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Fact Pattern RE: Consumer Fraud & Credit Cards

The following points illustrate a fact pattern for a type of credit card fraud against consumers that the industry and regulators have not adequately detected, prevented, and administratively remediated:

  1. The originating credit card bank transfers inactive / dormant credit card accounts to a third party administrator (compare loan securitization schemes). Most individuals have dormant cards, arising from, among other motivations, taking advantage of teaser interest rates and/or balance transfer bargains. When the term of the tease is completed, the card is not used. It may be destroyed or otherwise rendered inactive by the holder, who likely forgets about these card accounts. However, the economic relationship borne by the original credit card bank and third party administrator / transferee continues to operate in the shadowy and proprietary background.
  2. The third party administrator / transferee processes unauthorized and fraudulent charges from a complicit bogus / front vendor providing services from a foreign jurisdiction (e.g., a front Canadian company charging for fraudulent services to an account holder in the U.S.) Most likely, the bogus / front vendor has an economic relationship with more than one third party administrator. Volume is key for this scheme.
  3. The original fraudulent charge goes unpaid as the card holder is not made timely aware of the charge. Key to this scheme is the failure of both the original credit card bank and the third party administrator / transferee to deliver timely notice of the charges to the account holder. Exorbitant fees and interest charges layer atop the original fraudulent charge, finally resulting in notification to the card holder. The consumer / holder may pursue a time-consuming examination of the document and data trail to explain the failure of any original or timely notices (as late charges and interest accrue). Key to this scheme is the absence of legitimate business processes on the part of the original credit card bank and transferee to timely detect fraud, allowing the parties to nominally point the finger at the other’s deficient watchdogs.
  4. Third party administrator / transferee call center representatives, most of whom likely are unfamiliar with their own involvement in the broad cross-organizational fraud (compare conspiracy to commit wire fraud), lack authority to resolve economically and efficiently the card holders’ complaints. ‘Confusion and delay’ ensue – none of which benefit the victim in a satisfactory manner, creating a black hole of consumer complaints and feckless, ‘we’d like to help but’ responses. Key to this scheme is tying the original account holder to the dubious obligation for as long as possible as the obligation increases under the weight of compound interest (and other fees). In this volume-based scheme, many alleged debtors will pay before long as the remedy is time-consuming (and this is the most favorable attribute that I could imagine), characterized by too many ‘I’d like to help but’ responses.
  5. To reiterate: Key to this scheme is the low competency and ineffectiveness (compare low integrity and/or low staffing) of the fraud unit, whether in the original credit card bank and/or third party administrator / transferee whereby charges originating in foreign jurisdictions against accounts long inactive are not adequately flagged. Go figure?

There are many easy solutions. For example, if an account is inactive for 90 days, the original credit card bank sends a written notice via the U.S. mail (preferably, return receipt requested) to the original account holder that the account has not been used in 90 days (assuming no unpaid legitimate balance), and the line of credit from the card will expire by the end of 30 days from receipt of the inactivity notice unless affirmative notice is provided by the original card holder. Without notice from the card holder, the card expires. This will significantly reduce the risk of the profitability of the fraudulent scheme herein.

Administrative controls shifting responsibility to those with superior data, documentation, and dedicated business processes (generally, the component units of the financial services industry) make sense in this period characterized by rampant identity theft, lack of online privacy, failures in maintaining confidentiality of personal information of consumers, failures in processing integrity for charges, etc.

Postscript: Among other deficiencies in the documentation of the fact pattern summarized above is the alleged absence of original documentation of the unauthorized and fraudulent charges from the bogus / front vendor in the possession of the third party administrator (compare mortgages and notes payable transferred to loan servicing companies without complete documentation of the transactions). Best of luck in communicating with the fraudulent front company in the foreign jurisdiction. What is perhaps most important is that this scheme is not unprecedented. Indeed, it persists and mutates as its profitability is not seriously threatened by those with the resources and authority to combat it. How about a war against fraud?

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