On May 9, 2024, Maryland’s governor approved the Gift Card Scams Prevention Act, which is the first law in the nation aimed at targeting the widespread scam known as “gift card draining.” Maryland’s law comes as no surprise to federal authorities, who, for at least the past 18 months, have actively investigated the role of Chinese organized crime. The Department of Homeland Security launched a task force, dubbed “Project Red Hook,” to investigate this scam, leading to about 100 individuals being arrested, 80 to 90 of whom are Chinese nationals or Chinese Americans. In carrying out these scams, a “runner” steals gift cards, obtains the card numbers and drains the balance, before returning the worthless card to store shelves for later purchase by unsuspecting consumers. A single runner, driving from store to store, can swipe or return thousands of tampered cards in a very short time. In response, Maryland lawmakers, working with the gift card industry, came up with a bill that has three key components: (1) employee education; (2) packaging redesign requirements; and (3) disclosures to consumers.
The Act makes an important distinction between “open-loop” and “closed-loop” gift cards. Open-loop gift cards, such as Visa or American Express gift cards, are loaded with varying amounts of money and can be used anywhere that accepts them. Closed-loop gift cards, in contrast, are only redeemable at a specific merchant. Because of the heightened concern with open-loop gift cards, the Act also sets different effective dates. For open-loop gift cards, the Act takes effect on June 1, 2025, while the effective date for closed-loop gift cards is October 1, 2025.
With regard to employee education, the Act requires merchants who display open-loop gift cards for sale at their retail establishments to provide training to all employees whose duties include the regular sale of open-loop gift cards to consumers. The training must cover how to identify and respond to gift card fraud in accordance with the guidelines to be established by the Maryland Division of Consumer Protection of the Office of the Attorney General (Division). We can expect that the Division will promulgate guidelines long before the effective date of June 1, 2025.
Turning to packaging redesign, the Act imposes two main requirements: Gift card packages must (1) contain a mandated disclosure; and (2) be designed to conceal any of the numbers or data necessary to drain the card without revealing potential tampering. There are two possible exceptions to this requirement, however. First, in the context of open-loop gift cards only, a merchant may sell the gift card not enclosed in secure packaging if the gift card is a chip-enabled, numberless card that is activated by a consumer after registering the card on the merchant’s website. Second, also in the context of open-loop gift cards, merchants can sell a gift card that does not comply with the packaging requirements if the card is (1) exclusively sold by the merchant for use at its retail establishment; and (2) secured in a physical location within the retail establishment that is accessible only by an employee of the merchant.
The Act also requires merchants who sell open-loop or closed-loop gift cards to place signage in stores at the location where the gift cards are displayed. Model signage will be provided by the Division long before June 1, 2025, but at a minimum, it must (1) alert consumers that they should watch out for scams; (2) alert them to call a specific number if they suspect a scam; and (3) indicate that gift cards should not be used to pay debts. To the extent a merchant sells gift cards online, it will also need to have the same warning language on the webpages where the gift cards are displayed prior to sale.
As a final matter, the Act requires “Third-Party Gift Card Resellers” to record and for at least three years maintain a copy of the following information: (1) the date of the transaction; (2) the name of the person who conducted the transaction; (3) the name, age, and address of the seller of the gift card; (4) the seller’s and consumer’s driver’s license number or identification card number; (5) a description of the purchased gift card, including the retailer for which the gift card is intended for use and the gift card number; (6) the specific amount issued on the gift card; (7) the prices paid to conduct the transaction; and (8) the signature of the consumer. The information collected then has to be made available to law enforcement agents. As the legislative history makes clear, this onerous requirement is focused on a certain category of seller that purchases gift cards that have already been activated and loaded with money and then resells them, almost like a pawn shop.
Client Alert 2024-221
