Chip and Pin may not be the answer to credit card crime

This report, 24th January 2004

But the police team's find also confirmed an extremely worrying trend: organised criminals see UK consumers as fair game. The implications are not only financial, but also carry a terrible human cost. "Card fraud is directly linked to people-trafficking, drugs importation, terrorism, kidnapping and extortion," says Chief Inspector Clarke, who heads the Dedicated Cheque and Plastic Crime Unit. Tackling the problem is not just crucial in protecting consumers' savings, but also in preventing the heinous crimes being funded. Now, with the problem escalating rapidly - card fraud cost the industry just £83 million in 1995 - the banks and retailers are fighting back. The ambitious chip and PIN project, which kicked off in October and appears in a nationwide television advertising campaign from March, will for ever change the way we use our bank cards.

By the end of this year, most of the UK's 42 million cardholders will have received new debit and credit cards, each containing an electronic chip that will store their personal information. The chips will also be able to retain biometric details such as retina and fingerprint patterns, although there are no formal plans by banks to use this capability yet.

Instead of signing a receipt after a purchase, a customer will enter a four-digit PIN. Without the secret code, cardholders will not be able to buy the goods, which should dramatically reduce the amount of fraud that is committed with stolen cards. The chip will also be extremely difficult to replicate and this will greatly reduce the use of cloned cards, which account for a quarter of all losses. When a similar system was introduced in France a decade ago, card fraud fell by 80 per cent.

With the old-style cards, personal information is stored on the black magnetic stripe. But criminals have devised depressingly simple ways of tapping into this data. A crooked employee, typically working in a pub, restaurant or service station, swipes the card through a small handheld device known as a "skimmer", which reads and stores the information of up to 1,500 cards. They then sell the skimmer to a middleman, who downloads the information to a computer hard drive.

These details are then transferred to a replica bank card, typically manufactured in Malaysia or Taiwan, which can then be used anywhere in the world. Spending is debited from the genuine cardholder's bank account.

Since Chief Inspector Clarke's unit was set up nearly two years ago, it has made more than 160 arrests, the majority involving counterfeit cards. More than 95 per cent of the suspects have been illegal immigrants with links to groups such as the Tamil Tigers in Sri Lanka, extremists in Algeria, and Romanian people-traffickers.

But while the move to chip and PIN will be a major blow to the gangs, they are expected to shift their attention quickly to other types of bank fraud. Katy Worobec, head of risk at the Association for Payment Clearing Services (APACS), a body which represents the banks on payment issues, says: "Some of the criminal activity will go overseas, but other methods of card fraud will increase. People need to make sure that they are vigilant."

In fact, there is already evidence that gangs are moving into new areas. In 2003, there was a sharp increase in identity theft. Using false or stolen documents, which can include utility bills and bank statements, the fraudster opens an account in somebody else's name. Huge debts are soon accumulated. Another ruse is simply to take over a customer's account by using their personal details to contact the bank and redirect their mail, including bank cards, to a new address.

Victims of this identity crime often remain oblivious to it until they receive statements demanding payment or are turned down for credit because there are thousands of pounds owing in their name.

"People are not as aware as they should be that their banking information is valuable and should be looked after," Ms Worobec says. Checking statements at the end of each month is crucial. Financial correspondence should then be shredded.

Fraudulent purchases made over the internet or telephone, known as card-not-present fraud, are another major headache for banks and retailers. This crime is expected to grow sharply over the next few years because the card and its holder are not visible. Discarded card receipts are often used to acquire the information. These too should be shredded.

Despite many people's initial concerns about internet banking, the losses from hacking into people's accounts have so far been negligible. Not that there has been a lack of attempts. Using a technique known as phishing, described by the US Federal Bureau of Investigation as "the hottest and most troubling new scam of the internet", fraudsters send out bogus e-mails asking customers to reveal their account details. Most major banks have already been targeted, but the amateurish nature of the e-mails has limited their success.

Fraud at cash machines is also rising sharply. And the criminals are becoming more brazen in their methods. Last week Detective Clarke's team arrested an Eastern European gang that has been manufacturing fake front panels for ATM cash dispensers. "No matter what we do, the criminals are not simply going to go away," he says. "We just have to be one step ahead."

APACS offers these tips for cardholders:

Never let a card out of sight when making a transaction.