New FTC Report Documents Fraud-Busting Campaigns

Federal and state law enforcement actions, combined with innovative public-private sector consumer education campaigns, have stopped many fraudulent operations and are slowing the growth of several others, according to a report issued today by the Federal Trade Commis sion. The report, "Fighting Consumer Fraud: The Challenge and the Campaign," documents recent efforts led by the agency to fight telemarketing fraud against older people; investment fraud, business opportunity and job placement scams; and consumer finance scams.

"The good news is that we now have a roadmap for fighting consumer fraud and we’ve made significant headway in both reducing major scams and boosting consumer awareness," said FTC Chairman Robert Pitofsky. "The fight is not over, and fraud continues to present a signifi cant financial threat to consumers. But the network we’ve established is one we can build on as we continue our full-fledged campaign."

According to the report, companies engaged in these areas of consumer fraud are mimicking legitimate businesses, using Information Age technology to reach millions of con sumers with highly-polished, deceptive messages. The response -- collaborative, cooperative law enforcement "sweeps" and consumer education campaigns -- have stopped in their tracks hun dreds of firms that had been bilking consumers out of hundreds of millions of dollars a year. Moreover, enhanced criminal enforcement initiatives backed by or developed with civil law enforcement agencies, also reduced the popularity of particular types of fraud that the agencies targeted in their campaigns, particularly in the critical geographic areas where fraud promoters nest. These efforts have demonstrated the importance of collaboration in the fight against fraud, and provide a strong foundation for developing creative, cooperative tools to use in future anti- fraud efforts, the report states.

In addition, according to the report, the FTC’s Telemarketing Sales Rule, now one year old, has given law enforcers nationwide a powerful tool for combating some of the most prevalent types of abusive and deceptive telemarketing practices.

"When it comes to this sophisticated modern fraud, none of us in the law enforcement community can fight it alone," said Jodie Bernstein, Director of the FTC’s Bureau of Consumer Protection. "This report demonstrates over and over the necessity of a multi-faceted anti-fraud strike force that combines the experience, creativity and muscle of numerous government and private sector entities committed to combating the best that today’s fraud artists have to offer."

The new collaborative anti-fraud approach is characterized by massive federal-state crackdowns or "sweeps" targeting numerous marketers of particular types of frauds, followed up by extended consumer education campaigns. In coordinated efforts in 1996 alone, the report states, the FTC and its federal and state law-enforcement partners brought more than 200 actions against perpetrators of fraudulent "information superhighway" investment scams, business opportunity schemes, prize promotions, college scholarship search services, job search services, credit repair programs, advance-fee loan offers and small business supplies scams. In addition to cracking down on burgeoning fraud, the report concludes that law enforcers must stop incipient fraud before it spreads. In this vein, the FTC led several government and private organizations in December 1996 to conduct an Internet "Surf Day" which resulted in warning notices sent to more than 500 pyramid scheme websites. Through the FTC’s Partnership for Consumer Education, each of these efforts -- the law enforcement "sweeps" and Surf Day -- was followed up with a campaign to distribute consumer alerts and other educational materials to millions of consumers through hundreds of outlets to alert them as to what the "hot" frauds look like and how to avoid them.

The FTC "Fighting Consumer Fraud" report, made public today, surveys the scope of, and law enforcement approach against, four key areas of fraud:

1. Fraud Against Older Americans

"Scam artists are ruthless and relentless in their pursuit of older American consumers," the report states, noting a February 1996 study which found that 57 percent of older Americans were likely to receive telemarketing calls at least once a week and that college-educated seniors with higher incomes were more likely to be targeted. Yet more than half the respondents to the survey indicated they could not tell a legitimate telemarketer from an illegitimate one. Phony prize promotion schemes, scams designed to deceptively solicit charitable contributions, and "reloading" and "recovery room" schemes -- whereby previous victims are resolicited with promises that they can make back or recover money they’ve lost in a prior scam -- were among the most common frauds to target seniors in recent years, according to the report. Sustained law enforcement efforts may be reducing these frauds, however. Prize promotion schemes have topped complaint lists in prior years, but complaints dropped significantly in 1996, a year in which law enforcers in the United States focused on bringing coordinated actions against the perpetrators of such fraud, the report states. On the other hand, these schemes may be moving across the border: Quebec and Ontario now rank among the top 10 areas generating fraud complaints, with prize promotions among the most popular schemes, according to the report.

2. Investment Fraud

Individual consumers lose tens of thousands of dollars each to investment fraud every year. Among complaints in the FTC/National Association of Attorneys General Telemarketing Complaint System, more than half of the reported dollar losses are attributable to investment fraud, with the average loss exceeding $15,000 per consumer, according to the FTC report. Marketers employ two key techniques to disguise their schemes as legitimate offers. First, they structure passive investments in ways that purport to avoid securities registration laws. As a result, their promotional materials -- including profit projections, how they use investor dollars, and risk disclosures -- are not subject to routine regulatory scrutiny. Second, firms often pitch offerings that mimic popular, legitimate investments that have received substantial positive media attention, such as investments associated with emerging telecommunications technologies. Some schemes have even used valuations of real investments by prominent investment advisers or excerpted financial reports to tout their offerings, the report states.

One of the consumer education campaigns in this area involved a mass mailing by the FTC and the Federal Communications Commission to 17,000 consumers who had become FCC license holders through investment fraud schemes, alerting them to the danger of being reloaded by recovery rooms. "Once the project was completed, reports of suspected FCC license scams increased 397%," the report states, illustrating the success of the outreach effort. Ultimately, the FCC suspended acceptance of paging license applications pending efforts to combat such fraud.

"Law enforcement and consumers [can] follow headlines to forecast likely fraudulent investment schemes in 1997. Based on recent news stories, for example, fraud watchers can expect to see 'too good to be true’ pitches regarding Internet business investments and partnerships to build out new 'information superhighway’ communications systems," the report says.

3. Business Opportunity and Job Placement Scams

These scams are often highly sophisticated, in part because of the widespread use of home computers, according to the report. "Fraud promoters who once had to buy machinery and inventory, such as vending machines or pay telephones, now need only software and manuals to promote a new business venture," it states. Coordinated law enforcement actions in July 1995 and November 1996 demonstrate this shift: the July 1995 "Operation Telesweep" campaign targeted primarily vending machine and display rack scams, while the November 1996 "Operation Missed Fortune" campaign captured in its net numerous schemes involving sophisticated medical billing services franchises and Internet pyramid schemes. Job placement schemes continued to target recent college graduates, but they also focused on professionals who had been "downsized" or "restructured" out of jobs with ads that often were indistinguishable from ads for legitimate job search agencies and other employers, the FTC said.

4. Consumer Finance Scams

According to the FTC report, fraud promoters know that consumers who face financial troubles may be willing to pay small amounts of money up front to cure their financial ills. Scams pitching advance-fee loans, credit record repair services, and scholarship search services were among the most popular of these types of schemes in 1996, and the FTC coordinated collaborative law-enforcement "sweeps" and consumer education campaigns in all three areas. Seven companies targeted by the FTC in Project $cholar$cam alone brought in more than $15 million from more than 100,000 consumers over the last five years, the report states, adding that an unprecedented array of consumer education materials on avoiding scholarship search service scams have been distributed to high schools and colleges throughout the country with the help of private sector partners.

In conclusion, the FTC staff report calls for more partnerships of the nature profiled in the report, as well as a national system for polling consumer transactions to obtain figures on the incidence of fraud in the United States. Estimates of losses to fraud range from $3 billion to $40 billion a year and higher, but these figures are problematic because they are extrapolated from complaints reported to a variety of organizations often months after complainants have been victimized.

The Commission vote to release the First Annual Fraud Enforcement Report of the Federal Trade Commission was 5-0.

Copies of the report, all of the FTC’s consumer education materials, and news releases regarding the collaborative campaigns mentioned above are available on the FTC’s web site at http://www.ftc.gov and also 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 Matter No. P974903)