Apple Battles Relentless Fraud

Featured article by Lora Young, Independent Technology Author

It took almost five years, but Apple has finally made some progress fighting iPhone repair fraud. Current estimates show that while fraudulent repairs in China have dropped from a peak of 60% to about 20%, enterprising criminals are springing up in other countries, like Turkey and the United Arab Emirates, with new and innovative techniques.

Relentless fraud operations push up the cost of the popular devices, making it more expensive for all iPhone owners to purchase or repair a device.

Five years of detective work

In 2013, the problem of iPhone repair fraud was proven financially unsustainable, so the company set out on a five-year struggle to tackle it. Fraud teams discovered that people bought or stole iPhones and removed the valuable parts to sell. Subsequently, the vandalized iPhone was returned to an Apple Store with dummy replacement parts under a warranty claim. Not realizing the sweeping nature of the fraudulent practices, Apple wrote it off as a cost of doing business, assuming that fraud represented less than 10% of claims.

Multi-billion dollar problem

Once the company discovered that the number of fraudulent replacements comprised as much as 60% of warranty repairs in China and Hong Kong, executives put pressure on their teams to solve the multi-billion dollar issue. Scrubbing through customer accounts, the team counted the number of iPhones that switched Apple IDs after repair. The assumption was that legitimate customers would log back into the same Apple ID, so accounts without this pattern were identified as stolen or fraudulent.

The company uncovered even more potential fraud than what was forecast, with more than 60% of repairs in China deemed fraudulent. According to The Information, Apple set aside $1.6 billion for warranty repair costs in FY2013, but actual costs were $3.7 billion. Most of the gap was explained as fraud, particularly in China.

Innovative criminals

Apple phased out express walk-in repairs and initiated a reservation system that required proof of ownership to slow fraudulent repairs across the globe. But hackers exploited vulnerabilities in the rapidly deployed system and rendered it toothless. The reservation system is still in effect, so local consumers are assured that their warranty tickets are assigned to an authorized iPhone repair Sterling Heights to perform any work.

The company then instituted a software diagnostic program to identify phones that contained dummy parts without requiring the staff to perform visual inspections. However, enterprising thieves had a solution for this as well. They made minor changes that rendered the devices unable to turn on, therefore making the software diagnostic useless.

As with any multi-billion dollar operation, the criminals did not give up easily. The counterfeit operation was so lucrative that sophisticated groups acquired customer records for post-sale phones, physically etched models to match the configuration and submitted them for warranty claims, netting warranty repairs on expired handsets.

New security measures

During the failed attempts to rein in the fraud, Apple was re-engineering the supply chain and manufacturing components to add invisible dyes on batteries and sealing the CPU to make it harder to submit dummy components. The company also stopped immediate in-person warranty replacements in China. All warranty iPhone replacements are now required to go through rigorous testing at special repair centers rather than a retail swap.

Relentless

There is always a component of fraud in retail sales that adds to the cost of a device when purchased by a law-abiding citizen. Loss prevention and fraud detection is a cost of doing business, even as companies target fixes to lower the cost. Apple’s rapid growth and high-demand product makes an easy target for gangs and thieves. With billions of dollars on the line, neither the thieves nor Apple is likely to give up the fight.