With little more than a month to go before the start of the 2016 tax filing season, the IRS and the states are hunkering down for an expected slugfest with identity thieves who make a living requesting fraudulent tax refunds on behalf of victims. Here’s what you need to know going into January to protect you and your family.

The good news is that the states and Uncle Sam have got a whole new bag of technological tricks up their sleeves this coming tax season. The bad news is ID thieves are already testing those defenses, and will be working against a financially strapped federal agency that’s been forced to cede much of its ability to investigate and prosecute such crimes.

Tax refund fraud affects hundreds of thousands, if not millions, of U.S. citizens annually. Victims usually first learn of the crime after having their returns rejected because scammers beat them to it. Even those who are not required to file a return can be victims of refund fraud, as can those who are not actually due a refund from the IRS.

By all accounts, the IRS has improved at blocking phony refund requests. The agency estimates it prevented $24.2 billion in fraudulent identity theft refunds in 2013. Trouble is, it paid out some $5.8 billion in fraudulent refunds that year that it later determined were bogus, and experts say that is only the fraud the agency knows about, and the true number is likely much higher annually.

Perhaps in response to the IRS’s increasing ability to separate phony returns from legitimate ones, crooks last year massively focused on filing bogus refund requests with the 50 U.S states. To head off a recurrence of that trend in the 2016 filing season, the states and the IRS have hammered out an agreement to examine more than 20 new data elements collected by online providers like TurboTax and H&R Block.

Those new data elements include checking for the repetitive use of the same Internet address to rapidly file multiple returns, and reviewing computer device information (browser user agent string, cookies e.g.) tied to the return’s origin. Another check involves measuring the time it takes to file a return; fraudsters involved in tax refund fraud tend to breeze through returns in just a few minutes because they are generally copying and pasting information into the tax forms, or relying on an automated program to do it for them.

The hope is that the these new checks will let investigators more accurately flag suspicious refund requests processed by tax preparation firms, which also have agreed to beef up lax security around customer accounts. Under the agreement, online providers will enforce:

• new password standards to include a minimum of eight characters, with upper, lowercase, alphanumerical and special characters;
• a lock-out feature that blocks users with too many unsuccessful login attempts;
• the addition of three security questions;
• some sort of out-of-band verification for email addresses — sending an email or text to the customer with a personal identification number (PIN).

Julie Magee, Alabama’s chief tax administrator, said the state/IRS task force opted not to disclose all 20 of the data elements they will be collecting from tax prep firms.

“The thieves are going to figure these out on their own, and they’re already testing our defenses,” Magee told KrebsOnSecurity. “We don’t want to do anything to make that easier for them.”

ANALYSIS

Whether or not we see an increase in tax refund fraud next year, one thing seems certain: the IRS will prosecute far fewer of the crooks involved. Congress has persistently underfunded the IRS, and budget cuts have pushed prosecutions of identity thieves to a new low. According to the IRS’s 2015 Annual Report, IRS identity theft criminal investigations are down almost 50 percent since 2013.

Tax fraudsters were so aggressive last year that they figured out how to steal consumer identities directly from the agency itself. In August 2015, the IRS disclosed that crooks abused the “Get Transcript” feature on its Web site to steal Social Security numbers and information from previous years’ tax filings on more than 334,000 Americans.

The IRS has responded to the problem of tax ID theft partly by offering Identity Protection PINs (IP PINs) to affected taxpayers that must be supplied on the following year’s tax application before the IRS will accept the return. However, consumers still have to request an IP PIN by applying for one at the agency’s site, or by mailing in form 14039 (PDF).

Incredibly, the process that thieves abused to steal tax transcripts from 334,000 taxpayers this year from the IRS’s site also works to fraudulently obtain a consumer’s IP PIN. In fact, the following redacted screen shot from a notorious cybercrime forum shows a seasoned tax fraudster teaching would-be scammers how to use the IRS’s site to obtain a victim’s IP PIN.

Both the Get Transcript and the process to retrieve an IP PIN from the IRS’s site are vulnerable because they rely on the applicant supplying static information that is trivial for thieves to obtain, including the taxpayer’s name, date of birth, Social Security number and filing status. After that data is successfully supplied, the IRS uses a service from credit bureau Equifax that asks four so-called “knowledge-based authentication” (KBA) questions.

These KBA questions — which involve multiple choice, “out of wallet” questions such as previous address, loan amounts and dates — can be successfully enumerated with random guessing, but much of the data is readily available via free online social networking and consumer tracking services like Spokeo.

If any readers here doubt how easy it is to buy personal data on just about anyone, check out the story I wrote in December 2014, wherein I was able to find the name, address, Social Security number, previous address and phone number on all current members of the U.S. Senate Commerce Committee. This information is no longer secret (nor are the answers to KBA-based questions), and we are all made vulnerable to identity theft as long as institutions continue to rely on static information as authenticators.

My guess is that a huge chunk of 334,000 victimized via the IRS’s site this year probably will not request the IP PIN and will in fact have fraudulent tax returns filed with their info — whether they request the IP PIN and it is stolen or not. The IRS should just issue the IP PINs to affected taxpayers, instead of asking victims to do it themselves.

Incidentally, the IRS’s Twitter account is still promoting the online Get Transcript capability, even though it no longer offers the service online. For now, the only way to obtain a transcript is via snail mail.

DON’T BE THE NEXT VICTIM

In notifying 334,000 taxpayers affected by its Get Transcript debacle, the IRS predictably offered victims free credit monitoring services from Equifax. The IRS makes no mention of a more effective way to block ID thieves: Placing a “security freeze” on one’s credit files with the major credit bureaus. See this tutorial about why freezes are more effective than credit monitoring in blocking ID thieves from assuming your identity to open up new lines of credit.

While it’s true that having a security freeze on your credit file won’t stop thieves from committing tax refund fraud in your name, it would stop them from fraudulently obtaining your IP PIN. Also, anyone who has a freeze in place will need to temporarily lift that freeze to take advantage of any credit monitoring services (in this case, the consumer would need to briefly thaw a freeze at Equifax).

-File before the fraudsters do it for you – Your primary defense against becoming the next victim is to file your taxes at the state and federal level as quickly as possible after the 2016 Tax Filing Season begins — which is usually the second or third week in January. Remember, it doesn’t matter whether or not the IRS owes you money: Thieves can still try to impersonate you and claim that they do, leaving you to sort out the mess with the IRS later.

-Get on a schedule to request a free copy of your credit report. By law, consumers are entitled to a free copy of their report from each of the major bureaus once a year. Put it on your calendar to request a copy of your file every three to four months, each time from a different credit bureau. Dispute any unauthorized or suspicious activity. This is where credit monitoring services are useful: Part of their service is to help you sort this out with the credit bureaus, so if you’re signed up for credit monitoring make them do the hard work for you.

–Monitor, then freeze. Take advantage of any free credit monitoring available to you, and then freeze your credit file with the four major bureaus. Instructions for doing that are here.

-File form 14039 and request an IP PIN from the government. This form requires consumers to state they believe they’re likely to be victims of identity fraud. Even if thieves haven’t tried to file your taxes for you yet, virtually all Americans have been touched by incidents that could lead to ID theft — even if we just look at breaches announced in the past year alone.

FIGHT BACK

Thieves involved in tax return fraud may be laughing all the way to the bank, but that doesn’t mean we have to suck it up and take it: Exercise your rights to obtain a copy of the phony return, and you may just help put crooks in jail.

If you become of the victim of tax fraud and are motivated to learn who helped to defraud you and Uncle Sam, you can file form 4506 (plus a $50 fee) to get a copy of the return. That information can be shared with your local police, who may be able to use to track down people who help launder the proceeds from tax refund fraud.

Earlier this year, I wrote about Isha Sesay, a Pennsylvania woman who was arrested for receiving phony IRS refunds on behalf of at least two tax fraud victims. Among Sesay’s victims was resident Mike Kasper, whose request for the filing led to Sesay’s arrest. Kasper’s hard work helped expose the IRS’s pervasive authentication weaknesses and later testified to Congress about his ordeal. Sesay is currently scheduled to plead guilty (PDF) to the charges on Dec. 18.

Turns out, Kasper’s sleuthing was key to Sesay’s prosecution. When he found out he’d been victimized, Kasper requested the copy of returns that fraudsters filed in his name, but he did so before filing form 14039 to request an IP PIN.  Had he done it in the opposite order, the IRS would have redacted all of Ms. Sesay personal and financial information.

In testimony before the Senate this year, IRS Commissioner John Koskinen explained the reasoning behind that decision: A fraudulent return could include the personal information of other people. The end result is that it is better to file form 4506 and pay $50 to request a photocopy of the fraudulent return before you file form 14039 to formally report the fraud.

On any given day, there are thousands of gift cards from top retailers for sale online that can be had for a fraction of their face value. Some of these are exactly what they appear to be: legitimate gift cards sold through third-party sites that specialize in reselling used or unwanted cards. But many of the more steeply discounted gift cards for sale online are in fact the product of merchandise return fraud, meaning consumers who purchase them unwittingly help thieves rob the stores that issued the cards.

This type of scam mainly impacts brick-and-mortar retailers that issue gift cards when consumers return merchandise at a store without presenting a receipt. Last week I heard from KrebsOnSecurity reader Lisa who recently went online to purchase a bunch of steeply discounted gift cards issued by pet supply chain Petco.

Lisa owns two Rottweilers that both eat a good chunk of their weight each month in dog food, so Lisa said she felt like she’d really hit on a bargain when she found a $165 Petco gift card for sale at a popular online gift card retailer for $120 (a nearly 30 percent discount on the value).

“When I went to Petco to get my monthly supply of dog food and snacks for my Rotties, I used my merchandise card and the manager shared with me that folks are stealing merchandise from one Petco store and returning the items to another without a receipt and then selling the cards to places like raise.com and cardpool.com at a discounted price,” Lisa recounted.

Petco’s official policy is that for returns more than 60 days after the purchase — or if the receipt is unavailable — the value of the goods returned will be refunded to a merchandise card. Lisa said she bought the Petco card from raise.com, but she said the company never disclosed that the card was a merchandise return card — a fact that was printed on the front of the card she received.

“I feel really bad now because my purchase of these cards may have contributed to unlawful activities,” Lisa said. “Even though I saved $40+, Petco actually lost money as a result.”

Neither Raise nor Petco responded to requests for comment. But a look at the available Petco cards for sale via one gift card tracking site — giftcardgranny.com — shows Petco cards routinely sell for at least 25 percent off their value.

In any case, this fraud scheme is hardly specific to Petco. Cards from Petsmart, a competitor that also offers merchandise return cards, generally sell at 20 percent off their value. Clothier H&M’s cards average about 30 percent off.

Contrast these discounts with those for gift cards from restaurants, fuel stations and other businesses that generally don’t have to deal with customer returns and you’ll notice two interesting patterns: For starters, the face value of the cards from merchants that don’t take customer returns are far more likely to be even amounts, such as $50, $25 and $40. The percentage off the face value also tends to be much lower — between 3 and 15 percent. For example, see the discount percentage and value of cards from Starbucks and Chevron.

“Twenty-five percent off is really high, and there aren’t many that offer that high of a discount,” said Damon McCoy, an assistant professor of computer science at New York University and an expert on fraud involving stored value cards. “Normally, it is around 5 percent to 15 percent.”

According to a study conducted jointly by KingRogers International and The Retail Equation, approximately nine percent of all returns in the United States are fraudulent. The National Retail Foundation estimates that the problem will cost U.S. retailers nearly $11 billion this year.

Investigators say the crimes very often are tied to identity theft rings and drug addicts. Last month, authorities in Michigan convicted a 46-year-old father of four for running a large-scale fencing operation that used teams of prostitutes, heroin users, parolees and panhandlers to steal high-priced items from local Home Depot stores and then return the goods to a different Home Depot location in exchange for store debit cards.

Of course, another huge source card of gift card fraud are cards purchased with stolen credit cards. Thieves will buy “dumps” — card data stolen from brick-and-mortar businesses — and encode that data onto anything with a magnetic strip and try to buy high-dollar gift cards from a range of retailers. The carded gift cards very often wind up for sale online at steep 20-30 percent discounts.

Earlier this year I saw part of this process in action at a Giant grocery store in Maryland. The man in front of me in line looked and smelled homeless. The only items he was trying to buy were several $200 gift cards that Giant had on sale for various retailers. When the first card he swiped was declined, the man fished two more cards out of his wallet. Each was similarly declined, but the man just shrugged and walked out of the store. I asked the cashier if this sort of thing happened often, and he just shook his head and said, “Man, you have no idea.”

Lisa admits she remains conflicted over whether she would buy another steeply discounted card to help feed her dogs. But she said retailers could help stem this type of fraud by tying merchandise return cards to the identity of the person who returned the merchandise in the first place. Most stores that issue merchandise return cards now require the person returning the goods to show a valid state driver’s license, but the cards are not tied to that customer, nor do stores check ID when consumers use merchandise return cards at the store to purchase goods.

Adobe and Microsoft today independently issued software updates to plug critical security holes in their software. Adobe released a patch that fixes a whopping 78 security vulnerabilities in its Flash Player software. Microsoft pushed a dozen patch bundles to address at least 71 flaws in various versions of the Windows operating system and associated software.

Three-quarters of the patches Microsoft issued earned the company’s most dire “critical” rating, meaning malware or attackers could use the flaws fixed in these patches to fully compromise vulnerable systems with zero help from users. What’s more, two of the vulnerabilities are actively being exploited, including a bug in Windows and Microsoft Office.

As per usual, a patch for Internet Explorer addresses a huge chunk (30) of the individual security flaws tackled in this month’s update cycle. Microsoft also released a critical patch to correct 15 weaknesses in Microsoft Edge, the browser meant to supplant IE.

According to security firm Shavlik, supported versions of IE will be changing quite a bit in January. After January 12, 2016, only the latest IE version available on each operating system will be supported. This means if you are not running the latest version of IE available for the version of Windows you are on, you will no longer be getting security updates. More information about this change is available here.

The SANS Internet Storm Center is reporting that some Windows users who have Outlook installed are experiencing some difficulties using the program after applying this month’s updates. If you use Outlook, it may be wise to put off installing this patch for a few days until Microsoft addresses the issue.

Another vulnerability — fixed by a patch for domain name system (DNS) servers that run on Windows Servers — could prove extremely dangerous for organizations that rely on Windows Server for DNS services. According to SANS, Microsoft rates the exploitability as “2”, but doesn’t provide much details as to the nature of the vulnerability other than the fact that it can be triggered by remote DNS requests, which is bad news if you are using a Microsoft DNS server exposed to the public internet.

Adobe’s Flash update brings Flash to version 20.0.0.228 for Internet Explorer and Chrome on Windows and Mac systems, and 20.0.0.235 for Windows and Mac versions of Firefox and Safari.

As I noted in a previous post, most users can jump off the incessant Flash-patching merry-go-round by simply removing the program — or hobbling it until and unless it is needed for some purpose or site.

Disabling Flash in Chrome is simple enough, and can be easily reversed: On a Windows, Mac, Linux or Chrome OS installation of Chrome, type “chrome:plugins” into the address bar, and on the Plug-ins page look for the “Flash” listing: To disable Flash, click the disable link (to re-enable it, click “enable”). Windows users can remove Flash from the Add/Remove Programs panel, or use Adobe’s uninstaller for Flash Player.

If you’re concerned about removing Flash altogether, consider a dual-browser approach. That is, unplugging Flash from the browser you use for everyday surfing, and leaving it plugged in to a second browser that you only use for sites that require Flash. Another alternative to removing Flash is Click-To-Play, which lets you control what Flash (and Java) content gets to load when you visit a Web page.

If you decide to proceed with Flash and update, the most recent versions of Flash should be available from the Flash home page. Windows users who browse the Web with anything other than Internet Explorer may need to apply this patch twice, once with IE and again using the alternative browser (Firefox, Opera, e.g.).

The U.S. Department of Homeland Security (DHS) has been quietly launching stealthy cyber attacks against a range of private U.S. companies — mostly banks and energy firms. These digital intrusion attempts, commissioned in advance by the private sector targets themselves, are part of a little-known program at DHS designed to help “critical infrastructure” companies shore up their computer and network defenses against real-world adversaries. And it’s all free of charge (well, on the U.S. taxpayer’s dime).

KrebsOnSecurity first learned about DHS’s National Cybersecurity Assessment and Technical Services (NCATS) program after hearing from a risk manager at a small financial institution in the eastern United States. The manager was comparing the free services offered by NCATS with private sector offerings and was seeking my opinion. I asked around to a number of otherwise clueful sources who had no idea this DHS program even existed.

DHS declined requests for an interview about NCATS, but the agency has published some information about the program. According to DHS, the NCATS program offers full-scope penetration testing capabilities in the form of two separate programs: a “Risk and Vulnerability Assessment,” (RVA) and a “Cyber Hygiene” evaluation. Both are designed to help the partner organization better understand how external systems and infrastructure appear to potential attackers.

“The Department of Homeland Security (DHS) works closely with public and private sector partners to strengthen the security and resilience of their systems against evolving threats in cyberspace,” DHS spokesperson Sy Lee wrote in an email response to an interview request. “The National Cybersecurity Assessments and Technical Services (NCATS) team focuses on proactively engaging with federal, state, local, tribal, territorial and private sector stakeholders to assist them in improving their cybersecurity posture, limit exposure to risks and threats, and reduce rates of exploitation. As part of this effort, the NCATS team offers cybersecurity services such as red team and penetration testing and vulnerability scanning at no cost.”

The RVA program reportedly includes scans the target’s operating systems, databases, and Web applications for known vulnerabilities, and then tests to see if any of the weaknesses found can be used to successfully compromise the target’s systems. In addition, RVA program participants receive scans for rogue wireless devices, and their employees are tested with “social engineering” attempts to see how employees respond to targeted phishing attacks.

The Cyber Hygiene program — which is currently mandatory for agencies in the federal civilian executive branch but optional for private sector and state, local and tribal stakeholders — includes both internal and external vulnerability and Web application scanning.

The reports show detailed information about the organization’s vulnerabilities, including suggested steps to mitigate the flaws.  DHS uses the aggregate information from each client and creates a yearly non-attributable report. The FY14 End of Year report created with data from the Cyber Hygiene and RVA program is here (PDF).

Among the findings in that report, which drew information from more than 100 engagements last year:

-Manual testing was required to identify 67 percent of the RVA vulnerability findings (as opposed to off-the-shelf, automated vulnerability scans);

-More than 50 percent of the total 344 vulnerabilities found during the scans last year earned a severity rating of “high” (4o percent) or “critical” (13 percent).

-RVA phishing emails resulted in a click rate of 25 percent.

 ANALYSIS

I was curious to know how many private sector companies had taken DHS up on its rather generous offers, since these services can be quite expensive if conducted by private companies. In response to questions from this author, DHS said that in Fiscal Year 2015 NCATS provided support to 53 private sector partners.  According to data provided by DHS, the majority of the program’s private sector participation come from the financial services and energy sectors — typically at regional or smaller institutions.

DHS has taken its lumps over the years for not doing enough to gets its own cybersecurity house in order, let alone helping industry fix its problems. In light of its past cybersecurity foibles, the NCATS program on the surface would seem like a concrete step toward blunting those criticisms.

I wondered how someone in the penetration testing industry would feel about the government throwing its free services into the ring. Dave Aitel is chief technology officer at Immunity Inc., a Miami Beach, Fla. based security firm that offers many of the same services NCATS bundles in its product.

Aitel said one of the major benefits for DHS in offering NCATS is that it can use the program learn about real-world vulnerabilities in critical infrastructure companies.

“DHS is a big player in the ‘regulation’ policy area, and the last thing we need is an uninformed DHS that has little technical expertise in the areas that penetration testing covers,” Aitel said. “The more DHS understands about the realities of information security on the ground – the more it treats American companies as their customers – the better and less impactful their policy recommendations will be. We always say that Offense is the professor of Defense, and in this case, without having gone on the offense DHS would be helpless to suggest remedies to critical infrastructure companies.”

Of course, the downsides are that sometimes you get what you pay for, and the NCATS offering raises some interesting questions, Aitel said.

“Even if the DHS team doing the work is great, part of the value of an expensive penetration test is that companies feel obligated to follow the recommendations and improve their security,” he said. “Does the data found by a DHS testing team affect a company’s SEC liabilities in any way? What if the Government gets access to customer data during a penetration test – what legal ramifications does that have? This is a common event and pre-CISPA it may carry significant liability.”

As far as the potential legal ramifications of any mistakes DHS may or may not make in its assessments, the acceptance letter (PDF) that all NCATS customers must sign says DHS provides no warranties of any kind related to the free services. The rules of engagement letter from DHS further lays out ground rules and specifics of the NCATS testing services.

Aitel, a former research scientist at the National Security Agency (NSA), raised another issue: Any vulnerabilities found anywhere within the government — for example, in a piece of third party software — are supposed to go to the NSA for triage, and sometimes the NSA is later able to use those vulnerabilities in clandestine cyber offensive operations.

But what about previously unknown vulnerabilities found by DHS examiners?

“This may be less of an issue when DHS uses a third party team, but if they use a DHS team, and they find a bug in Microsoft IIS (Web server), that’s not going to the customer – that’s going to the NSA,” Aitel said.

And then there are potential legal issues with the government competing with private industry.

Alan Paller, director of research at the SANS Institute, a Bethesda, Md. based security training group, isn’t so much concerned about the government competing with the private sector for security audits. But he said DHS is giving away something big with its free assessments: An excuse for the leadership at scanned organizations for not doing anything after the assessment and using the results as a way to actually spend less on security.

“The NCATS program could be an excellent service that does a lot of good but it isn’t,” Paller said. “The problem is that it measures only a very limited subset of of the vulnerability space but comes with a gold plated get out of jail free card: ‘The US government came and checked us.’ They say they are doing it only for organizations that cannot afford commercial assessments, but they often go to organizations that have deep enough pockets.”

According to Paller, despite what the NCATS documents say, the testers do not do active penetration tasks against the network. Rather, he said, they are constrained by their rules of engagement.

“Mostly they do architectural assessments and traffic analysis,” he said. “They get a big packet capture and they baseline and profile and do some protocol analysis (wireless).”

Paller said the sort of network architecture review offered by DHS’s scans can only tell you so much, and that the folks doing it do not have deep experience with one of the more arcane aspects of critical infrastructure systems: Industrial control systems of the sort that might be present in an energy firm that turns to NCATS for its cybersecurity assessment.

“In general the architectural reviews are done by younger folks with little real world experience,” Paller said. “The big problem is that the customer is not fully briefed on the limitations of what is being done in their assessment and testing.”

Does your organization have experience with NCATs assessments? Are you part of a critical infrastructure company that might use these services? Would you? Sound off in the comments below.

Few schemes for monetizing stolen credit cards are as bold as the fuel theft scam: Crooks embed skimming devices inside fuel station pumps to steal credit card data from customers. Thieves then clone the cards and use them to steal hundreds of gallons of gas at multiple filling stations. The gas is pumped into hollowed-out trucks and vans, which ferry the fuel to a giant tanker truck. The criminals then sell and deliver the gas at cut rate prices to shady and complicit fuel station owners.

Agent Steve Scarince of the U.S. Secret Service heads up a task force in Los Angeles that since 2009 has been combating fuel theft and fuel pump skimming rings. Scarince said the crooks who plant the skimmers and steal the cards from fuel stations usually are separate criminal groups from those who use the cards to steal and resell gas.

“Generally the way it works is the skimmer will sell the cards to a fuel theft cell or ring,” he said. “The head of the ring or the number two guy will go purchase the credit cards and bring them back to the drivers. More often than not, the drivers don’t know a whole lot about the business. They just show up for work, the boss hands them 25 cards and says, ‘Make the most of it, and bring me back the cards that don’t work.’ And the leader of the ring will go back to the card skimmer and say, ‘Okay out of 100 of those you sold me, 50 of them didn’t work.'”

Scarince said the skimmer gangs will gain access to the inside of the fuel pumps either secretly or by bribing station attendants. Once inside the pumps, the thieves hook up their skimmer to the gas pump’s card reader and PIN pad. The devices also are connected to the pump’s electric power — so they don’t need batteries and can operate indefinitely.

Most internal, modern pump skimmers are built to record the card data on a storage device that can transmit the data wirelessly via Bluetooth technology. This way, thieves can drive up with a laptop and fill their tank in the time it takes to suck down the card data that’s been freshly stolen since their last visit.

The Secret Service task force in Los Angels has even found pump skimming devices that send the stolen card data via SMS/text message to the thieves, meaning the crooks don’t ever have to return to the scene of the crime and can receive the stolen cards and PINs anywhere in the world that has mobile phone service.

MOBILE BOMBS

Scarince said the fuel theft gangs use vans and trucks crudely modified and retrofitted with huge metal and/or plastic “bladders” capable of holding between 250 and 500 gallons of fuel.

“The fuel theft groups will drive a bladder truck from gas station to gas station, using counterfeit cards to fill up the bladder,” he said. “Then they’ll drive back to their compound and pump the fuel into a 4,000 or 5,000 [gallon] container truck.”

The fuel will be delivered to gas station owners with whom the fuel theft ring has previously brokered with on the price per gallon. And it’s always a cash transaction.

“The stations know they’re buying stolen gas,” Scarince said. “They’re fully aware the fuel is not coming from a legitimate source. There’s never any paperwork with the fuel driver, and these transactions are missing all the elements of a normal, legitimate transaction between what would be a refinery and a gas station.”

Needless to say, the bladder trucks aren’t exactly road-worthy when they’re filled to the brim with stolen and highly flammable fuel. From time to time, one of the dimmer bladder truck drivers will temporarily forget his cargo and light up a smoke.

“Two or three summers ago we had this one guy who I guess was just jonesing for a cigarette,” Scarince said. “He lit up and that was the last thing he did.”

Other bladder trucks have spontaneously burst into flames at filling stations while thieves pumped stolen gas.

“There have been other fires that took place during the transfer of fuel, where some static sparked and the whole place caught on fire,” Scarince said. “These vehicles are not road-worthy by any means. Some of the bladder tanks are poorly made, they leak. The trucks are often overweight and can’t handle the load. We see things like transmissions giving out, chassis going out. These things are real hazards just waiting to happen.”

How big are the fuel theft operations in and around Los Angeles? Scarince estimates that at any given time there are 20 to 30 of these deadly bladder trucks trundling down L.A. freeways and side streets.

“And that’s a very conservative guess, just based on what the credit card companies report,” he said.

Aaron Turner, vice president of identity service products at Verifone — a major manufacturer of credit card terminals — leads a team that has been studying many of the skimming devices that the Secret Service has retrieved from compromised filling stations. Turner says there is a huge potential for safety-related issues when it comes to skimmers in a gas-pump environment. 

“Every piece of equipment that is installed by gas station owners in the pump area is approved by reviewed and approved according to industry standards, but these skimmers…not so much,” Turner said. “One of the skimmers that we retrieved was sparking and arcing when we powered it up in our lab. I think it’s safe to say that skimmer manufacturers are not getting UL certifications for their gear.”

COUNTERING FUEL FRAUD

With some fuel theft gangs stealing more than $10 million per year, Scarince said financial institutions and credit card issuers have responded with a range of tactics to detect and stop suspicious fuel station transactions.

“A lot more card issuers and merchant processors are really pushing hard on velocity checks,” Scarince said, referring to a fraud detection technique that reviews transactions for repeating patterns within a brief period. “If you buy gas in Washington, D.C. and then 30 minutes gas later gas is being purchased on opposite side of the city in a short period of time. Those are things that are going to start triggering questions about the card. So, more checks like that are being tested and deployed, and banks are getting better at detecting this activity.”

Card issuers also can impose their own artificial spending limits on fuel purchases. Visa, for example, caps fuel purchases at $125.  But thieves often learn to work just under those limits.

“The more intelligent crooks will use only a few cards per station, which keeps them a lower profile,” Scarince said. “They’ll come in a swipe two to three cards and fill up 40-80 gallons and move on down the road to another station. They definitely also have what we determine to be routes. Monday they’ll drive one direction, and Tuesday they’ll go the other way, just to make sure they don’t hit the same stations one day after another.”

Newer credit and debit cards with embedded chip technology should make the cards more costly and difficult to counterfeit. However, the chip cards still have the card data encoded in plain text on the card’s magnetic strip, and most fuel stations won’t have chip-enabled readers for several years to come.

On Oct. 1, 2015, Visa and MasterCard put in force new rules that can penalize merchants who do not yet have chip-enabled terminals. Under the new rules, merchants that don’t have the technology to accept chip cards will assume full liability for the cost of fraud from purchases in which the customer presented a chip-enabled card.

But those rules don’t apply to fuel stations in the United States until October 2017, and a great many stations won’t meet that deadline, said Verifone’s Turner.

“The petroleum stations and the trade organizations that represent them have been fairly public in their statements that they don’t feel they’re going to hit the 2017 dates,” Turner said. “If you look at the cost of replacing these dispensers and the number of systems that have been touched by qualified, licensed technicians…most of the stations are saying that even if they start this process now they’re going to struggle to meet that October 2017 date.”

Turner said that as chip card readers take hold in more retail establishments, card thieves will begin targeting fuel stations more intensively and systematically.

“We’re moving into this really interesting point of time when I think the criminals are going to focus on the approaches that offer them the greatest return on their investment,” Turner said. “In the future, I think there will be a liability shift specifically for petroleum stations [because] the amount of mag-stripe-facilitated fraud that will happen in that market is going to increase significantly along with chip card deployment.”

Part of the reason Los Angeles is such a hotbed of skimming activity may be related to ethnic Armenian organized crime members that have invested heavily in fuel theft schemes. Last month, the Justice Department announced charges against eight such men accused of planting skimmers in pumps throughout Southern California and Nevada.

Scarince and Turner say there is a great deal of room for the geographic spread of fuel theft scams. Although the bulk of fuel theft activity in the United States is centered around Los Angeles, the organized nature of the crime is slowly spreading to other cities.

“We are seeing pump skimming now shoot across the country,” Scarince said. “Los Angeles is still definitely ground zero, but Florida is now getting hit hard, as are Houston and parts of the midwest. Technology we first saw a couple of years ago in LA we’re now seeing show up in other locations across the country. They’re starting to pick on markets that are probably less aware of what’s going on as far as skimming goes and don’t secure their pumps as well as most stations do here.”

WHAT CAN  YOU DO?

Avoid sketchy-looking stations and those that haven’t started using tamper-evident seals on their pumps.

“The fuel theft gangs certainly scout out the stations beforehand, looking for stations that haven’t upgraded their pump locks and haven’t started using tamper seals,” Scarince said. “If some franchised station decided not to spend the money to upgrade their systems with these security precautions, they’re going to be targeted.”

Scarince says he also tends to use pumps that are closest to the attendants.

“Those are less likely to have skimmers in or on them than street-side pumps,” he said.

Consumers should remember that they’re not liable for fraudulent charges on their credit or debit cards, but they still have to report the phony transactions. There is no substitute for keeping a close eye on your card statements. Also, use credit cards instead of debit cards at the pump; having your checking account emptied of cash while your bank sorts out the situation can be a huge hassle and create secondary problems (bounced checks, for instance).