What Happened

Many people have probably already seen this news story: a Chinese postdoc in Milwaukee, FAN XIA, was arrested for reselling large amounts of iTunes gift cards to China. But the case only came to light because an American was scammed by Indians out of Target gift cards. So what exactly happened? Based on the news reports, here is a summary of how it all unfolded.

On February 14, Milwaukee financial crimes investigators received a report from Illinois police that someone had been scammed out of nearly $5000 in Target Gift Cards through an IRS scam. The scam was very simple: the caller claimed to be an IRS employee and said the victim owed the IRS $5000 in taxes, and that failure to pay could result in jail time. The supposed IRS representative also said that the IRS was now working with Target, so the victim could pay the debt using Target Gift Cards. The victim then rushed to Target and bought two $2000 cards and one Target Gift Card worth a little over $900, and read the card numbers to the scammer. The victim later realized something was wrong and reported it to the police, but by then the balance on the Gift Cards had already been reduced to 0.

After investigating, police determined that the Target Gift Cards were used at the Wauwatosa Target. Surveillance footage showed that the person using the cards was the Chinese postdoc mentioned above, FAN XIA. In addition, the same cards had also been used at Target stores in Menomonee Falls and Grafton. To obtain a search warrant, police placed a GPS tracker on Xia's car and discovered that in just 8 days, he made a total of 23 visits to Target, Walmart, and Bestbuy.

After being arrested, Xia admitted that the Target Gift Cards obtained from the victim had been purchased by him from India. He then used them at Target to buy iTunes/Google Play Gift Cards, which he later sold to China. He sold them by taking photos of the Gift Cards and sending the images to buyers in China. When police searched Xia's residence, they found more than 200 Gift Cards of various kinds, including iTunes/Google Play Gift Cards, with a total value of about $10000. After examining Xia's phone, police found that from September 2016 to July 2017, he had resold nearly $300,000 worth of iTunes/Google Play Gift Cards to China. All of those cards were purchased using Gift Cards Xia had bought from India.


News translated from: Shorewood Man Arrested In International Gift Card Fraud.

I will not go into too much detail about Xia's personal background. Some Chinese editors like to exaggerate the backgrounds of international students, saying things like they are wealthy, drive BMWs, or spend lavishly. I would rather stick to the facts.

Answering Some Questions

What is an IRS scam?

The IRS is the Internal Revenue Service. If there is a problem with your tax filing, it may contact you to request additional documents or payment of taxes owed. But the IRS will never contact you by phone, email, or through a third party. The only official way it contacts you is by mailing a notice to your address!

IRS scams are extremely common in the United States. They usually prey on the victim's fear by making up claims about unpaid taxes and threats of arrest. Panicked victims then follow the scammer's instructions and send money. Also, you cannot determine where a call is really coming from based on the phone number alone, because the number shown on your phone can be hidden or spoofed by the caller.

Why do IRS scammers want gift cards?

In the past, some IRS scams asked victims to send money through PayPal or by bank transfer to an account controlled by the scammer, usually overseas. The reason scammers asked for Target gift cards in this case is simple: they are easy to cash out.

Gift cards usually do not have the holder's name on them, and once they are passed around, it is difficult to trace who ultimately used them. That gives scammers an excellent opportunity to monetize them. They can sell the gift cards to unsuspecting buyers, and because Target gift cards only require the card number to be used, they can be sold electronically. On top of that, Target gift cards can be used at Selfcheck Out, which makes the process even more convenient. Since Target gift cards are also widely used in everyday shopping, they can practically be considered a hard currency.

In short, scamming gift cards is harder to trace than scamming bank transfers, and the entire scam-and-cash-out process can be completed electronically without the scammer ever appearing in person.

How did the police identify the person who used the gift cards?

Although it is difficult to trace how many hands a gift card has passed through, the specific location where a gift card is used can be tracked. Using the card number, Target customer service can look up the gift card's usage history, including the store address where it was used.

So Target was able to identify the Target gift card numbers sold to the victim at the Target store where the victim purchased them. Once investigators had those numbers, they could see exactly where the cards had been used, what time they were used, and at which checkout register they were used. From there, reviewing surveillance video made it relatively easy to identify who used the gift cards.

What crime did Xia actually commit?

Strictly speaking, Xia had nothing to do with the original scam used to obtain the Target gift cards. It was most likely a phone scam run by an Indian group targeting Americans. Xia's role was buying the Target gift cards from the scammers and then cashing them out through iTunes and Google Play gift cards purchased at Target.

In theory, if Xia did not know the cards were illegally obtained, simply buying and using them would not necessarily be a crime. But Xia had already purchased $300,000 worth of gift cards from scammers and repeatedly used them to cash out value, which makes it pretty clear this was intentional. Combined with the screenshots on Xia's phone and the gift cards found in his home, police and the jury had reason to believe that Xia did not just accidentally buy stolen cards, but was engaged in actual criminal conduct.

How did Xia profit, and why choose iTunes/Google Play?

The news report did not explain exactly how much Xia made. But it is easy to imagine that he bought the Target gift cards from scammers at very low prices. My guess is that he paid around 50% of face value, mainly because the scammers also wanted to cash out quickly before the cards were tracked or zeroed out after the victim reported the fraud.

After acquiring the Target gift cards cheaply, Xia did not use them to buy physical merchandise. Instead, he bought electronic iTunes/Google Play gift cards. The main reason is that selling physical goods takes a lot of time and effort, and there is always risk if they cannot be liquidated immediately. Another factor is what appears to be a bug in Target's checkout system: Target gift cards could be used to purchase third-party gift cards. One reason for choosing iTunes and Google Play is that both were in high demand among buyers in China, because they could be used to add funds to a US App Store account and purchase value-added services there. Many games could only be downloaded with a US account.

These two types of cards could previously be sold directly on Taobao in China, usually for more than 90% of face value. So many people used to make money by buying them from US merchants during promotions and then reselling them on Taobao. Xia simply took that model to an extreme by using stolen gift cards to fund the purchases, which shows just how large the profit margin could be.

What will happen to Xia? And can the scammers still be tracked down?

I am not an expert on the law, but I assume he would probably be deported. I also hope Xia does not end up serving time in a US prison, since my impression of American prisons still comes largely from how they were portrayed in The Shawshank Redemption.

As for Xia's upstream suppliers, the scammers from India, I think tracking them down would be very difficult. Much of the communication was likely done by email, which makes it hard to identify the actual account holder. Of course, if the FBI became involved, there would still be some chance of finding them. But whether the US side has the manpower and financial resources to conduct that kind of cross-border investigation is another question. All we can say is that Xia let greed cloud his judgment and ended up becoming a money-laundering tool for the people above him. It really was not worth it.

Lessons for the Rest of Us

  • Never buy gift cards from questionable sources, especially if the price is unusually low. These cards are usually obtained through scams or stolen credit cards.
  • Buying on secondary marketplaces is relatively safer because there is at least some additional protection, but you should still keep your purchase emails and records.
  • If you really do end up buying a stolen card and a merchant warns you when you try to use it, make sure to explain the situation truthfully to avoid unnecessary trouble. Controls around gift cards are becoming stricter and stricter.
  • Government agencies such as the IRS and FBI never contact you by phone or email. It is 100% a scam!
  • One more reminder: free lunches do not exist.

Bonus Story

There is another old story involving iTunes. An international student met an attractive woman on some app and, after chatting for a while, asked to meet in person. She told him to first send a photo of a scratched-off iTunes gift card. So he eagerly ran to a convenience store, bought an iTunes gift card, and sent the photo over. That alluring profile picture then disappeared from his contact list forever...