Misclassifed Bust-Out Schemes: An $800 Million Fraud Gap

So-called bust-out fraud is an old credit card crime that's not going away, and currently it's responsible for about $800 million annually in largely unreported fraud losses. That sober estimate came this week during a presentation on worldwide transaction-system fraud given by John Schettino, MasterCard vice president for security and risk services for global credit and debit products, at the ATM Industry Association's fifth annual conference in Tampa, Fla. “It's an unbelievable amount of losses,” he says. In bust-out schemes, criminals induce persons with good credit records to apply for multiple cards from an array of issuers. After using the cards normally for several months and paying off monthly balances, the cardholders suddenly run up balances equaling the credit limit on each card, typically in collusion with merchants who also profit from the scheme. The perpretrators then disappear with their merchandise, leaving the issuers holding the bag. Although not a new crime, bust out goes mostly unreported as fraud. Schettino says that's because most issuers misclassify the losses as credit losses. For this reason, he says, worldwide fraud numbers are usually underestimated, making fraud a much more serious problem than even current numbers may indicate. The $800 million in losses he attributes to bust-out fraud would increase by 20% the $4 billion in annual worldwide payment system fraud Schettino says is currently reported.