The Institute of Trading Standards Administration
Good morning, and thank you for inviting me to discuss one U.S. perspective on protecting the consumer in the global marketplace.(1)Just as technological developments have encouraged the globalization of trade, they also have made it possible for dishonest marketers to harm consumers and competition by using the same technologies to deceive consumers in other countries. The Federal Trade Commission has first-hand experience with some of the difficulties and possible approaches to enforcement against fraudulent cross-border marketing and high-technology scams. Our approach of encouraging businesses to self-regulate and to work in partnership with government to educate consumers about how to protect themselves should be considered by those contemplating regulation at the global level.
Because some of you may not have had much contact with the Federal Trade Commission, I thought it might be helpful to outline what the Commission is and how it operates. The Federal Trade Commission is the only U.S. agency at the national level with a broad consumer protection law enforcement mandate. That mandate comes from Section 5 of the Federal Trade Commission Act ("FTC Act"), which makes illegal unfair or deceptive acts or practices in or affecting commerce. The Commission also enforces a variety of other consumer protection statutes, such as the Fair Credit Reporting Act, that prohibit specific trade practices and provide that violations are to be treated as unfair or deceptive acts or practices under the FTC Act.
In addition, the Commission has the power to promulgate and enforce industry-wide Trade Regulation Rules addressing unfair or deceptive practices. The Commission also provides guidance on how to comply with Section 5 through issuance of industry-wide Guides, and both the Commission and its staff may issue advisory opinions responding to particular questions.
Over the past two years, the FTC has hosted several conferences addressing consumer protection issues raised by global marketing. In the spring of 1995, we looked at advertising, marketing, electronic payment systems, consumer privacy issues, and industry self-regulation of online marketing. This meeting was followed in November 1995 by the FTC's hearings on Consumer Protection Policy in the New High-Tech, Global Marketplace, which focused on the rapidly changing technologies of the information society. In June 1996, the Commission heard from many industry representatives about the effect of online transactions on consumer privacy, especially in the context of advertising to children. The Commission also hosted several meetings about consumer identity theft in 1996. And, just two weeks ago, the Commission held four additional days of hearings on Consumer Information Privacy, including the collection and use of information in computerized databases, the use of unsolicited commercial e-mail, and children's privacy online.
The Commission's Global Marketplace hearings in November 1995 looked broadly at how information technologies are evolving, how they are used for marketing, and the implications for consumers. Our staff's report on the hearings provides an in-depth discussion of the issues raised and the testimony presented at the hearings. The Global Marketplace hearings highlighted the positive effect of new technologies on marketing. The hearings also addressed how these new technologies will challenge law enforcers by creating new opportunities to commit fraud. Effective consumer protection will require not only government enforcement against fraud and deception, but also private self-regulatory initiatives and the combined efforts of government, business, and consumer groups to equip consumers with the tools to protect themselves. I will elaborate on these themes today.
Fraudulent Cross-Border Marketing
Advances in communications technologies allow fraudulent marketers to communicate easily with their victims in foreign countries. The transnational nature of a scam may make it very difficult for law enforcers to catch the perpetrators and to compensate the victims. In particular, complicated questions of jurisdiction and choice of law can pose barriers to effective enforcement.
The Commission has been grappling for some time with the problem of fraudulent transfers of assets from United States marketers to foreign countries. In the absence of international agreements that would allow access to information about assets, foreign bank secrecy laws make it very difficult for the Commission to obtain timely information about marketers' assets overseas. When the FTC knows where the assets are and a U.S. court imposes an order freezing them for future consumer redress, further problems can arise with respect to assets located outside the U.S.
For example, in an action against an Internet pyramid scheme operated out of Washington State with victims all over the world, the FTC obtained a temporary order directing the defendants to return to the United States millions of dollars that had been transferred to a bank in Antigua, West Indies.(2) When the defendants -- who had left the country -- persistently failed to comply, the court ordered that they be arrested and jailed until they either complied or proved that they were unable to repatriate any foreign funds. At the FTC's request, the U.S. Department of Justice obtained an order from an Antiguan court freezing the defendants' assets in Antigua. The case recently settled on terms that make available to consumers refunds that could total over $5 million.
Despite the obstacles to cross-border enforcement, cooperation with foreign law enforcement authorities often yields success. One United States defendant in a telemarketing fraud case violated an asset freeze by withdrawing $1.2 million from frozen bank accounts and fleeing overseas.(3) The FTC obtained an order that he show cause why he should not be held in criminal contempt for his actions. When he failed to appear, the court issued an arrest warrant. The defendant ultimately settled in Canada. Canadian customs officials learned of the arrest warrant, which had been entered in law enforcement databases, and then learned that he had lied on his application for entry into Canada. Canada deported him to the United States under circumstances that permitted him to be arrested on arrival. He was then successfully prosecuted and jailed for his contempt of the U.S. court's asset-freeze order.
United States criminal law enforcement agencies also cooperate with foreign authorities. Under existing mutual legal assistance treaties, for instance, if a foreign-based marketer is indicted for wire or mail fraud in the United States, extradition proceedings may be instituted to bring the responsible parties to the United States to face criminal charges. The Commission will continue to encourage the extradition and criminal prosecution of fraudulent foreign marketers by providing all possible assistance to the appropriate criminal agencies.
In 1995, the U.S. and Canada entered into an agreement to coordinate enforcement of their competition and deceptive marketing practices laws. The agreement calls for the FTC and Industry Canada to cooperate in detecting deceptive marketing practices; to inform each other of investigations and proceedings involving cross-border deceptive marketing practices; to share information about and coordinate their enforcement; and to study further measures to enhance the scope and effectiveness of cooperation in this area. Since then, the Commission and Industry Canada have coordinated U.S. and Canadian participation in an effort to identify business opportunity scams on the Internet. As a result of a meeting in April between President Clinton and Canadian Prime Minister Chretien, a bilateral working group on telemarketing fraud was established for the purpose of developing additional forms of cooperation among law enforcement officials in the U.S. and Canada, including information sharing and joint consumer education efforts.
In 1992, I participated in the founding of the International Marketing Supervision Network, an international body of consumer protection law enforcement agencies. One objective of the Network is to find ways to cooperate in tracking consumer problems associated with cross-border transactions. Cooperation is informal, with participants using their best efforts to help each other (subject to national law and practice and the availability of resources).
Given the Network's informal nature, it does not give its participants any rights or impose any obligations on them. It does, however, represent an excellent forum for communication among countries that experience law enforcement difficulties across international lines.
Cooperation with Public and Private Partners
The FTC's experience has demonstrated that joint law enforcement activity benefits considerably from cooperative efforts with non-profit organizations and trade associations. This has worked particularly well in our efforts to combat fraudulent telemarketing. Cross-border telemarketing fraud is an increasing phenomenon. As U.S. enforcement efforts have stepped up, strengthened by tools like our Telemarketing Sales Rule, we have seen many fraudulent telemarketers relocate in other countries to avoid detection and prosecution.
With the national association of the state attorneys general, the FTC in 1987 created a Telemarketing Fraud Database that has since been expanded to include information about fraud on the Internet. This database contains information from tens of thousands of consumer complaints about marketing abuses in the United States and Canada. It also includes information contributed by law enforcement authorities about actions they have taken against suspect telemarketers.
This cooperative law enforcement effort seeks to thwart fraudulent marketers' attempts to hide their tracks: it allows the more than one hundred law enforcement members of the database to identify the largest scams, the names of prospective witnesses, other law enforcement agencies that might have information about a particular scam, and trends in law violations.
In our battle against telemarketing fraud, the Commission has relied on highly-publicized enforcement "sweeps": multiple law enforcement actions focused on particular types of law violations. These sweeps are coordinated with states, other federal agencies, and, in some instances, foreign law enforcement authorities. Project Loan Shark, for example, targeted 45 corporations and individuals that guaranteed to provide or find loans for victims who paid an advance fee. States filed eight cases and the FTC filed five cases alleging Rule violations, thanks to cooperation among the Commission, 15 states, and Canadian law enforcement authorities. The Canadian province of British Columbia simultaneously initiated enforcement proceedings under its laws against the Canadians involved in one of the scams.
The sweeps approach not only makes efficient use of information that is shared among different law enforcement authorities; it also results in greater publicity for law enforcement actions and, we hope, greater consumer awareness of fraud and a greater deterrent effect. Frequently, sweeps include joint consumer education efforts by the Commission and interested industry associations or individual companies. For instance, in coordination with a prize promotion sweep involving the Commission, state governments, and the U.S. Postal Service, a major, legitimate sweepstakes promoter and magazine seller worked with the FTC to develop educational materials that the company then distributed in its prize promotion mailings. Many of these joint consumer education campaigns occur through the Partnership for Consumer Education, a cooperative effort among U.S. government agencies, private industry, and consumer groups.
The development of the Internet and online services is another area where technology is erasing borders between countries. Although the Internet has been compared to the American Wild West of the 1800s -- a place where lawlessness reigned and order was enforced by self-appointed vigilantes -- in fact it is regulated by governments. Many of the laws that apply to commerce in general apply to commerce on the Internet. The Commission already has enforced the FTC Act and other statutes such as the Electronic Fund Transfer Act, in online marketing cases involving pyramid schemes, credit repair scams, unsubstantiated claims about business opportunities, and deceptive billing practices. The Commission plans a continued, vigorous presence to combat fraud and deception online.
The challenge for governments seeking to regulate the Internet is to limit practices that distort and impede informed consumer choice without making the Internet so cumbersome or expensive to use that its commercial benefits are not realized or its ability to serve as a forum for free speech is impaired. Regulation by many different governments could stifle the flow of information to consumers on the Internet. Some countries, for instance, do not permit comparative advertising or advertising to children, both of which are common in the United States. Others do not permit dissemination of certain information or depictions that are permissible under the laws of the countries in which they may originate. As governments begin to regulate the Internet directly or to enforce existing laws against online communications, my concern is that businesses may feel pressure to limit their online content to that which violates no country's laws.
It is technologically possible, for instance, to block access to offending materials from the Internet, at least to the extent that such materials can be identified. Such solutions, however, may block access to other, non-offending materials and can embroil countries in battles over what should and should not appear. Moreover, a technological fix to problems could, in turn, stifle technological development and limit competition in this rapidly evolving area. Regulation can thwart innovation, so we should strongly resist the temptation to overregulate the Internet.
Instead, governments should use the Internet to encourage forms of consumer protection particularly suited to the medium, such as self-policing and the provision of greater information to consumers to help them avoid becoming victims of deception. The ability of the Internet to make vast quantities of information readily available to users suggests it is particularly suited to consumer protection solutions that involve disclosures, self-regulation, and consumer education.
Online technology allows marketers to track a consumer's behavior -- to see what sites the consumer visits and what products the consumer buys. In addition, by the use of surveys -- sometimes in the form of registration screens that visitors must complete to access a site -- the site owner can collect valuable marketing information. All of this information helps marketers identify new consumers at little additional cost, and may allow companies to target consumers very narrowly according to their individual interests.
Some marketers, however, may deceive consumers as to whether and what information is being collected and how it may subsequently be used. One possible way to curb deception of consumers is through disclosures about who is providing or seeking information and how the information will be used. A number of technological solutions were discussed at the Commission's recent privacy hearings that may allow consumers to pre-select their own privacy preferences and, through their Net browsers, limit their access only to those sites that accommodate their individual preferences. The technology also could notify consumers who access a site that does not match their pre-selected preferences so that they could decide whether to continue or terminate use of that site.
Private organizations obviously can play a valuable role here. Several on-line vendors have developed proprietary logos guaranteeing various levels of privacy protections. Companies agree by contract to abide by the applicable privacy rules for the logos they choose to use. Enforcement of this regime would depend primarily on private action against the companies that violate the rules to which they have agreed and against unauthorized users of the proprietary logos. Several trade associations in the United States also have recently issued voluntary online privacy guidelines that may help prevent consumer deception. FTC action against companies that misrepresent their privacy policies is a possibility.
Another private initiative in the United States is the Council of Better Business Bureaus' Online Service Center. Here, consumers can file complaints and obtain information about businesses and charities, current frauds, and voluntary dispute resolution mechanisms. The Council is the umbrella organization for local Better Business Bureaus ("BBBs"). BBBs are business organizations that promote ethical business practices through voluntary self-regulation and consumer and business education. With help from a BBB, consumers often can get money back or achieve other resolutions of their complaints.
The Council of BBBs has just begun an innovative online seal of approval program funded by major corporate sponsors. Companies that agree to abide by BBB truth-in-advertising standards and dispute resolution procedures to protect consumers are authorized to use an encrypted "BBBOnLine" seal in their online advertising. If a consumer, a competitor, or the BBB challenges the truth or accuracy of an online claim, BBBOnLine participants are required to cooperate with a formal advertising review process administered by the BBB's National Advertising Division ("NAD").
The NAD resolves complaints from competitors or consumers arising from allegedly false or misleading claims about products or services. It monitors postings on online services and Internet newsgroups, and already has issued several decisions concerning online advertising. When an advertiser refuses to stop making claims that the NAD finds deceptive or refuses to give NAD information, the NAD refers the case to the Federal Trade Commission. In response to NAD findings, most advertisers agree to modify or delete offending claims.
The efforts of the Children's Advertising Review Unit ("CARU") of the Council of BBBs provide an additional example of self-regulation at work. CARU issues self-regulatory guidelines for children's advertising that cover a host of concerns, including deception of children, taking into account children's limited capacity to evaluate the credibility of information they receive. CARU recently updated its voluntary guidelines to cover marketing to children through interactive electronic media, and is publicizing and promoting compliance with its guidelines. Currently, it is in the process of contacting several advertisers that U.S. consumer groups have identified as using possibly deceptive or unfair practices relating to the collection and use of information from children. According to CARU's testimony at the Commission's recent privacy hearings, the advertisers it has contacted so far uniformly have expressed willingness to change their practices to conform with the guidelines. Failure to comply will result in enforcement through self-regulatory review, publication of decisions, and, if necessary, referral to the Federal Trade Commission.
Voluntary self-regulation by businesses, consumer education, and the use of Internet technology to help consumers protect themselves are promising techniques. The easy and inexpensive accessibility of the Internet lends itself particularly to individuals and small companies that are new to the advertising arena and may be unfamiliar with the general requirements of advertising law. Educating this group about the appropriate rules could go a long way toward stemming deceptive advertising on the Internet.
Global marketing promises to provide many benefits to consumers. As we have seen, however, it also presents some difficult consumer protection issues. Governments must remain open to different ways to address the problems presented both by traditional international marketing and by advertising on the Internet. Efforts such as the International Marketing Supervision Network should continue to be very helpful in combatting some of these problems. As for the Internet, governments may have to acknowledge that self-regulation may be more effective in the first instance than active government control.
In addition, governments should emphasize consumer education. The ease with which governments or consumer protection groups can post educational materials on the Internet, and the ease with which consumers can access those materials, make consumer education on the Internet particularly cost-effective.
The challenge for governments is to find ways to inhibit deceptive and fraudulent marketers from taking advantage of the greater access to consumers provided by the global market and the information society, without hindering or slowing the many benefits to consumers that these developments provide. Consumer education, industry self-regulation, and information-sharing among governments -- backed up by law enforcement action against the most egregious offenders -- should help achieve this goal.
1. The views that I express here today are my own, and do not necessarily reflect those of the Federal Trade Commission or any other Commissioner.
2. FTC v. Fortuna Alliance, Civ. No. C96-799M (W.D. Wash. 1996).
3. FTC v. American Nat'l Cellular, Inc., No. 85-7375 WJR (C.D. Cal. 1985).