WCC Issue by vivi07


									WCC Issue
Telemarketing Fraud

Research Section 1 Huntington Way Fairmont, WV 26554 Ph: 800-251-3221 Fax: 304-363-4312 Web: www.nw3c.org


(Last updated February 2003)

Any plans, programs, mail outs, solicitations, or campaigns to entice the purchase of goods, services, or charitable contributions through false representation; fraudulent schemes in which telemarketing is an integral component of the marketing effort including Internet marketing, offers over the telephone, infomercials, and targeted mailings; and using one or more telephone lines or any other telecom medium for false representation.1

How it Happens
Telemarketing, in and of itself, is not fraudulent. It is the marketing of goods and services. In 2001, the Direct Marketing Association reports that sales revenue from direct and interactive marketing topped $1.86 trillion.2 Although outbound teleservices generate an enormous sum of money in legitimate sales, there is conversely, a large sum of consumer income that is swindled by fraudulent telemarketers. Telemarketing fraud is a crime. It involves victim cooperation through deception. These are frauds about people who are willing to lie, cheat, and steal from individuals who are easily persuaded. The scams of today are largely variations of the scams of yesteryear. Who are the targets? They are our parents and grandparents who were raised to always be polite and to take care of others in need. They are soldiers and their families - especially in times of impending war. They are college and high school students looking for cash opportunities presented by new credit cards. They are the startup entrepreneurs who are trying to enter the market and who want a piece of the wealth. They are the kind souls who are touched by tragedy and who give money to charities in times of sorrow or need. They are the homemakers and stay-at-home parents who would rather work in the home office than get caught in the rat race. They are the unemployed. They are the financially strapped. As can be seen, it’s not just seniors who are typically viewed as lonely and willing to talk with anyone as they sit waiting for that phone to ring. One of the most damaging stereotypes is that the victim, whatever age and whatever socioeconomic status, was greedy and stupid and should have known better. How are they targeted? Telemarketing victims are targeted in a variety of ways including cold calling. This method is not as popular as in the past. Today, it is much easier to target potential hits through the purchase of lead lists/mooch lists from lead brokers, including e-mail addresses. Some leads are generated by combing the obituary pages for senior death notices looking for the “survived by his wife of 60 years” red flag. Additional means of targeting include credit card applications and contest entry forms. And many marketers are entering the television world of infomercials and commercials which reach a very large and varied audience. What is the real cost? The costs of telemarketing fraud to consumers can be huge! It can be the loss of financial security. The loss of a home. The loss of one’s retirement. The loss of a business. The loss of professional and/or personal credibility. And what about the emotional and physical costs? The loss of one’s sense of trust. The loss of one’s health.


Who are the fraudulent telemarketers? It varies. They may be former call takers who want to operate a spin-off business. Many times the perpetrators are former or current drug traffickers who are primarily interested in funding their “business.” Many are drug users who need quick funds to keep their habits going. Consider your basic small time criminals looking to make big money and move up in status. It is widely known that some traditional organized crime groups are engaged in these operations. These scamsters are professionals. They know how to play the game. If today’s pitch fizzles then tomorrow’s will be stronger. Should the fraudulent telemarketer be incarcerated—which occurs very rarely and typically not for long sentences—they can spend their “time” devising new schemes to employ upon release. They are mobile and street savvy. If they think their operation is either compromised or discovered, no problem, they can pack up and move down the street. These scamsters can be very fluid. It’s their job to stay ahead of law enforcement and on the heels of unsuspecting consumers. Telemarketing fraud is big business! Traditionally, fraudulent telemarketers have operated out of boiler rooms. This term originated in the 1920’s and is used to describe the highly charged atmosphere generated by the sales staff. A typical boiler room operation would involve sparsely furnished rented offices filled with banks of telephones. The more complex rooms may even be computer-networked. The salespeople, including fronters [first level callers], closers [sales reps who seal the deal], and verifiers [responsible for confirming the sale] use high-pressure tactics to pitch [the specific solicitation], via a script [the printed document used to sell the promotion], investment offers, charity donations, and low cost long distance telephone plans, just to name a few. The big boiler room operation of yesterday is being replaced by smaller rip and tear operations that can more easily avoid detection. Rip and tear telemarketers utilize various locations that essentially function as mobile offices from which they conduct their activities including hotel rooms. The use of rented mailboxes, disposable cell phones, and prepaid calling cards is also very popular. The object is to collect as much money as possible in a short period of time and then relocate before being identified. Keep it short in duration and simple in design. The schemes and scams are many and varied. They all typically involve elements of high pressure sales tactics. All of these schemes encourage the consumer to act now or risk losing out on the once-ina-lifetime offer! It’s about persuasion. It’s about pressure. It’s not about principles. The lottery scam remains a very popular draw for unsuspecting consumers. Imagine being told that you held the winning ticket for the Canadian lottery! Never mind the fact that most consumers who receive this call can’t remember ever having played the Canadian Lottery. They are told that they are guaranteed to take home the $500,000 winnings! All they need to do in order to receive the winning amount is to pay the taxes on the award. This has been a very popular scam over the last several years. Quite often the origination of these calls has been in Canada. Other national lottery names include the Australian, German, and Austrian, just to name a few. According to PhoneBusters, Canada’s national call center, 3,515 United States consumers reported being victimized in 2002 by a telemarketing prize and lottery occurrence for an average loss of $4,706.36 USD and a total USD loss of $16,542,858.28.3 The magazine sales scheme is another popular marketing ploy. The subscriber is encouraged to agree to a multi-year contract with automatic renewal agreements. The typical offer states “for cents per day” or “just a few dollars per month.” When the subscriber is asked for the credit card number to secure the special deal, they may not be aware of the total cost and/or may not realize that they will be paying hundreds of dollars over several years for magazines that would have been cheaper if they were bought at the news stand. For example, the consumer may be sold a 60 month subscription for only $2.00 per magazine for a 40% savings!! What the consumer may not realize is that 60 months is five years and the $2.00 per magazine is for three magazines totaling $360 due in the first 30 days of the new account: credit card payment only. Most legitimate magazine subscription companies will honor cancellations requested over the phone. Will the fraudulent operation refund the consumers’ money? Probably not!


Telemarketing fraud through charity solicitation can be an especially egregious form of preying upon consumers’ generosity. Recall the large number of charities that evolved as a result of 9/11. Often, names deceptively similar to organizations that are easily identified with legitimate charities are used: Fraternal Order of Police versus the Police Fraternal Order for example. Some fraudulent telemarketers solicit in the name of an actual group without that group’s consent. It may be stated that all money collected will be used to purchase bullet proof vests when in fact only one vest will be purchased and the remaining money will be pocketed by the telemarketing entity. It may be that only 10% of your donation is actually deposited into the charity fund and the remaining 90% is for administrative costs. That’s typically not what the consumers intended to be done with their money. Bad credit? No credit? No problem! Credit repair companies offer to improve or fix credit history for a fee. To the family mired in credit card debt, this can be an extremely attractive opportunity. They will send an application fee to a “company” that will search for a low interest card for which the family can qualify. But as is usually the case, no credit card is ever identified. Secured credit cards require payment of a sizeable fee for a low interest card and it may not be disclosed to the consumer that they must keep an amount of money that may be equal to the credit line in an escrow account. This is not necessarily fraudulent, but the lack of disclosure of the secured nature of the card is the sticking point. In Canada, credit card rooms are using shell companies to cover illegitimate businesses offering low interest Visa or MarsterCard cards. These sophisticated operations use account debiting agencies to obtain the victims’ current card information. The “company” will mail out worthless packages with victims often providing their personal information for lower interest cards. A twist on this scam is the credit card protection scam. This scam is predominantly run by loan telemarketers and other crime groups with many of these rooms located in Toronto and south western Ontario. This type of operation is often connected with other rooms in the United States, Montreal, and Vancouver and often have acquired the services of United States lawyers to facilitate the transactions on the American side. Investment scams are many and varied. Typically investors are promised quick, high value returns on any size investment, whether it be in foreign currencies, gas futures, vintage wine, or gold and rare coins, just to list a few. Even in times of stock market volatility, the con artists’ message to consumers is that there is plenty of money to be made in the market. But the importance is identifying the “safe alternatives” which will yield the highest returns. NASAA (North American Securities Administrators Association) publishes an annual top 10 investment fraud list. They reported that new to the list in 2002 were unscrupulous brokers, conflicts of interest in analyst research, charitable gift annuities, and oil and natural gas scams.4

Cost and Statistics
Consumers do not as readily report fraud victimizations to law enforcement as they do personal or property crime victimizations. The lack of reporting is typically due to a variety of reasons including shame, embarrassment, disbelief, self-doubt, self-blame, or simple unawareness that a crime has been committed. This lack of reporting makes it extremely difficult to measure the scope and impact of telemarketing fraud. However, there are some cost estimations and statistics that can aptly illustrate the problem. Congress estimates that American consumers lose $40 billion to telemarketing fraud each year.5 This is more than $1 million per hour. “The U.S. Department of Justice estimates that one out of six consumers is cheated by telemarketing criminals every year.”6 According to the Consumer Sentinel complaint database7, in 2002 complainants lost more than $343.5 million to fraud with an average loss of $1,987 per complaint. Consumers reported that 77% of the companies initially contacted them by way of phone or Internet sites or emails. Among the top complaint categories, it appears that telemarketing fraud was very likely a component of the fraudulent act. The


categories where this is most likely include identity theft, advance-fee loans and credit protection, shopat-home, foreign-money offers, prizes/sweepstakes, and lotteries complaints.8 According to the National Fraud Information Center, the top telemarketing scams in 2002 included credit card offers, work-at-home situations, prizes/sweepstakes, and advance-fee loan schemes. The average reported dollar loss was $845 and 27% of the complainants were 60 and older. Bank debits are increasingly being utilized for payment by consumers.9 This is of particular concern due to the everincreasing instances of identity theft.

High Profile Examples/Case Studies
Foreign Currency: Victims responded to newspaper advertisements and telephone calls regarding opportunities to invest in foreign currency (FOREX). They were told that with an initial outlay of anywhere from $2,500 to $10,000, an investment in the Japanese Yen would yield guaranteed high returns. FOREX telemarketing operations created an illusion for customers that trades were being executed daily and employed trading schemes to dwindle customer funds. After re-loading victims numerous times with promises of huge gains, FOREX eventually told customers their investment didn't pay off and that all moneys were lost. Investigators identified over $7.7 million that passed through the company’s U.S. bank accounts in one year. Seized records indicate that the company also had bank accounts in Canada and the Bahamas.10 Advance Fee Loan: A Canadian boiler room associated with an advance-fee loan group was shut down. The fraudulent activity allegedly began with advertisements in United States daily newspapers offering low-interest rate loans. Several North American bank names were used in this scam, a growing trend in today’s fraudulent telemarketing circles, adding a higher degree of “authenticity” to these fraudulent offers. Toll-free “800” numbers were included in the ads for potential victims to call. These calls were then transferred to fraudulently obtained cellular phones in Toronto. Victims’ personal information was sent via facsimile, a process also involving the use of cellular phones and portable computers. Some of the apparently approved loans were valued in the tens of thousand of dollars. In each case, the victims paid the first and last month’s payment fee to the suspects, usually an amount equaling 10% or more of the total loan offered. The actual money transactions were conducted by electronic money transfer agencies throughout the greater Toronto area.11 Promissory Note: Con artists are looking to nontraditional investment schemes to attract investors continually disappointed with the returns they have made in the stock market over the last few years. Four such scam artists were each sentenced to 17½ years in prison for recruiting independent insurance agents to sell millions of dollars worth of bogus promissory notes to their clients, many of whom made sales over the telephone. While investors were promised nine-month returns as high as 21%, half of each investment went straight to commissions that were divided among company principals and sales agents. Acting on a tip, securities regulators seized nearly $5 million of the $8 million stolen from local investors. In the end, it was found that the ringleader had scammed over $150 million from investors nationwide. Of the $150 million, nearly $90 million was seized and returned to investors. The average age of the victims was 68. In another instance, over 100 elderly persons fell victim to a promissory note scam involving losses nationwide of more than $52 million. Investors were told that the money would finance high-interest car loans that would provide a 9% return in nine months. Investors stopped receiving their dividend checks within months of making their investment and the company owner was nowhere to be found.12

Response and Current Efforts
In response to the growing problem of telemarketing fraud and in an effort to protect consumers, many states are enacting “no call” laws and registries. These laws are quickly becoming more common as many


states are considering how best to protect their citizens from fraudulent activities conducted over the phone and the Internet. Presently 33 states have do-not-call laws in place, 28 have state consumer lists required by law, and 5 enforce the Telephone Consumer Protection Act. At present, 19.5 million consumers are registered on state do-not-call lists and on the Direct Marketing Association Telephone Preference Service list.13 These actions are in response to consumers demanding better control over how and with whom they do business. In another effort to combat telemarketing fraud, the FTC has developed an initiative to provide a national no call registry. Recently, the Attorneys General in 49 states, the District of Columbia Corporation Counsel, the Northern Mariana Islands, Puerto Rico, the Virgin Islands, and the Hawaii Office of Consumer Protection submitted Comments to the Federal Trade Commission to urge them to amend the Telemarketing Sales Rule to make it a more valuable law enforcement tool by not preempting existing state laws or registries.14 Many Attorney General praised the FTC for suggested changes that would prohibit telemarketers from obtaining consumers’ billing information from third parties rather than from the consumers themselves. Essentially this suggestion would end the transfer and use of consumer billing by multiple vendors, particularly those using “trial offers” that require the consumer to affirmatively cancel an offer to stop charges. The FTC was also commended for proposing to limit the methods by which telemarketers can acquire “express verifiable authorization” to make electronic debit withdrawals from consumers’ bank accounts. The proposal also expands the scope of when a telemarketer must obtain such authorization.15 Law enforcement agencies, securities regulators, private partners, and advocacy and senior groups have also joined together to create task forces to combat telemarketing crime. Through use of reverse boiler rooms,16 agencies are arming targeted consumers with information, education, and strategies to help them resist high-pressure sales tactics.17

Education is one of the keys to preventing telemarketing fraud. Law enforcement, victim service providers, prevention specialists, judges, the media, and, most importantly, consumers will benefit from a concerted educational campaign. How well the issue of telemarketing and/or telemarketing fraud is dealt with on a national level will largely be determined by politicians and telemarketing lobbyists as well as consumer protection advocates. There are those who argue that the consumer must be protected from fraudulent calls, but at what price? For now many states have developed their own laws to restrict telemarketing within their jurisdictions. As with most types of fraud, it is through educational programs and community awareness programs that people can become aware of how these scams operate and attempt to avoid them. Telemarketing fraud will continue to exist and will most likely continue to target those most easily persuaded, but through the response efforts of many states and the passage of new legislation it may be curtailed.

Additional Resources
AARP (previously know as the American Association of Retired Persons) http://www.aarp.org/fraud/home.htm American Prosecutors Research Institute (APRI) Telemarketing Program - http://www.ndaaapri.org/apri/programs/senior_fraud/wcc_home.html Better Business Bureau - http://www.bbb.org Consumer Sentinel - http://www.consumer.gov/sentinel Department of Justice - http://www.usdoj.gov/criminal/fraud/telemarketing/


FBI-Economic Crimes Unit: About Telemarketing Fraud http://www.fbi.gov/hq/cid/fc/ec/about/about_tm.htm Federal Trade Commission (FTC) - http://www.ftc.gov/bcp/menu-tmark.htm FirstGov for Consumers - http://www.consumer.gov/index.htm Internet Fraud Complaint Center - http://www.ifccfbi.gov National Association of Attorneys General - http://www.naag.org/ National Association of Triads, Inc. - http://www.sheriffs.org/Triad/ National Consumer Law Center-What To Do If You Become A Victim Of Telemarketing Fraud http://www.consumerlaw.org/initiatives/seniors_initiative/telemarketing_fraud.shtml National Crime Prevention Council http://www.ncpc.org/ncpc/ncpc/?pa=resCenter&sa=searchResults&topicId=5 National Fraud Information Center - http://www.fraud.org/telemarketing/teleset.htm National Hispanic Council on Aging - Telemarketing Fraud http://www.nhcoa.org/telemarketing_fraud.htm North American Securities Administrators Association (NASAA) - http://www.nasaa.org/ Office for Victims of Crime (OVC) http://www.ojp.usdoj.gov/ovc/publications/infores/fraud/welcome.html PhoneBusters - http://www.phonebusters.com Privacy Rights Clearinghouse: Fact Sheet on Telemarketing - http://www.privacyrights.org/fs/fs5tmkt.htm Telemarketing and Consumer Fraud & Abuse Prevention Act - http://www.lectlaw.com/files/stf02.htm U.S. Postal Inspection Service - Characteristics of Telemarketing Fraud http://www.usps.com/websites/depart/inspect/fonetact.htm

Author: Kathryn Malbon, NW3C Special Assistant to the Deputy Director


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NW3C. (2002). Telemarketing Fraud Advanced Skills Team Training Manual. Direct Marketing Association. (2002). Findings and analysis from the DMA 2001-2002 Economic Impact Report. Retrieved February 25, 2003, from http://www.the-dma.org/cgi/disppressrelease?article=339 PhoneBusters. (2003). United States telemarketing prize & lottery occurrences. Retrieved March 3, 2003, from http://www.phonebusters.com/Eng/Statistics/us_stats1_2002.html



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securities regulators. Retrieved February 26, 2003, from

North American Securities Administrators Association. (2002). "Top 10" investment scams listed by state

AARP. (2002). Telemarketing fraud. Retrieved September 5, 2002, from http://www.aarp.org/fraud/home.htm AARP. (2002). Telemarketing fraud. Retrieved September 5, 2002, from http://www.aarp.org/fraud/home.htm Consumer Sentinel is a complaint database that catalogs fraud and identity theft complaints. Leading partners and data contributors include the Federal Trade Commission, National Association of Attorneys General, PhoneBusters, National Consumers League, Internet Fraud Complaint Center, Better Business Bureau, and others. For additional information on Consumer Sentinel go to http://www.consumer.gov/sentinel. Federal Trade Commission. (2003). National and state trends in fraud and identity theft: January – December 2002. Retrieved March 4, 2003, from http://www.consumer.gov/sentinel/pubs/Top10Fraud_2002.pdf National Fraud Information Center. (2003). Telephone interview with Susan Grant, NFIC Director. February 26, 2003. Georgia Governor’s Office of Consumer Affairs. (2003). Toronto Strategic Partnership. (2002, August 21). Wireless boiler room raided: North American bank names used by fraudulent telemarketers. Georgia Secretary of State’s Office. (2003). Gryphon Networks. (2003). The Gryphon Advisory. Retrieved February 13, 2003, from http://www.gryphonnetworks.com/press/newsletters/2003_02.html National Association of Attorneys General. (2002). Multistate actions. Retrieved September 5, 2002, from http://www.naag.org/issues/20020412-multi-no_call.cfm Office of the Missouri Attorney General. (2002). AGs to FTC: Don’t preempt No Call lists; Missouri Attorney General leads group comments. Retrieved September 5, 2002, from http://www.ago.state.mo.us/041202.htm An effective prevention technique whereby the tactics employed by callers in fraudulent boiler room operations are utilized by volunteers, generally seniors, who call potential victims and provide prevention tips. O’Riordan, A. (2000). Telemarketing fraud. Retrieved September 5, 2002, from http://www.nw3c.org/telemarketing.htm



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