E-commerce Fraud: The Latest Criminal Schemes
- 17 July, 2009 00:28
E-commerce fraud costs retailers approximately $4 billion each year, according to the most recent results of an annual survey conducted by Cybersource, a provider of electronic payment and risk management services. Sebbe Jones, manager of fraud and disputes at 2Checkout, is in the business of keeping e-commerce fraud at bay.
2Checkout, an international online payment service, is a reseller for small-and-medium-sized businesses. The company has more than 20,000 active suppliers and handles more than 200,000 transactions a month. Merchants come to 2Checkout to handle the financial life of their transaction. Naturally, criminals hoping to defraud people out of their money and credit card information also attempt to use the system for financial gain. Jones outlines how 2Checkout monitors fraudulent activity, and details some of the latest scams he sees on the job.
CSO: You provide online payment services for vendors. Where does the interest in preventing fraud come in to play?
Sebbe Jones: Once we start accepting transactions, we are legally the reseller of that product. Because we are legally the reseller, we are the merchant of record. It's our merchant account and if the charge backs are over one percent, it is our merchant account on record for that and we could receive fines from Visa or MasterCard. So we have to make sure our fraud rate is down. We have a fraud department and we also have a risk department. We have two or three departments that make sure our vendors are doing what they are supposed to doing; providing service. We keep an eye out on terrorist activities, such as money laundering, or putting fraudulent credit cards through an account. So we really have multiple departments to watch every door that there is.
Tell me about the system you use at 2Checkout for identifying possible fraud.
We use 41st Parameters' Fraud Net. We put 100 percent all of our orders through Fraud Net. There are about 300 or so rules turned on that all orders go through Fraud Net. It will take all of that data, and score each order with a points system and we at 2Checkout use that points system.
Based on those points, there are orders that go into 'reject' bucket and a 'suspect' bucket and then even a 'approve and note' bucket. If an order is rejected, it means the system is flagging it, saying 'This looks bad. Take a look at this.' Anything in the reject bucket we manually review 100 percent of that.
Then there is the suspect bucket; these are a little bit more interesting cases where the system is saying 'Maybe. This might be suspect and this is why.' The order scored poorly in our algorithms.
If the scoring on each order goes at or above 2,000 points, that will kick into manual review. Our team of analysts will go through and make a determination on whether or not to allow, reject or put on hold until we can get further verification on the order.
What are the points based on?
There are about 300 algorithms turned on. It can go anywhere from they didn't capitalize first and last name or the billing address. Also let's say they put their name as Fred Derf. It will fire on easy keys. Things like that. Rules that add more weight is the CVV code on the back of card failed, or the AVS code failed.
More substantial rules include the IP address. We have a list of high -risk countries because we are global. Places like Nigeria, Ghana, Vietnam. While we get a lot of business from there, we also get a lot of fraud from there. So we review every order that comes from there; we review the billing address or IP address or where the credit card is coming from. Or let's say the browsers language is configured to Vietnamese. Any of these things will make an order get flagged for review.
What are the more common types of fraud you deal with?
We are global, so we see a lot of different kinds of fraud. We'll see international frauders, whether in Ghana or Nigeria, or further east, like Vietnam, Malaysia, Turkey, trying to fraud credit cards out of the U.S. The U.S. has many more credit cards out there. Someone from third-world country like Nigeria can't very well steal from his neighbors because his neighbors are just as poor as he is. So we see a lot of fraud coming from third-world countries where they are trying to defraud someone from a country with more money and commerce. Usually they are trying to buy an intangible service, like an immediate download or maybe a membership, a hosting service. We see that a lot.
We also see scenarios where a presumed vendor will open an account and start getting some orders in. Often times we find if a frauder gets that first one or two orders in and stops there, they may be successful. But the greedier he becomes, and starts getting three, five, ten or more orders in, we are going to catch him. That's when we can usually connect it with other places within 2Checkout.
Often times a vendor will sign up for an account and start placing orders into the account using fraudulent credit cards. If that frauder is really good, he knows how to mask his IP. Let's say all orders show as all U.K. or U.S. He will make the IP address match up to the billing address of that order. So this looks legitimate to us and we will start passing those first few orders. But after he gets a few orders in, he'll place an order that may connect to another order. That is when we will investigate a little bit deeper into the account and these orders and start checking the PC print; which basically is device identification.
We try and ID the device of each one of these sales. And often times we find the device placing all of these different sales is the same device. We then try and liken it up to the vendor. And that is when we often times will find that it's a possibility of money laundering. Last week we had a case where we were able to connect this vendor to an OFAC SND (Office of Foreign Asset Control's Specially Designated Nationals List). It is a list of names and aliases of known terrorists. We were able to link this vendor to that list and get them shut down before ever paying him.
What about counterfeiting or stolen items?
Is that an issue you see often? Yes, absolutely. That falls under our risk department. We are reviewing every account and reviewing the products and services they are selling. We see a lot of copyright issues; whether it's music or movies and people trying to sell movies or music. Or a vendor trying to sell Coach handbags where they don't have the approval of Coach, or Louis Vuitton is another big one. We do have a prohibited products list that contains things that a we can't sell because we dont have ownership of it or because in the past we have had fraud experiences.
We had a case a few years ago where a guy was selling computers for what appeared to be a good price. We contacted the customers and found that what was arriving was not computers. Inside the box was ripped up phone books. The vendor kept insisting on payment because the products had been shipped. But fortunately we were able to get in touch with the customers first and, of course, stop payment and refund their money.
What is the biggest thorn in your side? I always feel frauders are going to be one step ahead of the merchants. Some of our best tools that we had five years ago really aren't anymore. So now common sense tells me the tools I have today will be out of date in a few years and we hope we can have something new when the time comes.
In dealing with disputes probably the biggest thorn in my side recently is friendly fraud. That plays out in a couple of different scenarios. For instance, a customer placed an order and then saw the charge on their statement and said 'I don't want this.' But instead of contacting their bank and saying 'Hey, I did place this order, but I don't like it,' they claim fraud. Or someone else in their household places the order and they claim fraud. But bottom line is they have to be treated as fraud when in all actuality it really isn't fraud. The credit card companies, so far, haven't really provided merchants an avenue to challenge those types of things successfully.
Also, I worry about people from terrorist groups trying to defraud us, because not only does that hurt my company, it hurts all of us. Fraud is bad enough, but when you are frauding to gain money for your evil empire, that makes it all the more worse.