Is Scamming Illegal?Legal Facts for Online Merchants

Is Scamming Illegal? Understanding Criminal Activity & Your Rights as a Merchant

From a moral or ethical perspective, it’s pretty hard to find instances where scamming is OK. From a legal standpoint, however, it’s not always a cut-and-dry answer.

To be a legal no-no, a scam has to meet the criteria of fraud. But, when does an individual’s behavior cross the line from underhanded to illegal? That’s what we’re going to look at today.

In this post, we examine what makes the difference between legal behavior and an illegal scam, and how to differentiate civil fraud from criminal fraud.

What Qualifies as a “Scam?”

Scam

[noun]/skam/

A specific subset of fraud that involves a plan to intentionally trick a targeted individual into giving up money or other valuables.

Before we dive in, let’s clarify what we’re talking about here, so that we’re not getting lost in the gray areas.

You might be surprised to learn that a seemingly innocent practice like using your spouse’s credit card is technically a case of fraud. Unless you’re an authorized user on the account, you’re impersonating another individual to conduct a financial transaction, which is fraud. That said, you’re not likely to get in trouble here; as long as you pay the bill, it’s “no harm, no foul.” Not exactly what we’d call a scam.

But, let’s say you set up a website that’s almost identical to Home Depot’s website. The specific intent here is to convince victims to provide you with their payment card information so that you can resell it on the dark web. Now that’s a scam.

Chargeback misuse is another good example of this ambiguity.

If the cardholder disputes a transaction with the bank because they think it’s the same as a merchant refund, that’s technically fraud. It’s not a scam, though; there are damages, but there was no intent. On  the other hand, if a cardholder makes a purchase fully intending to file a dispute and claim that the order never arrived, then that is a scam.

Examples of eCommerce Scams That Are Actually Illegal

The line between a legal and illegal activity can be subtle. So, let’s look at some instances where behavior that might “bend” the rules crosses the line into an illegal, fraudulent scam.

Identity Theft

Fraudsters use stolen credentials and act as an actual cardholder to make unauthorized purchases.

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Fake Payment Confirmation

Fraudsters “accidently” overpay an order using stolen or fake card data, then ask that the excess be refunded.

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Triangulation Schemes

A criminal can use sophisticated reshipping tricks or third-party triangulation fraud to con persons or organizations.

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Looking for specific fraud conditions can make it easier to spot scams, in some instances. That’s just the first step, though.

Federal Laws That Make Scamming Illegal

Prosecuting illegal scammers isn’t always easy, especially when scams are carried out online. But, there are some workarounds.

The infamous kingpin Al Capone was suspected of bootlegging, gambling, racketeering and even numerous murders. Federal agents, however, couldn’t get the evidence they needed to convict… that is, until he was ultimately sentenced to 11 years for tax evasion. Whatever works, right?

Federal scamming laws can be similar. Theft is the main crime felt by the public, but it’s the associated crimes that could ultimately put the fraudster behind bars.

A crook running a nationwide crime ring, for example, might not be prosecuted for committing fraud, per se. Rather, they might get charged with committing fraud across state lines, using wire, radio, television, or the internet.

Here’s a quick comparison of common fraud-related crimes at the federal level:

Key U.S. Fraud Statutes Overview

18 U.S.C. § 1343

Wire Fraud

Electronic commerce fraud

• Up to 20 years in prison
• Fines up to $1,000,000

18 U.S.C. § 1028

Identity Theft

Using another’s identity

• Penalties up to 30 years in prison
• Maximum fine $250,000+ for individuals

18 U.S.C. § 1029

Fraud via Access Device

Credit card, PIN, token

• Up to 20 years in prison
• Maximum fine $250,000

18 U.S.C. §§ 1961–1968

Racketeering

Organized fraud activity

• Up to 20 years in prison per count
• Greater of $250,000 or 2× proceeds

18 U.S.C. § 1341

Mail Fraud

Same conduct via USPS

• Up to 15 years in prison
• Maximum fine $250,000

Keep in mind that the maximum penalties in this chart are for typical cases with no aggravating factors. In some instances, the sentences could be much heavier. Brazen cases of racketeering, for example, could result in lifetime prison sentences, and fines running well into the millions.

While powerful, these laws are not much protection for merchants. They won’t prevent fraud from happening, and offer minimal chance of revenue recovery.

Jurisdictional Challenges in Online Scam Cases 

Many states also have laws against scams and fraud. These laws often have lower penalties; typically in the $500-1,000 range. There are exceptions though: under Texas Penal Code § 31.03, for instance, convicted fraudsters can receive a $30,000 fine plus a state jail felony charge.

Both state and federal governments can prosecute the same party, for the same acts, at the same time. Because of what’s called the “dual sovereignty doctrine,” this does not fall under the category of double jeopardy.

Things may get confusing, though, when defining jurisdiction between state and federal agencies, or even between federal government agencies themselves. For example, interstate wire fraud is handled by the FBI, but because the Secret Service has jurisdiction over certain financial crimes, they may also become involved.

Agencies have been known to scrabble over jurisdiction, although typically less overtly than depictions in popular media. The larger and more sophisticated the crime is, however, the more likely agencies will need to collaborate. 

Professional fraud rings run from outside the country are usually not targeted by federal agencies. US agents seldom have jurisdiction in these cases. Cross-border evidence is hard to obtain, and extradition can be a nightmare. Broadly speaking, US agencies tend to focus on parties operating within the country.

Fighting Illegal Scams in Civil vs. Criminal Court 

The odds that you’ll be reimbursed for criminal scam losses are not great. It’s not for lack of government support; the Mandatory Victims Restitution Act18 (U.S.C. § 3663A) gives federal judges the power to require restitution to victims, including merchants. In fact, restitution is mandated in some federal cases. 

Actually collecting that payment, though, is a different thing. The scammer may have already spent the money, or hidden it offshore. If there are any financial assets, fines and court costs will be taken out before you get a dime. And if there are other victims suing the fraudster, you’ll be fighting with them over anything that’s left.

That’s not to say you’re out of options, though. If you’ve been a victim of an illegal scam, you can try and recover your losses through civil court.

Cases of civil fraud are different from criminal fraud. Here, getting compensated is the whole idea. The victims sue the fraudster for financial losses as private parties. Sending the crook to jail is less important than just getting the money back.

There are significant differences in the way criminal and civil cases are handled: 

Criminal Fraud	Civil Fraud
Prosecutor must prove beyond reasonable doubt	Lower burden of proof
Intent to defraud essential	Victim can pursue directly
Government brings charges, not victim	Monetary damages only

Criminal charges do not preclude you from filing a civil suit. In fact, the defendant having been already found liable in criminal court would make your civil case a lot stronger.

If you win, you might even be awarded damages beyond restitution. But, winning a civil case still leaves you with the same problem. If the crook has no assets (or said assets are safely ensconced in the Cayman Islands), you’re going to have a hard time collecting anything.

What This Means for Merchants

In the long run, looking for legal remedies for scams is largely wishful thinking. Your best bet is to instead focus on prevention: putting safeguards in place to identify and block fraud attempts before they become wide-scale. 

Potential techniques can include requiring multifactor authorization, using identification tools like AVS and 3D-Secure, and implementing techniques such as device fingerprinting, geolocation, and IP address checks. At the same time, you can be working with your payment processor and acquirer on additional fraud prevention strategies.

While these features can help, protecting your business from fraud and chargebacks ultimately requires a comprehensive approach. Chargebacks911® has a wealth of experience-based knowledge and expertise in developing cost-effective prevention and risk mitigation plans. Contact us today to learn more.