Chargeback Fraud and Double Dipping
Chargeback fraud, also known as "double dipping," is a common form of fraud by consumers that violates any of several fraud laws in California. While it is difficult to convict because of the challenges in proving intent, chargeback fraud can have serious legal implications if you are charged or convicted.
Simply put, chargeback fraud is common, but getting prosecuted for it is pretty uncommon as it's often difficult to prove beyond a reasonable doubt. Proving intent can be difficult, and most cases of double chargeback fraud involve small amounts of money.
When a chargeback fraud case is pursued, it often carries significant penalties because it repeatedly violates numerous state and federal laws. Chargeback fraud is most frequently committed online in e-commerce stores through card-not-present (CNP) transactions. It is an abuse of the refund process by cardholders.
So, what exactly is “double dipping?” It is a scheme where someone buys a product or service with a credit or debit card and then demands a refund from the retailer and the credit card company.
When a demand is made for a refund from the retailer, they generally refund the purchase price, but the product must be returned. However, some perpetrators of double dipping often falsely claim the product never arrived or the service was never provided.
Sometimes, they will say the product was stolen from their porch after delivery, was already returned, or was defective or broken on arrival. Then, they would keep the product for their use or resell it.
Sometimes, people will call their credit card company or bank to dispute a charge, claiming it was fraud. If the claim is accepted, it will take the money out of the retailer's account and assess a chargeback fee.
There could be a dispute process to resolve the chargeback claim between the bank and the retailer, which could end up in a civil court. When chargeback requests happen simultaneously, the perpetrator might get twice what they paid for the product, hence the name “double dipping.”
What Is Chargeback Fraud?
Chargeback fraud happens when a customer purchases with their credit card (typically online) and gets a refund without returning the goods purchased. The most common form of chargeback fraud is double-refund chargeback fraud (aka, "double-dipping"), which occurs in two steps:
- The customer demands a refund from the merchant without returning the merchandise—typically making an excuse for why they can't return it, such as it never got delivered, was stolen off the porch, or arrived too damaged to return. In many cases, the merchant will issue the refund in good faith without receiving the merchandise.
- The customer then contacts their bank to dispute the charge. The bank reverses the charge (known as a "chargeback"), returning the money to the customer.
Meanwhile, the customer keeps the purchased goods or services without paying for them, essentially getting them for free—and by getting a refund from two sources (i.e., the merchant and the bank), they have gained money at others' expense—which is the definition of fraud.
What Is "Friendly Fraud?"
Friendly fraud is a version of chargeback fraud that may begin as an accident but is considered fraud. This occurs when a consumer doesn't recognize a charge on their credit card bill and disputes it with the bank, believing they are a victim of fraud, only to realize later that the charge was valid. This can happen because:
- The consumer forgot they purchased the item, or
- A friend or family member got hold of the card and purchased it without telling them.
In either case, if the mistake is discovered and they allow the chargeback to go through, it still becomes fraud.
Why is Chargeback Fraud a Criminal Act?
Chargeback fraud is considered a form of theft and is thus a criminal act. When customers dispute a legitimate charge, they essentially steal from the merchant by obtaining goods or services without paying for them.
In addition, they are causing financial harm to the merchant by initiating a chargeback process that comes with fees and penalties.
What Are the Possible Charges for Chargeback Fraud?
There is no specific statute describing chargeback fraud; instead, prosecutors may charge it under a range of criminal violations, any of which may result in substantial fines, jail or prison time, or mandatory restitution to the victim of the fraud.
In California, depending on the circumstances of the crime, chargeback fraud may be charged as:
- Shoplifting or petty theft (for charges under $950);
- Grand theft (for charges exceeding $950);
- Credit card fraud (Penal Code 484e – 484j PC);
- Bank fraud (e.g., fraud against the financial institution issuing the card);
- Wire fraud (e.g., if the fraudulent purchase was made online, by phone, or using radio or television communications);
- Mail fraud (e.g., if the fraud included using the mail, either via mail order or dispute by mail).
Note that the criminal charges may be at the state or federal level. If the amount of loss in a chargeback fraud case is large, the federal government may press charges if the transaction utilized interstate infrastructure (e.g., wire or mail fraud).
Additionally, if you're accused of chargeback fraud, you could face more than one charge based on the list above. For example, you could be charged with theft, bank fraud, and wire fraud, leading to possible multiple convictions and sequential sentencing.
What Are the Defenses Against Chargeback Fraud Accusations?
In reality, prosecutors are often reluctant to press charges for chargeback fraud, either because it is challenging to prove willful intent (especially in "friendly fraud") or because the loss is not significant enough to justify the cost of prosecution.
If you face fraud charges due to alleged fraudulent chargebacks or double dipping, a criminal defense attorney may offer a variety of strategies to defend against the charges. These include, but are not limited to:
- Lack of Intent: Since intent is the hardest thing for prosecutors to prove, lack of intent is the most common defense used. Attorneys may argue that the chargeback was a mistake on your part or that you did not intend to defraud the merchant (or the bank).
- Merchant Error: If the merchant made an error, such as double-billing or failing to deliver the goods or services, you had a legitimate reason to dispute the charge. Proving merchant error can get the criminal charge(s) dismissed.
- Identity Theft: If someone else used your credit card information without your permission, you may not be held responsible for the fraudulent charges.
Contact our California criminal defense lawyers for a case review and to discuss legal options. Eisner Gorin LLP has offices in Los Angeles, CA.