Chargeback Fraud and Double Dipping Law
Chargeback fraud, often referred to as "double dipping," is a serious form of consumer fraud that can result in significant legal penalties under California law, making it crucial for individuals involved in e-commerce to understand its risks.
While chargeback fraud is common, the difficulty in proving guilt beyond a reasonable doubt should make individuals involved in e-commerce and legal professionals cautious about potential prosecutions.
Pursuing a chargeback fraud case often results in severe penalties because it repeatedly violates state and federal laws.
This type of fraud typically occurs online through e-commerce stores using card-not-present (CNP) transactions.
It represents an abuse of the refund process by cardholders.
What is Double Dipping?
So, what exactly is "double dipping"? It involves purchasing a product or service with a credit or debit card and then falsely claiming a refund from both the retailer and the credit card issuer, which constitutes fraud with legal consequences.
Typically, when the retailer issues a refund, the purchase price is returned, provided the product is returned. However, some individuals engaging in double dipping falsely claim that the product never arrived or that the service was never rendered.
Simply put, this is a scheme in which an individual purchases a product or service using a credit or debit card and then requests a refund from both the retailer and the credit card issuer.
Disputing a Charge on a Credit Card
Sometimes, individuals allege that the product was stolen from their porch after delivery, or that it was already returned, defective, or broken upon arrival. Then, they keep the product for themselves or resell it.
Sometimes, individuals contact their credit card company or bank to contest a charge, asserting it was fraudulent.
If the claim is approved, the funds are deducted from the retailer's account, and a chargeback fee is applied.
A dispute process may exist for resolving chargeback claims between the bank and retailer, potentially leading to a civil court case.
If chargeback requests occur simultaneously, the offender may receive double the amount paid for the product, which is why it's called "double dipping."
What Is Chargeback Fraud?
Chargeback fraud occurs when a customer makes a purchase with their credit card, usually online, and receives a refund without returning the items. The most common type is double-refund chargeback fraud, also known as "double-dipping," which happens in two stages.
- The customer requests a refund from the merchant without returning the goods, often providing an excuse like it was never delivered, stolen from the porch, or arrived too damaged to return. In many instances, the merchant will issue a refund without receiving the merchandise back.
- The customer contacts their bank to dispute the charge, prompting the bank to reverse it (a "chargeback") and return the money to the customer.
Meanwhile, the customer retains the purchased goods or services without payment, thereby obtaining them at no cost. By obtaining refunds from both the merchant and the bank, they profit at the expense of others—an act that defines fraud.
Chargeback fraud constitutes theft and is a criminal offense. When customers dispute a valid charge, they effectively steal from the merchant by receiving goods or services without paying.
Additionally, they are causing financial harm to the merchant by initiating a chargeback process that entails fees and penalties.
What Is Friendly Fraud?
Friendly fraud is a type of chargeback fraud that often starts unintentionally but is classified as fraud.
It happens when a consumer doesn't recognize a charge on their credit card statement and disputes it, thinking they've been defrauded, only to find out later that the charge was legitimate. This situation can occur due to:
- The consumer either forgot they bought the item or
- A friend or family member obtained the card and purchased it without informing them.
In either case, if the mistake is identified and they approve the chargeback, it still counts as fraud.
What Are the Potential Charges?
No specific statute governs chargeback fraud; instead, prosecutors may charge it under various criminal laws, each potentially leading to substantial fines, incarceration, or mandatory restitution to the victim.
In California, chargeback fraud may be classified differently based on the specific circumstances of the crime.
- Shoplifting or petty theft for charges below $950
- Grand theft if charges exceed $950
- Credit card fraud (Penal Code sections 484e to 484j PC)
- Bank fraud, such as fraud committed against the card-issuing financial institution)
- Wire fraud includes when the fraudulent purchase was made online, by phone, or by electronic communication.
- Mail fraud involves using the mail, such as through mail order or disputes by mail.
Be aware that criminal charges can be brought at both the state and federal levels. If a chargeback fraud case involves a significant loss, the federal government might pursue charges if the transaction involved interstate infrastructure, such as wire or mail fraud.
As noted, accusations of chargeback fraud may result in multiple charges, including theft, bank fraud, and wire fraud, underscoring the importance of legal awareness for individuals involved in e-commerce and legal practice.
California Penal Code 475 prohibits possessing specific counterfeit financial documents or forged items with the intent to deceive a person, business, or financial institution.
California Penal Code 484e makes it illegal to steal, acquire, retain, transfer, sell, or possess credit card information, debit card information, or other access card account data.
California Penal Code Section 484g prohibits knowingly using a stolen, forged, expired, revoked, or fraudulently obtained credit card, or access cards to obtain money, goods, services, or valuables.
What Are the Possible Defenses?
In practice, prosecutors often hesitate to pursue charges for chargeback fraud, either because of difficulty proving willful intent—particularly in cases of friendly fraud—or because the loss isn't substantial enough to justify the prosecution costs.
If you're accused of fraud related to alleged chargebacks or double-dipping, a California criminal defense lawyer can recommend strategies to counter these charges. These may include:
- No Intent: Since proving intent is the most difficult for prosecutors, the most common defense is claiming a lack of intent. Lawyers might argue that the chargeback was an error on your part or that you had no intention to defraud the merchant or the bank.
- Merchant Error: If the merchant made a mistake, like double-billing or not delivering the goods or services, you have a valid reason to dispute the charge. Showing a merchant error can result in dismissal of criminal charges.
- Identity Theft: If someone else uses your credit card without permission, you might not be liable for the fraudulent charges.
Contact the criminal defense law firm at Cron, Israels & Stark for a case review.