I saw this indictment several days ago and have been sitting on it. But ultimately, I think it’s worth writing about, as this is yet another sad and cautionary tale of what not to do.
I’ve written about credit card farms several times, including a deep dive in this March 2017 post, as part of this February 2019 post with a PSA not to allow other people to swipe your credit cards, and in passing in this September 2019 post on what you should never do with your credit or credit cards. I’ve been sounding the alarm about the farming practice since at least this June 2014 post, which resulted in me being contacted by someone who said their very expensive and high class lawyers would shut down DansDeals if I didn’t delete the post.
In short, the credit card signup farms would promise up to $10,000 for handing over your social security number and letting them have their way with your credit. I shared horror stories of people being left with bills, not being paid, and having their mileage accounts frozen, and their credit ruined.
“It seems to be a common practice for some of the farms to promise to use only regular spending but then proceed to generate fake spending to earn signup bonuses. The farms are not accurately representing the potential risks and fraud involved that are being committed in the victim’s name. That is simply irresponsible and inexcusable.
One DDF member sent me information about farms using even more nefarious methods to multiply the points balances of their victims before cashing out, and leaving victims with massive negative balances that can affect their ability to get credit cards in the future. One of the farmers even bragged to him about how much he abuses his victims accounts, as if it’s all just one big game. If the account holder knew the level of fraud that was being committed in their name they would likely have never allowed it, but they’re simply not informed of what’s actually going on.”
And sure enough, the chickens are coming home to roost for some of the farmers. A grand jury has indicted 2 men that operated one of these credit card farms for wire fraud, conspiracy to commit wire fraud, and aggravated identity theft.
The indictment never mentions AMEX, but it seems obvious to me from the case details that they are the ones that brought the case forward to prosecutors.
The indictment says that they recruited people, called straw cardholders, by paying them to open credit cards in their name. This farm in particular was active from August 2014 through at least May 2016. The farmers would spend to meet the signup bonus threshold, transfer the points, refund the original purchase, and then cancel the card before the annual fee was due.
The indictment also says that the straw cardholders were deceived as they weren’t told that there would be fraud involved. It seems that the government won’t be going after individual cardholders in court in this particular case, at least unless they have reason to suspect that the individuals knew there would be fraud involved.
It’s noted that in 2015, one of the farmers emailed the other that they should start using real spend as credit card companies were cracking down on fake or manufactured spend. It’s noted in the complaint that the intention behind that was to make it more difficult for AMEX to detect the fraud, though more likely the intent was just to ensure that points were awarded. At any rate, they kept using fake spending as they figured they would get the points faster than AMEX could claw them back.
The farmers would also make up excuses in the cardholders’ names to get AMEX to post their pending points, such as for a honeymoon or bereavement need.
In the end, these particular farmers opened over 7,000 cards for more than 1,500 straw cardholders, racking up more than 790 million AMEX points. Those points were transferred into miles, which cost AMEX about $8.2MM.
It’s rare to see what airline miles cost the credit card company, and each airline likely has its own rate. But in this case we can calculate an average cost to AMEX of 1.04 cents per mile based on the loss numbers. That’s somewhat lower than I’d expect, though it’s hard to say without knowing exactly which airlines the points were transferred to.
Is this case just the tip of the iceberg? Would the case have gone forward if all the spending was legitimate?
It’s certainly no wonder that banks have gotten much stricter about opening credit cards over the past few years!
But the painful lessons here are obvious. Don’t try to scam the system or you’ll face jail time. And don’t hand over your credit information or credit cards to anyone else for any price.