Technology developed by Walmart helped the retail giant identify and freeze nearly $4 million in gift cards that had been bought by thousands of primarily elderly victims at the direction of con artists who duped them, according to court records and the company.
The U.S. Department of Justice, after being notified by Walmart, recently seized that money through a federal court action in Arkansas. Now victims of the frauds can claim the money.
“It was impressive what they were able to do,” a DOJ official said about Walmart’s actions. The official spoke with CNBC on the condition that they not be identified.
The seizure of the swindled gift card funds is good news for older Americans and others who lost money in those schemes — if they become aware that they can claim their swindled money.
But the money that Walmart saved for those victims is just a small fraction of the millions of dollars annually lost in so-called imposter scams that rely on gift card purchases.
And the amount of money obtained by such schemes has spiked in recent years.
In the first nine months of 2021, consumers reported losing $148 million in frauds where gift cards were used to pay scammers, according to Federal Trade Commission data.
In comparison, $114 million were reported lost in gift card frauds for the entirety of 2020, the FTC says.
How gift card scams work
Gift card scams routinely involve callers, often from overseas, phoning victims and telling them they owe money for a debt or needed services, and that they should immediately go to a retail location to buy a gift card that can be used to pay off the purported obligation.
The caller claims to be the representative of a government agency, utility, or private company that insists on immediate payment.
“They create this false sense of urgency,” said the DOJ official.
“‘You need to resolve this now, or some sort of horrible thing is going to happen,'” the official said, giving an example of how scammers pressure their targets.
“It’s a very vulnerable position to be put in, and it’s very effective.”
A common trick is to claim to be a federal entity, such as the IRS.
“Government agencies are scary,” the official noted.
The official said people when they get such calls should “take a breath. Hopefully, that will give you time to think about it,” and not rush to satisfy the caller’s demand for payment.
Andy Mao, the DOJ’s elder justice initiative coordinator, noted that “federal agencies, like the Social Security Administration, Internal Revenue Service, or FBI, will never request payment through a gift card.”
“So if someone makes that request, you should hang up or immediately stop the communication and report to the FBI’s Internet Crime Complaint Center,” said Mao.
Victims can file a complaint at the IC3 at https://www.ic3.gov/.
The FTC, on its website about gift card scams, notes: “Someone might ask you to pay for something by putting money on a gift card, like a Google Play or iTunes card, and then giving them the numbers on the back of the card.”
“If they ask you to do this, they’re trying to scam you,” the FTC says. “No real business or government agency will ever insist you pay them with a gift card. Anyone who demands to be paid with a gift card is a scammer.”
But about half of the victims who report “imposter scams” end up making a payment using a gift card, data shows.
In 2021, gift cards were the most commonly reported method of payment for victims of imposter frauds who were more than 60 years old.
Once the cards are purchased, scammers have their victims scratch off the back of the cards to reveal an ID number. It can be used online or in store to buy items that can then be sold for profit.
And when the cards are used, the cash is gone. It becomes difficult, if not impossible, for victims to recoup their losses.
Even as the losses from gift card scams grow, it remains relatively rare for retailers like Walmart, Target, Walgreens, CVS and others to stop victims from getting ripped off, much less freeze swindled gift cards so that victims can be repaid. Data show that those large retailers are the most common places where fraudsters direct their victims to buy gift cards.
“It’s great what happened in the Arkansas case [with Walmart], but that’s the exception, not the rule,” said the DOJ official who spoke with CNBC on the condition of anonymity.
“I suspect that a very small percentage of victims, particularly of gift card scams, get their money back,” said the official.
“It’s hard to get the money back,” noted the official.
The official urged people who believe they have been defrauded to contact the Victim Witness Program via a DOJ website — https://www.justice.gov/uspc/victim-witness-program — to report the crime, and, potentially, recoup their money.
Walmart says its victim-assisted consumer fraud program is unique among retailers. The effort has been successful in stopping some cases of fraud and in freezing funds in gift cards associated with scams.
“Walmart has implemented a multi-prong strategy to better protect consumers against the growing problem of victim-assisted gift card fraud in the retail industry,” said company spokesman Randy Hargrove.
“This includes developing our own proprietary, industry-leading technology designed to identify distinct red flags and freeze funds when possible before they can be used if consumer gift card fraud is suspected,” Hargrove said.
Walmart said it has developed technology to identify purchases of gift cards connected to fraud, and increased signage in its stores and online to educate consumers about common signs of scams.
And Walmart participates in government and private retail programs to share its technology with other retailers to help them address the problem of fraudulent gift card purchases at their own locations.
How $4M in swindled gift cards were saved
Walmart’s development of that strategy and how it works is discussed at length in an affidavit by a U.S. Secret Service agent. It was filed in federal court in Arkansas as part of the recent gift card forfeiture action.
The affidavit was publicly flagged by the Twitter account of Seamus Hughes, deputy director of the Program on Extremism at George Washington University in Washington, D.C. Hughes regularly trawls the online federal court filing system PACER for criminal and civil case documents that he finds interesting, but which have not been previously reported.
The affidavit says that in the fall of 2015, Walmart’s Global Investigations team “noticed a pattern of regular inquiries from local police departments regarding reports filed by victims of unspecified scams” who had been directed to buy Walmart gift cards, usually in the sum of $500 and $1,000.
In response, that team identified video surveillance in Walmart stores which had captured images of people loading cash on the gift cards that were the subject of the police reports.
The retailer found that “a disproportionate number of the victims at the cash registers who loaded the Walmart gift cards were senior citizens,” a U.S. Secret Service agent wrote in the affidavit.
The surveillance also showed that the victims usually were “actively using their cellular phones to convey the Walmart gift card numbers to the unknown individual” on the other end of the calls, the affidavit said.
The document reveals that Walmart, through a review of its gift card system, saw a pattern where a large number of gift cards were purchased around the United States and their values were immediately checked from overseas locations.
The retailer also found that those gift cards had been used to make purchases — within hours or minutes of the card value being loaded — in states that were different from where the card was loaded.
Walmart in February 2016 began tracking the checking of gift card balances from overseas, and developed a system to identify what the retailer believed were fraudulent patterns involving the cards, the affidavit said.
Eventually, Walmart identified about 10,600 suspicious transactions with a value of $4.4 million. In July 2017, the retailer froze the gift card funds connected to the suspected frauds and contacted the Secret Service about the money, the affidavit said.
The document also reveals how such frauds continued, giving examples of the methods con artists used to dupe their victims.
One man, a 64-year-old truck driver in Belleville, Mich., identified by the initials “R.J.,” told the Secret Service that in September 2020 a man with “a Middle Eastern accent” called his cell phone “and claimed to be a bill collector from an apartment complex in Michigan where R.J. previously resided.”
The caller claimed that R.J. owed $4,000, but could settle the balance by buying two Walmart gift cards for $500 each.
R.J. bought the cards while passing through North Little Rock, Ark., and, “as instructed,” quickly called the man who had demanded the payment “and provided the caller with the Walmart gift card numbers,” the affidavit said.
R.J. told the Secret Service agent that he “did not realize he had been the victim of fraud until the caller telephonically contacted him approximately one week later and made the same demands,” the agent wrote in the affidavit.
“R.J. refused the second time, and did not hear from the caller again.”
R.J.’s monetary loss of $1,000, and those of $500 or so by others in similar frauds, are typical for older victims of gift card scams. Other victims ended up losing much more.
One victim quoted in the affidavit, a 70-year-old identified as K.K., was swindled out of $8,000 worth of Walmart gift cards alone in a scam spanning 21 months.
K.K. told investigators that a fraudster called to offer K.K. protection from “hacking” of his various online accounts, and then much later claimed to be an FBI agent “trying to ‘bust the bad guys.'”
In addition to the gift cards, K.K. claimed to have been duped out of nearly $130,000 more by the scammer, the affidavit said.
Individual scammers can earn significant sums from gift-card-related frauds alone.
The DOJ official who spoke to CNBC on background said that in one case investigated by the department, scammers kept one victim on the phone line for 11 hours, “and that person ended up purchasing more than $35,000 in gift cards.”
In that case, the official said, “the bad guys told the victim that his Social Security number had been compromised, and there was a warrant out for their arrest.”
In November 2019, investigators with Walmart Global Investigations and the Secret Service identified one man, a Chinese national living in New Hampshire named Songhua Liu, as having completed more than $16,000 in gift card transactions in Arkansas during that month alone, according to the Democrat-Gazette newspaper and other Arkansas media outlets.
An affidavit in Liu’s criminal case said that investigators believed that the Chinese national netted between $500,000 to $1 million per month in fraudulent gift cards, according to reports.
Liu later was sentenced to 27 months in federal prison after pleading guilty to wire fraud, with the expectation that he would be deported at the end of his term, records show.
In January, police in Colleyville, Texas, announced that they had arrested two additional people who allegedly were part of what they called an “Asian Money Laundering Ring,” which has scammed victims, many of them elderly, out of more than $3 million involving gift cards, with the proceeds being sent to China.
Police said Walmart Global Investigations, working with the Texas law enforcement and the Secret Service, identified the fraud, which involved victims being led “through a complex story about how they allegedly owed money for a Norton Antivirus scan.”