Executive Summary

Marketing and telecommunications advances in the Information Age give everyone, even con artists, the power to boost the sophistication and reach of a sales pitch. Fraud promoters now masquerade as national sales firms, using telemarketing, direct mail, television, and the Internet to reach consumers nationwide. Thanks to personal computers, desktop publishing software, and affordable video equipment, bogus sales pitches have the look of legitimacy, and lure millions of consumers to take the bait. In sum, fraud promoters pose a significant threat to average consumers and to the economy.

Congress has estimated that telemarketing fraud alone may be a multi-billion dollar-a-year industry.(1) The FTC's recent experience supports this estimate. The nearly 100 federal district court cases brought by the agency between October 1995 and December 1996 cumulatively reflect that fraudulent sales in these actions cost consumers more than $250 million a year and more than $700 million over the life of the schemes. Although economists agree that reported consumer fraud is likely to represent only a fraction of actual consumer fraud in the U.S., complaints and questions about it are significant and steady. For example, in 1996, the National Fraud Information Center (NFIC), a project of the National Consumers League, received a record number of inquiries on its toll-free consumer fraud hotline. The NFIC receives about 10,500 calls from consumers a month, or 350 calls a day. About 28 percent of these consumers ultimately file complaints of fraud with the NFIC, at a rate of 100 complaints a day.

Consumer fraud knows no geographic boundaries. The Telemarketing Complaint System, a consumer complaint database operated by the FTC and the National Association of Attorneys General, shows that 89 percent of all 1996 complainants reported that they were victimized by out-of-state fraudulent enterprises. According to the NFIC, Quebec now is the third largest geographic area generating telemarketing complaints by United States consumers--trailing California and Florida, but ahead of Nevada and New York.

While fraud evolved, anti-fraud responses in 1996 grew as well. Indeed, at Congress' direction in 1994, the FTC promulgated the Telemarketing Sales Rule (TSR), prohibiting numerous fraudulent telemarketing misrepresentations and regulating several notoriously abusive telemarketing techniques. Effective December 31, 1995, the TSR authorized both the FTC and the fifty states to bring suit against fraud operators and obtain nationwide injunctions, enforcing the rule and halting fraudulent and abusive telemarketing activity. Thus, as 1996 began, the TSR signaled that federal and state law enforcement agencies were prepared to cooperate and innovate in efforts to attack fraud.

This report describes the FTC's recent anti-fraud efforts in four of the biggest and most economically significant categories of mass-marketed fraud within its jurisdiction. The enforcement activities directed by the agency--enhanced with consumer education messages--demonstrate that collaborative, comprehensive anti-fraud efforts are effective in combating fraud across the country, internationally, and in cyberspace.

These enhanced law enforcement techniques consist of the following:

Coordinated federal and state law enforcement actions: The FTC, with federal and state law enforcement partners, brought over 200 actions against perpetrators of fraud. These actions included nine coordinated initiatives to "sweep out" major players in the fraud industry, including purveyors of "information superhighway" investment scams and business opportunity frauds and promoters of prizes and sweepstakes, scholarship services, employment services, credit repair, advance fee loans, and office supply scams.

Combined civil-criminal actions: In December 1995, the Department of Justice led Operation Senior Sentinel, a massive, and successful, criminal crackdown on telemarketing fraud against older Americans. As part of this effort, the FTC and other law enforcement partners were asked to use their authority to shut down boiler rooms, seize assets, and identify witnesses. Members of the American Association of Retired Persons (AARP) posed as consumers to record fraudulent sales pitches for evidence.

Around the same time, the FTC and the U.S. Attorney's Office in the Eastern District of Tennessee formed the Chattanooga Telemarketing Task Force, bringing criminal law enforcement actions against more than 30 local telemarketers. In addition, the FTC and the U.S. Attorney's Office of the Middle District of Florida used civil and criminal law enforcement actions to stop job placement fraud in Orlando, Florida. Complaints about fraud in each of these areas dropped significantly after these law enforcement efforts.

Partnerships for consumer education: On the theory that educated consumers are the first line of defense against various kinds of consumer fraud, the FTC took the Partnership for Consumer Education (PCE) into its first full year of operation, collaborating on the development and dissemination of consumer education materials with other law enforcement agencies, consumer protection advocates, and private industry. PCE members, including American Express, Publisher's Clearing House, Spiegel, the Interactive Services Association, and Sallie Mae, distributed innovative education materials to millions of consumers, alerting them to frauds ranging from credit repair and sweepstakes promotions to scholarship schemes and pyramid scams on the Internet.

• Combined efforts to combat cross-border and Internet fraud: The FTC and its partners confronted the new threats of cross-border and Internet fraud. In FTC v. Fortuna Alliance, both the FTC and criminal authorities took action against a multi-million dollar international pyramid scheme. The FTC also worked with the Justice Department to repatriate telemarketing fraud victims' money from foreign bank accounts, led other government and private groups in an Internet "Surf Day" involving education messages to more than 500 likely pyramid scheme web sites, and initiated joint efforts with Canadian law enforcement officials to fight fraud.

This report also documents the importance of data collection and the need for better ways to measure the prevalence of fraud, the extent of consumer injury, and the success of enforcement and education efforts. One measure is consumer complaints, but they are far from comprehensive. Consumers do not always know when they have been defrauded and some are too embarrassed to admit they have been taken in. Often, consumers report the same complaint to multiple agencies. In addition, reports of fraud may not be timely in terms of law enforcement: The number of complaints generally rises after Congressional hearings and media stories, indicating that the collective consumer consciousness has been raised. But the fraud may have taken place months or years earlier. Further, numbers of complaints are difficult to estimate. Literally hundreds of consumer protection agencies and organizations receive consumer complaints, but most do not tally or report the complaints.

Nevertheless, this report details a successful approach to enforcement with a focus on partnerships. The stories of these recent law enforcement activities illustrate why the fight against consumer fraud requires a new collaborative kind of effort; how federal and state law enforcement agencies worked effectively and efficiently when they coordinated their efforts; and how the private sector worked with government agencies and non-profit organizations to help disseminate public education messages.