Pursuing Criminal Charges Against Gross Chargeback Fraud

Alex ForbessUncategorized2 Comments

Pursuing Criminal Charges Against Gross Chargeback Fraud

We reached out to Nasir N. Pasha (Esq.), the managing attorney of Pasha Law PC to get some expert legal advice on how to take legal action against a chargeback fraudster. In this guest Q&A, Mr. Pasha explains what legal matters merchants can take if chargeback fraud either gets out of control or if it becomes something too big for the card networks to handle. So, without delay, here is what Mr. Pasha advises when merchants experience gross chargeback fraud.

1. How can you prosecute someone who is committing chargeback fraud?

Chargeback fraud should be seen for what it is, theft and larceny. Persons who have been caught committing chargeback fraud have been prosecuted for such. Though unlike shoplifting, the level of proof is often lacking. It is easy to prove that someone took something without paying for it, whereas it’s another thing to prove that a person actually received a product when they say they did not.

Where you have reasonable proof that chargeback fraud occurred, it need not be for a large sum of money for authorities to prosecute. There are different degrees of charges that range from petit larceny, often defined theft that is below $50, to grand larceny, often defined as theft above somewhere between $500 to $1,000.

A significant challenge to merchants is that many prosecutors around the country may not have the resources or political will to make such crimes a priority. Prosecutors will also choose to not take on a case that looks more like a civil matter than a criminal one, e.g. a chargeback that looks more like a contract dispute with nuanced facts. Accordingly, a merchant’s best option may be to file a civil lawsuit that may include causes of action of fraud, conversion, breach of contract, and other related allegations.

2. What authority/agency do you file with and what law(s) govern it?

Where to refer the criminal case to depends on multiple factors including the amount of money and where the merchant and customer is located. As stated above, your case will only be accepted with adequate proof and provided that the prosecutor is able to make it a priority. Where the merchant is located in a different place than the customer, the merchant may be afforded two shots for a prosecutor to take the case.

3. If the card network denies your challenge, is there a separate recourse for law authorities? Or will Visa or MasterCard rules of card acceptance ale precedence?

There are typically no significant hurdles for a merchant to sue the customer directly or referring such customers over to authorities. The dispute resolution process with the card network is merely a civil appeals process that is contractually based between the merchant, network, and customer/card holder.

4. As a merchant, what proof will I need in order to prosecute this person?

This question is a little broad and requires specific scenarios. For example, if someone has a store front and you have camera recording of someone walking out with a product, that may be enough.

5. Let me reframe the previous question. Our audience deals with a lot of card-not-present (CNP) transactions. Here is a scenario of what they experience:

I am a manager of a subscription box company. Our business relies heavily on recurring billing. One of our customers frequently files disputes for the following reasons: 

  • The product does not arrive to the shipping address (even though our carrier says otherwise) 
  • The product arrives as defective or damaged (even though we take extreme precaution in packaging) 
  • We made an unauthorized transaction on his card (even though our policy clearly states when a transaction is expected to occur) 

The issuing bank did favor us, so a chargeback has not been initiated. But we found out that this customer now has another card and has attempted to file the same disputes as listed above. It does not look like this customer will stop filing disputes, and we’re getting nervous that he may soon get away with a chargeback. What proof will I need to prosecute this person?

The standard of proof is beyond a reasonable doubt when it comes to criminal prosecution; whereas, in a civil lawsuit, for most causes of action, it is a preponderance of the evidence standard or “more likely than not.” In one or two instances with the customer that constantly complaints may not be enough for prosecution. But perhaps a pattern of complaints that have facts to support the merchant may be enough. As I’m sure you agree, it is possible that the package is not delivered while the carrier says it was. It is also possible for goods to be damaged despite being well taken care.

6. Well, what about friendly fraud? That’s a big concern for online merchants. Here’s another scenario that explains how friendly fraud is usually played out:

A customer authorizes multiple transactions for a video game streaming service. He believes that chargebacks are a great way to get a refund whenever he is dissatisfied with a game. But he knows there are risks to falsely file a dispute with his issuing bank. 

As time passed, he’ll file disputes every other month, saying that our services are ‘Not As Described’. Since he uses a Visa card for these transactions, we deal with Reason Code 53 in our responses. 

We’ll win some cases, but not all the time. And this customer does not look like he’ll change his behavior. What will I need to do in order to file a civil lawsuit against this person?

Though the person in this scenario wants to know what they need to file a civil lawsuit, the first step should be to assess whether that’s the best course of action. Once that is decided, then the “how to” is a matter that can be done by an attorney or without an attorney in some states through the small claims system that is designed for non-lawyers to file suit. Pursuing a civil lawsuit in any type of case has multiple challenges that need to be assessed before moving forward. One of the main reasons why there is not a lot of litigation of businesses suing its customers for chargeback fraud is because of these challenges. The main obstacle for these types of suits is the economics of recovery. Factors such as the dollar amount in question, the likelihood of success, cost of litigation will dictate how to go forward.

For example, if it is a large amount of money at issue, it may be worth paying an attorney hourly to pursue the case or even find an attorney willing to take it on contingency where fees are only paid upon recovery. Even if a small amount of money, in some cases, it may be worth the time to go to small claims court for which some states prevent even using an attorney, thereby limiting costs. With all that said, even a successful court judgement needs to be enforced in order to collect.
Another obstacle for many online retailers is dealing with customers that are not located near you. The general default requirement is for lawsuits to be filed in the jurisdiction of the defendant (your customer). This can be changed using terms of service agreements and other legal strategies.
There is a step before pursuing a civil lawsuit that is much more economical and almost as effective, i.e. a demand letter from an attorney.

7. The fraudulent activity is affecting me out-of-state. What laws will affect my chances to prosecute the offender from my home state?

See above [Question #2]. It is typically easier for a prosecutor to pursue the suspect if within their state.

8. I was able to track the fraudster, and it turns out this person is a regular customer who frequently files a dispute from the same IP address. Should I send a subpoena to the fraudster?

Issuing a civil subpoena may be an option if you intend to pursue the person in a civil matter, but note that an IP address may or may not reveal the person’s identity and may not be enough for proof of liability. It really depends on the likelihood of recovery and how much the chargebacks total.

9. What about fraudulent activity outside of the U.S.? What laws enhance or diminish my chances to prosecute someone in another country?

Each country will have different laws, but typically persons outside the U.S. will have very limited reach from a U.S.-based business. Theoretically, if there are significant amounts at issue, certain countries that may have treaties with the U.S. may give a pathway to prosecution, but overall unlikely without local prosecution in the customer’s home country.

10. How long does this type of prosecution usually last?

This has a pretty wide range depending on the jurisdiction and whether the case goes to trial. Often these types of matters end with some kind of plea agreement that often includes some kind of restitution (repayment back to the victim) through lump sum payment or payment plan. Such restitution should not be expected by merchants for at least a year or two and beyond. This also assumes that the criminal is financially capable of restitution.

11. From your expertise, is this prosecution worth pursuing? If not, why is it difficult to prosecute someone for gross chargeback fraud?

First, many merchants are reluctant to pursue lawsuits against customers due to the public perception. Second, and most importantly, the cost-benefit analysis with the probability of success is usually a large obstacle to civil recovery. Lastly, unless a large dollar amount and/or clear proof, it is difficult to find prosecutors to pursue such claims.

12. What do you recommend merchants should do when very experience gross chargeback fraud?

Merchants should first consider whether the loss is an acceptable cost of doing business or worth pursuing. If the merchant is able to prove the fraud and it is of an amount that is worthwhile pursuing, the merchant may have multiple options including criminal and civil remedies. Lastly, consider the goal. Is the goal to make an example to deter future chargeback fraud? If so, is the merchant large enough to even make such an impact? Is the goal to recover the funds? If so, even if successful, is the customer financially capable of paying you the money back? Unfortunately, more often than not, merchants will find themselves in a position where it is more worthwhile to find ways to prevent gross chargeback fraud than it is to pursue after the fact.

A Little Background of Our Guest

Portrait of Nasir N. Pasha

Portrait of Nasir N. Pasha

Nasir N. Pasha is the managing attorney of Pasha Law PC. Mr. Pasha prides himself on helping clients navigate the complex waters of legal bureaucracy and parse through complicated legalese to find the best solutions and insights for clients’ specific legal issues. His clients appreciate his ability to present solutions in a way that the everyday businessperson can easily understand.

Mr. Pasha’s legal experience spans a diverse range of practice areas, including business law and litigation, broker legal compliance, real estate law, dispute resolution, health care law, regulatory compliance, and online business defamation. He regularly helps clients tackle issues relating to contracts, intellectual property rights, employment law, risk management, litigation management, and corporate governance, offering a crucial balance between conservative advice and practical solutions.

When he’s not zealously representing his clients, Mr. Pasha also produces and co-hosts a podcast (Legally Sound | Smart Business) with fellow Pasha Law attorney Matt Staub, answering client questions and analyzing current legal events that impact the business world. Mr. Pasha also serves as a legal expert on corporate law for various radio programs.

Outside the office, Mr. Pasha is a programmer hobbyist whose interests also include hiking, campaigning for displaced refugees, mountain biking, and traveling.

Feel free to request consultation from Mr. Pasha and Pasha Law PC for your legal needs.

Other Methods to Confront Chargeback Fraud

A confrontation that is performed half-spirited will result into a blowback that is twice as damaging. That’s why chargeback management needs to be pervasive and extended to other areas outside of fraud analysis. Customer service, policies, sales and other factors need to work coherently in order prevent chargeback fraud from happening. Let us start with the basics of chargeback management and work our way up to more specific, and simple, tactics that will help you recover more revenue.

Alerts and Real-Time Dispute Resolution

Every second spent is another second being allocated to an emerging chargeback. The Chargeback Alerts allow you to take powerful actions like instant gift card deactivation, cancel recurring billing, and services suspension. This allows you to prevent fulfillment of goods and services for which you won’t receive payment.

The Chargeback App also offers you real-time dispute resolution. And you can respond to disputes immediately with the right kind of action. Let’s say a cardholder files a dispute that states her subscription box has not arrived. You can easily reroute the shipment if the box got lost with the carrier. The Chargeback App will allow you to notify the cardholder when she should expect the box to arrive. Refunds can also be activated within the SaaS software.

Take Time to Know Your Customers

And we don’t just mean have a friendly e-chat. You should take the time to know the actions, and rationale, customers take when they commit chargeback fraud. One crucial rationale is that committing chargeback fraud is incredibly easy (and you’ll learn more about that right here). You’ll even need to make a tough decision whenever, gross chargeback fraud becomes, well, gross and uncontrollable. A customer ban is an option, but that will require some pondering. A move like this can blow up in your face or, at the very least, damage your business’ reputation.

Customer Service on the Frontlines

We cannot understate the fact the customer service can make or break chargebacks. Every prompt, informative response sent is another shield against future disputes. Here are a few articles we written about that highlights the importance of customer service. We also did a few ‘deep-dives’ that explored what scenarios does customer service frequently encounter:

Responses and Evidence

These two, interdependent variables can have a great impact if submitted properly. This includes sticking the formalities such as knowing your Merchant Category Code (MCC). But it also includes being innovative and engaging in how you write your chargeback response. Another thing you should consider is what other evidence can submitted that will make your case. There is a lot you can achieve if you properly use social media as evidence (some things in this topic even surprised us).

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