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US national regulators are looking into the role of Taiwanese organized crime organizations in gift cards fraud schemes that have taken hundreds of millions of dollars or more from American customers.
A task force headed by the US Department of Homeland Security has been set up to fight a” cards draining” system, in which criminals steal or have their cards altered to steal cash before the owner can use it. Its presence has not previously been reported. The program has been dubbed” Project Red Hook” in honor of the culprits ‘ ties to China and their abuse of cards displayed on “J-hooks” in business shops.
This is the first time national regulators have focused on and directed resources to combating the part of Chinese organized crime in product card fraud. In response to a burst of customer complaints and arrests relating to id draining, Homeland Security began placing a priority on gift card scams late last year.
Over the past 18 months, legislation enforcement across the country has arrested about 100 people for card flushing, of whom 80 to 90 are Chinese nationals or Taiwanese Americans, according to Adam Parks, a Homeland Security assistant special agent in charge based in Baton Rouge, Louisiana. Parks, who is leading the work force, estimates that another 1, 000 people could get involved in passport flushing in the US, generally as athletes for the criminals.
” We’re talking hundreds of millions of dollars, potentially billions of dollars, ]and ] that’s a substantial risk to our economy and to people’s confidence in their retail environment”, he told ProPublica.
What occurs when crooks remove gift cards from a store display, opened them in a different location, report the card numbers and Wires, or substitute them with a new id, is known as card draining. The thieves then clean up the packaging, take the cards up to a store, and set the cards up on a shelf. Unintentionally selecting and loading funds onto a compromised card, the criminal can get the card online and rob the balance of the card.
According to Parks, national investigators believe that numerous Foreign legal organizations are involved in card flushing and are using the money to finance other illegal activities, including cocaine and human trafficking. Recently, ProPublica revealed Chinese prepared crime’s participation in the illegally cultivated US cannabis industry and the money being levied for cocaine, heroin, and morphine. ProPublica has also revealed how gift card fraud has been facilitated by Walmart and different retailers, as well as the part that Chinese fraud networks play in gift cards libel.
A French man who stole more than$ 22 million by operating an illegal online gift card market that targeted American consumers and businesses was the subject of the investigation led by the DHS group in Baton Rouge. Parks and special adviser Dariush Vollenweider saw the need for a nationwide reply as arrests for cards draining began to pour up all over the nation.
Next November, they convened a two- time conference at DHS headquarters in Washington, DC, attended by many of the country’s top stores and gift cards suppliers, including Walmart. Federal authorities pushed the sector to share information and assist in thwarting the gangs. The organization then circulated a bulletin in December to inform law enforcement across the nation about the card-tampering practices. About 15 Homeland Security agents, according to Parks, are currently dedicating the majority of their time to Project Red Hook.
” It’s not just a one- store problem”, Vollenweider said. ” It’s not just a Secret Service or DHS or FBI problem. It’s an industry problem that needs to be addressed”.
According to estimates from the industry, Americans are expected to spend more than$ 200 billion on gift cards this year. Retailers adore gift cards because they increase sales and profit: In general, customers spend more than the value of a card when they shop, and stores like Walmart and Target profit from purchases made by third-party gift cards like those from Apple or Google.
According to consumer and retailer data, card draining has increased dramatically in recent years. According to comments made by a company loss prevention officer in a Florida sheriff’s office in June last year,$ 300 million has been taken from customers alone as a result of card draining.
Nearly a quarter of Americans have given or received a card without the balance on it, presumably because the money was stolen, according to a recent survey by AARP, the nonprofit advocacy group for people over 50. More than half of the victims surveyed said they could n’t get a credit or a refund. ( Apple, Walmart and Target say, in their terms and conditions, that they are not responsible for lost or stolen gift cards. )
More broadly, almost 60 % of retailers said they experienced increases in gift card scams between 2022 and 2023. Between 2019 and 2023, Americans lost close to$ 1 billion to card draining and other gift card scams, according to the Federal Trade Commission.
Consumers who purchased or received gift cards only to discover the balance had been stolen have filed class-action lawsuits against Target and Walmart. The plaintiffs claimed in each case that the businesses had failed to secure the gift card packaging and keep an eye on the displays. The complaint in the Target case states that” the tampering of Gift Cards purchased from Target is widespread and widespread, and Target is well-known of the problem, yet Target continues to sell unsecure Gift Cards susceptible to tampering without warning customers of this fact.”
The Walmart case was resolved in 2022 with an undisclosed settlement, and Target is engaged in settlement talks. Apple settled a similar card- draining class- action case in January, agreeing to pay$ 1.8 million. Walmart and Apple did not admit liability.
Apple declined to comment about card draining and the DHS investigation. In court filings in the class- action, Apple said that since the cards were purchased at Walmart,” the fraud occurred as a result of Walmart’s security protocols, rather than Apple’s”. We are proud of our routine work with federal law enforcement, according to a Walmart spokesperson, who stated to ProPublica,” We are proud of our routine work with federal law enforcement to stay ahead of these fraudsters and help keep customers safe.
In court documents, Target claimed in court that its gift card security measures were ineffective and that its cards lacked potential for unauthorized tampering. In a statement to ProPublica, Target said,” We are aware of the prevalence of gift card tampering and take this issue very seriously.” Our stores ‘ teams check cards for physical tampering, and our cyber fraud and abuse team uses technical controls to protect guests. According to Target, employees should be on the lookout for “high dollar amounts or large quantities of gift cards” or “tampering with gift cards in stores.” LIke Walmart, Target said it works closely with law enforcement.
Gift card scammers affiliated with Chinese criminal organizations con their victims in a variety of ways, including card draining. Some frauds turn victims into unintentionally paying criminals with gift cards. Whatever the ruse, the crime rings make use of low- level “runners” in the US, who are almost exclusively Chinese nationals or Chinese Americans. In card draining, the runners assist with removing, tampering and restocking of gift cards, according to court documents and investigators.
A single runner traveling from one store to another can quickly swipe or return thousands of tampered cards to racks. What they do is they simply fly into the city, get a rental car, and then hit every big-box store along a corridor off an interstate, according to Parks.
In a 24- hour period last December, an alleged runner named Ming Xue visited 14 Walmarts in Ohio before being arrested, according to court documents. Police said they found 2, 260 Visa, Apple and Mastercard gift cards in his car. According to a prosecution motion, Xue entered the US illegally months before his arrest. He has pleaded innocent.
DHS is looking into whether Chinese criminal organizations use foreigners as card-drainers when they enter the country. According to John Cassara, a retired federal agent and author of China-Specified Unlawful Activities: CCP Inc., transnational crime and money laundering, Chinese criminal organizations frequently smuggle workers across the border for prostitution or marijuana growing.
According to Parks,” some of the people who were arrested were encountered illegally crossing the southern border within weeks to months” according to Parks.
Other alleged card-draining runners allegedly entered the country legally and allegedly claimed to have been hired through online advertisements.
After being spotted by employees at a Florida Target removing gift cards from a bag and putting them on racks, Donghui Liao was arrested. Through a translator, he told police that his employer hired him online and mailed gift cards to him, according to court documents. He received a 30 cent fee for each card he returned to the rack. Police said they found$ 60, 000 worth of tampered cards in his possession.
Liao’s case was recently transferred to federal court, and he is still being held. Liao has entered an innocent plea and the DOJ did not respond to requests for comment.
In New Hampshire, three people were detained between December and March for allegedly using stolen gift card balances to purchase expensive iPhones and other electronics.
According to a police report, the suspects ‘ apartments had” a large quantity of Apple brand devices, cash, and a computer program that appeared to be running gift card numbers, in real-time.” ( Criminals use software to automatically check the balances of gift cards to alert them when a customer purchases and loads money onto a tampered card. ) According to Vollenweider, the con artists typically return the electronics to China to resell them.
Parks said Red Hook is recommending anti-fraud measures to retailers, such as more stringent scrutiny of gift card displays, while also raising awareness of the issue among local law enforcement and business. Instead of arresting and prosecuting runners, according to Parks, store security and local police have occasionally treated them as temporary annoyances and booted them from stores. The task force hopes to collaborate with neighborhood police to locate and charge runners who have previously been released.
” It’s important for us to start delivering consequences”, he said.
Craig Silverman is a national reporter for ProPublica covering voting, platforms, disinformation and online manipulation. Folow him on X @CraigSilverman. The reporter Peter Elkind covers government and business.