Criminal Chargeback Fraud

The chargeback process was designed to protect consumers from fraud, but it’s an imperfect tool—and in the wrong hands, it can be used not to remedy fraud, but to perpetrate it. So-called “friendly” fraud is also known more accurately as chargeback fraud, and when committed with deliberate intent, its purpose is to defraud merchants out of revenue that rightfully belongs to them.

Many friendly fraudsters think that what they’re doing is minor and inconsequential, but it is fraud by any reasonable definition and can do real harm to merchants. What happens when chargeback fraud rises to the level of a criminal offense?

Chargebacks are supposed to protect consumers from two types of fraud: credit card fraud, and fraudulent merchants.

Without the protection of chargebacks, many consumers would be afraid to take the risk of sending their credit card numbers out over the internet or shopping with a new and unfamiliar merchant.

Chargebacks preserve consumer confidence in credit card payments and e-commerce, but disputes can be subjective—especially when it comes to merchant fraud. A merchant may struggle with fulfillment issues due to supply chain issues and other problems beyond their control, but from the consumer’s perspective they paid for goods that they no longer expect to receive, and thus they feel entitled to a chargeback.

The subjective element to payment disputes means that fraudsters can abuse the chargeback process to “cyber-shoplift,” making up false dispute claims in order to claw their payment back and keep the goods they purchased. While it’s not always easy to separate the friendly fraudsters who are making honest mistakes from the chargeback fraudsters willfully engaging in cyber-shoplifting, there is no question that deliberate chargeback fraud is legally no different than any other type of fraud.

What Is Chargeback Fraud?

Chargeback fraud is when a cardholder obtains a chargeback under false pretenses. For example, a fraudster might place an order with a merchant, and a few weeks after they receive it, they call their bank and say, “I never received my order, and the merchant won’t respond to my emails.” In reality, the ordered goods are in their possession, and they never tried to contact the merchant, but the bank hears what sounds like a valid dispute claim and grants them a chargeback.

Not everyone who engages in chargeback fraud would consider themselves to be a criminal fraudster. Some people rationalize it by vilifying the merchant and telling themselves that they’re just fighting back against a system that is rigged against them, others convince themselves that a chargeback is no different than a refund and merchants don’t really care. In truth, chargebacks are very costly and harmful, especially to smaller merchants.

Is there a Difference between Chargeback Fraud and Friendly Fraud?

Friendly fraud and chargeback fraud are often used interchangeably, but the former term is useful for describing invalid chargebacks that arise out of genuine confusion or error. A good example here would be a cardholder who sees a charge on their bank statement that they don’t recognize, and they call their bank to dispute it even though it’s actually legitimate.

While the cardholder should have tried harder to investigate the charge before disputing it, they had no fraudulent intent, and calling it “chargeback fraud” can paint an inaccurate picture of what really happened.

Of course, merchants should vigorously fight false chargebacks through the representment process, regardless of the claimant’s intentions.

What Are the Legal Implications of Engaging in Chargeback Fraud?

By design, chargeback fraud can be subjective and hard to prove, and many cybercriminals operate under false identities or out of foreign countries, making it hard to track them down. Even when a friendly fraudster’s identity is known, prosecutors don’t often prioritize small cases of individual e-commerce fraud.

Chargeback fraud is more likely to result in a civil case than a criminal one. The full unfolding of the chargeback process ends when one of the parties escalates the dispute to arbitration by the credit card network, which has the final word on the chargeback, but not the greater question of the dispute itself. Both parties can still file a lawsuit over the matter, and merchants have been successful at winning back high-value chargebacks by taking the cardholder to civil court.

However, some chargeback fraudsters can and do end up facing serious legal consequences. One Florida man was recently sentenced to ten years in prison for chargeback fraud, but he was hardly an ordinary friendly fraudster.

This individual stole more than $9 million from as many as 76 different merchants over a five-year period, utilizing a complicated scheme wherein he would dispute charges on behalf of unsuspecting third parties and intercept the returned funds.

The average friendly fraudster is unlikely to see the inside of an attorney’s office, let alone a prison cell, but they play a dangerous game when they convince themselves that their crimes are too insignificant to get them into any real trouble. The more they push the boundaries of what they can get away with, the more likely they are to attract the attention of law enforcement.

How Can Merchants Prevent and Fight Chargeback Fraud?

Merchants are often advised to prevent friendly fraud by improving the quality and coverage of their customer service, updating the merchant descriptors that appear on billing statements, providing a generous and flexible return policy, and communicating frequently and transparently with their customers about shipping delays and other issues.

These tips do work well at reducing friendly fraud that happens due to error, but they won’t stop the cyber-shoplifters who know exactly what they’re trying to get away with.

Chargeback fraud usually has to be fought after the fact, by representing the disputed charge along with evidence that proves the cardholder’s claims are false. You can prepare for this by keeping meticulous transaction records, saving copies of your correspondence with customers, and ensuring that your policies and terms of sale are clearly communicated prior to purchase. If you suspect a customer of engaging in deliberate chargeback fraud, you should block them from making any future purchases.

 Conclusion

Fighting chargebacks can be time-consuming and expensive, especially if appeals push it to the arbitration stage. The choice of whether or not it’s worth suing over chargeback fraud depends greatly on the merchant’s unique circumstances, but for merchants who sell high-value items where a single sale can have a big impact on your bottom line, it’s good to know that you have the option.

Even when chargeback fraud rises to the level of criminality, law enforcement doesn’t always have the resources to deal with it. As always, merchants must be their own strongest defenders and advocates when it comes to fending off fraud and chargebacks, but help is out there when you need it.


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