Chinese Organized Crime’s Latest U.S. Target: Gift Cards

Chinese crime rings already dominate the illegal marijuana trade in the U.S. and launder cocaine and heroin profits. Now a federal task force is investigating their role in a burgeoning form of gift card fraud.

This article was written by  Craig Silverman and Peter Elkind and originally published by ProPublica.

Federal authorities are investigating the involvement of Chinese organized crime rings in gift card fraud schemes that have stolen hundreds of millions of dollars or more from American consumers.

The U.S. Department of Homeland Security has launched a task force, whose existence has not previously been reported, to combat a scheme known as “card draining,” in which thieves use stolen or altered card numbers to siphon off money before the owner can spend it. The initiative has been dubbed “Project Red Hook,” for the perpetrators’ ties to China and their exploitation of cards hung in store kiosks on “J-hooks.”

This marks the first time that federal authorities have focused on the role of Chinese organized crime in gift card fraud and devoted resources to fighting it. Homeland Security Investigations, a DHS agency, began prioritizing gift card fraud late last year in response to a flurry of consumer complaints and arrests connected to card draining.

Over the past 18 months, law enforcement across the country has arrested about 100 people for card draining, of whom 80 to 90 are Chinese nationals or Chinese Americans, according to Adam Parks, a Homeland Security assistant special agent in charge based in Baton Rouge, Louisiana. Parks, who is leading the task force, estimates that another 1,000 people could be involved in card draining in the U.S., mostly as runners for the gangs.

“We’re talking hundreds of millions of dollars, potentially billions of dollars, [and] that’s a substantial risk to our economy and to people’s confidence in their retail environment,” he told ProPublica.

Card draining is when criminals remove gift cards from a store display, open them in a separate location, and either record the card numbers and PINs or replace them with a new barcode. The crooks then repair the packaging, return to a store and place the cards back on a rack. When a customer unwittingly selects and loads money onto a tampered card, the criminal is able to access the card online and steal the balance.

Federal investigators believe multiple Chinese criminal organizations are involved in card draining and are using the proceeds to fund other illicit activities, from narcotics to human trafficking, according to Parks. ProPublica recently revealed Chinese organized crime’s involvement in the illegal U.S. cannabis industry and the laundering of cocaine, heroin and fentanyl profits. ProPublica has also exposed how Walmart and other retailers have facilitated the spread of gift card fraud and has revealed the role of Chinese fraud rings in gift card laundering.

The DHS team in Baton Rouge led an investigation that resulted in the conviction and 2023 sentencing to prison of a Canadian man who stole more than $22 million by operating an illicit online gift card marketplace that victimized American consumers and businesses. As arrests for card draining began piling up around the country, Parks and special agent Dariush Vollenweider saw the need for a national response.

Last November, they convened a two-day summit at DHS headquarters in Washington, D.C., attended by many of the country’s top retailers and gift card suppliers. Federal authorities pushed the industry to share information and help thwart the gangs. The agency then issued a bulletin in December alerting law enforcement across the country about the card-tampering tactics. Parks said about 15 Homeland Security agents are now spending most of their time on Project Red Hook.

“It’s not just a one-store problem,” Vollenweider said. “It’s not just a Secret Service or DHS or FBI problem. It’s an industry problem that needs to be addressed.”

The Illinois State Police found hundreds of altered gift cards in the back of a car during a traffic stop in January 2023. Credit:United States District Court

Americans are expected to spend more than $200 billion on gift cards this year, according to an industry estimate. Retailers love gift cards because they drive sales and profit: Consumers typically spend more than a card’s value when they shop, and chains like Walmart and Target earn a profit when someone buys a third-party gift card, such as those from Apple or Google.