The investigators who searched the apartment on Reseda Boulevard last week were looking for the leader of a fraud ring who was changing the magnetic coding on credit cards, making them usable for thousands of dollars in untraceable purchases.
They found new stereo equipment, a closet full of expensive clothing and other merchandise believed to have been purchased with the fraudulent cards. They also found a home computer and an encoding device used to alter credit cards.
And they found the man they believe was the ringleader: A 19-year-old college student named Ali Mojaddam.
The arrest of a teen-ager such as Mojaddam, who allegedly used skills from computer classes and work at a shoe store to orchestrate a fraud estimated to have cost credit card companies as much as $100,000 is not unusual, investigators say.
Encoding fraud, though considered the most sophisticated of credit card schemes, has become widespread in the Los Angeles area and is being perpetrated by scam artists ranging from schoolchildren to gangs of West Africans.
“It is the credit card scam of the ‘90s,” said Michael Freil, president of the Southern California chapter of the International Assn. of Credit Card Investigators, an organization composed of law enforcement, bank and private industry credit card fraud investigators.
Los Angeles Police Detective Julio Nieves said Mojaddam’s arrest was the result of a six-month investigation in which 25 people have been arrested on charges of using altered cards. About 40 people have been arrested throughout the Los Angeles area this year for encoding fraud.
Jim Miller, assistant special agent in charge of the U.S. Secret Service office in Los Angeles, said Mojaddam’s arrest shows how widespread the problem has become. He said the crime has become so prevalent in Los Angeles that the agency makes arrests on encoding charges almost weekly.
Worldwide losses for Visa International because of encoding fraud jumped from zero in 1989 to $39 million last year, company spokesman Gregory Holmes said. MasterCard officials said they have not broken down their losses from encoding fraud, but that they would be comparable to Visa’s.
Encoding scams operate in several ways, but crooks typically steal or illegally buy valid credit card numbers and encode them onto the magnetic strip of their own cards or on stolen or counterfeit cards. The altered card is offered as payment. A computer reads the number from the magnetic strip, checks to make sure it is valid and bills it to the stolen number.
Investigators said the magnetic strip of a single card can be repeatedly re-encoded. Thieves use a single number for up to a month or until reaching its credit limit.
Because most credit card receipts are computer-generated, the printed receipts contain only the information from the altered magnetic strip, making it virtually impossible to trace the actual buyer. Signatures on receipts are usually unreadable scrawls.
Investigators said the best method of catching a scam artist is for a cashier to compare the receipt information to the number embossed on the card, but that rarely happens.
“If it comes up clear, you are clear,” Miller said. “Most of those folks don’t check the number while making the sale.”
Investigators said an even more sophisticated method, which is more difficult to trace, is to encode valid numbers on stolen or counterfeit cards and then emboss the cards with matching names and numbers.
Investigators say the technology needed to re-encode cards is not difficult to understand or obtain. Police said Mojaddam bought an encoder at a Reseda computer store and hooked it by modem to his home computer. The encoders are sold commercially and are used in many other applications, such as encoding ID cards for businesses, hospitals and schools.
“Six hundred bucks gets you one of these encoders,” said Nieves, who arrested Mojaddam after a search of his apartment Tuesday.
Nieves said Mojaddam was in the process of re-encoding three of his own credit cards when he was arrested. Mojaddam is scheduled to enter a plea Sept. 11.
Investigators believe that Mojaddam got valid credit card numbers while working at a shoe store at the Northridge Fashion Center. Other numbers came from associates who worked at other stores in the mall and throughout the San Fernando Valley, authorities said. Nieves said Mojaddam used illegally re-encoded cards and sold others to associates for up to $400 each.
Mojaddam, who was released on $5,000 bail after being charged with suspicion of illegally possessing equipment to alter credit cards, declined to comment through a family member. He could receive a three-year sentence.
“This 19-year-old kid--it’s a normal run-of-the-mill case,” Miller said. “There is no big deal about it. It just takes someone with a little bit of computer knowledge and you can re-encode anything you want.”
A 17-year-old friend of Mojaddam was arrested with him for possession of a forged credit card and was released to his parents.
Banks survive the millions of dollars in losses by passing them on to credit cardholders in the form of high interest rates, Freil said.
Magnetic strip encoding fraud has increased considerably this year, said Paul Geggie, a detective with the Los Angeles Police Department’s Bunco-Forgery Division. As many as 20 encoding machines have been reported stolen in the Los Angeles metropolitan area since Jan. 1, with about six being recovered.
As many as 15 organized rings are operating in the Los Angeles metropolitan area and parts of Orange and Ventura counties, Geggie said.
“There are some detectives who believe that re-encoding credit cards is going to be the savings and loan debacle of the ‘90s,” Geggie said.
Authorities are investigating a Carson-based encoding ring that purchased valid credit card numbers from a telephone operator who used his position at a New Jersey-based lingerie mail order company to steal the numbers, Freil said. It is estimated that the ring has gotten away with $2 million by encoding stolen numbers on credit cards that are used to gain cash advances from banks in Indiana, New Mexico, Wisconsin and Arizona.
Magnetic strips were added to cards in 1974 as a security feature, Freil said.
Los Angeles authorities said they first learned of encoding fraud in 1987 when a Silicon Valley-based manufacturer was approached by several men who tried to buy an encoding device with a stolen credit card, Geggie said. The Secret Service traced the operation to Los Angeles, where the machine was seized.
Another early case involved an installer of automated teller machines. He rigged a cash machine at a fast-food restaurant so he could get the account numbers for all the credit card transactions before they reached the bank. He made 4,000 cards out of pasteboard and authorities said he was waiting for a four-day weekend so he could empty the machine. However, authorities were tipped off and the installer and an associate were arrested.
The escalation of encoding fraud has spurred credit card companies to turn to new technology to protect the magnetic strip, though their efforts have not kept pace with the crime, Miller said.
The scam artists are tapping into a conflict in the credit card industry.
Though estimates on losses from encoding fraud range from hundreds of millions to billions, the losses are small compared to the companies overall take. So the companies are reluctant to make costly changes in card security.
“You have a big conflict between marketing and security in the industry,” Miller said. “Meantime, the criminals are having a field day. And it will grow. Once losses hit a percentage the credit card companies can’t live with, then they will change things. The conflict in marketing is: ‘How much loss can we absorb before we change?’ ”
In the last eight months, Visa began putting a complex code in the magnetic strip of cards in Asia and have armed merchants with sophisticated terminals to verify sales using the secret codes, Holmes said. The company plans to include the algorithmic codes in the magnetic strips of the 286-million Visa cards issued worldwide by 1993.
Warner Brown, western regional director of security for MasterCard International, said his company adds extra security codes to magnetic strips on an optional basis, but that it is likely the code will become a required security feature in the near future.
But changing the codes could require updating terminals or replacing them with sophisticated models that can read them, Miller said. The switch could cost credit card companies astronomical amounts.
“If they change the cards, they have to change the terminals,” Miller said.
Entrepreneurs are also developing “smart cards,” which contain codes and identification on microchips. Efforts are also being made to manufacture magnetic strips with codes that cannot be tampered with.
In addition to protecting card codes, Freil said, the industry is embarking on ways of reducing thefts of credit cards being mailed to valid clients. In the future, cards may be delivered by a courier service, he said. Cardholders may also be required to notify banks to activate their cards.
“It appears this is going to be a long-term phenomenon,” Brown said. “We’re going to try and nip it in the bud, but it’s going to be tough.”