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Loss Prevention


									     Loss Prevention
               Best Practices
Preventing Gift Card Fraud
                                             Protecting your program from loss and liability
Gift Cards have become the perfect gift         How are the losses occurring?                       protecting the card. When it comes to
choice for many consumers over the                                                                  protecting the card, retailers should
past years, and for retailers a successful      As retailers were quick to bring gift               make certain that they do not overlook
source of increased revenue. According          cards to market, many were in fact slow             the security of the card itself in order to
to industry analysts, the 2006 holiday          to provide certain protection for the gift          reduce the overall costs per gift card.
season alone should bring almost $25            cards themselves, proper controls at the
billion in sales with projected annual          point of sale and the development of                Deterring Fraud at the Point of
sales through 2007 to possibly top the          adequate reporting of gift card activity.           Sale
$100 billion mark. It is obvious from           These failures opened up gift cards to
these predictions that both retailers and       fraud, both from “customers” as well as             Gift cards are a form of tender and
consumers have accepted gift cards as a         dishonest associates.                               when it comes to tender fraud, the point
great choice in the retail marketplace.                                                             of sale is often where it occurs.
                                                There have been several methods that                Understanding how your point of sale
Another group who has seen gift cards           thieves, both internally and externally,            system issues, redeems, cashes and
as a popular choice is the retail               continue to use to commit fraud. Some               activates gift cards will help you to
fraudster. In similar fashion to other          methods are designed to actually obtain             prevent fraud.
tenders, certain criminal elements have         a fraudulent gift card or the gift card
taken the gift card and developed a             account numbers, while others are used              Card Activation
variety of scams and methods of                 to obtain the gift card as the “stolen
stealing the cards and their values from        merchandise” from the retailer. Once                At what point the card is activated in
the retailer. As gift cards have been           the cards are in the possession of the              your POS system can determine your
rolled out retailer after retailer, more        thief, they can be redeemed, cashed or              vulnerability to gift card fraud. Many
incidents of fraud and loss have been           sold at on-line auctions or through other           retailers allow their cards to activate
reported.                                       stolen good channels. Regardless of the             once scanned as an item for sale, before
                                                methods used, actual incidents have                 the transaction has been tendered and
Gift Card fraud has been reported to            shown that thousands of dollars can be              completed. Although a popular point of
have occurred in all types of retailers.        stolen easily through gift card fraud.              activation, this opens the retailer up to
From large department and discount                                                                  some forms of fraud (See How They Do
stores to specialty retailers and               Protecting the Card                                 It on page 2). Other areas of system
restaurants. Incidents have shown that                                                              vulnerability include the possible post
gift card fraud may not be retailer or          The first point of protection should be             voiding of a gift card, or shutting down
market specific, but more focused on            the card itself. Stored-Value Card                  the register in the middle of a
the card “value” and the lack of controls       providers are consantly developing new              transaction after a gift card is activated.
in place. The retailers it will affect the      security features to better protect the             Dishonest associates have been known
least are those that build strong               card.    Tamper-resistant     packages,             to use these methods to steal activated
programs to protect their gift cards.           encrypted magnetic strips and scratch-              cards from their employer. Review your
                                                off codes and numbers are all means of              point of sale processes for card

                                              LP Innovations is the leader in loss prevention outsource services and solutions, providing
                                              retailers with programs designed to reduce loss, protect profitability and increase margin.
                                              Working with retailers of all segments and sizes, LP Innovations can assist you in developing
                                              a program to flex with your budget, mold to your coporate culture and drive results to increase
                                              the profitability of your retail locations.
activation and look for different ways that you can maintain             widely seen methods. Not until the customer uses the card
card activation while removing the transaction from the system.          do you find out that there is a zero balance and then you
                                                                         have a customer relations problem, which in itself can be
Card Display and Handling                                                frustrating for both customer and retailer.

Cloning cards, although rarer than many may think, has caused            Fraud Can Be Prevented
some retailers considerable loss. Keeping blank gift cards in an
area where they are more visible can help deter theft. Have              As many in the loss prevention and retail industry are
associates review card stocks for missing sections, which can be         working through myths and facts surrounding gift card
an indicator of blank card theft. Utilizing tamper-resistant             fraud, the overall costs of fraud are still an unknown. Even
packaging will also deter theives from stealing blank cards for          though more incidents are being reported, the likelihood of a
cloning theft (it will be difficult for the thief to return the blank    retailer falling victim is more dependent upon what is done
card without knowing it has been tampered).                              to prevent fraud. Understanding your gift card program,
                                                                         developing proper safeguards with the card and your POS
The Inside Factor                                                        System, and auditing your program for compliance and
                                                                         concerns will better protect your program from various
Many retailers are finding out that their biggest gift card              points of fraud. Decreasing the opportunties and likelihood
fraudsters are their associates. Switching customer’s newly              of incidents will then allow you to reap the benefits of a
purchased gift cards with zero balance cards and using the               good gift card program.
customer card to purchase merchandise is one of the most

                                                  Register Shut Down: An employee rings           purchases over the Internet, catalog
   How They Do It?                                up a gift card and activates it at the point    or in case one must manually key the
                                                  of purchase. Before tendering the               card at point of sale, the same uses
                                                  transaction they unplug or conduct a hard       can be completed fraudulently. An
   The following are known methods of             shut down of the register. Did the gift         employee can write down the
   gift card fraud as reported within the         card activate? Did the transaction get          numbers (or provide someone with
                retail industry.                  recorded? Some retailers have lost              the numbers) and then conduct
                                                  thousands to this method before realizing       continual balance inquiries (via
  The Switch: An employee receives a              what had occurred.                              telephone or web) until it is learned
  gift card as payment from a customer.                                                           that the card has been activated with
  The card after purchase still has a             Stealing the Numbers                            a balance. At that time, the card can
  balance. The employee switches the                                                              be used via the Internet, catalog or
  card with a zero balance card lying by          Replicate (Clone) the card: Like credit         manually keyed into a point of sale
  the register. The customer leaves with a        cards, some organized thieves will get          by the employee. The number can
  zero balance card, and the employee             their hands on the gift cards (collusion        also be sold to others in the
  takes the customer’s original card with         with employees) and replicate gift card         “underworld” to use via the same
  the remaining balance. Next time your           “mag” stripes, thereby making a duplicate       means.
  customer comes back they will not be            of the gift card. Using it or selling it
  happy to learn they have a card with No         quickly, the card gets into play and the        Fraudulent Acquisition of Gift
  Balance! (While the employee uses the           first to use it is normally the thief. Other    Cards
  active card).                                   known incidents include “customers”
                                                  stealing blank cards off display, taking        For many, purchasing gift cards via
  Laundering: An employee rings the               them out of the store, cloning the cards        stolen credit cards or bad checks may
  purchase of a gift card on register #1 for      and then returning the original cards to        be considered gift card fraud;
  $100. They complete the purchase, but           the store. The “customer” then uses an          however they are actually acts of
  do not put any money in the register (no        IVR or Web system to continuously               credit card and check fraud. Multiple
  customer is present). They go to register       monitor the balance on the cloned card          purchases of gift cards in short
  #2 and purchase two (2) $50 gift cards,         until a balance exists (someone                 periods of time using the same credit
  using the gift card of $100 as tender.          legitimately purchased the cloned card off      card or purchasing high dollar valued
  They then go back to register #1 and            display). They (the fraudulent customer)        cards with checks or credit cards
  Post Void the original sale. They now           can then use the card immediately after a       should be looked at cautiously.
  have two (2) $50 “clean” gift cards that        balance exists.                                 Create restrictions or limits of dollar
  they paid nothing for. (Can’t post void a                                                       amounts on a gift card to protect
  gift card sale? What happens in your            Take the number off the card:                   against using fraudulent monies to
  system if they suspend the original             Hopefully happening less and less with          purchase cards. Enhancement of your
  transaction instead? If your gift card          the enhancements made to gift cards, but        reporting to quickly detect multiple
  activates before tender, you may want           there are cards out there with printed          purchases using similar tenders
  to check this out!)                             numbers on the card. Primarily used for         should also be considered.

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