Intellectual Property Law

Online Payment Scams Growing in Europe According to EU Report

By IBLS Editor

As the Internet increases in range and wealth of business opportunities, so do criminals up their efforts to develop more sophisticated and effective ways to scam online. Net credit card fraud is growing in Europe, according to an official European Commission report on the web sector, called ?Report on fraud regarding non cash means of payments in the EU: the implementation of the 2004-2007 EU Action Plan.? The report sums up the problem, saying: ?Fraud against means of payment (payment fraud) remains a threat to the success of the internal market for payments. Payment fraud affects the consumer confidence in non-cash means of payment and ultimately the real economy.?

While new laws fighting cyber crimes have been passed by many EU members,  the European web remains a dangerous place for business, according to the Report. The details are eye-catching, including a figure of 10 million fraudulent web transactions costing EU merchants a 1.5 billion Euros ($2.2 billion) in losses per annum. The Report offers a snapshot of the activity in Net fraud and countermeasures taken between 2004 and 2007, which shows that while the number of fraud cases is a small percent, this illegal shadow still damages overall confidence  for online buyers in the EU states.

One of the most problematic areas was the so-called "skimming fraud." The Report details this, saying, ?In this situation, the magnetic stripe (not the chip) of cards is copied in payment terminals or, more often, in ATMs or unattended payment terminals (for example those in petrol stations). The copied data (in some cases the PIN code is also captured) are used for the production of counterfeit cards which are then either used in non-EMV terminals (in Europe or in countries where the EMV technology has not been implemented) or for non-face to face payments (e.g. mostly Internet transactions).?

Further, electronic payment fraud has evolved from interpersonal interactions to non face-to-face situations like Internet payments, says the report, with ?card-not-present" type of fraud leading the way for growth. The EU is fighting back with several legislative actions addressing these cybercrime issues. One emphasis is meant to fight  money-laundering. On this directive, the Report states, ?The new directive on the prevention of money laundering of 2005 has introduced more detailed obligations for financial institutions in relation to customer due diligence which at the same time are more flexible and better adapted to the level of risk involved. The implementation of a sound "know your customer" policy by financial institutions should lead to a better management of the fraud risks involved, notably regarding identity theft type of fraud (e.g. when accepting new customers) or non-face to face situations (e.g. When monitoring customers' transactions).?

The second directive is for services in the internal market (PSD) which was adopted in
2007.  The Report states this is aimed at ?ensuring that payments within the EU ? in particular credit
transfer, direct debit and card payments ? become as easy, efficient, and secure as domestic
payments within a Member State are today. By setting up a harmonised legal framework for
payments within the EU, the PSD will provide more transparency and will reinforce the rights
and protection of all the users of payment services (consumers, retailers, large and small
companies as well as public authorities).?

The Report describes these types of online credit card fraud and ID theft crimes as ?a moving target,? which occurs in many various ways.  While identity theft/fraud is an enormous issues, a larger problem has arisen regarding ?identity management.? In association with the 10 million fraudulent transactions are 500 000 merchants being hit badly. If it becomes ingrained in the average European resident's mind that online transactions are inherently dangerous, it will effect consumer confidence and put the goal of a non-cash economy in danger. Therefore the EU must make sure it is tackling Internet fraud as aggressively as possible.

Full post as published by IBLS Internet Law Blog on April 30, 2008 (boomark / email).