New Telemarketing Sales Rule "Strong New Weapon" Against Demand Draft Fraud, FTC Says

The Federal Trade Commission said today that the Telemarketing Sales Rule implemented by the Commission will be a “strong new weapon in the arsenal against demand draft fraud and telemarketing fraud....” Testifying for the Commission before the House Banking Committee, Jodie Bernstein, Director of the FTC’s Bureau of Consumer Protection said that although the Rule has only been in effect since December 31, 1995, the Commission has already brought law enforcement actions against a cluster of companies that violated the demand draft consent provisions of the rule. In addition, the rule empowers each state Attorney General and the D.C. Corporation Counsel to file suit in federal court, “and obtain nationwide injunctions and redress for their citizens. This means that now there are an additional fifty-one cops on the nationwide telemarketing fraud beat,” the Commission testimony said.

The FTC says that demand draft fraud -- the unauthorized debiting of a consumer’s checking account -- is a growing problem because credit card companies have taken “strong measures” to halt credit card fraud and swindlers have turned to demand draft fraud as an easier option to cheat consumers.

“Fraudulent actors persuade consumers, either over the telephone or though the mail, to divulge their checking account numbers by telling them that their bank account numbers are needed to verify prizes or to deposit prize money directly into consumers’ bank accounts,” the FTC statement explained.

“In other cases, fraudulent actors tell consumers that only a small amount will be withdrawn, but in fact withdraw huge amounts,” it said. “Little do consumers know that once they give fraudulent actors access to their bank account information, their money will disappear.”

The FTC testimony pointed out that legitimate demand drafts are used by millions of consumers and countless businesses. “[T]here is nothing inherently unfair or deceptive about the use of demand drafts as a payment method; and, in fact...demand drafts provide consumers the same convenience and opportunity to purchase goods or services that they could enjoy using credit cards. But like so many other innovative developments in the marketplace, demand drafts are susceptible to misuse by unscrupulous operators.” But while consumers have protection from unauthorized use of their credit cards through the Fair Credit Billing Act, “...in the case of demand drafts, there is no legally mandated dispute mechanism, and no limit on liability,” the testimony said.

“When a consumer disputes an unauthorized demand draft to his or her checking account, banks often take the position that the mere fact that the consumer’s bank account number is on the draft shows that the consumer authorized the debit,” the Commission noted. “Indeed banks may hold consumers responsible for fraudulent demand drafts because of the consumers’ negligence in giving out their checking account numbers.”

The FTC responded to the growing problem of demand draft fraud and the limited consumer recourse by including strong provisions in the FTC Telemarketing Rule to limit demand draft fraud. “In adopting provisions of the Telemarketing Sales Rule that require consumers’ express verifiable authorizations for demand drafts in telemarketing transactions, the Commission addressed the problem of nonexistent demand draft industry standards by establishing such standards, at least in the telemarketing context,” the statement said. “The Commission has taken and will continue to take a strong enforcement stance against demand draft fraud under the Telemarketing Sales Rule, and where appropriate, will bring actions...against fraudulent users of the automated payment system that are not covered by the Rule,”

In addition to the Rule, the Commission has taken the lead in developing a broad consumer education campaign to help consumers protect themselves from demand draft fraud. The cooperative effort involving federal agencies, private industry and consumer groups has already provided information to more than 1.5 million consumers, the FTC says.

“Consumers can protect themselves and their bank accounts by never disclosing their checking account information to anyone they do not know or for any purpose other than to pay for a purchase through direct debiting of their accounts;”

“Consumers should complain to their banks immediately upon learning of any demand draft against their checking accounts that they have not authorized or that is inconsistent in any way with any authorization they have given to any seller to obtain payment by means of a demand draft;”

“Finally, consumers should report incidents of misrepresentation or fraud regarding demand drafts to their state Attorney General. Consumer complaints are an invaluable tool in identifying appropriate targets for enforcement action.” The FTC testimony noted that the National Fraud Information Center (NFIC) compiles complaint information and enters it daily on a database jointly maintained by the FTC and the National Association of Attorneys General. “Over one hundred federal, state and local law enforcement agencies use this database to help in identifying overall trends in telemarketing fraud as well as individual operators that are likely candidates for prosecution or other law enforcement action. By reporting demand draft fraud to the NFIC hotline, consumers greatly enhance the ability of the Commission and other law enforcement agencies to take action,” the statement said.

Copies of the testimony are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326- 2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710 FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov