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April 2, 2021 Reading Time: 5 minutes

Gift cards are consistently ranked as one of the most popular Christmas presents. But they have also earned a more dubious distinction. According to the Federal Trade Commission (FTC), they have become the favorite way for scammers to extract money from their victims, particularly the elderly.

When good products are used for bad things, our gut reaction is to inquire whether something has gone wrong. Who is responsible? Is there a way to fix gift cards?

Like gift cards, phones are also used by fraudsters. Does that mean phone companies should be held accountable for the crimes of their customers? It’s difficult to know where to draw the line.

A recent court case against Apple did draw a line. Victims of Apple iTunes gift card scams took Apple to court in 2020 for aiding and abetting gift card fraud. After deliberating, a Federal judge ruled earlier this month that Apple was not guilty of helping fraudsters, and threw out the lawsuit. Scam victims were left empty-handed.

No one likes to think of the elderly being victimized. It’s also hard to stomach the idea of Apple making money off of this victimization. On the other hand, if businesses in the gift card industry are held liable for fraud, they would be forced to tighten up gift card procedures. Gift cards would become less attractive as presents, and all licit users would be worse off.

These are complicated issues. The court’s thinking on Apple (and other fraud cases) is worth exploring more closely.

Anatomy of a gift card scam

Let’s start by dissecting the most notorious gift card scam of all, the fake IRS agent scam, to see how third parties like Apple get caught up in fraud.

An elderly person answers the phone only to be told she is being investigated by the IRS. “If you pay $1,500 in gift cards today,” the phony IRS agent says, “the IRS will end the investigation.” She races down to Walmart and picks out three $500 cards. Walmart policy requires the clerk to inform likely victims about gift card scams. (Often they do not). Once the cards are purchased, the victim sends the codes to the phony IRS agent. The moment the codes are sent the scam has succeeded. Grandma has lost her money.

The scammers manning the phone lines are the front line workers in what are often elaborate criminal organizations. Agents follow prepared scripts and work out of Indian call centres along with dozens of other scammers. Once the front-line scammers have received a gift card code, they forward it to the money laundering end of the operation. 

One way to launder the funds is to resell gift card codes on third-party gift card selling sites like Paxful or Raise. Another money laundering route takes advantage of Walmart’s policy of allowing gift card-to-gift card swaps. The scam operators text store-branded gift card codes to “runners” who visit Walmarts all across America in order to buy other gift cards. This extra tumble helps obfuscate the money flows. It also provides an opportunity to convert less sought-after gift cards into more valuable iTunes or Google Play cards.

Scammers also launder funds by creating and listing their own apps in the App Store. After a scammer extorts an iTunes card from a victim, they drain the card balance within their own app. Apple takes a 30% cut and then forwards the remaining 70% on to the scam network.

The scammer is the obvious villain in this story. More complicated is the culpability of the third-party platforms such as Walmart, Apple, and gift card exchanges such as Paxful. Yes, Apple was recently found to be innocent of facilitating iTunes scams. But there are plenty of cases in which third-party platforms have been indicted for aiding and abetting crimes committed by their customers.

For instance, stores and pawnbrokers that buy stolen property for resale are often found guilty in court, even though they weren’t the ones to commit the actual theft. We even have a word for this crime: fencing. It’s an old offense, going back to the 1600s.    

Although the crime of fencing means that it is possible for third parties to be found guilty of aiding and abetting fraud, the bar for convicting is quite high.

A high bar to complicity

In most court cases involving fraud, courts require fraud victims to prove that a third-party financial provider such as a bank “knowingly” abetted the fraud. That is, if Apple genuinely didn’t know that they were helping a particular scammer to defraud an elderly victim, then it can’t be guilty of wrongdoing.

Showing that the accused party should have known something is a fraud because anyone else in their position would reasonably be expected to see it that way is insufficient to establish guilt. To prove that a third party such as Apple abetted fraud, the accuser must demonstrate actual knowledge. That is, the third party must actually and directly know that fraud is happening. 

But even if the third party actually and directly knows that fraud is happening, that is not enough to implicate the third party for abetting fraud. It must be demonstrated that the third party also participated in or assisted a fraudulent scheme. Moreover, a third party’s participation or assistance cannot be of minimum or incidental importance to implicate it. In the UK, the assistance must “facilitate” the fraud, or at least have made it easier than it would otherwise have been. In the U.S., assistance must be “substantial.” That is, there must be a definite causal link between the third party’s actions and the fraud.

Substantial assistance

Requiring plaintiffs to prove that would be offenders provided substantial assistance to a fraudster is where the case against Apple appears to have foundered. To justify Apple’s innocence, the judge relied on a previous case filed against Visa in 2006.

In 2006, Visa and several other financial institutions were accused of providing payments services to a website that sold stolen and altered digital images. Visa admitted that it was aware that its customer was a fraudster—it had received multiple notifications from the victim. Yet even with this knowledge, Visa continued to serve the violator (and profit from them). 

Guilty, right?

Not so quick. The court found that Visa’s contribution to the fraud, though conscious, wasn’t substantial enough to incriminate it for aiding and abetting. Visa did not in any way assist in the actual theft or alteration of images, the court said. It only provided a service of secondary importance, payments. And so Visa was declared innocent of aiding and abetting the fraud. 

Fourteen years later the judge reasoned along those same lines. Apple may have been aware that its platform was being used by certain gift card scammers. It also continued to connect said scammers and earn fees from them. However, there was no evidence that the assistance Apple provided was substantial.

For instance, the court found that Apple did not go out of its way to grant the scammers any specific authorization to run their apps. The bad actors had to go through the same App Store authorization process as all other Apple app creators.

In the end, the law requires a very high standard of proof for third-party guilt. And so Apple was cleared.

It makes sense that the legal bar for third-party guilt be set quite high. If you’ve ever worked in a retail sales setting or owned a business, there’s a good chance you have accidentally or negligibly helped fraudsters commit crimes. Set the bar for third-party culpability too low and most of us would face the risk of being caught up as criminals. Our regular dealings would be hampered by having to be constantly on our guard. Trade would slow down.

But does Apple really deserve to get away that easily? 

While today’s judge described the service that Apple provides as tangential to scammers’ business model, the next time a case like this gets litigated the judge may decide that getting paid is the very lifeblood of these schemes. After all, iTunes gift cards and the App store make it much easier for scammers to extort money from their victims, especially in a world where banks and Western Union identify all their customers. 

For now, Apple is free to keep providing gift cards as before. Which means that scammers will probably not face additional hurdles to coopting gift cards for extortion payments. As for the rest of us, that means we get to keep enjoying a hassle-free gift card experience.

J.P. Koning

listpg_koning

J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a Canadian brokerage firm and a financial writer and publisher at a large Canadian bank. More recently, he has written several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments. He founded the popular blog Moneyness in 2012. He designs economics and financial wallcharts at Financial Graph & Art.

Koning earned his B.A. in Economics from McGill University.

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