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Thank you very much for inviting me to
speak to you today. Though the National Consumers League was founded more than
one hundred years ago to advance the economic and social interests of consumers,
long before the Internet was born, we have kept on the cutting edge of issues
such as electronic commerce. Internet fraud is the dark side of electronic
commerce, and anyone who goes online is a potential victim.
Our involvement in fighting Internet fraud has
its roots in the National Fraud Information Center, a program that NCL set up in
1992 as the first nationwide toll-free hotline to assist consumers with
questions or problems concerning telemarketing fraud. In 1996, as many of the
same scams that we saw in telemarketing began to appear in cyberspace, we
created a companion program, the Internet Fraud Watch, and a Web site,
www.fraud.org
. These programs perform two very important
functions.
Fraud Prevention
The first is fraud prevention. More than
half of the 1,000-1,200 consumers who contact us by phone or via the Web site
each week have not yet been victimized. They are doing exactly what we want all
consumers to do – checking out offers that sound enticing but may not be
legitimate. Our trained counselors help consumers identify the "red flags
of fraud," such as sweepstakes winnings that require payment to claim,
unrealistic promises of big returns on investments with little or no risk, easy
ways to earn money with little or no work, and guaranteed credit even for those
with bad credit histories. It is crucial to prevent victimization whenever
possible because, as those in law enforcement will tell you, chances of actually
recovering money from crooks are usually fairly low. We reinforce the advice
that our counselors provide by sending everyone who contacts us educational
materials, by mail or email, on the specific types of scams about which they
inquired.
Alerting Law Enforcement Agencies Quickly
The second vital function of our fraud
programs is to alert law enforcement agencies quickly about con artists and
their victims. We transmit the information that consumers have provided to us by
phone or via the online form on the Web site to the appropriate federal, state
and local law enforcement agencies, alerting them to scams about which they may
not already know and to people who need their help.
Agencies tell us in advance what they wish to
receive by certain criteria, such as geographic location, type of scam, or other
factors. For example, the Florida Attorney General’s Office wants complaints
where either the consumer or the perpetrator is in that state. The Securities
and Exchange Commission receives information about investment-related scams. The
Postal Inspection Service is interested in cases where the payment was sent by
mail. Our FAST Alert System matches the information that our counselors take
from consumers with the agencies’ criteria and automatically relays those
complaints by fax or email. We also send agencies a daily log showing them what
other agencies have received the same fraud reports and the contact information
so that investigators and prosecutors can coordinate their activities. To date
there are more than 230 agencies on our system.
Since it is not uncommon for one complaint to be
of interest to several agencies, we save consumers the trouble of having to
contact each directly. We also upload new complaints on a weekly basis to the
Consumer Sentinel database, which is maintained by the Federal Trade Commission
and the National Association of Attorneys General. Law enforcement agencies can
query Consumer Sentinel to find information that aids in their investigations
and prosecutions.
The Worst Internet Scams
What is the worst scam on the Internet?
That depends on how you look at it. In terms of volume, it ’s online auction
fraud. As a survey that we recently conducted shows, most sellers are honest,
and most buyers are happy with their experiences. But there are some individuals
and companies who offer items on online auctions that they don’t really have
or that don’t remotely resemble the descriptions they provide. Last year, 78%
of the Internet fraud complaints we received were about online auction
transactions. The good news is that this is down from 87% the year before, but
it is still a significant concern. Whenever consumers pay in advance for items
they haven’t seen, there is an element of risk. We launched a public education
campaign earlier this year to tell consumers how they can protect themselves in
online auctions.
We have attached to our testimony the list of the
top ten Internet frauds of 2000, and that information is on the Web site at
www.fraud.org/internet.It00totstats.htm
. The Web site also provides basic Internet tips and
specific tips on common Internet scams. More than 300,000 people visit our Web
site every week. Some Internet scams are the same as we see in telemarketing
fraud; for example, work-at-home schemes, advance fee loans, bogus offers of
credit cards, and empty promises of free or cheap trips. Others are specifically
Internet-related. Online auctions are a phenomenon made possible by this new
interactive medium. Other frequent complaints are about offers for Internet
services and sales of computer equipment and software.
Based on the amount of money that victims lose,
Nigerian money offers are the worst Internet scam. These offers, which used to
come by airmail but now are increasingly arriving by email, promise millions of
dollars in exchange for allowing your bank account to be used to safeguard
someone else’s riches. But the real intent is to take money out of your
account, not put money in it. These scams rose to the top ten Internet frauds
last year, and victims are losing an average of $3,000 in money they’ve paid
or that was taken from their bank accounts. Another category with high dollar
losses is travel scams, an average of $1,464 per victim last year. Overall, the
average loss to Internet fraud was $427 in 2000, up from $310 in 1999.
Victims of Internet Fraud
The biggest losers to Internet fraud are people
in their 20s, 30s and 40s, who represented 77% of the victims we heard from last
year. Among the top ten frauds, the most young victims are found in the advance
fee loan category, the most older victims in bogus credit card offers. But no
one is exempt; there is a scam for everyone. The states with the most people are
where the most victims are located: California, Florida, New York, and Texas.
Those states are also the top locations for
cybercrooks. But since the Internet has no geographic boundaries, neither do the
con artists. Nearly 4% of the Internet scams reported to us last year originated
from Canada, a little more than 2 % from other countries, and offshore fraud is
growing.
Because we hear from so many online auction
victims, the most common method of solicitation is through Web sites. But 12% of
the victims were solicited through emails last year, up from 9% in 1999, and 4%
were solicited through newsgroups, a sharp increase from 1% last year. Consumers
have to be wary no matter where they go on the Internet. A friendly tip from
someone in a newsgroup can actually be a trap set by a fraudster.
Since many online auction transactions are
completed with the high bidder sending payment offline to the seller, the most
frequent methods of payment are money order and check. But more consumers are
paying for fraudulent online transactions by credit card, 11% last year compared
to 5% in 1999. We advise consumers to pay by credit card because of the strong
legal dispute rights they have for unauthorized charges, nondelivery or
misrepresentation. However, we are beginning to see payments made with debit
cards or by demand drafts from consumers’ bank accounts, and the legal dispute
rights in those cases are not as strong. This is a concern, especially as new
forms of electronic payment such as cyberwallets are developed.
Making the Internet Safer for Consumers
There are several things that should be
done to make the Internet a safer place for consumers and enable e-commerce to
achieve its full potential:
Set some basic rules for e-commerce. Five years
ago, the federal Telemarketing Sales Rule was promulgated by the FTC to require
certain disclosures and prohibit specific practices. States are empowered to
help enforce the rules in federal court. In December of 1999, the Organization
for Economic Cooperation and Development issued Guidelines for Consumer
Protection in the Context of Electronic Commerce, which provide suggestions to
the member countries for how e-commerce should be conducted. The United States
played a major role in drafting the guidelines. Now we should implement them by
setting some basic rules for e-tailors, such as requiring that they provide
their physical addresses, and prohibiting practices that should be illegal on
their face, such as advance fee loan offers from entities that are not regulated
financial institutions.
Enact online privacy protection. Consumers should
have legal protections against commercial email that they never agreed to get
and having their personal information shared by companies to whom they provide
it without their permission.
Enact uniform protection for different forms of
electronic payment. To encourage e-commerce, debit card issuers currently
provide more generous dispute rights to consumers than those required by law,
but those policies are not written in stone, and other forms of electronic
payment aren’t treated the same. Dispute rights for fraud and
misrepresentation don’t just help consumers – they make the sellers more
responsive to problems and more likely to conduct themselves properly in the
first place, because if they don’t they may not be paid and could even lose
their ability to participate in the electronic payment system.
Provide more resources for fighting Internet
fraud. Law enforcement agencies need more resources to train investigators and
prosecutors and to bring actions that may entail appearing in court in another
country. We need more resources to sustain the League’s fraud programs, too.
In the past few years, we have received grants from the Bureau of Justice
Assistance in the Department of Justice that have enabled us to upgrade our data
system and improve services to law enforcement agencies and consumers. We need
more federal funding to supplement the support that we receive for the programs
from our members and businesses that care about fighting fraud.
Provide more resource for consumer education.
Education is needed on an ongoing basis to make consumers aware of the danger
signs of fraud and give them confidence in the new electronic marketplace. We
have done many educational projects about e-commerce in the last few years with
support from the private sector. For example, our Be e-Wise: How to Shop
Safely Online brochure, which is on the League’s main Web site,
www.nclnet.org
, was produced with a grant from MasterCard. More
recently, we developed a Consumer Guide for Internet Safety and Security,
also on the League’s Web site, with support from Dell Corporation. The
government should join the private sector in providing resources for nonprofit
groups such as ours to reach out to consumers with the information they need to
protect themselves in cyberspace.
Thank you very much for asking the National
Consumers League to share its knowledge and suggestions on this important issue.
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