Every phone has several different number associated with it, and one of those numbers is called an International Mobile Equipment Identifier, or IMEI. Whenever a phone tries to connect to a network, it sends along its IMEI number to the cellphone tower. This helps the carrier know what type of phone it is, and can also identify who it belongs to. It’s basically a universally standardized serial number that links back to one specific phone.
When you report a phone as stolen, that IMEI number gets added to a giant list of phones that are known to be stolen/bad called a “blacklist”. This list is massive, with potentially millions of devices on it. When a phone sends its IMEI number to a cellphone tower, the cellphone company will check the IMEI number against the blacklist and won’t activate the connection if it’s a blacklisted device. At least in the US, carriers are sometimes required to file a police report every time someone tries to activate a phone that’s blacklisted. This makes it effectively impossible for it to be re-used on any cellphone network.
Now, most reputable pawn shops will also search a phone’s IMEI number against this blacklist before buying a phone to prevent themselves from getting burned buying stolen products. This prevents someone from reselling the phone to someone reputable.
What it doesn’t prevent, and where most stolen phones actually end up, is someone taking apart a phone for it’s raw components like the battery and screen and re-selling those for a profit. It also doesn’t prevent shady shops that don’t check the blacklist status of a device from buying a phone, but those shops often just resell blacklisted phones to the people that take apart phones and sell the parts.
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