The Changing Face of Payments Fraud (Part 1)

In the past decade, financial fraud has changed more than it did over the entire previous century, and for that matter, perhaps more than it did over the entire history of banking. The Internet has opened the doors to countless new types of schemes, and the proliferation of computing and imaging technology has turned the stereotypical small-time amateur fraudster into a formidable opponent.

As a manufacturer of scanning equipment for banks, we’ve witnessed firsthand the evolution of document forgery and manipulation, as well as advanced tactics to combat them. But change is happening just as fast in other areas – card fraud, counterfeiting, identity theft, other scams. We recently sat down with fraud expert Sean Trundy, co-founder of the banking and UV security firm Fraud Fighter, to discuss how technology has changed the game for banks and businesses, as well as for the crooks trying to rip them off. Part 1 of our Q&A is below:

Digital Check: You’ve been involved in fraud prevention for more than a decade, on both the currency and card/ID sides. What have been the most noticeable changes in the business since you started?

Sean Trundy: Well, I’d say what has changed to the greatest degree has been the effect of technology on the “supply” side of the business, if you want to call it that.  It is clearly obvious that technology has swung the advantage towards the bad guys.  Back in 2000, when I entered this industry, the prevalence of digitally produced counterfeits was low.  Regardless of whether you talk about ID cards, currency notes, or other documents, 13 years ago, most of them were still being produced with very difficult-to-master offset printing techniques.  Because this required, in essence, a domain expert in producing printing plates, the barrier to entry was high, and the costs were much higher.  This, in turn, meant most operations were fairly large-scale, and thus, easier for law enforcement to locate.

Since then, the widespread adaptation of digital printing and digital graphics programs has put counterfeiting into the hands of the amateur.  Anyone with around $1500 worth of equipment can produce very good facsimiles of most documents. This means it is no longer necessary to produce large quantities of counterfeits to be profitable. In fact, it is not uncommon for someone to produce only one or two banknotes in order to “go out for the night” or to purchase a new video game, for example.

This phenomenon has been coupled with the social-connection paradigm that we all enjoy so much in our personal and business lives.  Social websites and online marketplaces for stolen data, and for suppliers of high-quality counterfeits, have sprung up all around the globe.  Such so-called “dark markets” make it possible for anyone to purchase complete forgery “packages”. This could be pre-printed completed documents, such as an identity package which might include social security card, driver license, birth certificate and passwords or answers to secret questions.  Or, this could be Photoshop or Illustrator files for printing currency, traveler checks, gift checks, etc, along with the correct paper for printing them.

DC: Stolen credit card numbers and other information have become widely available online, and the Internet offers lots of easy and anonymous opportunities for fraud. Why would anyone go to the trouble of counterfeiting currency anymore?

ST: It’s a good question.  I think my previous answer addresses this, to some degree.  It is easy to counterfeit currency.  Especially in the United States, where the physical “overt” security features on the currency are so easy to overcome.  Also, it is not necessary to be a major, life-long criminal in order to become a counterfeiter.  We have heard countless stories of college students making “pocket cash”, and even of elementary-school aged kids printing money to use in their school cafeteria.  My point is, people will make and use counterfeit currency for as long as the relatively low-risk opportunity to produce and use it exists.

I believe, also, that the concept of going online to obtain stolen data has its own “barrier”.  Typically, you must know someone and be invited into one of these sophisticated marketplaces.  As such, at the moment at least, this aspect of criminal behavior remains highly organized and held somewhat closely within the “families” that are involved in the industry of digital theft.  These dark markets are the creation of, and are operated profitably by and for, organized criminal rings.  While they do have distribution networks which disseminate the product outside of their immediate ring members, for the casual criminal who is not connected to these rings, the access is not as easy.

DC: The printing and imaging technology that’s available over the counter has gotten quite good. Are we still one step ahead of the typical small-time criminal? What does it take to maintain that edge?

ST: No, absolutely not.  At the moment, the counterfeiter has the advantage, for all of the reasons I have listed above.  You know, these things really do swing like a pendulum, back-and-forth.  At the moment, I think the pendulum is squarely on the side of the bad guys.  Eventually, countermeasures will be taken that prove effective. Then, over time, the counterfeiters will circumvent the countermeasures, and the pendulum will swing in their favor again.

For example, on the credit-card side, Europe has seen great advances in fraud reduction by implementing “EMV”.  This is a combination of integrated circuit “chips” and password/pin security.  While studies have shown that EMV is still vulnerable to organized attacks, it does take the small-time criminal out of the loop.

In October of 2013, the U.S. Treasury will release a newly designed $100 bill.  I believe this new bill to be highly secure.  I’ve held the bill and verified the visible overt security, and it is a tremendous step forward.  However, do I believe that the security is insurmountable?  No.  The new security features will eventually be overcome.

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In Part 2 of our Q&A, we’ll discuss the rising popularity of UV, the dangers of the amateur criminal versus the professional, and the future of fraud prevention. Stay tuned for more next week!

About the Author: Jeff Hempker is Vice President of Digital Check Corporation, an Illinois-based manufacturer of check scanners and imaging equipment for the financial industry. Visit Digital Check online at www.digitalcheck.com.