There are too many variations of this scam to list them all, but the general idea is one person creates a distraction while someone else steals your valuables. This is basically a variation of the old pickpocket scam.
Pickpockets often work in teams. Here's one scam that's popular overseas: you're busy walking down the street minding your own business and enjoying you well deserved vacation and a pretty woman arguing with someone captures your attention. Her argument with this person, who is accusing her of stealing, escalates until a crowd gathers. Sometimes the woman will even start to take off her clothes to prove her innocence! While you and everyone else stand there gaping, her accomplice is working his way through the crowd, relieving people of their wallets and valuables.
Other methods of distraction? Someone will "accidentally" spill something on you. Or someone will point out bird poop on the back of your shirt and offer to clean it off. A group of children will surround you, begging for money or food. An elderly woman will fall down in front of you. Some people even report a person shoving a baby at you, stealing your valuables when you instinctively reach out for the child.
How do you avoid falling victim? It's unfortunate that many thieves and scammers rely on your sense of goodness in order to steal money from you. Anywhere there's a crowd or scene, you're a potential victim. So be smart -- don't walk around with an open bag and don't keep your wallet in your back pocket. Keep your bag slung around you so it can't be snatched. Wear a pouch or smaller bag under your clothes.
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