A U.S. Senate hearing this week on Chinese money-laundering organizations touched on a little-known but expanding problem: gift card fraud schemes.

Chinese organized crime rings have turned to gift card fraud schemes that have stolen hundreds of millions of dollars from American consumers, prompting the Department of Homeland Security to launch a task force to address the problem of “card draining,” ProPublica reported in April.

Here’s how card draining works: Criminals take gift cards from stores, open them at a separate location, and either record the card numbers and PINs or replace them with an entirely new bar code. The criminals then repair the packaging and take the gift cards back to the store. When customers buy the cards and add money to them, the criminals can access the cards online and steal the funds.

“When an unwitting customer loads funds onto the altered gift card, the CMLO [Chinese money-laundering organization] converts those funds to hard goods, often iPhones, through retail purchases made by CMLO mules throughout the United States,” Ricardo Mayoral, assistant director of countering transnational organized crime at the Department of Homeland Security, said Tuesday at the Senate hearing.

“Those iPhones, together with devices procured with criminal proceeds purchased from TCOs [transnational criminal organizations], are then exported abroad for resale to complete the underground banking cycle,” Mayoral added.

In New Hampshire, police arrested three people from December to March for allegedly using stolen gift card funds to buy millions of dollars' worth of electronics, including iPhones.

Over the past 18 months, authorities across the United States have arrested about 100 people for card draining, Adam Parks, a Homeland Security official who is leading the new task force, told ProPublica. Of those, 80 to 90 are Chinese nationals or Chinese Americans, the official said.

Multiple Chinese criminal groups are believed to be involved in card draining and are likely using the stolen money to finance other illegal activities, according to Parks. The crime groups use low-level “runners” in the United States to perpetrate the scheme.

In one case, a man named Ming Xue visited 14 Walmart stores in Ohio in just one day before he was arrested, court documents show. Police said they found 2,260 Visa, Apple and Mastercard gift cards in his car. He has pleaded not guilty.

In another case, police said they found $60,000 worth of altered gift cards in the possession of a man named Donghui Liao, who was arrested at a Target in Florida while restocking the stolen cards.

Americans spend a lot of money on gift cards, which helps explain why they’re being targeted in the first place. An industry estimate expects Americans to spend more than $200 billion on gift cards in 2024.

Data indicate that card draining has been on the rise in recent years.

In 2022-23, nearly 60% of retailers said they experienced an increase in gift card scams, according to a report by the National Retail Federation.