Gift Card Gangs From China Operating Inside The United States

How Organized Crime Gangs from China are Operating inside the U.S.

Authors:
•  Craig Silverman and Peter Elkind, ProPublica
•  SCARS Editorial Team – Society of Citizens Against Relationship Scams Inc.

About This Article

Federal authorities are investigating the involvement of Chinese organized crime rings in gift card fraud schemes targeting American consumers, launching a task force named “Project Red Hook” to combat this growing threat. The initiative focuses on preventing “card draining,” where thieves exploit stolen or altered card numbers to siphon money before legitimate owners can use them.

Over the past 18 months, law enforcement has arrested about 100 individuals for card draining, with the majority being Chinese nationals or Chinese Americans. The schemes, estimated to have stolen hundreds of millions of dollars, highlight the need for industry collaboration and heightened security measures.

The prevalence of gift card scams underscores the urgency in addressing this issue, as Americans are expected to spend over $200 billion on gift cards annually. Retailers and consumers alike have suffered significant losses, emphasizing the necessity of proactive measures to safeguard against such fraudulent activities.

Chinese Organized Crime’s Latest U.S. Target: Gift Cards

Chinese crime rings already dominate the illegal marijuana trade in the U.S. and launder cocaine and heroin profits. Now a federal task force is investigating their role in a burgeoning form of gift card fraud.

Federal authorities are investigating the involvement of Chinese organized crime rings in gift card fraud schemes that have stolen hundreds of millions of dollars or more from American consumers.

The U.S. Department of Homeland Security has launched a task force, whose existence has not previously been reported, to combat a scheme known as “card draining,” in which thieves use stolen or altered card numbers to siphon off money before the owner can spend it. The initiative has been dubbed “Project Red Hook,” for the perpetrators’ ties to China and their exploitation of cards hung in store kiosks on “J-hooks.”

This marks the first time that federal authorities have focused on the role of Chinese organized crime in gift card fraud and devoted resources to fighting it. Homeland Security Investigations, a DHS agency, began prioritizing gift card fraud late last year in response to a flurry of consumer complaints and arrests connected to card draining.

Over the past 18 months, law enforcement across the country has arrested about 100 people for card draining, of whom 80 to 90 are Chinese nationals or Chinese Americans, according to Adam Parks, a Homeland Security assistant special agent in charge based in Baton Rouge, Louisiana. Parks, who is leading the task force, estimates that another 1,000 people could be involved in card draining in the U.S., mostly as runners for the gangs.

“We’re talking hundreds of millions of dollars, potentially billions of dollars, [and] that’s a substantial risk to our economy and to people’s confidence in their retail environment,” he told ProPublica.

Card draining is when criminals remove gift cards from a store display, open them in a separate location, and either record the card numbers and PINs or replace them with a new barcode. The crooks then repair the packaging, return to a store and place the cards back on a rack. When a customer unwittingly selects and loads money onto a tampered card, the criminal is able to access the card online and steal the balance.

Federal investigators believe multiple Chinese criminal organizations are involved in card draining and are using the proceeds to fund other illicit activities, from narcotics to human trafficking, according to Parks. ProPublica recently revealed Chinese organized crime’s involvement in the illegal U.S. cannabis industry and the laundering of cocaine, heroin and fentanyl profits. ProPublica has also exposed how Walmart and other retailers have facilitated the spread of gift card fraud and has revealed the role of Chinese fraud rings in gift card laundering.

The DHS team in Baton Rouge led an investigation that resulted in the conviction and 2023 sentencing to prison of a Canadian man who stole more than $22 million by operating an illicit online gift card marketplace that victimized American consumers and businesses. As arrests for card draining began piling up around the country, Parks and special agent Dariush Vollenweider saw the need for a national response.

Last November, they convened a two-day summit at DHS headquarters in Washington, D.C., attended by many of the country’s top retailers and gift card suppliers. Federal authorities pushed the industry to share information and help thwart the gangs. The agency then issued a bulletin in December alerting law enforcement across the country about the card-tampering tactics. Parks said about 15 Homeland Security agents are now spending most of their time on Project Red Hook.

“It’s not just a one-store problem,” Vollenweider said. “It’s not just a Secret Service or DHS or FBI problem. It’s an industry problem that needs to be addressed.”

Americans are expected to spend more than $200 billion on gift cards this year, according to an industry estimate. Retailers love gift cards because they drive sales and profit: Consumers typically spend more than a card’s value when they shop, and chains like Walmart and Target earn a profit when someone buys a third-party gift card, such as those from Apple or Google.

Data from retailers and consumers shows that card draining has skyrocketed in recent years. Target alone has seen $300 million stolen from customers due to card draining, according to comments last June from a company loss prevention officer contained in a Florida sheriff’s office report. A recent survey by AARP, the nonprofit advocacy group for people over age 50, found that almost a quarter of Americans have given or received a card with no balance on it, presumably because the money had been stolen. More than half of victims surveyed said they couldn’t get a credit or refund. (Apple, Walmart and Target say, in their terms and conditions, that they are not responsible for lost or stolen gift cards.)

More broadly, almost 60% of retailers said they experienced an increase in gift card scams between 2022 and 2023. Between 2019 and 2023, Americans lost close to $1 billion to card draining and other gift card scams, according to the Federal Trade Commission.

Target and Walmart have faced class-action suits from consumers who bought or received gift cards only to discover the balance had been stolen. In each case, the plaintiffs alleged that the companies have failed to secure the packaging of gift cards and to monitor their displays. “The tampering of Gift Cards purchased from Target is rampant and widespread and Target is well aware of the problem, yet Target continues to sell unsecure Gift Cards susceptible to tampering without warning consumers of this fact,” reads the complaint in the Target case.

The Walmart case was resolved in 2022 with an undisclosed settlement, and Target is engaged in settlement talks. Apple settled a similar card-draining class-action case in January, agreeing to pay $1.8 million. Walmart and Apple did not admit liability.

Apple declined to comment about card draining and the DHS investigation. In court filings in the class-action, Apple said that since the cards were purchased at Walmart, “the fraud occurred as a result of Walmart’s security protocols, rather than Apple’s.” A Walmart spokesperson told ProPublica, “Although we will not comment on ongoing investigations, we are proud of our routine work with federal law enforcement to stay ahead of these fraudsters and help keep customers safe.”

Target denied in court filings that its gift card security practices were inadequate and that its cards were susceptible to third-party tampering. “We are aware of the prevalence of gift card tampering and take this issue very seriously,” Target said in a statement to ProPublica. “Our cyber fraud and abuse team uses technical controls to help protect guests, and our store teams inspect cards for physical signs of tampering.” Target said it encourages employees to watch for people buying “high dollar amounts or large quantities of gift cards, or tampering with gift cards in stores.” Like Walmart, Target said it works closely with law enforcement.

Gift card scammers linked to Chinese criminal organizations trick their victims in many ways besides card draining. Some scams dupe victims into unwittingly paying criminals with gift cards. Whatever the ruse, the crime rings make use of low-level “runners” in the U.S., who are almost exclusively Chinese nationals or Chinese Americans. In card draining, the runners assist with removing, tampering and restocking of gift cards, according to court documents and investigators.

A single runner driving from store to store can swipe or return thousands of tampered cards to racks in a short time. “What they do is they just fly into the city and they get a rental car and they just hit every big-box location that they can find along a corridor off an interstate,” said Parks.

In a 24-hour period last December, an alleged runner named Ming Xue visited 14 Walmarts in Ohio before being arrested, according to court documents. Police said they found 2,260 Visa, Apple and Mastercard gift cards in his car. Xue entered the U.S. illegally months before his arrest, according to a prosecution motion. He has pleaded innocent.

DHS is looking at whether Chinese criminal organizations bring people into the U.S. to use them as card-draining runners. John Cassara, a retired federal agent and the author of “China-Specified Unlawful Activities: CCP Inc., Transnational Crime and Money Laundering,” said Chinese criminal enterprises often smuggle workers across the border for other enterprises such as prostitution or growing marijuana.

Parks said investigators are aware that “some of the individuals who were arrested were within weeks to months of being encountered illegally crossing the southern border.”

Other alleged card-draining runners entered the U.S. legally and told police they were hired via online postings. Donghui Liao was arrested at a Florida Target after employees noticed him removing gift cards from a bag and placing them on racks. Through a translator, he told police that his employer hired him online and mailed gift cards to him, according to court documents. He was paid 30 cents for each card he returned to the rack. Police said they found $60,000 worth of tampered cards in his possession. Liao remains in custody and his case was recently transferred to federal court. The DOJ did not respond to requests for comment and Liao has pleaded innocent.

In New Hampshire, police arrested three people between December and March for, among other alleged crimes, using stolen gift card balances to purchase millions of dollars worth of electronics such as iPhones. An apartment used by two of the suspects contained “a large quantity of Apple brand devices, cash, and a computer program that appeared to be running gift card numbers, in real-time,” according to a police report. (Criminals use software to automatically check gift card balances so they can be alerted when a customer buys and loads money onto a tampered card.) The fraudsters typically export the electronics back to China to resell them, according to Vollenweider.

Parks said Red Hook is recommending anti-fraud measures to retailers, such as closer scrutiny of gift card displays, while also heightening awareness of the problem among merchants and local law enforcement. Store security and local police have sometimes treated runners as small-time annoyances and booted them from stores, rather than arresting and prosecuting them, according to Parks. The task force hopes to work with local police to locate and charge previously released runners.

“It’s important for us to start delivering consequences,” he said.

CORRECTION

April 10, 2024: Based on information provided by a Walmart spokesperson, this story originally stated incorrectly that Walmart attended a two-day summit between DHS and top retailers to address gift card fraud. Walmart subsequently said it did not attend the November meeting. Walmart is participating in Project Red Hook.

Clarification, April 10, 2024: This story has been clarified to note that the investigation described in the article is being conducted by Homeland Security Investigations, a DHS agency.

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This story was originally published by ProPublica. Reprinted with permission.

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