In California, chargeback fraud is typically the crime of buying something with your credit card, demanding a refund from the seller without returning the item, and then disputing the charge with your credit card company. Also known as “double-dipping,” you would have the item and its cost in money. It can be prosecuted under a variety of criminal statutes.
How chargeback fraud can work
There are a couple of different ways to commit chargeback fraud, which is also known as:
- friendly fraud,
- liar-buyer fraud,
- double-dipping, or
- cyber shoplifting.
The most common type of chargeback fraud scheme is to:
- buy something using a credit or debit card, typically online,
- receive the item,
- contact the merchant and claim that you did not get what you bought, often by saying it was stolen from your porch, or that it was defective,
- get a refund from the merchant,
- call your credit card company or the card’s issuing bank to dispute the charge,
- receive the payment price again if the credit card company accepts the claim, and
- keep the item.
Some variations on this process are to:
- actually return the item to the merchant before getting refunded by both the merchant and credit card company,
- falsely claim that the item was already returned, or
- resell the item.
In the end, though, all chargeback fraud cases leave you with the cost of the item purchased. You will have gotten the refund for it from the merchant, plus the cost of it from your credit card company. That money will have come from the merchant’s account, who would have paid a chargeback fee to your credit card company or payment processor for the allegedly fraudulent transaction. That fee is the cost of the item purchased, plus other penalties that often exceed the credit card transaction amount.
If you then resell the item, you would have the proceeds of the sale as well.
Mastercard alone estimated that it would handle $615 million in global chargeback fraud in 2021.[1] Total online payment fraud, the type of fraud that includes chargeback fraud, was expected to cost over $20 billion that year.[2]
California criminal charges you can face
There is no California or federal criminal law that specifically forbids chargeback fraud. However, the conduct that constitutes chargeback fraud violates numerous laws, including those for:
- credit card fraud,
- mail fraud,
- wire fraud,
- bank fraud,
- shoplifting, and
Some of these are state offenses. Others are federal. Some of them are both.
“While chargeback fraud has gotten increasingly common, criminal charges are still rare. Each incident generally only involves a small amount of money. Furthermore, it can be difficult for the merchant or the bank to identify the culprit. Many merchants and banks have resorted to chargeback management companies to mitigate the problem, streamline the chargeback dispute resolution process, and to take fraud detection and fraud prevention measures. However, if the problem persists or gets much worse, we will probably start to see more criminal charges getting filed.” – criminal defense lawyer Neil Shouse
Credit card fraud
The criminal defense attorneys at our law firm think that credit card fraud is the most likely criminal charge you would face for chargeback fraud. Credit card fraud is a very broad offense, so nearly all unauthorized or fraudulent uses of a credit card are covered.
You can face California state charges or federal charges for this offense.[3]
Convictions for a violation of federal law carry up to 15 years in some circumstances for first-time offenders.[4]
Mail fraud
You could also face a federal charge for mail fraud.[5] This is the crime of:
- coming up with a fraudulent scheme,
- using the U.S. mail system in furtherance of that scheme, and
- acting with the specific intent to deceive or defraud.[6]
Prosecutors using this statute to pursue chargeback fraud would likely argue that it applies because the item that was purchased passed through the mail.
A conviction carries up to 20 years in prison.[7]
Wire fraud
You could also be charged with wire fraud. This is another federal offense. The criminal elements are:
- having a scheme to commit fraud,
- using a wired, radio, email, television, or internet communications system in furtherance of that scheme, and
- acting with the specific intent to commit fraud.[8]
Convictions for wire fraud against a financial institution, such as the credit card company or the bank that gets implicated in a chargeback fraud scheme, carry up to 30 years in prison and a million dollars in fines.[9]
Bank fraud
Bank fraud is another federal offense that can be filed for a chargeback fraud scheme. The criminal elements of bank fraud are:
- knowingly executing a fraudulent scheme against a financial institution, or attempting to do so,
- using that scheme to obtain that institution’s property, and
- doing so by means of false or fraudulent pretenses or representations.[10]
Convictions carry up to 30 years in prison.
Shoplifting
In California, you may face state shoplifting charges if your chargeback fraud took place in a brick-and-mortar store and implicated less than $950.[11]
Shoplifting in California is a misdemeanor. Convictions carry up to 6 months in jail.
Grand or petty theft
California’s theft laws may also be used to prosecute chargeback fraud. The criminal elements of theft by false pretense are:
- you knowingly and intentionally deceived a property owner, or the owner’s agent, by false or fraudulent representation or pretense,
- you did so intending to persuade the owner to let you take possession and ownership of the property, and
- the owner gave you the property in reliance on the false representation or pretense.[12]
If the fraud nets $950 or less then it would be petty theft, which carries up to 6 months in jail.[13]
If the chargeback fraud obtains more than $950 it would be grand theft. A conviction could carry up to 3 years in prison.[14]
Legal defenses to friendly fraud
There are legal defenses to an allegation of chargeback fraud. The 3 that our lawyers use most often are:
- lack of intent,
- you were the victim of identity theft, and
- the merchant made a mistake.
Lack of intent
Theft and fraud require the prosecutors to prove that you acted with an intent to defraud or take the money. This can be difficult for them to do.
Our attorneys have found that arguing that you did not intend to defraud the credit card company and the merchant is one of the strongest defenses available. However, this defense gets much weaker the more fraudulent credit card charges there are. If you get a refund from both your credit card issuer and the merchant more than a couple of times, prosecutors will argue that this pattern of behavior is evidence of intent.
Identity theft
It is not uncommon for chargeback fraud schemes to be perpetrated by people who use stolen identities and bank account information. If you were the victim of identity theft and your information is being used to commit chargeback fraud, you could face a criminal charge for it. Showing that a fraudster is using your credit card information to make unauthorized charges can get the prosecutor to drop the charges against you.
Merchant error
An error by the merchant can lead to an allegation of chargeback fraud. For example, if the merchant or retailer double-bills you and you initiate the dispute process with a chargeback request, it can look like chargeback fraud.
Legal References:
[1] Press Release, “Mastercard Delivers Greater Transparency in Digital Banking Applications,” Mastercard (Sept. 29, 2020).
[2] Press Release, “eCommerce Losses to Online Payment Fraud to Exceed $20 Billion Annually in 2021,” Juniper Research (April 2021).
[3] California Penal Code section 484(e)-(j) PC and 18 USC 1029.
[4] 18 USC 1029(c).
[5] 18 USC 1341.
[6] Miller v. Yokohama Tire Corp., 358 F.3d 616 (9th Cir. 2004).
[7] 18 USC 1341.
[8] United States v. Garlick, 240 F.3d 789 (9th Cir. 2001).
[9] 18 USC 1343.
[10] 18 USC 1344.
[11] California Penal Code 459.5 PC.
[12] California Criminal Jury Instructions (CALCRIM) No. 1804.
[13] California Penal Code 484 PC.
[14] California Penal Code 487 PC.
