A security vendor is trying to sell transaction monitoring services directly to consumers, a technology that until now has been offered primarily to banks.

[From service-mobile-phone-fight-fraud-targets-consumers - PaymentsSource Article]

This doesn't work for me, because if fraudsters use my credit card number to buy a car in Kazakhstan while I am in England, I don't care: it's the bank's problem, not mine, which is precisely why I value my credit card so highly and charge everything I possibly can on it.

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[Dave Birch] I was kindly invited along to a breakfast briefing on e-crime by the folks at International Business Wales. They are trying to develop the financial services business in Wales by bringing together business, academia and government to create a more effective infrastructure. Obviously, financial e-crime threatens this sort of development, so I can see why they would be interested in finding ways to avoid it. Naturally, I was mainly interested in the payments-related parts aspects of the discussion, but I was generally curious about the topic as a whole. Before I reflect on the presentation, an aside on the topic of financial e-crime. There's no doubt that financial e-crime is on the rise the world over: here is one just one case chosen almost completely at random:

Criminals have stolen more than $479,000 from a Pennsylvania housing development authority after infecting its computer system with the notorious Clampi Trojan. The crime is the latest in a rash of heists from small business banking users in the US, which has led some industry bodies to suggest radical lock-down procedures for companies banking online.

According to local press reports, the Trojan was installed through a fake Web site purporting to belong to Cumberland County Redevelopment Authority's bank, M&T.

Once installed, Clampi stole passcodes which were used to transfer the money to bank accounts set up by the hackers at 11 different financial institutions. About $109,000 has been recovered since the money was taken on 22 September.

[From Finextra: $479,000 heist from small business bank account lends weight to calls for online banking 'lock-down']

This is clearly recognisable e-crime, but there are many other forms. In the UK, the probably biggest single category of business fraud is VAT carousel fraud. Is this an e-crime or not? Even though the crime is perpetrated using computers, I wouldn't call it an e-crime, since exactly the same crime could be carried out in exactly the same way without computers. What about credit card fraud? That clearly needs computers to execute at scale, but again I wouldn't really call cloning magnetic stripes "e-crime". I'd give card fraud its own category.

Police in 12 countries have arrested 178 people accused of involvement in an international credit card cloning ring that is believed to have netted crooks around EUR20 million. According to the Spanish Interior ministry, the arrests come after a two-year investigation that culminated in 84 raids in Spain, Italy, Romania, France, Germany, Ireland, Sweden, Greece, Finland, Hungary, the US and Australia.

The raids turned up 11 cloning 'laboratories' with around 120,000 card numbers and 5000 fake cards found in Spain alone.

[From Finextra: Card cloning raids net 178 arrests]

What? $20m? That's peanuts. Some guy was just indicted for a fraud fifty times bigger than that.

Former South Florida lawyer Scott Rothstein was sentenced to 50 years in prison for using his law firm to run a $1.2 billion Ponzi scheme that financed a lavish lifestyle, bankrolled his firm and bought political influence.

[From Rothstein Gets 50 Years for $1.2 Billion Fraud (Update3) - BusinessWeek]

Card fraud is so last year. But on to the report.

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[Dave Birch] I've been involved in a few discussions about prepaid cards over the last couple of weeks. One of those discussions was about whether some prepaid products would remain viable under stricter regulatory conditions. Why would regulators want to increase the regulatory burden, and therefore cost, of products aimed at the unbanked? Well, in the US, prepaid cards are the focus on attention because of their supposed criminal use.

The "Stored Value Device Registration and Reporting Act of 2010" will close a loophole that has treated stored value cards differently than cash, money orders and traveler's checks..

• Money stored in electronic devices would be considered the same as currency for regulatory purposes. Prepaid cards, cell phone chips and other electronic devices would be covered.
• Stored value devices loaded with more than $10,000 would have to be registered with the Treasury Department.
• The flow of money via stored value devices would be tracked. "There's no current data on how stored value devices are currently used" to smuggle funds, said Giffords.

[From Bills aims to snip cash-card money smuggling | Border]

Well, I'm sure there's lots of data on how stored-value is used, but it is of course private and the issuing banks would of course need a warrant to give it up. But I'm still curious to know whether criminal masterminds really are using prepaid cards instead of cash. My O2 Money card, for example, has a maximum balance of five hundred pounds unless you go through KYC/AML in which case it goes up to ten grand. So what criminal mastermind would want twenty O2 Money cards rather than a hundred $100 bills or twenty €500 notes? The article specifically mentions drug cartels, but when the police bust the Mr. Bigs, they don't find prepaid cards, they find cash.

"Don't trivialize this by calling these gift cards," Goddard said. "These devices can hold hundreds of thousands, if not millions of dollars."

[From Bills aims to snip cash-card money smuggling | Border]

No, they can't. The maximum you can put on a typical US prepaid card with going through KYC is $500-$1,000. But a drug-running master criminal might decide to get a hundred card and put $1,000 on each of them I suppose. Let's take a look at what we find in their treasure hoards.

The arrest of more than 2,200 persons and seizure of 74 tons of illicit drugs in 18 states in a massive nationwide undercover investigation by federal, state and local authorities has revealed that Mexican drug smuggling organizations are well entrenched in the United States… the operation accounted for $154 million in cash, 1,262 pounds of methamphetamine, 2.5 tons of cocaine, 1,410 pounds of heroin, 69 tons of marijuana, 501 weapons and 527 vehicles.

[From Massive bust nets suspects, drugs in 18 states - Washington Times]

But not, apparently, prepaid cards. Similarly, these ice men clearly prefer greenbacks to Starbucks' cards.

Authorities confiscated more than $200 million in U.S. currency from methamphetamine producers in one of this city's ritziest neighborhoods, they said Friday, calling it the largest drug cash seizure in history… Mexican officials said the cash seized was mostly in U.S. $100 bills and weighed at least 4,500 pounds.

[From Mexico meth raid yields $205 million in U.S. cash - latimes.com]

That's TWO TONS OF CASH. I suggest that the Senate turns its attention to the abolition of the $100 bill rather than imposing cost and inconvenience on my kids US$ "Cash Passport" cards that they have with them on vacation in California. Some more people who don't read my blog about the benefits of electronic payments over cash were uncovered last year.

Federal agents have rounded up more than 750 suspects in a wide-ranging crackdown on Mexican drug cartels operating inside the United States… The DEA seized more than 23 tons of marijuana, cocaine, heroin and methamphetamines; plus dozens of planes, boats and cars; more than $63 million in cash; and scores of weapons in the operation.

[From Feds Bust 750 In Mexico Cartel Crackdown - CBS News]

No mention again of their Sears gift cards or Walmoney. And, as an aside, the guy who owned the house that had the $200m in cash in it? He actually had $340m, most of which he spent in Las Vegas apparently, where the casinos assumed that he was legitimate businessman — his mistress paid a million dollars in cash for an apartment, shouldn't that ring some alarm bells? — unlike those Canadian casinos where the real criminals go to launder money.

Money laundering by organized crime groups is rampant at Canadian casinos but police are essentially doing nothing to combat it… "Since 2003, FINTRAC (the Financial Transactions and Reports Analysis Centre of Canada) has sent several disclosure reports to the RCMP on suspicious transactions involving casinos throughout Canada, with amounts totalling over $40 million," the 2009 report states.

[From Money laundering thrives at casinos: Report]

Come on. Prepaid cards don't make the slightest difference to criminals, tax evaders, drug smugglers or executive expense chats. But making them more expensive and more inconvenient does make a difference to people who are excluded from the financial system.

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[Dave Birch] I was leafing through the English newspapers on the plane the other day — the usual kinds of thing, you know, men out on charity walk attacked and hospitalised by drunken yobs, public worker gets £80,000 payoff because new chairs cause backache, 18,000 Facebook tributes to murdering nutter and so on — but it was the story of the thieving Air France stewardess that caught my eye. The light-fingered trolly dolly was arrested for stealing from sleeping first-class passengers. Her preferred pilfering plane route was Paris-Tokyo, apparently because Japanese tourists carry huge wads of cash around with them and, like any self-respecting criminal, she wanted cash.

Police have arrested French air stewardess Lucie R. (her identity is protected) in Tokyo on suspicion of stealing from First Class Air France passengers while they slept.

[From France24 - Air France stewardess stole from passengers while they slept]

Incidentally, I loved Air France’s comment on this story, which was to say that only checked baggage is their responsibility and that theft from the cabin was a matter for travel insurance. Or, in English, “tough”.

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[Dave Birch] I’ve been thinking about ATMs this morning because of the news that

the man credited with being the inventor of the world’s first hole-in-the-wall cash dispenser has died in hospital following a short illness. John Shepherd-Barron… died at Inverness’s Raigmore Hospital on Saturday, at the age of 84.

[From BBC News - Inventor of cash machine, John Shepherd-Barron, dies]

It’s astonishing, really, how quickly the ATM permeated society. Today it is taken for granted. But will it be around for long? There are some signs that the days of the ATM are waning.

SIGNS are emerging that Australia is moving towards a cashless society, with the number of consumers making ATM cash withdrawals dropping to the lowest point in more than six years.

[From Cash transactions on their way out | The Australian]

I shouldn’t think the ATM manufacturers are throwing themselves off of buildings just yet. So long as people continue to use cash, the ATM is here to stay, and despite the best efforts of e-payment fanatics such as yours truly, they’re going to be here for some time. But that wasn’t what I was thinking about, because I’m in the middle of doing some work on trends in security technology for one of our UK customers, so what I was thinking was that ATMs will remain a focus for attack: the bad guys know that there is where the money is too.

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[Dave Birch] The cost of cash isn’t only the cost of the notes and coins, the ATMs and armoured cars, the night safes and counting machines. It’s the lack of efficiency in the economy that goes with it. And economies that are stuck with cash are the worst off. So how much does cash cost in a developing economy? I happened across this figure while I was looking for something else in connection with a project that we are working on.

“The total cost of cash handling in Indonesia is Rp 6.13 trillion a year,” she said.

[From More consumer purchases made in cash | The Jakarta Post]

It’s hard to work out by calculating adjusted GDP and historic exchange rates, but I reckon this is about 0.5% of GDP, which is comparable to the UK. Considering that over 90% of all Indonesian retail transactions are in cash, this seems low to me, but who knows. Anyway, in discussion with someone else today, another point emerged. The real hidden cost of cash in developing countries is corruption.

A friend of mine just got shaken down by the Kenyan police in an excellent new scam. Watch out for this one next time you go to Nairobi! He got a approached by a man who wanted to talk to him: my friend ignored him and carried on walking down to the street. A few metres on he was stopped by two policemen who said that they had just seen my friend talking to someone who was a known terrorist and that they were going to arrest him and he would get five years in jail. Unless, that is, he could pay the fine for talking to known terrorists, which in Kenya is apparently $300. My friend was marched back to an ATM (the policemen were very specific that it had to be a Barclays ATM, connected to the Visa network) to get the money. If only, I thought, he had had been using the excellent M-PESA mobile money transfer! Then he could have paid the fine on the spot. That would have been much more efficient.

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