Still Playing Catch-Up : O.C. Arrests Give Banks Little Relief From Credit Fraud

Despite a major crackdown this week that pointed to weaknesses in federal credit card laws, there are no immediate plans in Washington to try to curb a fraud scheme that has cost U.S. banks at least $100 million.

Consequently, banks and law-enforcement authorities may continue to have their hands full trying to catch perpetrators of this potentially lucrative fraud, experts suggested Friday.

Federal agents arrested 17 Southland residents Thursday and Friday and shut down two rings that operated out of Little Saigon.

Leaders of the two rings were able to bilk 120 banks nationwide out of some $40 million by taking advantage of federal laws that force banks to post credit payments before the checks clear, authorities alleged.

However bankers won’t see congressional action soon to try to halt the so-called bust-out schemes. Lawmakers are stymied by a host of more pressing issues and have no immediate plans to change banking laws to curb check-kiting and credit card fraud, according to congressional aides and banking lobbyists.

“Any possible changes are not on the fast train through Congress,” said John L. Hall, a spokesman for the American Bankers Assn.

For now, bankers are trying to halt the credit card scam by tracking accounts with computers, but they acknowledge that they are overwhelmed by the problem.

Federal truth-in-lending and other banking laws, coupled with the protective cover of Bankruptcy Court, have allowed criminals to manipulate credit card payments and charges to gain tens of thousands of dollars worth of cash and expensive goods on each card they hold before going bankrupt.

This week’s crackdown comes after years of bank neglect in recognizing the problem and law enforcement inaction once the problem was identified.

The bust was one of the nation’s largest crackdowns on credit card fraud and the first involving this scheme.

A third ring is believed to still be operating in the Little Saigon area, law enforcement officers said, and numerous individuals are using the scheme on their own.

The scheme takes advantage of the time lapse between the day a payment--always a large overpayment--is credited to an account and three to four days later when the check is returned for insufficient funds. During that brief period, cardholders go on shopping sprees and take out huge cash advances.

In pre-dawn raids Thursday, a task force of 135 Secret Service and FBI agents and local police arrested 16 people and carted away hundreds of thousands of dollars worth of gold bullion, jewelry, Las Vegas gambling chips, cash, electronic equipment and other expensive goods.

Early Friday, one more individual, Trung Duc Tran of Los Angeles, was arrested. Authorities say that in the coming weeks they expect to pick up 25 additional suspects--a total of 42--named in sealed indictments and criminal complaints.

The Secret Service set up a hot line, (714) 968-0648, for information leading to others who have participated in the fraud. Federal prosecutors said those wishing to turn themselves in, “instead of waiting for that knock on the door,” also can call that number to make arrangements.

“The credit card was never designed with security involved,” said Stan Belitz, director of security for MasterCard’s Southern California region. “We never had a real problem until 1984.”

But from then on, he and others in the banking industry said, it’s been tough to keep a step ahead of the fraudulent activity.

The hologram was first put on cards in 1987, followed by magnetic stripes and signature panels, “none of which is foolproof,” Belitz said. Smart cards with computer chips embedded and card validation measures are coming.

*

Criminals have learned to copy or get around all the security measures so far, said Nessa Feddis, the ABA’s senior federal counsel. “Once you take care of one problem, there will be others,” she said.

But the solutions are getting so costly that some banks are balking, deciding to take their chances. Seafirst National Bank in Washington state has devised a computer-aided system that alerts it to cardholders who overpay their accounts by unusually large amounts--called booster checks.

But Belitz said such a system is expensive and might not be practical for large credit card issuers like Bank of America, Citibank or Chase Manhattan.

Feddis is one person who occasionally overpays her credit card bill, and many others also do it, sometimes extending their credit beyond individual limits.

They want credit available, for instance, when they go on vacation, when the get a large expense account advance or when they want to make a large purchase and don’t want the bill later.

Under federal laws, banks must credit accounts as soon as they receive the checks. But processing checks to collect the money backing them can take three or four days. If the checks are bad, the opportunity exists for a cardholder to ring up purchases and cash advances fraudulently.

In the case of the Little Saigon scheme, cardholders were paying off $200 balances with checks for $20,000 or more.

*

By the time the checks were returned unpaid because of insufficient funds, the cardholders had amassed huge bills and, when pressed for payment, went bankrupt.

“We’re not going to stand by and allow this to happen,” Belitz said. “We will take steps to get these people prosecuted.”