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« Payments = trade = good | Main | Bullish on mobile »

Moral panic or genuine worry?

By davebirch posted Jan 22 2007 at 8:01 AM

[Dave Birch] It looks as if gift cards will need some better PR. The panic has been growing for a while, but I thought it had peaked before Christmas with stories about them being the ideal present for organised criminals in Canada. According the Mounties, such persons use them as "virtual currency" for drug deals and money laundering. Apparently, a recent organized-crime threat assessment for Canada and the United States identified gift cards and prepaid debit cards as one of the tools in the financial-crime kit of organized crime. The assessment was compiled by the RCMP, the FBI and the U.S. Drug Enforcement Administration. "All these cards were built for legitimate purposes, obviously," said Det. Insp. John Sullivan of the Mounties, "But as with any new technology, as soon as criminal organizations see a gap, they exploit it."

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The deposit limit on "closed" cards (eg, my Starbucks card) make them less attractive for organized-crime groups who, according the Mounties again, prefer "open" (ie, Visa and MasterCard-branded) cards with higher limits. These are now accepted as valid currency between criminals who settle drug deals in gift cards instead of cash.. Instead of a suitcase of cash, operatives might show up for a drug deal with a fistful of gift cards. Is this a realistic threat? Who knows, but the Mounties also note that the cards are useful for transferring money across the U.S. border, because they don't qualify as "monetary instruments" and aren't subject to reporting limits (people who cross the border with $10,000 or more must file a report with Canadian border authorities).

In addition to supporting criminal value chains, gift cards also stimulate their own kinds of crime. The U.S. National Retail Federation (which estimated Americans will spent $24.8 billion U.S. on gift cards over the holidays) carried out a survey of 75 retailers that track gift card theft and found that they averaged almost $72,000 a year in losses due to gift card fraud. The loss is higher among the 60 percent of retailers polled who have re-loadable cards. Absolutely predictably, and in line with all of our experiences carrying out risk analysis for new e-payment schemes, almost two-thirds of the losses are due to dishonest employees with the remainder split between counterfeit and stolen cards. Gift cards don't rob people, people rob people.

My opinions are my own (I think) and are presented solely in my capacity as an interested member of the general public. [posted with ecto]

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