Report from the National Consumers League
to the U.S. Department of Justice
Concerning Telemarketing and Internet Fraud
January 10, 2000
A. The Problems
1. Telemarketing Fraud
Telemarketing fraud is a widespread and serious form of economic crime,
one that is estimated to cost Americans at least $40 billion each year. It also has a serious impact on the
legitimate telemarketing industry. If
fairness is the cornerstone of the competitive marketplace, then fraudulent
telemarketers are like termites that threaten the integrity of the structure.
In 1992, the National Consumers League, a nonprofit consumer
organization, commissioned a Louis Harris & Associates survey of consumers'
experiences with telephone-based frauds.
The first of its kind, the survey found that 3 percent of the
respondents, representing 5.5 million people, had bought something over the
phone within the past two years that they now believed was fraudulent. Nearly two-thirds (62 percent) of the
respondents said they would not know where to call to find out if a telephone
offer or promotion was legitimate. And
one in six (17 percent) admitted that they found it difficult to resist a
telephone sales pitch.
A 1999 AARP survey designed to assess consumer behavior, experiences
and attitudes found similar results. Of
the 17 percent of respondents who believed they had been victims of a major
consumer swindle, 2 percent said they had been telemarketing fraud victims. AARP has also found that older consumers are
especially vulnerable to telemarketing fraud.
In a 1996 AARP survey of victims of telemarketing fraud who had been
identified by federal and state law enforcement officials, 56 percent were age
50 or older. .
NCL also collects data about telemarketing fraud directly from
consumers through its National Fraud Information Center, a toll-free hotline,
(800) 876-7060, that was created in 1992 to offer consumers advice about
telemarketing offers and relay victims' information to the appropriate
agencies. In 1998, 38 percent of the
consumers who reported telemarketing fraud to the NFIC were age 50 or older,
while that age group represented only 26 percent of the U.S. population
according to 1996 Census data. The average
loss per consumer was $2,384, though some individual victims lost hundreds of
thousands of dollars.
The top ten telemarketing frauds reported to NFIC in 1998 were:
1.Telephone cramming 6.Magazine sales
2.Advance fee loans 7.Credit card offers
3.Telephone slamming 8.Pay-per-call services
4.Prizes/sweepstakes 9.Business opportunities/franchises
5.Work-at-home plans 10.Travel/vacation offers
While 14 percent of the fraudulent telemarketing companies were located
in Canada and 2 percent in other countries outside of the U.S., in some
product/service categories the percentages were higher. For instance, 80
percent of the fraudulent advance fee loan operations were located in
Canada. Fraudulent offers for credit
card, credit repair, advance fee loans, sweepstakes, lotteries offers and other
telemarketing scams originating in other countries also target U.S.
consumers. U.S. law enforcement agencies
face difficult challenges in pursuing cross-border consumer fraud, including
increased cost and differences in legal systems.
While the 1999 statistics are not available for release yet, there are
likely to be changes from the previous year. Cramming (unauthorized charges on
consumers' phone bills for optional services they never ordered), which was not
even a category in the NFIC database until October of 1997, rose to #1 by the
end of 1998, and then fell significantly during 1999. NCL believes that there were two reasons for the drop in cramming
incidents: 1) telephone companies, who act as billing services for third-party
service providers, implemented voluntary screening and monitoring systems to
prevent and curb abuses; 2) state and federal law enforcement authorities
aggressively prosecuted cramming cases.
The cramming problem is an example of how changes in technology and
other factors can give rise to new types of fraud. The challenges for industry, government and consumer
representatives are to anticipate potential problems and prevent them, respond
to emerging scams quickly and effectively, and educate the public about
avoiding fraud.
2. Internet Fraud
The Internet has become the new frontier of fraud. The very attributes that make it so
attractive as a means of communication and commerce also make it attractive to
con artists. They have taken advantage
of the low cost of communication that it affords, the capacity to reach a
worldwide audience, and the fact that it is difficult to distinguish whether
information and the source of that information is legitimate or not.
In 1996, NCL launched the Internet Fraud Watch as a companion program
to the NFIC. Through the toll-free
number or the www.fraud.org Web site that NCL created, consumers can get
advice about online offers and report suspected Internet fraud to law
enforcement agencies.
In 1998, the top ten Internet frauds reported to IFW were:
1.Online
auction transactions 6.Business opportunities/franchises
2.General merchandise sales 7.Multilevel marketing/pyramids
3.Computer hardware/software sales 8.Credit
card offers
4.Internet related services 9.Advance fee loans
5.Work-at-home plans 10.Job listings/employment offers
While many of these types of fraud are similar to those found in
telemarketing, others are not. Problems
with online auction transactions, sales of general merchandise, computer
hardware/software sales, and Internet related services are new. Most of these complaints involve non-receipt
of promised merchandise or services, or misrepresentation. Online auctions are especially intriguing
because the operators of the auction sites generally do not sell the goods
themselves, but rather charge a fee to list items and oversee the bidding on behalf of the sellers.
One interesting question is what liability, if any, auction companies
have for fraud perpetrated through their sites. Another is the liability of the sellers. Many of these online sellers are private
individuals. It is possible that some
may simply not be aware of the need to describe things accurately or deliver
promptly. However, since the IFW often
receives multiple reports against the same individuals, it appears that many of
them are engaged in fraudulent activities operating out of residential
addresses. The presence of
non-traditional sellers on the 'Net also raises questions about when and in
what circumstances the consumer protection laws that have traditionally only
applied to businesses should apply to individuals.
In addition, it highlights one important difference between Internet
fraud and telemarketing fraud; Internet fraud can be operated from anywhere,
even someone's home. It does not
require large numbers of employees or the boiler room facilities that characterize
telemarketing fraud.
Another difference between telemarketing fraud and Internet fraud is
the age range of victims. Consumers age
50 and older accounted for 20 percent of the reports to IFW in 1998. Most of the Internet fraud victims were in
their 20s, 30s and 40s. The average
loss per person was $293, significantly less than in telemarketing fraud. However, as with telemarketing fraud, there
were individuals who lost hundreds of thousands of dollars.
Since the Internet has no geographic boundaries, some fraudulent
sellers victimizing U.S. consumers are located in other countries. In 1998, 4 percent of the companies or
individuals reported to the IFW were located in Canada, and 2 percent were in
other parts of the world. Law
enforcement agencies encounter the same difficulties in pursuing cross-border
Internet fraud as they do in telemarketing fraud. Furthermore, investigating Internet fraud can be even more
complex because of the ease with which sellers can hide their real names and
physical locations.
Payment in both fraudulent telemarketing and Internet-related
transactions is most commonly made by check or money order. Only 8 percent of telemarketing or Internet
fraud incidents reported to NCL's fraud programs in 1998 involved credit card
payments. The relative slowness of
mailing payment across national borders and the currency differences between
countries probably hinder cross-border fraud.
If fraudulent marketers gain access to electronic payment systems, it
will be easier for them to perpetrate scams on a more global scale.
Finally, the most alarming aspect of Internet fraud is its explosive
growth. Reports from victims to the IFW
rose by 600 percent between 1997 and 1998, and the 1999 statistics are expected
to show another significant increase.
Perhaps this is not surprising considering the increasing number of
consumers who are going online. The
rapid rise of Internet fraud strains the resources of law enforcement agencies.
If consumer confidence in the Internet is affected by fraud, it will
also have a serious impact on the growth of legitimate electronic
commerce. Thus, the challenges for law
enforcement agencies, industry and consumer organizations are to prevent con
artists from abusing the Internet, take swift and concerted action to prosecute
offenders, and educate the public about safe online shopping.
B. Solutions
There are no silver bullets for resolving the problems of telemarketing
or Internet fraud. Governments,
legitimate marketers and consumer groups all play vital roles in combating
abuses. The three prongs of a
comprehensive approach to telemarketing fraud are education, enforcement, and
industry policy.
1. Education
Education must be viewed as a continuous process, not a one-time
effort. Effective educational campaigns
are based on a clear understanding of the problem, the target audiences, and
the desired outcome. One example is the
National Consumers League's Elder Fraud Project, launched in 1996 with a major
grant from American Express in response to concerns about the social and
economic impact of telemarketing fraud targeting older people. The first step was a retreat that brought
together consumer and elder advocates, law enforcement agents, psychologists,
gerontologists, and experts in social marketing. This was the first time that such a group had been convened, and
the discussions gave all participants a much better understanding of older
consumers' motivations and how to convey anti-fraud information more
effectively.
As a result of this and subsequent focus groups, in cooperation with
AARP, a new anti-fraud message emerged
-- that fraudulent telemarketers are criminals. A variety of materials were produced by NCL, from brochures to a
video, "They Can't Hang Up."
They have been provided to law enforcement agencies, social service
agencies, offices on aging, civic and fraternal organizations, corporations,
assisted living facilities, libraries, cooperative extension service offices,
labor organizations, and numerous other groups that have use them to raise
public awareness and understanding about telemarketing fraud. NCL continues to fulfill requests for these
materials.
To assess public awareness about Internet fraud, NCL commissioned a
survey in September of 1999 which showed that while consumers were excited
about shopping online, they were concerned about the potential risks and
confused about their rights and remedies.
Sixty-nine percent of the respondents incorrectly believed that it is
safer to pay for an online purchase by check or money order rather than by
credit card; only half knew that federal law requires online orders to be
delivered by the time stated or, if no time period is stated, within thirty
days; and nearly a third mistakenly believed that businesses must go through a
screening process to ensure that they are legitimate before they can put Web
sites up on the Internet. In addition
to concerns about the safety of their credit card information, consumers also
said they were worried about the privacy of other personal information that
they were asked to provide. About one
in five consumers who had made online purchases in the last year had complaints
about non-delivery, misrepresentation, unauthorized charges, or other billing
problems.
In October, NCL announced its new "Be E-Wise" campaign,
developed with support from MasterCard International, to educate consumers
about shopping safely online. The
"Be E-Wise" brochure, available from the www.nclnet.org Web
site as well as in hard-copy form, is being promoted through media interviews,
newsletters, mailings, and other means.
NCL also works in partnership with local, state and federal government
agencies, trade associations, and other consumer organizations on public
education about telemarketing and Internet fraud. In addition, NCL provides one-on-one educational information
through its National Fraud Information Center/Internet Fraud Watch programs. Those programs are supported by the members
of NCL, donations from foundations, companies and other private sector
entities, and government grants.
Adequate resources for research, production and outreach, combined with
expertise and objectivity, are the crucial ingredients for implementing
effective educational efforts.
Recommendations:
The federal government should establish a permanent grant fund to
support public education about telemarketing and Internet fraud.
The federal government should also work with state and local
governments, consumer organizations and others, in the U.S. and in other
countries, by forming partnerships and providing in-kind services, expertise
and outlets for joint public education efforts.
2. Enforcement
Law enforcement agencies must have sufficient tools to protect
consumers from harm and ensure a fair and level playing field in the
marketplace. Laws and regulations that
provide clearly guidance for how legitimate marketing should be conducted,
prohibit abusive practices, and enable agencies to prosecute violations swiftly
and effectively, are important tools in the battle against fraud. The Telemarketing Sales Rule, which can be
enforced by both state and federal agencies, has been helpful in combating
telemarketing fraud. While general
statutes and regulations concerning unfair or deceptive acts or practices
clearly apply to online marketing, legislative and regulatory bodies should consider
whether specific requirements, prohibitions and penalties are needed in
relation to electronic commerce. The Guidelines
for Consumer Protection in the Context of Electronic Commerce issued last
December by the Organization for Economic Cooperation and Development,
resolutions concerning electronic commerce from the Trans Atlantic Consumer
Dialogue, representing consumer organizations in the U.S. and European Union,
and other recent initiatives provide good resources in considering these
issues.
Penalties must be strong enough to act as real deterrents to
fraud. Monetary penalties should be
substantial, and egregious or repeat offenses should be treated as crimes. Another vital component of enforcement is
cooperation among agencies in different jurisdictions, especially in regard to
telemarketing and Internet fraud, which cross state and even national
boundaries.
Government agencies need sufficient resources to investigate and
prosecute telemarketing and Internet fraud.
Specialized training is also important.
Some agencies have set up special units to handle telemarketing and
Internet cases.
Finally, in order to effectively combat fraud, law enforcement agencies
must be alerted to it quickly. Many
surveys have shown that consumers are unsure who to contact or how to complain. Given the high volume of complaints, it is
not feasible for one agency or organization to be the sole contact.
Furthermore, there are many agencies that have overlapping jurisdiction to
investigate and prosecute different types of fraud. A number of resources are available to assist consumers,
including the National Consumers League's National Fraud Information
Center/Internet Fraud Watch programs, which collect and automatically relay
information about individual incidents of telemarketing and Internet fraud to
the appropriate local, state and federal law enforcement agencies in the U.S.
and Canada. As telemarketing and
Internet fraud become more global, it will be imperative to widen efforts to
collect and distribute information.
Recommendations:
The federal government should consider whether new laws or regulations
are needed to provide more guidance for marketers, better tools for law
enforcement agencies, and more effective penalties to combat telemarketing and
Internet fraud.
The federal government should also establish permanent funding to help
train investigators and prosecutors at all level of government and to assist in
law enforcement actions, especially across national borders.
The federal government should make a long-term commitment of financial
support to nonprofit organizations that collect and provide information about
incidents of telemarketing and Internet fraud to law enforcement agencies.
3.
Industry Policies
Legitimate marketers, trade associations, and industries that
facilitate telemarketing and electronic commerce also have a responsibility and
an interest in preventing fraud. The
voluntary guidelines described earlier to address telephone cramming problems
serve as a model for how industry policies can be helpful to prevent abuses of
billing systems. Industry members have
also joined together in associations or coalitions to set standards of conduct
for marketing and sales, protect consumers' privacy, and resolve complaints.
These efforts complement, but do not substitute for, legal requirements
and prohibitions that may be needed to ensure fair competition and prevent
fraud. Many individual companies have
also developed good consumer protection policies and procedures.
Public education, whether conducted individually, through a trade
group, or in partnership with others, must also be a long-term commitment for
members of the private sector. NCL has
provided several examples of how private support has aided its public education
and fraud-fighting programs. Companies
and trade associations also assist law enforcement agencies by providing
expertise and other resources for investigations and prosecutions, and by
sharing information about suspected fraudulent activities.
As telemarketing and electronic commerce become more global, the
private sector can play an important role in developing worldwide codes of
conduct, establishing alternative dispute resolution mechanisms, promoting
public education, and informing agencies about abuses.
One issue that has arisen is how well the current framework of legal
protection that consumers are afforded in their respective countries works when
transactions are made between buyers and sellers in different countries. Some companies complain that it is difficult
to comply with disparate rules and regulations. They propose that transactions should be governed by the laws of
the country that the business chooses, or to give consumers a choice of law. Another alternative is binding arbitration
that would preclude the consumer's ability to resort to formal legal
action. The National Consumers League
does not believe that these options are acceptable solutions to the problems
that arise from cross-border complaints.
Companies should adopt the highest standards for marketing and sales
practices and provide effective informal resolution mechanisms. These measures will mitigate the need for
formal legal action.
Recommendations:
The federal government should encourage operators of credit card, debit
card, and other payment systems to consider whether better screening and
monitoring policies are needed to reduce the potential for billing abuses by
fraudulent telemarketers or online sellers.
As new online payment systems are developed, the federal government
should consider whether consumers are adequately protected from liability for
fraudulent transactions and work with industry to develop new consumer
protections as needed.
The federal government should encourage companies and trade groups to
review existing codes of conduct and consider whether new codes are needed to
provide strong guidance to telemarketers and online sellers.
The federal government should encourage the development of alternative
dispute resolution systems that provide consumers with prompt, fair, and easily
accessible assistance with individual complaints without requiring them to
waive their legal rights.
The federal government should work with industry organizations to
ensure that information about telemarketing and Internet fraud reaches law
enforcement agencies.
The federal government should provide incentives to industry to support
consumer education about telemarketing and Internet fraud.