FTC Issues Five-Year Report, "Protecting Consumers Online"

A new report issued by staff of the Federal Trade Commission highlights how the agency has worked to stop online fraud and deception, address the issue of online privacy and tailor its law enforcement to meet the challenges of the globalization of e-commerce. The report, titled "Five Years: Protecting Consumers Online," describes how the agency, since the fall of 1994, has used its resources to develop creative policies for protecting consumers in cyberspace. The Commission's goal from the beginning was to protect consumers in an atmosphere that promotes the growth of e-commerce. According to the report, the agency has used traditional law enforcement under existing statutes and consumer and business education to reach its goal. It has supported self-regulation and developed policy in areas that raise new consumer protection concerns, such as online privacy and global electronic commerce.

"I am particularly proud of the work that the FTC has done to protect consumers in cyberspace," FTC Chairman Robert Pitofsky said in releasing the report. "E-commerce offers great challenges and opportunities. Over the past five years, we have sought to meet these challenges in the most practical and effective way possible. This report reflects those efforts, as it outlines the agency's comprehensive program to extend offline protections to consumers online. As e-commerce continues to grow, so will our work. We look forward to our continuing partnerships with the public and private sectors in our efforts to build consumer confidence in the electronic marketplace."

The report outlines the rapid changes facing the new electronic marketplace. "Today, more than a third of all U.S. households are online, and more than 80 million American consumers - 40 percent of U.S. adults - are accessing the Internet," it states. Advertising also has been affected, the report notes. Online advertising revenues in the United States grew from $300 million in 1996 to almost $2 billion in 1998. And consumer online sales, estimated at over $7 billion for 1998, are projected to reach $12 billion to $18 billion this year.

This expanding marketplace also poses new risks for consumers, the report states. The Internet is cheap and easy to enter. It offers anonymity and is easy to exit, the staff explained.

"The challenge for law enforcement is to identify and stop wrongdoers before they can harm individual consumers and undermine confidence in the marketplace."

STOPPING FRAUD, DECEPTION AND UNFAIR PRACTICES

Technology as a Tool

According to the report, the FTC "pioneered the use of the Internet as a law enforcement tool." For example, it created Consumer Sentinel, now the largest database of consumer fraud complaints in North America. Over 200 law enforcement partners in the United States and Canada have free access to the data through a secure, searchable Web site, enabling more coordinated and comprehensive law enforcement efforts aimed at the most prevalent types of fraud.

Earlier this year, the Commission established an Internet Lab. Equipped with state-of-the-art personal computers, the Lab is a resource for ongoing efforts to educate agency lawyers about the Internet and to search for fraud and deception in a secure environment.

The Commission also created Internet Surf Days to search for specific online scams. The Commission uses surfs to identify problematic sites for possible law enforcement and to educate Web site operators that they may be in violation of the law. Four thousand Web sites with dubious claims have been identified in 18 surfs with over 250 partners around the world.

Traditional Law Enforcement Applied Online

To combat fraud and deception online, the Commission has brought more than 100 Internet-related law enforcement actions against nearly 300 businesses and individuals on behalf of millions of online consumers. Cases have targeted technology-based scams such as modem hijacking, spam, and Web cramming, as well as traditional scams that have moved online, such as pyramid schemes, credit scams and bogus health claims.

"Scams involving hijacking modems and Web sites, which are unique to the Internet, exploit its special features to trick consumers," the report notes. In FTC v. Carlos Pereira, for example, defendants in Portugal and Australia "captured" unauthorized copies of U.S.-based Web sites and produced look-alike versions that were indexed by major search engines. In FTC v. Audiotex Connections and Beylen Telecom, defendants used software on their sites that silently hijacked consumers' modems as they downloaded information from the sites.

Traditional Advertising

The report also outlines the Commission's work on the application of traditional advertising law and its Rules and Guides to online advertising. The agency has brought a number of law enforcement actions and held a public workshop in May 1999 to "clarify the fact that the fundamental principles of consumer protection apply online," the report states.

Consumer and Business Education

According to the report, "[u]se of the Internet to develop and disseminate information about fraud and technology-related matters is integral to the FTC's education, deterrence, and enforcement efforts and has allowed the agency to reach vast numbers of consumers and businesses quickly, simply and at low cost." The Commission has been at the forefront of using the Internet to educate and empower consumers with the use of hyperlinks, "teaser" Web sites and tutorials. Teaser sites are Web sites that mimic scam sites but also alert consumers to the telltale signs of fraud as they browse for products and services online.

The Commission was also one of the founding agencies to establish consumer.gov, an Internet site that provides one-stop access to consumer information from over 60 federal agencies.

Protecting Consumers' Privacy Online

"One of the Commission's major policy initiatives has been to address online privacy - an area of considerable concern to consumers," the report states. The agency has held public forums, conducted a Web survey and made legislative and policy recommendations in an effort to "address consumers' privacy concerns and support the development of e-commerce." It also successfully completed a rulemaking to implement the Children's Online Privacy Protection Act, which requires operators of Web sites directed to children to give parents notice of their information practices and get verifiable consent to collect and use their children's personal information.

Globalization

"Still another major challenge for consumer protection stems from the increasing globalization of the electronic marketplace," the staff report notes. "Globalization offers businesses a bigger market and consumers more choice, but it also presents more risk. Cross- border fraud is harder to discover and stop, redress for consumers is more difficult to achieve, and legitimate companies face uncertainty about the legal standards that apply to global transactions."

Law Enforcement Across Borders

To address concerns about Internet fraud involving operators located across the globe, the Commission has developed new ways to share information and cooperate in law enforcement initiatives including the development of an international Web site, international Surf Days, cross- border case cooperation and international consumer redress.

Developing Policies for E-Commerce

According to the report, "the Commission is active in the public policy debate on the international consumer protection principles that should govern the new global marketplace."

The agency heads the U.S. delegation to the OECD's Consumer Policy Committee, which has developed guidelines for consumer protection in electronic commerce. The FTC also has held an international workshop and has participated in a broad range of international forums to further the dialogue on consumer protection in the global electronic marketplace.

The report concludes by stating that "consumer protection is the cornerstone for consumer confidence in the e-marketplace. Building on its long history of protecting consumers offline and its recent experiences protecting consumers in cyberspace, the Commission looks forward to continuing its efforts with public and private sector partners to meet the challenges of the online marketplace."

The Commission vote to authorize release of the staff report was 4-0, with Commissioner Thomas B. Leary not participating.

Copies of the staff report as well, as all other information relating to the Commission's work on e-commerce, are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD 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.