Amid a thriving and highly profitable black market overseas for smartphones, more criminals are turning to fraud and identity theft to obtain discounted devices in bulk, according to law-enforcement officials. Authorities say the kill switch, which remotely deactivates stolen phones, has made street-level smartphone theft less lucrative. But joint investigations by state and federal authorities in Minnesota, Michigan and Georgia have uncovered vast networks of criminals who use stolen information, fake credit cards and dummy corporations, among other means, to obtain discounted phones in bulk from U.S. carriers.
The phones are often then resold for use on foreign networks, including in China and the Middle East, where U.S. carriers can’t find them, officials said. Profit on the resale of new smart phone models abroad, where phones aren’t subsidized by wireless carriers, can amount to $500 to $1,000 per phone or more, state and federal investigators say. California passed a law this year, the first of its kind, requiring manufacturers to sell smartphones with kill switches, or activation locks, enabled by default. Since the introduction of kill switches by Apple Inc. in September 2013, authorities have credited them with reducing iPhone robbery in cities like San Francisco, New York and London. An antitheft feature for Android phones was introduced earlier this year. “The kill switch was a great incremental help to the problem that made it less profitable for these street robberies to occur,” said Lou Stephens, special agent in charge of U.S. Secret Service Minneapolis field office. “But more of the problem has migrated to fraud.”
U.S. carriers declined to provide internal figures on fraud and theft. A spokeswoman for CTIA, a wireless-industry trade group, declined to comment. In one recent case in Minnesota, the Secret Service and other state and federal law-enforcement agencies dismantled an organization that allegedly obtained tens of thousands smartphones through fraud and theft from at least 2006 to 2014. At the center of the scheme was a family that owned 13 stores in the Twin Cities where the phones were resold. Authorities said the family sent “runners” to stores such as Best Buy and Wal-Mart with fake or stolen identity information, including Social Security numbers, and had them sign up for family and business plans, allowing them to acquire as many as 30 heavily discounted devices at once. The runners targeted big retail locations in Minnesota and others as far flung as Arizona, Idaho and North Dakota. Many of the phones were resold in China, according to Mr. Stephens.
Alberto O. Miera, a St. Paul, Minn., lawyer who represents Jamal Mustafa, the alleged ringleader of the operation, said 95% of his client’s business was legitimate. The U.S. carriers, he said, invite abuse by offering promotions without closely monitoring who is signing service contracts. Mr. Mustafa pleaded guilty in March to conspiracy to engage in interstate transportation of stolen goods. He is awaiting sentencing. In Atlanta, federal and state investigators are closing in on “fencing organizations” they allege have acquired smartphones in bulk, with the help of company insiders and through fraud, and resold them abroad, according to court documents unsealed in October. As part of the investigation, a federal grand jury indicted six men in September who allegedly defrauded several major carriers, including Sprint Corp., Verizon Communications Inc. and AT&T Inc. Michael Mason, Verizon’s chief security officer, described an “upward swing” in device theft from the company, which declined to provide specific figures. AT&T declined to comment. In a twist, the defendants secured smartphones with phony documents and stolen identities, and then, saying the smartphones were damaged or stolen, defrauded a cellphone insurance company, reaping twice the profits, authorities allege. Joe S. Habachy, an Atlanta defense lawyer representing one of the men charged, said he learned in conversations with federal prosecutors that many of the smartphones were resold in Dubai. More indictments are expected, as the investigation expands, according to Mr. Habachy and a law-enforcement official.