Mr. Goldmann

Security & Safety

Credit Card Fraud: The Threat to Hotels and Restaurants Everywhere

By Peter Goldmann, President, FraudAware Hospitality

The problem is two-fold: While until recently, most credit card fraud involved "guests" using stolen or fraudulently obtained credit cards to pay for hotel charges, now the Internet has added a new dimension of credit card fraud threatening hospitality businesses.

For example, cyber criminals can hack into a company's customer database and steal large batches of guest credit card information that they then sell on the black market. Or, they can use the stolen credit card information to manufacture counterfeit credit cards, which they then use to fraudulently purchase goods or services.

Making matters worse, like companies in other industries that have been hacked by information thieves, hospitality companies could suddenly find themselves on the receiving end of lawsuits claiming damages for liability related to the theft of confidential guest information.

To prevent incidents such as these, optimizing the company's information security defenses is the obvious first step. In addition, more and more businesses are looking into cyber-crime insurance as an option for protecting against the growing risk of liability for theft of confidential information.

Leading insurance companies such as Chubb and Traveler's offer a variety of coverages that are worth researching.

Phishing For Fraud

The term "phishing" refers to a high-tech form of illegal "data harvesting". In these schemes, cyber-criminals create "copycat" Web sites that look exactly like those of the company they are targetubg (such PayPal, AOL, Citibank, etc). to steal customer E-mail addresses. They then send out mass E-mailings, saying that for security purposes (or another phony reason), the company needs the customer to click to a "secure" Web site (the phony one controlled by the criminals) and update their credit card information.

Of course, every time this happens, the credit card information is recorded and stored for later use in identity theft crimes.

Depending on which report you read, this type of fraud has risen by as much as 300% since 1999.

The problem for hotels and restaurants is that the purloined credit card information can be used to manufacture counterfeit cards that then turn up at the front desk or restaurant credit card terminal. The charges are ultimately charged back once the legitimate card holder finds out he or she has become a victim of identity fraud.

Old-Fashioned Fraud Still Hurts

The problem of accepting phony credit cards at the front desk is common among virtually every hospitality property in the world. Fortunately, credit card criminals who break the law the old fashioned way-by stealing wallets or purses-are usually not able to use their victims' credit cards to reserve or pay for hotel rooms, since most victims of these card thieves find out about their loss in time to cancel their accounts before many fraudulent charges are made.

The greater threat comes from identity thieves who use legitimate individuals' personal information to fraudulently apply for credit cards. They steal credit card applications from mailboxes or post offices and change the addresses (usually to a private mail box number they control) and simply wait for the illegally obtained cards to arrive.

According to the Federal Trade Commission, it can take up to six months before the individuals whose name, date of birth and other personal information were used to obtain the cards learn about it. By that time, thousands of dollars of phony charges can be made by the crooks.

When the victim finally starts to undo the damage to his or her identity, and the credit card accounts are shut down, the fraudulent credit card purchases typically get charged back to the companies that accepted the cards in the first place.

According to David Bleser, Vice President of Operations at Hospitality Safeguards Inc., Orlando, FL hospitality fraud prevention consultants, the only truly reliable to way for front desk personnel to prevent these crimes is to require all guests checking in to produce their driver's license in addition to their credit card.

Unfortunately, few hotels require this procedure, or if they do, enforcement is lax. That, says Bleser, is simply asking for trouble.

For added security, front desk staff should carefully compare the name on the arriving guest's driver's license with that on the credit card and the reservation information stored in the hotel's system.

Credit card criminals will sometimes claim that they don't have a drivers' license or other form of identification. If this occurs, the best policy for hotels is to decline the credit card and accept cash only.

In addition, it is essential that all employees carefully follow the credit card companies' transaction processing procedures-to avoid being stuck with fraudulent charges for failing to take adequate precautions against guests bearing stolen or countefeit cards.

The Insider Threat: Phony Refunds

Another increasingly costly form of credit card fraud involves phony refund requests.

It is not uncommon for a legitimate hotel guest to challenges a credit card charge that may have been mistakenly added to his or her bill. When the guest calls to challenge the charge, a front desk staffer or an employee an accountant or bookkeeper usually issues a credit to the customer's card.

But what if the "guest" calling to reverse the charge isn't the guest at all. What if he or she is an employee of the hotel- such as a front desk clerk who poses as a legitimate guest and requests a refund, but gives his or her own credit card number for the refund? The best defense against these frauds is to formulate and enforce a strict policy where the corporate accounting staff receives "credits without debits reports" from the credit card processor. These will identify credits that aren't backed up by corresponding debits and should therefore be checked to determine if the credit card name and number to which the refund is being made matches the name and number on the card that was originally used to make the purchase. If the cards don't match, the refund is declined.

In some cases, insiders, such as accountants or bookkeepers will issue credits to their own credit cards and cover them up by making revenue adjustments on the books. Because these thieves often commit such crimes on multiple occasions, getting a "multiple credits issued report" from the card processing company can point to such suspicious patterns for further review.

For an added layer of defense, ensure that this process is conducted by the internal audit department in addition to someone independent of accounting.

The hotel's credit card processing company can assist in screening for these frauds. Processors have increasingly sophisticated software applications for screening unusual credit card transactions. The service can be set up to specifically screen for refund anomalies which are then reported back to the hotel's auditor or controller who then manually reviews the refund request.

Important lesson: Even in today's high-tech business environment, credit card frauds are still often avoided only when a human being manually screens for them. That's why it is important to have procedures in place that maximize the effectiveness of both technological and manual fraud-prevention measures.

Peter Goldmann is the Developer of FraudAware/Hospitality, the first on-line fraud awareness training course for hospitality managers, supervisors and line employees. He is is the publisher of the monthly newsletters, White-Collar Crime Fighter and Cyber-Crime Fighter. His company, White-Collar Crime 101 LLC also is the developer of FraudAware/Hospitality, a customizable Web-based fraud awareness training course for managers, supervisors and line employees. He is a member of the Association of Certified Fraud Examiners, and The International Association of Financial Crimes Investigators. Mr. Goldmann can be contacted at 203-431-7657 or pgoldmann@wccfighter.com Extended Bio...

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