Baltimore Resident Sentenced for Bank Fraud in Connection With Counterfeit Card Encoding Scam

On May 3, 2023, the Department of Justice (DOJ) sentenced defendant Leroy Holmes to five years in federal prison for his connection to a counterfeit card encoding scam that resulted in the fraudulent creation of nearly 600 credit cards, debit cards, and gift cards. According to court documents, total losses came to at least $212,000 to financial institutions, businesses, and cardholders.

In addition to his sentence, the defendant has been ordered to pay restitution for the victims’ losses and a money judgment of $106,032. 

The Counterfeit Card Encoding Scheme

According to the defendant’s plea agreement, between October 2019 and March 2022, Holmes used stolen financial information to make hundreds of unauthorized cards that enabled him to transact without authorization from the victims or their financial institutions. In some cases, the counterfeited credit and debit cards used by Holmes contained unemployment insurance benefits provided to victims from various US states. 

To launder the funds, Holmes used the counterfeit cards to purchase gas at stations in Pennsylvania and Maryland, which he then sold to truckers in exchange for cash.

While it is unclear how Holmes obtained the victim’s financial information, two common tactics seen in credit card fraud and identity theft involve purchasing information that was stolen during a data breach from the dark web or ‘skimming’ cards at ATM locations. This latter tactic was highlighted in a similar encoding scheme reported by the DOJ in March 2023, where 15 individuals were arrested for allegedly skimming electronic benefit transfer (EBT) cards. According to court documents, over $38.9 million in funds were stolen from low-income beneficiaries’ EBT cards.

Credit Card Fraud on the Rise

In 2021, there were 389,845 reports of credit card fraud in the US, with the Federal Trade Commission citing it as the most common type of identity fraud affecting people aged 20-39. However, as of January 2023, research conducted by Security.org found that 65 percent of US cardholders have experienced credit card fraud at least once – up from 58 percent in 2021. 

A rise in concern around credit card fraud was also recorded in our 2023 global compliance survey. When asked which types of fraud firms were most concerned about, 37 percent of US firms said credit/debit card fraud – second only to tax fraud. 

While the methods fraudsters use to perpetrate credit card fraud will continue to evolve, firms can help their credit card customers to avoid becoming victims. Customers must also know how to report credit card fraud as soon as possible. Helpful advice to pass on to customers includes:

• Using strong customer authentication, such as multi-factor authorization, one-time passwords (OTPs), in-app approval, and biometrics.
• Checking statements regularly and setting up transaction alerts.
• Not conducting financial transactions over public Wi-Fi.
• Ensuring e-commerce web addresses start with https:// and show the website is secure.
• Being proactive about checking if their details have been part of a data breach.
• Using up-to-date antivirus software, anti-spyware, and firewalls.
• Changing banking passwords regularly.

Key Takeaways

From a practical perspective, firms may consider a range of measures to manage and control risks of money laundering and fraud through re-encoded card scams, including:

• Ensuring cards are only activated once the customer receives them.
• Imposing limits on funding, purchasing, and reloading in relation to gift cards and other prepaid cards. 
• Monitoring transactions in real-time to track customers’ spending habits and flag suspicious activity as potential fraud.

To combat the rise of credit card fraud, compliance teams should ensure their anti-money laundering (AML) and fraud solutions provide a holistic view of transactions. This can be done efficiently by implementing an AI overlay to existing tools. In addition to being cost-effective and not requiring a total system overhaul, AI overlays allow organizations to customize their rule sets and stay one step ahead of new evolutions in credit card fraud schemes.