     This is part four of a planned six-part series on the credit card in-
     dustry.  It will be helpful if you have read parts one through three,
     as I use a lot of terminology here that was introduced earlier.  Enjoy.

     WARNING

     This installment describes various methods of perpetrating fraud
     against credit and charge card issuers, acquirers, and cardholders. Le-
     gal penalties for using these methods to commit fraud are severe. The
     reason for sharing this information is so that consumers will be aware
     of the importance of security and be aware of the procedures used by
     financial institutions to protect against fraud.  Neither I nor my em-
     ployer advocate use of the fraudulent methods described herein.

     All the information here is publicly available from other sources. Un-
     necessary detail is purposely not included, particularly as it applies
     to detection and prevention of fraud.


      CARDHOLDER FRAUD
      ---------- -----

     The most common type of fraud against credit cards is cardholders fal-
     sifying applications to get higher credit limits than they can afford
     to pay, or to get multiple cards that they cannot afford to pay off. 
     Sometimes this is done with intent to defraud, but most often it is
     done out of desperation or sheer financial ineptitude.  Those who in-
     tend to defraud generally use the multiple-card approach.  They give
     false names and financial data on several (sometimes as many as hun-
     dreds) of applications.  Often, the address of a vacant house that the
     crook has access to is given, making it difficult to track the crook's
     real identity.  Once cards start showing up, the crook uses them for
     cash advances or charges merchandise that is easy to sell, like con-
     sumer electronics.  The crook will run all the cards up to the limit
     immediately, and will generally move on by the time the bills start ar-
     riving.  This type of fraud is not applicable to debit cards, since
     they require an available account balance equal to or greater than any
     purchases or withdrawals.

     Protecting against this type of fraud, either intentional or otherwise,
     is exactly the purpose of credit bureaus such as TRW.  Issuers have be-
     come more aware of the need for careful screening of applications, and
     are using better techniques for detecting similar applications sent to
     multiple issuers.  More sophisticated velocity file screening can also
     be used to detect possibly fraudulent usage patterns.  Since this is a
     method of fraud that can be used to gain really large amounts of 
     money, it is a high priority with issuers' security departments.

     A variant of this scheme is much like check kiting.  Can you use your
     VISA to pay your MasterCard?  Well, you might be able to manage it, but
     if you're doing it with intent to defraud, you can be prosecuted. Kit-
     ing schemes typically don't last long, have a low payoff, and are very
     easy to detect.

     Another type of cardholder fraud is simply contesting legitimate
     charges.  Most often, retrieving the documents gives pretty convincing
     proof.  Frequently, a family member will be found to have used the card
     without the cardholder's permission.  Such cases are usually pretty
     easy to resolve.  In the case of an ATM card, cameras are often placed
     at ATMs (sometimes hidden) to record users of the machine.  The camera
     is usually tied to the ATM, so that a single retrieval stamp can be
     placed on the film and the ATM log.  If a withdrawal is contested, the
     bank can then retrieve the picture of the person standing at the ma-
     chine, and conclusively tie that picture to the transaction.

     A type of cardholder fraud that is endemic only to ATMs is making false
     deposits.  You could, theoretically, tell the ATM that you are deposit-
     ing a large amount of money, and put in an empty envelope.  Most banks
     will not let you withdraw amounts deposited into an ATM until the de-
     posit has been verified, but some will allow part of the deposit to be
     withdrawn.  Typically, you can't get away with much.  If you have any
     money actually in your account, the bank has easy, legal recourse to
     seize those funds.  Most banks have no sense of humor about such
     things, and will remove ATM card privileges after the first offense.


      THIRD-PARTY FRAUD
      ----------- -----

     The simplest way for a third party to commit fraud is for them to get
     their hands on a legitimate card.  There is a large black market for
     credit cards obtained from hold-ups, break-ins and muggings.  Perhaps
     one of the cruelest methods of getting a card is a "Good Samaritan"
     scam.  In such a scam, credit cards are stolen by pick-pockets,
     purse-snatchers, etc.  That same day, someone looks up your number in
     the phone book and calls you up.  "I just found your wallet.  All the
     money is gone, but the credit cards and your driver's license are still
     here.  It just happens that I'll be in your neighborhood next Wednesday
     and I'll drop it off then."  Since the cards are found, you don't re-
     port them stolen, and the crooks get until next Wednesday before you're
     even suspicious.  If such a thing happens to you, ask if you can come
     and pick the cards up immediately.  A true good samaritan won't mind,
     but a crook will stall you.  If you can't get your hands on the cards
     immediately, report them as stolen.  Most issuers will be able to get
     you a new card by next Wednesday, anyway.

     Often stolen cards will be used for a time exactly as is.  The best
     tool for preventing this is verification of the signature, but this is
     ineffective because most merchants don't consistently check signatures
     and some people don't even sign their cards.  (I guess these people
     figure that all purse snatchers are accomplished forgers as well.) 
     Many cards will eventually be modified as the various security schemes
     start catching up.

     It is a very easy matter, for example, to re-encode a different number
     on the magnetic stripe.  Since the card still looks fine, a merchant
     will accept it and run it through the POS terminal, completely ignorant
     of the fact that the number read off the back is not the same as that
     on the front.  Although the number on the front would fail a negative
     file check, the number on the back is one that hasn't been reported
     yet.  A card can be re-encoded almost any number of times, as long as
     you can keep coming up with new valid PANs.  To protect against this,
     some merchants purposely avoid using the magnetic stripe.  Others have
     terminals that display the number read from the stripe, so the cashier
     can compare it to the number on the card.  Some issuers are experiment-
     ing with special encoding schemes, to make re-encoding difficult, but
     most of these schemes would require replacing the entire embedded base
     of POS terminals.  An interesting approach I've seen (it's probably
     patented) uses a laser to burn off the parts of the magnetic stripe
     where zeroes are encoded, leaving only the ones.  This severely limits
     the changes you can make to the card number.  Some issuers use the
     "discretionary data" field to encode data unique to the card, that a
     crook would not be able to guess, to combat this type of fraud.

     Since an ATM doesn't have a human looking at the card, it is especially
     susceptible to re-encoding fraud.  A crook could get a number from a
     discarded receipt and encode it on a white card blank, which is easy to
     obtain legally.  Many people use PINs that are easy to guess, and the
     crook has an easy job of it.  Most ATMs will not give you your card
     back if you don't enter a correct PIN, and will only give you a few
     tries to get it right, to prevent this type of fraud. Velocity file
     checks are also important in detecting this.  You should always take
     your ATM receipts with you, pick a non-obvious PIN, and make sure that
     nobody sees you enter it.  

     One place that a crook can get valid PANs to encode on credit cards is
     from dumpsters outside of stores and restaurants.  The credit slip
     typically is a multipart form, with one copy for you, one for the mer-
     chant, and one for the issuer (ultimately).  If carbon paper is used,
     and the carbons are discarded intact, it's pretty easy to read the num-
     bers off of them.  Carbonless paper and forms that either rip the car-
     bons in half or attach them to the cardholder copy automatically are
     used to prevent this.

     There are a lot of scams for getting people to tell their credit card
     numbers over the phone.  Never give your card number to anyone unless
     you are buying something from them, and make sure that it is a le-
     gitimate business you are buying from.  "Incredible deal!!  Diamond
     jewelry at half price!!  Call now with your VISA number, and we'll rush
     you your necklace!!"  When you don't get the necklace for four weeks,
     you might start to wonder.  When you get your credit card bill, you'll
     stop wondering.  

     There are other, more sophisticated ways to modify a credit card.  If
     you're skillful, you can change the embossing on the card and even the
     signature on the back.  For most purposes, these techniques are more
     trouble than they're worth, since it's not difficult to come up with a
     new stolen card, or fake ID to match the existing card.


      MERCHANT FRAUD
      -------- -----

     There are many urban rumors of merchants imprinting a card multiple
     times while the cardholder isn't looking, and then running through a
     bunch of charges after the cardholder leaves.  I don't know of any case
     where this is an official policy of a merchant, but this is certainly
     one technique a dishonest cashier could use.  The cashier can then take
     home a bunch of merchandise charged to your account.  Although some
     people are afraid of this happening in a restaurant, where a waiter
     takes your card away for a while, it's actually less likely there,
     since there isn't anything the waiter can charge against your card and
     take home.

     A merchant could also make copies of charge slips, to sell the PANs to
     other crooks.  (See above for use of PANs.)  Most credit card investi-
     gation departments are sensitive to this possibility, and catch on real
     fast if it's happening just by looking at usage history of cards with
     fraudulent charges.

     A merchant is also in a position to create many false charges against
     bogus numbers, to attempt to defraud the acquirer or issuer.  These
     schemes are usually not too effective, since acquirers generally re-
     spond very quickly to an unusual number of fraudulent transactions by
     tightening restrictions on the merchant.


      ACQUIRER AND ISSUER FRAUD
      -------- --- ------ -----

     The place to make really big bucks in fraud is at the acquirer or is-
     suer, since this is where you can get access to large amounts of money. 
     Fortunately, it's also fairly easy to control things here with audit
     procedures and dual control.  People working in the back offices, pro-
     cessing credit slips, bills, etc. have a big opportunity to "lose"
     things, introduce false things, artificially delay things, and tempo-
     rarily divert things.  Most of the control is standard banking stuff,
     and has been proven effective for decades, so this isn't a big problem. 
     A bigger potential problem to the consumer is the possibility of an em-
     ployee at the issuer or acquirer selling PANs to crooks.  This would be
     very hard to track down, and could compromise a large part of the card
     base.  I know of no cases where this has happened.

     Programmers, in particular, are very dangerous because they know where
     the data is, how to get it, and what to do with it.  In most shops, de-
     velopment is done on completely separate facilities from the production
     system.  Certification and installation are done by non-developers, and
     developers are not allowed any access to the production facilities. 
     Operations and maintenance staff are monitored very carefully as well,
     since they typically have access to the entire system as part of their
     jobs.

     Another type of fraud that is possible here is diversion of materials,
     such as printed, but not embossed or encoded, card blanks.  Such mate-
     rials are typically controlled using processes similar to those used at
     U.S. mints.  Since most of the cards issued in the United States are
     actually manufactured by only a handful of companies, it's not too hard
     to keep things under control.

     There are many types of fraud that can be perpetrated by tapping data
     communication lines, and using protocol analyzers or computers to in-
     tercept or introduce data.  These types of fraud are not widespread,
     mainly because of the need for physical access and because sophisti-
     cated computer techniques are required.  There are message authentica-
     tion, encryption, and key management techniques that are available to
     combat this type of fraud, but currently these techniques are far more
     costly than the minimal fraud they could prevent.  About the only such
     security technique that is in widespread use is encryption of PINs.

     The next episode will be devoted to debit cards, and the final episode
     will talk about the networks that make all this magic happen.


                     Joe Ziegler
                     att!lznv!ziegler
