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Man gets 10-year prison sentence after exploiting common consumer refund tool

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He abused a consumer measure created to protect against fraud.

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Credit cards usually offer these protections, but they’re easy to abuse.

By Kari Paul, MarketWatch

There’s being frugal, then there’s taking it too far.

Florida man Michael Cooper was sentenced to 10 years in prison on Monday after misusing credit card “chargebacks,” the term for when a credit-card company takes money back from a merchant to refund a consumer, federal prosecutors said Monday. Created to enhance consumer fraud protection, chargebacks are meant for situations when a product is unsatisfactory, arrived damaged or never arrived at all. The consumer can file a complaint with the credit-card company rather than the retailer and be reimbursed at the latter’s expense.

Cooper fraudulently obtained more than $9 million in refunds from at least 76 different businesses this way between 2012 and 2016, according to the Department of Justice. He owned and operated several businesses devoted to the process of fraudulently claiming refunds. Under the guise of being an internet service company, he gleaned customers’ personal information. He then impersonated these individuals in phone calls and written communications with the individuals’ credit-card companies, fabricating documents on some occasions to obtain refunds on their behalf, but then funneling the money to himself.

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Ecommerce sites lost $7 billion to fraudulent chargebacks in 2016, a number that is expected to leap to $31 billion by 2020, according to the Nilson Report, a credit-card research firm. Such fraud is called “friendly fraud” and is an increasingly expensive problem for business owners, according to Robert Harrow, head of credit-card research at personal-finance site Value Penguin. It is called “friendly fraud” because the cardholder, or supposed victim, and the fraudster are the same person. If customers continue to abuse the amenity, Harrow added, they may lose it.

“People should take this story as a learning point,” he said. “If people abuse this over time, it’s possible for such protections to be reworked. The moment this begins costing others millions of dollars, the banks and Congress will take notice and take action.”

However, consumers should be aware of chargeback protections in instances where they have a right to use them. Chargebacks can be made if the goods or services promised did not come as advertised — broken merchandise, for example — and the customer already made an effort to resolve the issue with the merchant.

Consumer advocates advise seeking reimbursement or replacement from the retailer before contacting the credit-card company. For purchases under $50, consumers are generally reimbursed with no questions asked, Harrow said, but for more expensive transactions they may be required to provide proof of damage or answer additional questions.

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