Prepaid Debit Cards and Fraud (Why You’ll Get Caught)

                     

Prepaid Debit Card FraudEchostar Technologies (NASDAQ:SATS) has a program in which they pay retailers for marketing and selling Echostar television programming services. The resellers get a commission for selling the services. One reseller got the bright idea to set up fake buyer accounts using prepaid debit cards. Not surprisingly, the law caught up with him, and he ended up serving a couple years of jail time.

The conviction of the owner of a satellite television equipment retailer in California (Satellites and More) for fraud was confirmed on appeal today by the United States Court of Appeals, Tenth Circuit. The owner, Joseph Masek, appealed his 33 month sentence. His conviction was affirmed.

Here’s what is interesting to us at GetDebit.com.

Mr. Masek was paid by Echostar for each new account he set up. Echostar paid Masek for new accounts, and often allowed new accounts to be set up without the owner being billed for up to 90 days. So, Mr. Masek got the great idea of using fake prepaid debit card accounts as the payment accounts for fake buyers of his services. He got the commissions from Echostar, and then when Echostar attempted to charge the prepaid debit card accounts, Echostar was declined (as there were insufficient funds in the accounts 90 days later when they presented the charge).

Luckily for Echostar, an account representative noticed that a large number of declines associated with sales from Satellites and More were coming from accounts having the same address — in Tulsa Oklahama (despite the fact that Satellites and More is from Santa Ana California). They investigated, and uncovered the prepaid debit card scam.

Here’s the facts of the scam from the Court case:

When Satellites and More signed up a new Echostar customer or opened a new account, it received two payments from Echostar: (1) a reimbursement for the equipment; and (2) an incentive payment, or commission. The average amount paid to a retailer per account is approximately $400 and is based on a two-tier system. The first-tier commission is paid if a customer account remains open for ninety days, and the second-tier requires 360 days.

In 2005, Bruce Warner, Echostar’s general manager of risk and audit retail services, learned about seventy-nine suspicious accounts related to Satellites and More. Each account was registered in Tulsa, Oklahoma—even though Satellites and More was located in California—and each account featured an inexpensive receiver and programming package, included no customer contact information, and was set up so that statements would not be mailed to a physical address. This discovery led Warner to investigate the 9067 accounts opened by Satellites and More. Of this total, Warner identified 4310 he believed to be fraudulent; that is, accounts for which no actual customer had ordered programming. Warner turned off service for these accounts but only sixteen customers called to complain, leading Echostar to conclude that Satellites and More had opened 4294 fraudulent accounts. Many of the fraudulent accounts were opened using pre-paid debit cards set to make automatic payments with limited funds. Most of these accounts were opened in states where Echostar offered promotions that featured little or no payments in the first ninety days of service, allowing Satellites and More to collect a commission before the account became delinquent.

Mr. Masek is serving 33 months in a federal pen.

The moral of the story? Despite the fact that prepaid debit card accounts are relatively easy to set up, it is very easy to identify fraudulent activity. Set up a scam like this, and it is very likely that you will get caught.

Here are the case details for further information:

U.S. v. MASEK
UNITED STATES OF AMERICA, Plaintiff-Appellee,
v.
JOSEPH MASEK, Defendant-Appellant.
No. 08-1296.
United States Court of Appeals, Tenth Circuit.
December 10, 2009.

Filed under: Debit Card News
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