[Senate Hearing 105-646]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 105-646

 
           ``CRAMMING'': AN EMERGING TELEPHONE BILLING FRAUD

=======================================================================

                                HEARING

                               before the

                               PERMANENT
                     SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 23, 1998

                               __________

      Printed for the use of the Committee on Governmental Affairs

                               ----------

                     U.S. GOVERNMENT PRINTING OFFICE
50-355 CC                    WASHINGTON : 1998



                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOHN GLENN, Ohio
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              JOSEPH I. LIEBERMAN, Connecticut
SAM BROWNBACK, Kansas                DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi            ROBERT G. TORRICELLI,
DON NICKLES, Oklahoma                  New Jersey
ARLEN SPECTER, Pennsylvania          MAX CLELAND, Georgia
             Hannah S. Sistare, Staff Director and Counsel
                 Leonard Weiss, Minority Staff Director
                       Lynn L. Baker, Chief Clerk

                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                   SUSAN M. COLLINS, Maine, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOHN GLENN, Ohio
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SAM BROWNBACK, Kansas                JOSEPH I. LIEBERMAN, Connecticut
PETE V. DOMENICI, New Mexico         DANIEL K. AKAKA, Hawaii
THAD COCHRAN, Mississippi            RICHARD J. DURBIN, Illinois
DON NICKLES, Oklahoma                ROBERT G. TORRICELLI, New Jersey
ARLEN SPECTER, Pennsylvania          MAX CLELAND, Georgia
           Timothy J. Shea, Chief Counsel and Staff Director
                 David McKean, Minority Staff Director
                 Pamela Marple, Minority Chief Counsel
                     Mary D. Robertson, Chief Clerk




                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Collins..............................................     1
    Senator Glenn................................................
    Senator Levin................................................     5
    Senator Brownback............................................     6
    Senator Durbin...............................................     7
    Senator Cochran..............................................    18

                               WITNESSES
                        Thursday, July 23, 1998

Susan Grant, Vice President, Public Policy, National Consumers 
  League.........................................................     8
Lawrence E. Strickling, Deputy Chief of the Common Carrier 
  Bureau, Federal Communications Commission......................    20
Eileen Harrington, Associate Director for Marketing Practices, 
  Bureau of Consumer Protection, Federal Trade Commission........    22
Roy M. Neel, President and Chief Executive Officer, U.S. 
  Telephone Association..........................................    26

                     Alphabetical List of Witnesses

Grant, Susan:
    Testimony....................................................     8
    Prepared Statement...........................................    47
Harrington, Eileen:
    Testimony....................................................    22
    Prepared Statement...........................................    72
Neel, Roy M.:
    Testimony....................................................    26
    Prepared Statement...........................................   100
Strickling, Lawrence E.:
    Testimony....................................................    20
    Prepared Statement...........................................    55

                                APPENDIX

                 Exhibit List for July 23, 1998 Hearing

 1. GCharts prepared by the National Fraud Information Center:
   a. GNational Consumers League/National Fraud Information 
  Center top Ten Telemarketing Frauds, 1997, January-June 1998...   109
   b. GNational Fraud Information Center Reports of Cramming: 
  January-June 1998..............................................   110
 2. a-g: GExamples of consumer cramming complaints provided by 
  the National Consumers League..................................   111
 3. GStatement of Senator Thad Cochran, with attachments (copies 
  of telephone bills showing examples of ``cramming'')...........   119
 4. G``Anti-Cramming Best Practices Guidelines,'' dated July 22, 
  1998...........................................................   124
 5. GMemoranda prepared by John Neumann and Linda L. Algar, 
  Investigators, Permanent Subcommittee on Investigations, dated 
  July 21, 1998, to Permanent Subcommittee on Investigations' 
  Membership Liaisons, regarding `` `Cramming': An Emerging 
  Telephone Billing Fraud''......................................   140
 6. GSupplemental Questions and Answers for the Record, Susan 
  Grant, Vice President, Public Policy, National Consumers League   150
 7. GSupplemental Questions and Answers for the Record, Roy M. 
  Neel, President and CEO, U.S. Telephone Association............   152
 8. GSupplemental Questions and Answers for the Record, Eileen 
  Harrington, Associate Director, Federal Trade Commission.......   159
 9. GSupplemental Questions and Answers for the Record, Lawrence 
  E. Strickling, Deputy Chief of the Common Carrier Bureau, 
  Federal Communications Commission..............................   161


           ``CRAMMING'': AN EMERGING TELEPHONE BILLING FRAUD

                              ----------                              


                        THURSDAY, JULY 23, 1998

                                     U.S. Senate,  
              Permanent Subcommittee on Investigations,    
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:03 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Subcommittee, presiding.
    Present: Senators Collins, Brownback, Cochran, Glenn, 
Levin, and Durbin.
    Staff Present: Timothy J. Shea, Chief Counsel/Staff 
Director; Mary D. Robertson, Chief Clerk; Kirk E. Walder, 
Investigator; Linda Algar, Investigator (Cong. Fellow); John 
Neumann, Investigator (Detailee, GAO); Lindsey E. Ledwin, Staff 
Assistant; Pamela Marple, Minority Chief Counsel; Beth Stein, 
Counsel to the Minority; Michael Rubin (Senator Brownback); 
Michael Loesch (Senator Cochran); Felicia Knight (Senator 
Collins); Jodi Johnson (Senator Nickles); Jeff Gabriel (Senator 
Specter); Harold Waltzman (Senator Brownback); Marianne Upton 
(Senator Durbin); Doug O'Malley, (Senator Lieberman); Melissa 
Mertz (Senator Durbin); Darla Silva (Senator Durbin); Jane 
Terry (Senator Cleland); and Myla Edwards (Senator Levin).

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. The Subcommittee will please come to 
order.
    Today, the Permanent Subcommittee on Investigations will 
examine the emerging problem of telephone cramming. For those 
of you unfamiliar with the term, the Federal Trade Commission 
defines cramming as unexplained charges on a consumer's 
telephone bill for services that were never ordered, 
authorized, received, or used. This hearing will highlight the 
scope and nature of cramming, educate consumer about this 
practice, and determine what can and should be done to control 
this deceptive practice.
    Like telephone slamming--the unauthorized switching of a 
consumer's long distance provider--cramming is theft by 
deception. Consumers are ripped off by fraudulent companies who 
are increasingly billing consumers through their local 
telephone bills for various charges, many of which may have 
nothing to do with telephone service. These charges are often 
vaguely described to avoid detection by the consumer. Indeed, 
unless a consumer reads his or her telephone bill very 
carefully, unauthorized charges may be paid routinely for 
months. The charges are often for very small amounts, so they 
are easily overlooked. But the point is that the consumer does 
not owe the money for these charges, and they add up over time.
    Our inquiry into the cramming problem is part of the 
Subcommittee's ongoing investigation into telephone billing 
fraud. Last December, the Subcommittee initiated an 
investigation into the practice of slamming. These hearings 
resulted in a report and tough new anti-slamming legislation 
introduced by Senator Richard Durbin and myself. Our anti-
slamming bill was incorporated into legislation that the Senate 
unanimously passed in May.
    At the Subcommittee's April 23 slamming hearing, the 
Chairman of the Federal Communications Commission warned 
``cramming is the next major consumer protection issue that we 
have got to deal with.'' The rapidly growing number of cramming 
complaints shows that concerns about this deceptive practice 
are warranted. The two Federal agencies responsible for 
enforcement in this area--the Federal Trade Commission and the 
Federal Communications Commission--have reported a surge in 
cramming complaints. The FTC has reported that cramming now 
ranks fifth among the complaints it receives, with 6,000 
complaints since October of 1997. While the FCC has only begun 
receiving cramming complaints since late 1997, it has already 
received more than 15,000 complaints from consumers. In 
addition, the National Consumers League reported that in the 
first 6 months of this year, the number of cramming complaints 
it received surpassed the number of slamming complaints for the 
first time. In fact, cramming ranks first in the consumer 
complaints received by the League.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1a. which appears in the Appendix on page 109.
---------------------------------------------------------------------------
    My office has received a number of complaints from Maine 
consumers about unexplained charges mysteriously appearing on 
their telephone bills. For example, one woman from Limington, 
Maine, wrote to complain that she was billed $45 on her local 
telephone bill for a 2-minute 800-number call that she never 
made. A resident of Bucksport, Maine, called my office to 
complain that he was charged $10.25 on his local telephone bill 
for a credit card that he does not possess. In addition, his 
mother was crammed with a $25.75 charge for a personal 800 
number which she had not ordered. This family has had 
particularly bad luck with cramming.
    Cramming is simply wrong. We should have zero tolerance for 
this kind of fraud, which uses a vital utility like telephone 
service to deceive and rip off American families.
    Now, many of my constituents have asked: How does cramming 
happen? The Subcommittee's investigation has found that some of 
the same deceptive marketing techniques that were used by 
companies to slam consumers are now being used to cram them. 
Some unethical companies are using negative option notices, 
contests, and sweepstakes entry boxes to trick consumers into 
giving so-called authorization for a calling card or paging 
services. Other particularly unscrupulous companies are simply 
submitting charges to telephone numbers obtained from 
directories or other lists without any contact with the 
consumer at all.
    Prior to deregulation of the telecommunications industry, 
the only charges that appeared on a consumer's telephone bill 
were for telephone services. Now, telephone bills are 
increasingly being used as an alternative to a charge card, to 
bill consumers for anything from telephone-related services, to 
club fees, to consumer goods. However, unlike credit card 
charges, there are no safeguards in place to protect consumers 
from fraudulent charges to their telephone bills.
    Under the current system, any business can enter into a 
contract with a local telephone or billing company to charge 
consumers using their local telephone bills. Neither the local 
telephone company nor the billing company requires a business 
to provide any kind of proof of a consumer's authorization 
before billing consumers for miscellaneous charges. They simply 
trust that the business actually received a request from 
consumers for these charges and for these services.
    However, when a consumer calls to complain to the local 
telephone company about an unauthorized charge, they are often 
not afforded that same trust. They usually are told to call the 
billing company that handled the charge or to call yet another 
company that originated the charge in order to get the 
fraudulent charge removed from their bill.
    While local telephone companies trust the fraudulent 
companies by automatically billing for them, they have not 
extended that same kind of trust to consumers by issuing an 
automatic credit when the consumer advises them that the charge 
was not authorized. That is very unlike what happens if you 
have a fraudulent charge to your credit card.
    I am very pleased to see that Bell Atlantic has now adopted 
a policy of automatically issuing a credit to consumers who 
call to complain that they have been crammed, and I hope that 
other telephone companies will also adopt this policy.
    To be fair, there are many legitimate businesses billing 
consumers through local telephone bills for services that the 
consumer knowingly authorized and indeed wants. In this 
electronic age, it is not at all uncommon for a consumer to 
have local telephone service, long distance telephone service, 
paging, cellular service, voice mail, and Internet services--
each being provided by a different company. Many consumers 
enjoy the convenience of having all of their telecommunications 
charges consolidated on one bill. We need, therefore, to make 
sure that legitimate companies are still able to provide 
consumers with the convenience of one bill as we crack down on 
cramming.
    Telephone deregulation has brought consumers many benefits, 
including greater convenience, more choices, and in some cases, 
lower rates. But the deregulated market has also opened the 
door to unscrupulous individuals who will take advantage of 
unsuspecting consumers in order to make a quick buck.
    To assist us in resolving this problem, we will hear this 
morning from two panels of witnesses. Our first witness is 
Susan Grant, the vice president of public policy for the 
National Consumers League. She will testify about the 
prevalence of cramming, provide some examples of consumers who 
have been crammed, and suggest some ways to control this 
problem.
    Our second panel of witnesses consists of those who can 
help us solve this problem. It includes Larry Strickling from 
the Common Carrier Bureau of the FCC, Eileen Harrington from 
the Bureau of Consumer Protection at the FTC, and Roy Neel, 
representing the U.S. Telephone Association. Mr. Strickling and 
Ms. Harrington will discuss what the Federal Government is 
doing to control cramming, as well as examine what additional 
regulatory or legislative changes need to be implemented. Mr. 
Neel will discuss what the telephone industry is doing to 
prevent cramming from happening in the first place, including 
the industry's recently developed anti-cramming guidelines. We 
look forward to hearing the testimony of all of our witnesses.
    Before turning to our first witness this morning, I would 
like to first recognize Senator Glenn, the Ranking Minority 
Member of the Committee and of the Subcommittee, the Senator 
from Ohio.

               OPENING STATEMENT OF SENATOR GLENN

    Senator Glenn. Thank you, Madam Chairman, very much, and I 
want to congratulate you for holding this hearing, because I 
have become interested in these consumer fraud issues, 
including misuse of billings that hit every home in this 
country. I want to commend you for having the hearing this 
morning, and thank the witnesses also for being here.
    Cramming, which we are going to be looking into today, is 
on the top of the list of complaints that consumers make about 
their telephone service. That is true in Ohio; I think it is 
true all over the country. And more and more consumers are 
complaining about these mysterious charges on their phone bills 
and about charges that are just clearly fraudulent if they take 
time to look at them. We are all busy. Sometimes you get the 
phone bill, it must be right, so you write the check and pay 
it--too often that is what we do.
    Telephone consumers today--and that is most of us--all of 
us, in fact--we derive so many benefits from recent 
deregulation of the phone industry so we don't want to turn 
back the clock. Some of us didn't think that this opening up of 
the telephone industry that Judge Greene did back years ago 
maybe was the way to go because we have the best, the finest 
communication system in the world. But it has resulted in lower 
charges. Along with that, however, have come some problems 
also. Deregulation often results in at least some unscrupulous 
individuals finding loopholes in the system to make a profit at 
the expense of the American consumer.
    We saw that happen with telephone slamming, a problem this 
Committee explored in April. We heard then about consumers who 
found that their long distance company had been changed without 
their permission, they didn't even know it. Sometimes they even 
signed up unknowingly with a different company than they 
thought they were getting service from.
    I know we are working to remedy that problem. The problem 
we are looking at today is similar in that unscrupulous 
individuals have managed somehow to make fraudulent charges 
appear on our local telephone bills. In fact, I understand that 
after we put the heat on the slamming practice, some of the 
individuals who were engaged in slamming have now just 
redirected their profit-making schemes to the practice of 
cramming, which shows we have a very flexible crook force out 
there. I don't know how we address that. Maybe we need a 
hearing on flexibility in crime or something.
    I am not making light of it. It is a very serious issue. We 
all want to pay our phone bills, and we want to understand what 
we are paying for when we write our checks. And I know phone 
bills can be confusing. I look at the one at home that my wife 
goes over every month, and I am not quite sure how I read the 
thing sometimes. So the bills themselves are not exactly as 
clear as I think they should be, and maybe that is another area 
some of the companies could work on in helping make sure that 
you can recognize something when it is illegal on your phone 
bill.
    I don't know quite how you do that, but the bills often are 
confusing, particularly with charges such as monthly fees and 
various taxes and charges for an increasing number of services 
and flex services. And if you use so much time it is a 
different rate and so much more based on the distances. I am 
not trying to turn back the progress that has been made, but it 
is confusing when people are trying to analyze their own phone 
bills. We have got to stop those individuals who would use our 
telephones to charge us for services we have never ordered.
    So, Madam Chairman, I commend you for your efforts in 
putting this practice to a halt. Unfortunately, I have some 
other conflicts, as too many of us do around here. We have too 
many Committee assignments and too little time to meet them 
all. So I will be here for a little while, but I am sorry I 
will have to leave shortly.
    Thank you.
    Senator Collins. Thank you, Senator.
    Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Madam Chairman, thank you, and thank you for 
holding these hearings, again, focusing on consumer complaints 
about fraudulent and deceptive telephone billing practices.
    Cramming and deceptive billing in general on telephone 
bills is the number one complaint now that the Michigan Public 
Service Commission receives. They get 10 complaints a day, on 
the average, about improper billing, and the majority of those 
complaints now involve cramming.
    It starts with a deceptive practice when somebody signs up 
for something thinking they are trying to sign up for this, 
but, in fact, unwittingly you are signing up for some telephone 
service, pager service, or what have you. So it starts with the 
deception of a consumer. And then that deception is implemented 
by a vague listing, usually on a telephone bill, a nondescript 
listing such as ``enhanced services'' that appears on a 
telephone bill. Frequently, a consumer being confronted with a 
telephone bill with pages of items on it doesn't catch it. 
Typically, this can cost a consumer from $5 to $40 a month.
    I have a constituent, for instance, by the name of Eric 
Anderson who attended what he thought was a fun fair and was 
approached to enter a sweepstakes. He signed up for that 
sweepstakes thinking he was being given a chance to get an 
automobile for nothing. But then later on, an item appeared on 
his telephone bill from something called Hold Billing Service, 
and his mother started to make inquiry: What was that item? He 
called up this so-called company, Hold Billing Service. They 
refused to cancel the item, were indeed very curt, hung up on 
him, and the customer here, the person who was paying the bill, 
then was confronted with a situation that was really totally 
intolerable.
    The Federal Trade Commission has recently taken action 
against the Hold Billing Service for inducing customers to 
enter purported sweepstakes without disclosing that they were 
treating those sweepstakes applications as authorizations to 
bill packages of services to the telephone number that was 
filled in on the sweepstakes application form.
    Now, the FTC is involved. The FCC is involved. Madam 
Chairman, under your leadership, I hope that we will look at 
legislation to strengthen our laws against these deceptive 
practices and to make certain that customers and consumers are 
not fleeced by these companies that would engage in those kind 
of practices. Again, we commend you for your leadership in this 
area.
    Senator Collins. Thank you, Senator Levin.
    Senator Brownback.

             OPENING STATEMENT OF SENATOR BROWNBACK

    Senator Brownback. Thank you, Madam Chairman. I appreciate 
very much you holding this hearing and your leadership earlier 
on slamming and now on cramming. These are important consumer 
fraud issues.
    I just want to briefly state that I am pleased to see that 
the industry and the FCC, perhaps because of this hearing, were 
able to reach an agreement working together that I think will 
help address some of this issue. I am delighted to see some 
panel members here to talk about it. I am happy to see that 
progress taking place. I think these hearings are an important 
step to try to move this issue on forward with. And so with 
that, I just want to add my congratulations to you and thanks 
for maturing the issue on forward and getting some things to 
start happening on an important consumer fraud issue.
    [The prepared statement of Senator Brownback follows:]

                PREPARED STATEMENT OF SENATOR BROWNBACK
    Madame Chairwoman, thank you for holding this hearing today. I 
suppose that it is no mere coincidence that the FCC and the industry 
agreed on a voluntary set of guidelines to combat cramming within 24 
hours before this hearing.
    Cramming, as well as the slamming issue this Subcommittee has also 
addressed, are true consumer fraud problems. I am pleased that the 
industry and the FCC were able to reach an agreement, and that this 
issue will be resolved through voluntary, industry-created solutions 
rather than through the rulemaking process.
    I certainly hope that these voluntary guidelines will weed out the 
bad actors. Advance screening, greater telephone company scrutiny of 
service providers, greater verification of end user approval of new 
services are all excellent ways of drastically reducing the number of 
customer complaints related to cramming.
    I do have several questions, but I first want to thank the industry 
and the FCC for working together to find a non-governmental solution to 
this problem. I am a strong believer in the notion that allowing 
industries to police themselves often is more effective than imposing 
rules upon them.

    Senator Collins. Thank you very much, Senator.
    Senator Durbin has been a real leader in the fight against 
slamming, and he was the one who first brought cramming to my 
attention. So I am pleased to recognize him this morning.

              OPENING STATEMENT OF SENATOR DURBIN

    Senator Durbin. Thank you very much, Madam Chairman. I 
appreciate the initiative in calling this hearing.
    The term cramming was coined by a Chicago reporter. He was 
doing a story on slamming and read his own telephone bill and 
realized, no, he hadn't been a victim of slamming, that is, 
unauthorized change in long distance service, but there were 
charges on his bill that he just couldn't explain. As he took a 
closer look, it turned out they were charges that he had never 
authorized.
    He wasn't the only victim. In fact, there have been lots of 
them, and I am sure we will hear about that today.
    In Orland Park, Illinois, Mildred Brudd found a $35 charge 
on her telephone bill that she couldn't explain, so she started 
making phone calls, and one of the companies told her she had 
ordered the services as part of a contest to win a Jeep 
Cherokee. It turned out Mrs. Brudd never liked Jeep Cherokees 
and couldn't believe she ever could have entered such a 
contest. It took her 4 months and 50 phone calls to get the $35 
charge off her bill.
    She wasn't the only one. In North Syracuse, New York--this 
is one that takes the cake--Martin Gaines finally saw a piece 
of junk mail on his desk and decided to open it. He noticed a 
line in the junk mail that said he would be charged $4.95 a 
month for a phone card unless he responded. In other words, if 
you failed to respond, that meant you were signing up. That is 
an example of what is going on out there.
    Today's phone bills have often become swamps of fraud where 
some scammers dump charges they hope will sink straight to the 
bottom and evade discovery. It is time to drain this consumer 
quagmire. People shouldn't need a microscope or a bloodhound to 
check their telephone bills. I am glad we are having this 
hearing.
    Senator Collins. Thank you, Senator.
    Our first witness this morning is Susan Grant, the director 
of the National Consumers League's National Fraud Information 
Center. I would like to welcome Ms. Grant for once again coming 
before the Subcommittee. She and the League have been extremely 
helpful to us as we have explored a number of consumer fraud 
areas involving telephone fraud. The National Consumers League 
was founded in 1899, and it is a nonprofit membership 
organization representing consumers across the country.
    Pursuant to Rule VI, and I know Ms. Grant understands, all 
witnesses who testify before the Subcommittee are required to 
be sworn, so at this time I would ask that you stand and raise 
your right hand.
    Do you swear that the testimony you are about to give will 
be the truth, the whole truth, and nothing but the truth, so 
help you, God?
    Ms. Grant. I do.
    Senator Collins. Thank you. You may proceed.

  TESTIMONY OF SUSAN GRANT,\1\ VICE PRESIDENT, PUBLIC POLICY, 
                   NATIONAL CONSUMERS LEAGUE

    Ms. Grant. Good morning. My name is Susan Grant, and I am 
vice president for public policy at the National Consumers 
League and director of the League's National Fraud Information 
Center. As the oldest nonprofit consumer organization in the 
United States, the League is alarmed by this newest and most 
outrageous abuse of the telephone billing system--cramming. In 
less than 1 year, unauthorized miscellaneous charges on 
consumers' phone bills have become the top telemarketing scam 
reported to our National Fraud Information Center.\2\
---------------------------------------------------------------------------
    \1\The prepared statement of Ms. Grant appears in the Appendix on 
page 47.
    \2\ See Exhibit No. 1a. which appears in the Appendix on page 109.
---------------------------------------------------------------------------
    We call it the case of the phantom phone charges because 
anyone who has a telephone can be victimized without even ever 
having any contact with the crammer. Actually, cramming is not 
new. We began to receive reports about mysterious charges such 
as voice mail and personal 800 numbers on consumers' phone 
bills a few years ago in connection with calls to 900-number 
pay-per-call services.
    At our National Fraud Information Center, a toll-free 
hotline for consumers to call for advice about telemarketing 
and to report telemarketing fraud, we recorded these complaints 
under the category of pay-per-call services. However, by late 
October of last year, it became obvious to us that there were 
many different ways that these charges were appearing on 
consumers bills and that we needed to have a separate category 
for them.
    In the last 2 months of 1997, we received about 200 
cramming complaints, or about an average of 100 a month. But in 
the first 6 months of 1998, we have received 2,071 cramming 
complaints, an average of about 350 a month.
    As the map shows,\3\ we hear from consumers in nearly every 
State about crammers located in nearly every State. In fact, we 
are now receiving twice as many cramming complaints as 
slamming, or unauthorized carrier switching, which currently 
ranks No. 3. We know that this is just the tip of the iceberg, 
however. Not all consumers who have been crammed complain to 
us, nor could our small hotline staff handle it if they did. 
Also, the numbers do not reflect the consumers who call our 
hotline for general advice and not to make a specific fraud 
report or those who don't even realize that they have been 
crammed.
---------------------------------------------------------------------------
    \3\ See Exhibit No. 1b. which appears in the Appendix on page 110.
---------------------------------------------------------------------------
    Between cramming, slamming, and other telephone bill 
abuses, such as deceptive 900-number charges, we see a trend 
towards the telephone bill becoming the con artist's preferred 
method of bilking consumers. By the end of June, 47 percent of 
all payments that consumers reported making to us in fraudulent 
telemarketing transactions were made through their phone bills. 
Unfortunately for consumers, however, they don't have the same 
dispute rights in these instances as they would if the charges 
were made on their credit card accounts.
    Cramming charges are relatively small, in the range of $5 
to $40. But since most of them are recurring monthly charges, 
and in light of the fact that consumers often don't notice them 
right away, they can add up to significant amounts. We have 
received cramming complaints from consumers about totals in 
dispute of more than $2,000. In the first 6 months of this 
year, the average amount of disputed cramming charges reported 
to us has been $42 per consumer.
    We believe that cramming has become more prevalent than 
slamming because it is easier to do. In slamming, the con 
artist makes money by charging for the calls that consumers 
make, usually long distance calls, and in order to do so, the 
con artist has to actually provide the telephone service. Even 
if it is a reseller, it has to purchase the phone service from 
another telephone carrier.
    But cramming is phantom billing because the con artist 
makes money from fees for miscellaneous services that may never 
have been provided. In fact, it isn't really necessary to have 
the facilities to provide voice mail, paging, personal 800 
numbers, or other miscellaneous services in order to arrange to 
bill consumers for them.
    Cramming is pure profit through fraud and deception. It is 
also not necessary for the crammer to have had any prior 
contact with the consumer. All that is needed is the person's 
phone number. And people's phone numbers are widely available. 
Directly or through a billing aggregator acting on its behalf, 
the crammer simply represents to the telephone company that the 
consumer has agreed to purchase these services, and the company 
bills on its behalf.
    Therefore, it is not surprising that many consumers who 
contact us had no idea that they had been crammed until they 
discovered the charges on their bills and have no idea how it 
happened. When consumers think they know how they were crammed, 
the most common method reported to us is through contact with a 
900 number or other pay-per-call service. In many instances, 
these are psychic hotlines that have advertised free readings. 
Consumers call the numbers, and whether the readings turn out 
to be free or not, later monthly charges start to pop up on 
their phone bills or personal 800 numbers, paging, voice mail, 
or other unspecified services, sometimes for club memberships.
    The second most frequent source of cramming reported to us 
is contest entry forms that consumers fill out in the hope of 
winning a car or cash or some valuable prize. There may be 
something on the form that says that they are signing up for 
some type of service, but if there is, it is in fine print so 
minuscule that consumers would need a microscope in order to 
see it.
    Negative option notices are yet another method of cramming 
where consumers get solicitations that look like junk mail, 
toss them unopened, only to discover later that they have been 
automatically enrolled in services for which they are being 
billed on their telephone bills, and this has happened because 
they didn't contact the company to say that they wanted to 
cancel.
    Here are some examples from the complaints that we have 
received at the National Fraud Information Center of various 
ways that consumers have been crammed.
    A Texas woman got a call from a company asking to verify 
her address. She said yes, that is my correct address, and 
later began to get unauthorized charges on her phone bill. When 
she called the company to dispute them, she was told that her 
``yes'' answer was authorizing the services for which she had 
been billed.
    A telemarketer offered to place ads on the Internet for a 
woman from Ohio. She said no, but she was crammed anyway for 
unauthorized Internet services.
    A Maryland man got a phone solicitation for long distance 
service. As a good consumer, he asked for the information to be 
sent to him in writing. He never received anything, but he did 
start to receive charges on his bill for paging services.
    A telemarketer called a New York woman, offering her the 
opportunity to join a travel club. She asked for written 
information, which she did receive, but she never acted on it. 
Nonetheless, charges for club membership began to appear on her 
telephone bill.
    A New York man got a letter from a company informing him 
that he would be charged for a personal 800 number unless he 
called the company to cancel. He tried to call twice and was 
left on hold for a total of 2 hours and finally gave up.
    A man in Virginia got a call from a company telling him he 
had won a trip to Las Vegas. He agreed to pay a $20 processing 
fee in order to get this trip. But then he began to receive 
unauthorized charges on his phone bill for voice mail. When he 
called to dispute the charges, he found out that his long 
distance service was also being switched.
    A Texas woman got a letter in the mail welcoming her to a 
plan to buy merchandise at discounted rates and announcing that 
the $5 monthly charge would be billed through her phone 
company. But she had never enrolled in this program.
    People tell us that they have also been crammed by calling 
800 numbers in response to messages left on their answering 
machine. In one of the most creative cramming cases reported to 
our hotline, a man called a company that advertised on 
television for coupons that you could use to get discounts off 
of veterinarian services and pet-related products. He agreed to 
pay $20 for the coupons. But when he tried to use them, the 
vendors rejected them. Even worse, he began to get charged $10 
a month on his phone bill for a pet club membership. When he 
called to dispute the charges, he was told that there was a 
recording of his agreement, but all he had agreed to was to pay 
$20 for the coupons, and they turned out to be worthless.
    One of the biggest problems with cramming and the reason 
why it is so successful is that it is hard for consumers to 
spot these charges. Phone bills are confusing enough with all 
sorts of taxes and other fees, so cramming charges may look 
like just another part of your regular bill. They are often 
described in vague terms, such as ``monthly fee,'' ``call 
manager,'' ``basic access,'' ``monthly service fees,'' 
``special plan,'' etc.
    Sometimes the companies making these charges even use names 
that sound like phone services in order to make it harder for 
consumers to detect them on their bills. Even when the charges 
are more descriptive, people may not notice them right away. 
The names of the service providers do not appear on the first 
page summary of your bill, making it necessary to scrutinize 
every single page in order to see what you are being billed 
for. In our busy lives, many of us simply look at the total 
amount due and pay it.
    Once consumers discover they have been crammed, their 
problems are only just beginning. When they call the number on 
their bill for disputes, it is usually the crammer or the 
billing aggregator acting on its behalf. They are often left on 
hold for inordinate amounts of time or get incessant busy 
signals or only reach a recorded answering service. If they do 
manage to talk to a live person, they are often lied to. They 
are promised refunds and don't get them. They are told that 
they authorized the charges, and then they are presented with 
documentation such as forged signatures, doctored audiotapes, 
and sometimes they are refused any documentation at all. They 
are threatened with loss of their phone service if they don't 
pay and with their credit reports being ruined.
    In desperation, they turn to the local phone companies from 
whom they received the bills, and until recently, they didn't 
get as much help there as they should have. Often they were 
referred back to the crammers, and in many cases the local 
phone companies, because their relationships may have only been 
with the billing aggregators, couldn't even tell the consumers 
who the actual service providers were or how to reach them. 
They didn't have that information, which made it very difficult 
for consumers to complain and also for law enforcement agencies 
to pursue these matters.
    I am happy that at the urging of the FCC the local 
telephone companies are now working collectively to respond to 
the cramming crisis, and they have also been working, some of 
them, individually.
    For example, Ameritech is overhauling its bills to simplify 
them and to actually list the companies that they are billing 
for on the front page of the bill.
    Bell Atlantic announced earlier this month that it is 
removing disputed charges the first time that a consumer calls, 
even if the consumer hasn't yet contacted the crammer, and 
yesterday announced that it was going to develop a blocking 
service.
    Bell South announced a temporary moratorium from accepting 
any new billing agreements for these miscellaneous services 
until it can put good procedures in place to screen them.
    And, collectively, the local phone companies have drafted 
these best practices which encourage the adoption of procedures 
to curb the problem of cramming and give consumers more 
protection.
    We applaud these efforts, and we know that some of the 
billing aggregators are also discussing amongst themselves 
voluntary standards that they might adopt.
    But at the root of this problem is the fact that consumers 
have lost control over their telephones. At our fraud center, 
our counselors tell us that when consumers call about cramming, 
they are more incensed than consumers who call about any other 
type of telemarketing fraud, and that is because they see 
themselves as innocent victims whose privacy has been invaded 
and whose phone bills have been hijacked for services that they 
never agreed to. They don't understand how this can happen, and 
they want control back over their telephone bills so that they 
can stop it from happening.
    I know I have exceeded my time, but I would like to just 
briefly run down the ten suggestions that we have given for how 
cramming can be stopped and consumers given more control.
    Senator Collins. Certainly.
    Ms. Grant. Thank you.
    The first suggestion is to ban deceptive methods for 
selling miscellaneous services. They should not be promoted 
through contest entry forms, pay-per-call lines, or negative 
option solicitations.
    Second, charges should only be allowed on telephone bills 
for telephone-related services. Consumers don't expect charges 
for club memberships or other non-telephone-related services to 
be on their phone bills, so they don't look for them.
    Third, phone companies should be required to get 
information about the service providers and the billing 
aggregators because they have a responsibility to know who they 
are billing on behalf of and that the services for which they 
are billing are legitimate.
    Fourth, we need to impose strict liability on the billing 
aggregators. They must share the responsibility for the service 
providers that they represent.
    Fifth, we would like to suggest that consumers be notified 
by the local phone company as soon as miscellaneous--charges 
for miscellaneous services have been requested to be put 
through to their phone bills. This is really the single most 
important thing that Congress could do. If consumers received 
an advance notice saying this is an important notice about your 
phone service, this company--naming the service provider--has 
requested that we bill you for this service, describing the 
service, the cost, whether it is a monthly service or whatever 
the other terms of it are, and please notify us by a certain 
number of days if you did not authorize this service, it would 
nip a lot of cramming cases in the bud. It would prevent these 
charges from ever getting on consumers' phone bills to begin 
with, and it would also give the telephone companies quick 
information about providers that may be abusing the telephone 
billing system.
    Sixth, we would like to have Congress require truth-in-
telephone-billing. Charges for miscellaneous services should be 
clearly described along with the identities of service 
providers, any billing aggregators acting on their behalf, and 
their locations.
    Seventh, consumers should be provided with dispute rights 
similar to the rights that they have for disputed 900-number 
charges. They need to be able to dispute these charges and have 
a process for doing so, without fear of losing their phone 
service or having their credit ruined.
    Eighth, States and consumers should have the right to sue 
crammers in Federal court. This would make it easier to stop 
deceptive and abusive practices wherever a company may be 
operating and to get redress for abuses.
    Ninth, levy serious penalties against crammers. There 
should be stiff fines and penalties for violations, and repeat 
offenders should be treated as criminals.
    Tenth, give consumers better control. Telephone companies 
should be required to develop mechanisms like blocking or PIN 
number systems that consumers can use to control who adds 
charges to their telephone bills and for what.
    In summary, the free and competitive marketplace only 
functions properly if consumers are able to make informed 
choices about the products and services that they want to buy. 
We need to ensure that it is the consumers who are actually 
making those choices, not phantoms who are billing them for 
products or services that they never requested.
    We look forward to working with this Subcommittee and 
Congress and members of the telephone industry to stop this 
egregious abuse of the telephone billing system and preserve 
the integrity of the telecommunications marketplace.
    Thank you.
    Senator Collins. Thank you very much, Ms. Grant.
    When you were talking about people calling 1-900 numbers 
for psychic readings, I kept wondering whether any of those 
psychics predicted that the consumer who was calling would soon 
be a victim of telephone fraud.
    Ms. Grant. I don't think so.
    Senator Collins. I kind of doubt it.
    One of the purposes of our hearing today is to get a better 
understanding of the specific techniques that crammers use and 
also to educate consumers on what to look for when they review 
their telephone bills.
    I would like to use some specific examples--and we have 
blown up some telephone bills--of how individuals and their 
families were crammed so that we can get a better understanding 
of how these scams work.\1\ We have enlarged several telephone 
bills, and there are copies that have been provided to the 
Members and at the press table. I think there are some 
additional ones if people in the audience can't see it that 
well.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 2a-2g. which appears in the Appendix on page 
111.
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    These, I understand, are actual bills that have been sent 
to you at the National Consumers League in support of 
consumers' complaints about telephone cramming. I would like to 
have you explain for us how the fraudulent charges are listed 
on these bills and how consumers can try to identify fraudulent 
charges and, indeed, the difficulty of their doing so.
    Let's look at the first exhibit. It is Exhibit 2a. Do you 
have a smaller version, or can you see that?
    Ms. Grant. I can see it.
    Senator Collins. You can see that? Your eyes are better 
than mine. How did the consumer get crammed in this case?
    Ms. Grant. As in many of the cramming complaints that we 
receive, the consumer had no idea how he came to have these 
charges on the bill. But what is particularly interesting about 
this one is that it appears that the name of the company making 
the charge is Axces. As you may know, consumers do get a 
legitimate access charge that is mandated by law on their phone 
bill. But this isn't that access charge. This is a charge by a 
company with the name of Axces, and it would be very easy for a 
consumer to mistake this for the access charge that is a part 
of the regular bill.
    Senator Collins. That is what troubles me so much about 
this bill. It would take an extremely alert consumer to not 
think that that is the standard monthly access charge that 
appears on all of our long distance bills. And it seems very 
clear to me that the name Axces--with the unusual spelling but, 
still, the word ``access''--was chosen specifically to deceive 
the consumer.
    Would you agree with that in looking at this?
    Ms. Grant. I would speculate that is the reason for the 
choice of name.
    Senator Collins. It reminds me of when we were having our 
hearings on slamming, and we found that there were companies, 
long distance providers, who chose names like Phone Bills or 
Telephone Calls or Long Distance Services, which were the names 
of the companies but they looked like they were headings on the 
phone bills. And I think when we tell consumers you have got to 
look very carefully at your bill, that is certainly true, but 
there should be some burden on the industry to make sure that 
there isn't deliberate deception that is going to fool all but 
the most astute consumer.
    Ms. Grant. I agree. And in the best practices that the 
local telephone companies are considering, one of them is that 
each company will decide on standard text phrases to describe 
the services. And that would be helpful.
    Senator Collins. The next exhibit that I am going to show 
you, which I think in our exhibits is Exhibit 2c., I would ask 
for it to be put up. Again, could you explain what happened in 
this case and whether this is a typical example of a local 
phone company billing for non-telephone-related services?\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 2c. which appears in the Appendix on page 113.
---------------------------------------------------------------------------
    Ms. Grant. This is a typical example of a non-telephone-
related service being billed through the telephone bill. Again, 
the consumer does not know how this happened and does not have 
a debit card from anyone that they think is related to this 
telephone bill.
    Senator Collins. So this is an example of a charge being 
put on a telephone bill that has absolutely--appears to have 
absolutely nothing to do with telephone service.
    Ms. Grant. That is right.
    Senator Collins. The next exhibit I would like to show you, 
which is Exhibit 2g. on our list,\2\ is another one that I 
think aptly expresses the consumer's frustration. This is a 
blown-up version of the actual bill sent to you complete with 
the consumer's comment.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 2g. which appears in the Appendix on page 118.
---------------------------------------------------------------------------
    Ms. Grant. Yes.
    Senator Collins. Could you walk us through this one as 
well, please?
    Ms. Grant. This is another one where the consumer does not 
know how this happened, and obviously, he had a comment to make 
wondering what this was. And I have no idea what Extensor 
Services is. I don't know whether it is the name of a company--
Extensor Systems. I don't know whether it is the name of a 
service. I have no idea. Obviously, the consumer does not.
    Senator Collins. OK. Thank you.
    I wanted to bring those up because I think it shows the 
variety of phantom charges that are appearing on consumers' 
bills and the difficulty that consumers would have in 
identifying them.
    I also think that it is significant that, by and large, 
these charges are small amounts. If a consumer saw an 
unexplained charge for $100, it would certainly catch the 
consumer's attention. But if a consumer has, as in the first 
case, a monthly access fee of $3, they are much more likely to 
believe that it is a legitimate charge.
    Is that an accurate assessment of what is going on here?
    Ms. Grant. I think it is, and it is another difference from 
slamming, because in slamming, as you know, what often prompts 
the consumer to realize that he or she has a different 
telephone carrier is that the long distance charges are two, 
three, even four times the amount that their original carrier 
would have charged for the same services. But with these 
cramming charges, they are so small that they can easily slip 
by without the consumer noticing them.
    Senator Collins. All of the reports that we have had, 
whether it is from Federal agencies, State agencies, or your 
private organization, suggest that cramming has just exploded 
in the last 6 months. Why do you think that is so? Do you think 
that it is, as Senator Glenn suggested, that as we have cracked 
down on slamming, the same con artists have now moved to 
cramming, or is something else going on?
    Ms. Grant. We do notice some of the same telephone 
company--or, not telephone company, but some of the same 
service provider names and billing aggregator names in 
connection with cramming as we have seen with slamming. We have 
seen combinations of cramming and slamming. Some of these 
companies are also familiar to us from 900-number problems.
    I really think that the reason why it has escalated so much 
is that crooks have discovered that it is so easy to do and so 
inexpensive for them to do. It is pure profit.
    Senator Collins. It doesn't require any sort of special 
equipment or expertise.
    Ms. Grant. No. You and I could set up shop tomorrow to do 
this.
    Senator Collins. But we never would, I would hasten to say.
    As you know, the industry has recently issued some 
voluntary guidelines. They just were issued yesterday. I don't 
know whether you have had the opportunity to review them in 
depth, but could you give us your initial impression on whether 
or not you believe that they go far enough and will be 
effective?
    Ms. Grant. I think they are a really good first step, and I 
congratulate the FCC and the companies for doing this. However, 
I do have some concerns, and the uppermost concern that I have 
is the lack of uniformity, because what these guidelines say is 
that each company will decide itself whether to adopt any or 
all of these practices and, in adopting a practice, how to 
implement it.
    To use thresholds as an example, one of the suggested 
practices is that the local telephone company sets a threshold 
for numbers of complaints that would trigger severing its 
relationship with a service provider or a billing aggregator. 
But it would be up to each company to decide what that 
threshold would be.
    My concern is that you have the possibility for unequal 
consumer protection in different parts of the country that are 
served by different companies, and also different thresholds 
for the same service provider in different parts of the 
country. So I would like to see some minimum standards that 
they all agree to adopt, and then if a particular company wants 
to go further than the minimum, more to their credit.
    Senator Collins. Thank you.
    Senator Durbin.
    Senator Durbin. Thank you, Madam Chairman.
    Ms. Grant, it is good to see you again, and thank you for 
your testimony.
    Ms. Grant. Thank you.
    Senator Durbin. I am sorry to learn that Illinois ranks 
only behind California in the number of complaints that have 
been lodged with your agency for this type of consumer fraud.
    I want to make sure that it is clear on the record and in 
my mind how this--who the players are here. There is a service 
provider, if that is what we can call those who offer a 
service. They notify a clearinghouse which gathers bills on 
each of us, and that clearinghouse then does business or sends 
the bills to us through the local exchange carrier. And I guess 
my question really gets down to the responsibilities of each 
party involved, assuming that the first one, the service 
provider, is out to defraud.
    Is there any requirement of proof now that you know of when 
a service provider notifies a clearinghouse that there is a 
charge to be added to a monthly bill?
    Ms. Grant. No, not that I know of.
    Senator Durbin. So it is simply a matter of this could be a 
cram artist, a service provider, notifying a clearinghouse that 
in my situation, my telephone number and my hometown, I should 
be billed for the following service.
    Ms. Grant. That is right.
    Senator Durbin. The clearinghouse then passes that 
information along to the local exchange carrier, and in most 
instances--or in any instance, does the local exchange carrier 
require any proof at that point that the customer authorized 
the original service?
    Ms. Grant. No.
    Senator Durbin. I have noticed in my State of Illinois, the 
attorney general, Jim Ryan, has been aggressive on this, and I 
certainly want to salute him for it. And several things that 
they have done may be worth considering on a national basis.
    First, they have totally banned the use of sweepstakes and 
promotions for the initiation of these services, and I think 
some of the material that we have at this hearing indicates how 
people are often deceived into signing up for a trip to Las 
Vegas, or whatever it is, and end up so-called authorizing 
these services.
    Do you know of any other States that have done this in 
terms of prohibiting sweepstakes as a basis for this new 
service?
    Ms. Grant. I know that some other States have considered 
doing that, and I don't know if any of those prohibitions have 
actually been enacted yet.
    Senator Durbin. Also, in our State, we have passed 
legislation which requires a more customer-friendly telephone 
bill. I think this would be a great help. It just strikes me 
that for most people, when they receive that stack of paper, 
they quickly turn to the front page or back page to find out 
how much they owe, and if it sounds vaguely consistent with 
what they have been paying or what they expected to pay, they 
don't plow through every line on every page.
    I assume that is your experience, too, with consumers who 
call in.
    Ms. Grant. Yes, and I would like to note that your State 
has been in the forefront of acting against cramming and 
crammers and is to be congratulated for that.
    Senator Durbin. Wouldn't it be helpful to a consumer if 
there was a page which said ``new charges,'' something that is 
showing up on the telephone bill for the first time----
    Ms. Grant. It sure would.
    Senator Durbin [continuing]. And then below each of the new 
charges was the name of the so-called service provider and a 
telephone number where they could be reached? I mean, the 
customer is at least getting a forewarning, here is something 
new on your phone bill, and here is the company that is 
providing this service.
    Ms. Grant. I think it would be helpful. The reason why we 
have suggested, however, a notice separate from the bill and 
that would precede the bill is, first of all, as you know, 
consumers' phone bills are already pages long, and I don't 
know, even if the billing format is simplified, that they can 
be reduced significantly in how many pages they are. And, 
second, at that point, it is already on the bill. We would like 
to keep it from being on the bill if we can at all.
    Senator Durbin. Tell me how the mechanism would work in 
your mind in terms of this pre-authorization before it comes to 
the bill. Would the customer--service provider, rather, be 
required to send that notice to the customer before they can 
notify the clearinghouse to add it to the bill?
    Ms. Grant. We want the notice to come from the consumer's 
local phone company, not the service providers. We know from 
the negative option types of solicitations that if consumers 
get mail from a company whose name they don't recognize, they 
may think that it is just junk mail and not even open it and 
throw it away. We would like to see a notice come from their 
local phone company at the point where it has been asked by the 
service provider to institute billing for the service, saying 
this is a special notice about a change or an addition to your 
phone service that would get the consumer to open that 
envelope, and then inside it would say we have been asked by 
Axces to bill you for voice mail, it is a $5 monthly charge, 
let us know by such-and-such a date if you never authorized 
this service.
    Senator Durbin. Of course, that is an expensive undertaking 
for your local exchange carrier to send this notification, to 
accept word back from the customer. Who is going to pay for it?
    Ms. Grant. It could be built into the cost of the billing 
arrangements that they contract for. After all, they are not 
providing this billing for free. This is a business 
relationship between them and the service provider, either 
directly or through a billing aggregator, and they are charging 
for that service. So the cost of this notification, whether it 
is done by mail or even done by telephone, if it is a small 
telephone company in a small area, could be built into the 
contractual relationship that they have with the service 
provider.
    Senator Durbin. And if I am running a local exchange 
carrier, in addition to the cost factor I want to know the 
liability factor. How are you going to protect me so that 
ultimately if the customer says, despite all this, this wasn't 
authorized, I am going to sue everybody in sight? How do you 
protect the local exchange carrier that is trying to play the 
role of middleman?
    Ms. Grant. If there were clear dispute rights that set 
forth who is responsible for what, as there are with 900-number 
charges, I think it would be helpful. We certainly don't want 
the local phone companies to be liable if they shouldn't be, if 
they didn't realize that they were billing for a crammer. We 
want to hold the crammer responsible and the billing aggregator 
working on its behalf.
    Senator Durbin. I thank you for your testimony. I think we 
have learned from almost every venture into deregulation and 
free market that several things do occur, not the least of them 
are efforts by some to take advantage of this Wild West 
atmosphere and make a buck, sometimes legitimately and 
sometimes not. There also seems to be a consolidation of the 
companies that do business once we go into a free-market 
atmosphere, and that is the case with telecommunications as 
well as others.
    I think we have to be vigilant to protect this free-mark 
opportunity, but to do it in a way that gives the consumer a 
fighting chance. I am glad you are here helping. Thanks.
    Senator Collins. Thank you, Senator.
    It is now my pleasure to turn to Senator Cochran. Senator 
Cochran has been very concerned about this problem, I know from 
our discussions, and I welcome him here this morning.

              OPENING STATEMENT OF SENATOR COCHRAN

    Senator Cochran. Thank you very much, Madam Chairman.
    We appreciate very much your assistance to our Subcommittee 
today. Your being here and testifying as you have is very 
helpful, giving us an opportunity to more fully understand the 
magnitude of this problem and how serious it is and how 
important it is that Congress and Federal agencies work hard to 
try to put a stop to this very fraudulent and difficult and 
serious problem.
    I just happened to be in my Oxford, Mississippi, office on 
Monday of this week, and the phone was ringing. My staff was 
tied up doing other things. I picked up the phone, and it was a 
constituent calling to talk about this problem.
    Clarence A. Hall in Jackson, Mississippi, had called to 
tell me one of my staff members, that he knew, had been working 
on this issue--about the specific problems that he had 
encountered. Three different charges had been made, one against 
his own telephone bill, one against his mother's, one against a 
daughter's line that he assumes responsibility for, but it just 
happened all at once, and he has been trying to find a way to 
get it straightened out.
    He knows all three charges. He has checked into all three 
of them. One was sort of a fictitious name. He still does not 
know what the letters are. It is just an acronym that was on 
the bill.
    I am going to ask that the copies of the bills be put in 
the record to just illustrate another complaint, another real 
problem, but I assured him that we were trying to do something 
about it, and coincidentally, this hearing was coming up and I 
got permission to use his name and to put these copies in the 
record.\1\
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    \1\ See Exhibit No. 3 which appears in the Appendix on page 119.
---------------------------------------------------------------------------
    I know our other witnesses are going to talk about what the 
agencies are trying to do about this and what the options are 
for solving it, but I am convinced that we have got to act. 
Something has to be done, either legislation is required to 
further strengthen the Federal laws on this subject or the 
agencies have to take a more aggressive role in trying to do 
something about this.
    The individual victims are really helpless, and that is the 
point. They are turning to Members of Congress and to State 
regulatory agencies and State legislators and others to get 
something done, and they are very impatient and aggravated 
about it and I do not blame them a bit. This is outrageous.
    If there is not a law against it, there certainly ought to 
be a law against it and so severe that those who are punished 
know that they have committed a serious crime. This is not just 
something that we are going to take very casually. So everybody 
ought to understand that.
    So I am glad the Chairman has called the hearing, and it is 
very timely, very appropriate, and we are going to work hard to 
get this problem solved.
    Senator Collins. Thank you, Senator Cochran, and we would 
be glad to put your constituent's example into the record. It 
will help us learn of yet another example of this cramming 
going on.
    Thank you very much, Ms. Grant. We may have some additional 
questions which we will submit in writing to you.\1\ The 
hearing record will remain open for 10 additional days. Thank 
you.
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    \1\ See Exhibit No. 6 which appears in the Appendix on page 150.
---------------------------------------------------------------------------
    Senator Collins. I would now like to ask our second panel 
of witnesses to come forward. They will describe for us what 
the Federal Government and the telecommunications industry is 
doing to control cramming.
    The first witness, Lawrence E. Strickling, is the deputy 
chief of the FCC's Common Carrier Bureau. The Common Carrier 
Bureau is responsible for implementing the FCC policies 
concerning telephone companies that provide long distance and 
local service to consumers. This bureau is also responsible for 
taking enforcement actions against companies that violate FCC 
regulations, including the unauthorized charges that are being 
billed to consumers.
    Our second witness is Ms. Eileen Harrington, the associate 
director for marketing practices at the FTC's Bureau of 
Consumer Protection. The Bureau of Consumer Protection's 
mandate is to protect consumers against unfair, deceptive, or 
fraudulent practices.
    As part of its mandate, the bureau is charged with taking 
enforcement actions against companies that engage in deceptive 
marketing practices, including cramming.
    Our third witness is Roy Neel. Mr. Neel is the President 
and CEO of the U.S. Telephone Association. The USTA represents 
more than 1,200 small, mid-sized, and large local telephone 
companies who bill consumers for various telephone and other 
miscellaneous charges. In that capacity, Mr. Neel has been an 
active participant in the telephone industry's efforts to 
develop voluntary guidelines to prevent cramming.
    Pursuant to Rule 6, all witnesses are required to be sworn. 
I would ask that you would stand and raise your right hand.
    Do you swear to tell the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Strickling. I do.
    Ms. Harrington. I do.
    Mr. Neel. I do.
    Senator Collins. Thank you.
    We look forward to hearing from each of you today. Your 
written testimony will be made part of the hearing record. We 
will ask in the interest of time and to allow time for 
questions that you limit your oral presentations to 10 minutes 
each.
    You will notice in front of you is a lighting system. 
Please be aware that approximately 1 minute before the red 
light comes on signifying the end of the 10-minute period that 
you will see the light turn from green to orange. So orange is 
your warning light asking you to wrap up your testimony.
    Mr. Strickling, we are going to start with you. Thank you.

 TESTIMONY OF LAWRENCE E. STRICKLING,\1\ DEPUTY CHIEF, COMMON 
       CARRIER BUREAU, FEDERAL COMMUNICATIONS COMMISSION

    Mr. Strickling. Thank you, Chairwoman Collins and Members 
of the Subcommittee, and I want to thank you for the 
opportunity to testify here this morning on this growing 
consumer fraud known as cramming.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Strickling appears in the 
Appendix on page 55.
---------------------------------------------------------------------------
    I am the deputy chief of the Federal Communications 
Commission's Common Carrier Bureau, where I oversee the 
consumer protection work of the bureau's Enforcement Division. 
And I do not want to duplicate the descriptions of cramming 
already provided by Susan Grant, except to add that about each 
month, we receive 300 written complaints from consumers at our 
Consumer Protection Branch, and our National Call Center in 
Gettysburg receives about 2,000 cramming-related inquiries each 
month.
    The Commission now ranks cramming, right up there with 
slamming, as one of the most serious consumer problems in the 
industry today.
    What I would like to spend my time on this morning is the 
recent action that the FCC has taken to combat cramming. You 
will remember that in April when Chairman Kennard was appearing 
before this Subcommittee on slamming, he announced that he was 
calling the local telephone companies to come together with the 
Commission to develop a voluntary industry code of conduct to 
stop cramming.
    I am very pleased to report, Madam Chairwoman, that 
yesterday those guidelines were completed, just 2 months after 
the first meeting of the telephone companies.\2\
---------------------------------------------------------------------------
    \2\ See Exhibit No. 4 which appears in the Appendix on page 124.
---------------------------------------------------------------------------
    I want to emphasize that the speed of this process was the 
direct result of Chairman Kennard's choosing to use a 
nontraditional way to attack this problem. We recognized that 
consumers needed a rapid response from the Commission in order 
to stop the spread of cramming, and we knew that traditional 
regulatory tools, such as a rulemaking, would have taken months 
to complete and would have left consumers without the 
protection they need while this process would have dragged on.
    We congratulate the telephone companies for their speedy 
response to the Chairman's challenge, and we will look for 
opportunities in the future to use this type of collaboration 
to solve new consumer protection issues as they arise.
    Turning to the substance of the guidelines themselves, I 
would like to highlight three specific best practices that the 
bureau thinks will have a major impact on reducing cramming.
    First and foremost, to stop cramming, we have to stop the 
bad actors from getting the money for their fraudulent charges, 
and we are very pleased that the guidelines suggest that when a 
customer calls to complain that he or she has been crammed that 
the telephone company will provide an immediate credit on the 
bill so that the customer does not have to pay the fraudulent 
charge and then try to recover his or her money later on.
    Second, the guidelines recommend that the telephone 
companies more comprehensively screen the background of service 
providers who want to use the telephone bill and the products 
and services they want to offer. By reviewing the marketing and 
advertising materials, the telephone companies should be in a 
good position to refuse to bill for deceptive services before 
they are ever offered to consumers.
    The sweepstake forms that we have seen this morning, for 
example, that practice is illegal under our slamming 
guidelines, and the carriers have come together and have said 
that when they see that practice being used for non-telecom-
related services that they would refuse to bill for those as 
well, and we think that is an effective way to get at this 
problem.
    And if they do go ahead and accept a service that ends up 
drawing lots of complaints, the guidelines recommend setting 
thresholds that trigger action by the companies to stop the 
problem, even termination of the billing contract where that is 
justified.
    Third, we are particularly pleased that the telephone 
companies now acknowledge that consumers should have more 
control over what is put on their telephone bill. Yesterday, 
Bell Atlantic announced that it will be offering a billing 
block to its customers in the near future, and I understand 
other local telephone companies are considering similar plans.
    I must add that these best practices, while very thorough, 
are not intended to be the complete solution to the problem of 
cramming.
    As I have described in more detail in my written testimony, 
the local companies are only one link in the billing chain, and 
the other links which Senator Durbin brought out, the 
clearinghouses and the service providers, must also deal with 
this problem.
    And to this end, we are encouraged that just last week, a 
group of the largest billing clearinghouses announced their own 
policies to prevent cramming, and I understand that a number of 
service providers are also preparing their own guidelines.
    These ongoing efforts underscore the growing recognition 
that the legitimate members of the industry need to be part of 
the solution, not part of the problem.
    These guidelines are not the end of the process. We will be 
monitoring the implementation of anti-cramming programs by the 
telephone companies, and we will pay close attention to the 
level of consumer complaints that we continue to receive at the 
Commission.
    We do expect the level of complaints to drop substantially 
as the companies implement various parts of the guidelines. If 
it does not happen, however, we stand ready to take any 
additional action that might be necessary to stop this fraud.
    As the Chairwoman knows, we are prepared to issue new 
slamming rules. We are evaluating right now whether to extend 
the verification rules that currently exist in our slamming 
guidelines and slamming rules to non-telecom services such as 
those that are involved in cramming.
    We are also in the process of preparing a truth-in-billing 
notice to the industry, and we are evaluating whether some of 
these principles of the bill format ought to be included in 
that.
    We clearly see the choice of the name of a provider, as it 
has been reflected in some of the examples presented here 
today, as a factor in our determination as to whether a 
consumer was likely misled by the practice. We see these 
companies when we send complaints to them for response sending 
back the form that indicates a consumer may have signed it or 
otherwise apparently authorized the service, but we think that 
the choice of the name of the provider and the choice of the 
method used to sell this service has to be evaluated in 
determining whether or not that signature truly reflects a 
knowing authorization of service.
    Before I close, I would like to discuss two legislative 
proposals that we think would greatly add to the fight against 
cramming.
    First, Congress should extend the jurisdiction of the 
Federal Communications Commission to reach the practices of 
billing clearinghouses and service providers when unauthorized 
charges appear on consumers' telephone bills. This proposal at 
least to cover the billing clearinghouses is included in the 
slamming bill that was passed by the Senate earlier this year, 
and we hope it is enacted into law this term.
    Second, we recommend that Congress clarify that the Federal 
Trade Commission has jurisdiction to ensure that common 
carriers engage in fair advertising and marketing practices and 
end the confusion that has been described in the FTC's 
testimony.
    We recognize that the combined effect of these 
recommendations, if enacted, might result in an overlap in 
jurisdiction between the two agencies, but I believe that each 
commission is committed to working with the other, and frankly, 
this is an area where the more cops on the beat, the better.
    I thank you for the opportunity to testify. I look forward 
to working with Congress in resolving this problem, and I look 
forward to answering any of your questions this morning.
    Senator Collins. Thank you, Mr. Strickling. Ms. Harrington.

   TESTIMONY OF EILEEN HARRINGTON,\1\ ASSOCIATE DIRECTOR FOR 
  MARKETING PRACTICES, BUREAU OF CONSUMER PROTECTION, FEDERAL 
                        TRADE COMMISSION

    Ms. Harrington. Thank you, Senator Collins and other 
Members of the Subcommittee.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Harrington appears in the 
Appendix on page 72.
---------------------------------------------------------------------------
    I am Eileen Harrington with the FTC's Bureau of Consumer 
Protection, and I am privileged to appear this morning to 
present the Commission's testimony which has been submitted in 
its full text for the record.
    There are three points that I want to emphasize this 
morning. First, unauthorized billing abuses have plagued other 
new billing and collection systems, and the FTC has a long 
history of playing a key role in remedying those problems as 
they emerge.
    Second, the Congress has provided the Federal Trade 
Commission with authority and tools to impose some regulatory 
solutions for these problems, and the FTC is presently in the 
process of using that authority and those tools to do just 
that.
    And third, the FTC has tough law enforcement authority 
granted to it by the Congress to attack this kind of deceptive 
conduct, and we are using it to attack cramming.
    The FTC has a long history of attacking the problem of 
unauthorized billing in various billing and collection systems, 
particularly in the early years of the implementation of those 
systems.
    In fact, the cramming problem that we address today is 
reminiscent of billing abuses that surfaced in the early years 
of regional and bank card, credit card systems.
    Back in the 1960's unauthorized charges on credit card 
statements nearly destroyed the bank card system. Then, credit 
card issuers inundated consumers' mailboxes with unsolicited 
credit cards. Too often, the unsolicited cards were stolen 
right out of the mail either from the consumer's mailbox or 
somewhere along the line in the mail delivery system.
    Unsuspecting consumers receive credit card bills at the end 
of the month from credit card issuers they had never heard of, 
for goods they had never purchased, and they had no recourse 
except to either pay the charges or face legal collection 
actions. Does this sound familiar?
    When industry failed to correct these problems and consumer 
confidence in this new bank card system hit rock bottom, the 
Congress stepped in with balanced consumer protection 
legislation. Then it was the Fair Credit Billing Act which 
amended the Truth in Lending Act, and importantly, fairly 
apportioned risks and responsibilities associated with the 
credit card billing system.
    The Fair Credit Billing Act limited consumer's liability 
for unauthorized charges and gave them important rights to 
dispute charges that appear on credit card statements.
    It imposed responsibility on creditors to make sure that 
the charges that they placed on consumers' credit card 
statements were authorized and valid. The law outlawed the 
issuance of unsolicited credit cards. Now we just get 
unsolicited promotional materials, but we are not getting 
unsolicited credit cards in the mail.
    And most importantly, it restored consumer confidence in a 
payment system that over the past three decades, I think you 
would agree, has more than lived up to its promise of 
convenience, universality, and efficiency for businesses and 
consumers alike.
    More recently, the FTC has dealt with unauthorized debiting 
and billing in two other payment systems, the pay-per-call or 
900-number industry which Susan Grant talked to you a bit about 
a moment ago and direct debiting of consumers' checking 
accounts.
    In the early days and months following the deployment of 
these payment and collection systems, we at the FTC saw 
widespread abuses similar to those seen in the early years of 
the credit card billing system.
    Unfortunately, and I think several of the Members of the 
Subcommittee have made this point, con artists and other 
unscrupulous operators always seem to seize upon promising new 
payment systems and technologies, exploiting both the 
convenience of the systems and the consumer's lack of 
familiarity with them.
    In both the 900 number and check debiting system examples, 
the FTC brought swift, tough law enforcement actions to halt 
the fraud and to focus public attention on the problem.
    The Commission staff urged legitimate businesses who were 
making use of the new systems to impose controls to prevent 
abuses, and when industry failed to act, the Congress stepped 
in outlawing the abuses while preserving the technologies, the 
systems and their benefits for the market.
    In the pay-per-call or 900-number area, the FTC and FCC 
worked together to issue rules to govern the 900-number payment 
system, making it essentially safe for consumers to dial 900 
numbers and giving them important rights to dispute billing 
errors.
    And in the example of the check debiting payment system, 
the FTC through its Telemarketing Sales Rule imposed fraud 
controls on telephone-authorized checking account debits to 
make sure that consumers' accounts were not debited unless the 
party debiting could demonstrate that the consumer had given 
his or her express, verifiable authorization, and that the 
merchant who wanted to make the debit had proof of that.
    Today, we face a new but familiar problem with unauthorized 
billing, this time on consumers' telephone bills. In 1992, when 
the Congress passed the Telephone Disclosure and Dispute 
Resolution Act, or the TDDRA as we call it, the 900-number 
dialing pattern was the only access route to telephone-based 
purchases by consumers.
    Within a short time of the issuance of the FCC and FTC 
rules implementing that statute, however, both legitimate and 
unscrupulous businesses found new access routes to provide pay-
per-call and other services and to bill consumers for them on 
their phone bills.
    Initially, the problems that we faced surfaced in 
connection with the use of international dialing patterns. 
Within the past year, an even greater problem has emerged, and 
that is the use of the telephone number alone as a device for 
imposing charges on the consumer's telephone bill for an 
endless array of products and services, some of which you have 
heard about from Susan Grant this morning.
    Once again, the Federal Trade Commission has brought tough 
law enforcement actions to stop some of the most egregious of 
these problems, and once again, the Commission is prepared to 
use its regulatory authority to prevent billing fraud of this 
type.
    In the Telecommunications Act of 1996, which is best known 
as the big bill that really deregulated or opened the way for 
deregulation and competition in local phone markets, the 
Congress in one little line gave the Federal Trade Commission 
the authority to expand the coverage of its 900-number rule to 
cover similar services that are accessed through other dialing 
patterns where the Commission finds that there are unfair and 
deceptive practices occurring.
    Using this authority from the 1996 Act and the authority to 
regulate telephone-billed purchases that was vested in our 
Commission under the TDDRA, the Federal Trade Commission 
initiated in the spring of 1997 a regulatory review proceeding 
to determine whether the existing pay-per-call rule, the 900-
number rule, was working for everybody, businesses and 
consumers, and how it could be amended to fulfill the statutory 
mandates of the 1992 and 1996 acts.
    The Commission staff has amassed a record based on 
submitted written comments, on oral presentations from all of 
the stakeholders that were obtained in workshops that we held 
on the issue, and information gleaned from these recent law 
enforcement actions.
    We are currently completing the review of the record, and 
the Federal Trade Commission will then decide how the pay-per-
call rule should be modified to appropriately remedy the 
problem of cramming and other abuses that are emerging in this 
brave new world of telecommunications.
    In the meantime, the Commission will continue to use its 
enforcement authority vested in it under Section 5 of the FTC 
Act, to act to prohibit deceptive and unfair trade practices.
    In fact, the Commission last week announced filing of two 
cramming cases against billing aggregators and their client 
vendors.
    In one case--and on the first chart \1\ that we have that 
Linda is kindly holding up--there is a chart demonstrating how 
this scheme worked. That case involves the Federal Trade 
Commission v. International Telemedia Associates and one of its 
client vendors, Online Communications, and in that case, the 
defendants allegedly used the latest electronic equipment to 
capture the telephone numbers of persons who called their 800 
numbers in response to deceptive advertisements of the sort 
that Linda is holding up.\2\
---------------------------------------------------------------------------
    \1\ See FTC statement, Appendix Chart F which appears in the 
Appendix on page 97.
    \2\ See FTC statement, Appendix Chart G which appears in the 
Appendix on page 98.
---------------------------------------------------------------------------
    When consumers called these 800 numbers, the phone number 
from which the call was placed was electronically captured and 
was used to call these consumers back on that number, and then 
later in the month, collect phone call charges appeared on the 
phone bills of the line subscriber whose number had been 
captured. The charges typically were $75.
    In that case, the court granted a temporary restraining 
order and has appointed a receiver to oversee the operations of 
Online Communications.
    In the other case, and you have heard about this method, 
the defendants used a decidedly low-tech method, the sweepstake 
entry box. This was a photograph taken by some victims of this 
scheme at the home show that they visited where they thought 
they were entering a sweepstakes.\3\
---------------------------------------------------------------------------
    \3\ See FTC statement, Appendix Chart A which appears in the 
Appendix on page 92.
---------------------------------------------------------------------------
    Consumers who filled out the forms that were available 
there, which were applications for membership in an 
organization that purportedly provides a bundle of services and 
supporters veterans' concerns, the consumers unwittingly in 
filling out these forms agreed to recurring monthly charges for 
membership in the organization. Oftentimes, these forms were 
filled out by the line subscriber's mothers or grandmothers who 
thought that they would help their kids out by entering them 
into a contest to win a car.\1\
---------------------------------------------------------------------------
    \1\ See FTC statement, Appendix Charts C and D which appear in the 
Appendix on pages 94 and 95.
---------------------------------------------------------------------------
    In this case, the Commission has asked the court to enter a 
preliminary injunction, and we are awaiting the hearing on our 
motion for preliminary injunction.
    At the FTC, we are going to continue bringing these kinds 
of enforcement actions against crammers, and at the same time, 
we will be moving forward with a set of regulations to provide 
consumers with some protections in this area.
    We commend our sister agency, the FCC, for the work that 
they are doing with the phone companies. We look forward to 
continuing our work with them, and we would be happy to answer 
any questions that you have this morning.
    Senator Collins. Thank you, Ms. Harrington.
    Mr. Neel.

  TESTIMONY OF ROY M. NEEL,\2\ PRESIDENT AND CHIEF EXECUTIVE 
              OFFICER, U.S. TELEPHONE ASSOCIATION

    Mr. Neel. Thank you, Madam Chairman. I will be brief.
---------------------------------------------------------------------------
    \2\ The prepared statement of Mr. Neel appears in the Appendix on 
page 100.
---------------------------------------------------------------------------
    First of all, I think the FCC deserves a great deal of 
credit here. Mr. Strickling, and Chairman Kennard, and other 
Commissioners have moved very quickly to do something that is 
quite unusual, to bring industry leaders and industry groups 
together to try to figure out how to fix this problem without 
going into an onerous and time-consuming rulemaking process 
that could end up giving us more burdensome regulation on the 
vast majority of companies that are providing real services and 
who are good actors, but rather find some way to cooperate with 
an industry group to really get at the bad actors.
    So that has been a remarkable process, and I hope that 
Larry's right and that this can be used as a model for dealing 
with future problems like this.
    I think the Congress, this Subcommittee, you, and Senator 
Durbin, in particular, deserve a lot of credit in raising this 
issue to a more public level. If nothing else, those efforts 
could help dramatize this problem for a lot of consumers who 
are vulnerable to these kinds of quick-buck schemes, as Ms. 
Harrington pointed out, and get consumers more energized to 
look more closely at their bill. We are going to do that as we 
go forward, in terms of consumer education.
    I would like to point out, too, that the local telephone 
industry has an intense strong interest in fixing this problem; 
in large part, because the bad actors are a minority. We have a 
business relationship with all of these companies who place 
charges on our bills, and the vast majority of them are 
legitimate. They provide a service to our customers who want 
these kinds of comprehensive billing processes for their own 
convenience, and we want to keep that process going.
    Any money our companies may make off of these bad actors, 
by processing their bills, is more than offset by just the 
aggravation that is required in resolving these billing 
disputes and in lowering the consumer confidence in our 
companies. This is extremely important to us.
    As you might imagine, whether it is a utility or any 
business that has an embedded base of customers, there is 
nothing more important to that business than the good will and 
trust of a consumer base like local telephone customers. So it 
is in our extreme self-interest to get this problem solved, and 
we are pleased to have been able to work very closely with Mr. 
Strickling, and the Chairman, and the result of the Commission 
to get this problem solved, to nip it in the bud.
    It is also important to point out that these bad actors, in 
terms of using the local telephone bill, are a fairly recent 
phenomenon. It is only been within the last year that we have 
begun to see an alarming number of complaints or even the level 
of activity of placing these kinds of services on the phone 
bill. It is an attractive target. We are always going to have 
scam artists. They are always going to be with us. They have 
been with us through recorded time, and this is just one more 
avenue for abusing vulnerable consumers.
    But this practice of loading these things on a local 
telephone company bill, through fraudulent procedures, is 
fairly new. So we are working very aggressively to try to fix 
them. It is important to note, too, that we did not simply wait 
for the Commission to convene a meeting or a process to get on 
top of this.
    Mr. Strickling referred to a number of practices. Bell 
Atlantic is pursuing, essentially, a blocking mechanism. SBC, 
one of our larger companies, has already kicked 20 or more of 
these bad actors off the bill. U.S. West has a three strikes 
and you are out practice. We are working hard. We have been 
working hard to try to get these bad actors off the bill and to 
have a system, where consumers can have confidence.
    There are always going to be problems because there are 
literally millions of transactions, and we are working to 
improve our own consumer education to be more user-friendly. 
You pointed out in your opening statement that sometimes a 
consumer is not getting the kind of response that he or she 
really needs when they call to complain to the local telephone 
company. We are working to fix that.
    It is also important to expect the consumers to take a 
little more responsibility in poring over these bills, and do 
just what the one consumer did on that bill; write a damning 
phrase about this charge or whatever and simply not pay it. 
They should not pay it. They should tell us about it. They can 
call the number to the company that supposedly has provided the 
services.
    If they notify the local companies, we will take it from 
there. These new guidelines that Mr. Strickling has pointed out 
will be a kind of a watch word, a benchmark for this industry 
to rally around a set of principles that we can put into our 
networks to make sure that consumers have those tools, and they 
are voluntary. But it has got to be noted that it is in our 
interests to incorporate as many of those as possible to make 
sure our customers feel good about their telephone bill.
    So some of them might work in Bangor, and they may not work 
in Los Angeles, but the important thing is to make sure that 
something works, so your constituents and those in Chicago or 
Mississippi or wherever at least have some confidence that this 
problem will be fixed. So the companies need some flexibility, 
and the release in the announcement of these guidelines will go 
a long way toward helping companies rally around a set of 
principles that they can put into their networks, and it could 
be a variety of things. It could be some additional things down 
the line.
    One important reason why we do not need a new Federal law 
or a formal rulemaking is that, in doing so, you take a 
snapshot, you sort of freeze in time a solution to a problem 
that exists today. This is such a dynamic situation, and 
unlimited creativity in the way these guys can abuse consumers, 
that a year from now, 2 years from now, these may not be the 
best ways to go after them. So it is important not to freeze 
them in place right now.
    You have got the opportunity, in fact, you will exercise 
rigorous oversight. So will the Commission, so will the FCC, 
which has legal authority to go after these fraudulent business 
practices, and I would invite you, encourage you, and welcome 
that aggressive oversight, and we will be responsive to that as 
you see problems down the line.
    It is also important to note that no one in this country 
should lose their local telephone service because of a billing 
dispute with a crammer, no one. If it ever happens, you should 
let one of the companies know or bring it personally to my 
attention, and we will make sure it gets fixed. No one should 
lose local service.
    I would give the State Commissions a great deal of credit 
that they prohibit this sort of thing. The State Commissions 
are right there on the firing line to ensure that local 
customers are not abused in this process for telecommunication 
services. Many of them have in place rules that prohibit a 
local phone customer from being cut off as a result of a 
billing dispute. We are not going to let that happen, and the 
State Commissions are not going to let that happen.
    These guidelines go a long way to helping educate our 
companies. We are going to take the lead at USTA to make sure 
that every company, not just the big, large companies that you 
hear about a lot, but every small phone company, mom and pop 
companies, co-ops and others are made well aware of these 
practices. We will work with them to put them in touch with the 
Commission or other companies to exchange information about how 
to do this best.
    Verifications are critical, bill adjustment practices, 
having contracts with teeth, making sure that the bills are 
easier to read and understand. It is a very important thing, so 
it does not look like gobbledy-goop. Blocking options could be 
enormously helpful and consumer education. These are all 
options. We are going to incorporate them, and we are going to 
use the most effective tools, the most effective business 
practice in each of our markets, the one that works the best, 
the one that has the most teeth to get these bad actors out of 
the system, so there is increasing consumer confidence.
    Every time we have these kind of complaints, every time it 
splashes on the front page of USA Today or is on the network 
news, it does not help us. In fact, it hurts our companies. We 
want to clear this up, so there is not this degree of fear or 
lack of confidence.
    So between the FTC and their legal authority, the FCC's 
oversight, and your aggressive oversight, Madam Chairman, I 
think we can solve this problem. We are always going to have 
new forms of this problem, and we have to go back and fix them 
as they come along. But we welcome your interest, your 
aggressive pursuit of solutions here, and we want to work with 
you and everyone involved to fix this problem.
    Thank you.
    Senator Collins. Thank you, Mr. Neel.
    I do want to commend the telecommunications industry and 
the two agencies before us in working together to bring forward 
these voluntary guidelines.\1\ But I do have a number of 
concerns about their voluntary nature. One Attorney General of 
one State mentioned that he felt it was a Chinese menu approach 
to this problem; that you can pick one from Column A and one 
from Column B, and that it would lead to inconsistent 
enforcement and inconsistent protection for consumers across 
the United States. They are a good first step.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 4 which appears in the Appendix on page 124.
---------------------------------------------------------------------------
    I recognize that it is a far quicker, and I believe our 
hearings helped prompt the speedy resolution of this issue or 
the speedy action on this issue. It is much easier to do 
industry guidelines. It is much quicker than going through the 
formal rulemaking process, but I am concerned about what the 
impact is going to be on those bad actors who do not adopt the 
regulations or whether the piecemeal adoption of regulations by 
local telephone exchanges will, in fact, let the scam artists 
proliferate and continue to operate.
    I want to start with Mr. Strickling and Ms. Harrington in 
this area. It's my understanding that neither the FTC, nor the 
FCC, now has specific regulations that prohibit the billing of 
unauthorized charges. You have related regulations dealing with 
the pay-per-call area, but there are no regulations in either 
agencies that specifically prohibit the unauthorized billing of 
charges; is that correct, Ms. Harrington?
    Ms. Harrington. Yes, that is correct.
    Senator Collins. Is that correct, Mr. Strickling?
    Mr. Strickling. That is true, but we do have the authority 
to go after any misleading practices of common carriers, so we 
would have the legal authority to pursue that, and we are 
pursuing some people in some current investigations.
    Could I comment on the question of standardization?
    Senator Collins. Yes, please do.
    Mr. Strickling. Because I would like to give you my 
perspective that over the last 2 months it has become very 
apparent to us at the FCC that the local exchange carriers, who 
are generally not the perpetrators of the fraud here, it is 
other people, but they have decided that consumer protection is 
now good business.
    And we have seen, I think, in the last 2 months, a certain 
level of competition developing among the companies to see who 
can be the first to adopt various practices. And I think Bell 
Atlantic, yesterday, wanted to be the first to adopt a bill 
blocking. We have had others who have selected various pieces 
of this to latch onto and move forward.
    I would like to give the industry an opportunity to let 
this competition run its course a little bit longer before we 
try to lock in on any kind of standards because I think, as Roy 
suggested, this is an area where what we are dealing with today 
may not be the problem in 6 months or a year. It is a new area. 
We are trying to understand it.
    The response of the local exchange carriers I think has 
been tremendously rapid and thorough, and I think we ought to 
give them the opportunity to really work at this. Let us 
monitor the complaint levels. We will continue to work with the 
FTC to go after the bad actors directly. But right now we are 
seeing a lot of good ideas coming out of these companies.
    Frankly, these guidelines are better than what we could 
have written as an Agency in a rulemaking because of this 
competition and spirit of cooperation among the companies. I 
think they understand that we have deregulated billing, but 
that with freedom comes some responsibility, and they have 
taken it on, and they have gone after it, and I would not like 
to see that stopped by an attempt to do some premature 
standardization.
    Consumers will be protected under these programs. I am 
confident of that.
    Senator Collins. Does not the lack of a specific regulatory 
framework, however, inhibit your enforcement actions? I am 
thinking, for example, of slamming, and how difficult it was to 
fit slamming into existing laws, and when you had egregious 
cases, such as the Fletcher case, that we are all familiar 
with, where criminal penalties really should have applied, but 
there were not criminal penalties.
    Do you really feel that you have the regulatory tools if 
you don't have regulations that at least specifically address 
the billing of unauthorized charges, Ms. Harrington?
    Ms. Harrington. Senator, I think that that is a good point. 
The Federal Trade Commission is working on expanding its 900-
number rule to include some key principles in regulation of 
billing practices.
    I think that Mr. Neal and Mr. Strickling both make a very 
good point that all of these technologies, whether we are 
talking about telephone-based purchases or a few months ago we 
had the pleasure of appearing before your Committee about 
Internet issues. We know that all of the technologies are 
changing every day, but I think that the FTC's view is that 
there are some enduring principles that apply under Section 5 
of the FTC Act, broadly. You cannot lie. You have to disclose 
to consumers all of the material terms and conditions of a 
transaction.
    You cannot engage in practices that unfairly cause 
unavoidable economic injury to consumers, and our challenge is 
to incorporate those enduring principles into an appropriate 
regulatory framework to address these new systems; payment 
systems, collection systems, marketing technologies as they 
arise.
    What we want to do is incorporate the principles in the 
rules in a way that is stated as broadly as possible, so that 
we cover these new approaches as they develop and use the 
elasticity of our statute to allow these technologies and 
marketing systems to grow and to change, while imposing a set 
of consistent and enduring principles on the payment system.
    So in the FTC on-going rulemaking in the pay-per-call area, 
we are looking to extend the kinds of billing dispute 
procedures and protections for consumers that apply in the 900-
number area to all telephone-based purchase transactions, where 
the charges appear on phone bills, and we certainly will be 
incorporating anti-fraud provisions, as we have done in the 
telemarketing sales area, so that we are not being too 
proscriptive and too detailed, but so that we are making it 
clear that, for example, there is a requirement for customer 
authorization before a charge appears on a phone bill.
    I think that it will help to have that fixed in the law, 
but I also think that what Mr. Strickling pointed out about 
this FCC initiative is true, and that is that we have made a 
giant leap forward through the voluntary efforts of the LECs in 
at least improving the status quo considerably until the time 
that we can get some good regulation in place.
    Senator Collins. Mr. Strickling, would you want to comment 
on that issue?
    Mr. Strickling. I basically agree with the comments of Ms. 
Harrington, and we are looking, as I indicated before, in our 
truth-in-billing notice, whether there are some of these basic 
principles that ought to be incorporated in regulation now.
    I am, though, a little concerned about trying to 
standardize, before we have really gotten a better sense from 
the companies of all of the technologies and tools that might 
be out there to solve this problem, as I indicated earlier.
    Senator Collins. Mr. Neel, you mentioned in your testimony, 
and you went on at a little greater length in your written 
testimony that the consumer must exert some responsibility in 
this issue, and you go on to say consumers must carefully read 
their bills, identify any questionable charges, and bring them 
to the prompt attention of his or her service provider.
    My concern is, as we have seen this morning, that even the 
most astute and careful consumer is not equipped to deal with 
such fraudulent companies, and I would like to show you a 
specific example. I would like Exhibit No. 2e. to be brought 
up.\1\
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    \1\ See Exhibit No. 2e. which appears in the Appendix on page 116.
---------------------------------------------------------------------------
    Consumers certainly have an obligation to look at their 
bills, but there is a limit to what you can expect consumers to 
be able to catch. This is an enlargement of a telephone bill 
that was received by a consumer who was crammed. As you can see 
from the exhibit, the consumer was billed by Hold Billing 
Services for two vaguely identified charges; one is activation, 
$4.95. The other is monthly fee, $4.95.
    Now you are an expert in this area, if you looked at that, 
could you tell that those were cramming charges rather than 
legitimate charges?
    Mr. Neel. No, not at all.
    Senator Collins. I think that is my point, it is very 
difficult to detect cramming in many cases because of the 
deceptive techniques that are used by some of the bad actors in 
the industry. That is why I am a bit concerned.
    I know what you are saying when you are advising consumers 
that they must take more responsibility. But on the other hand, 
even a very careful consumer is not going to be able to spot 
this kind of fraud. That is one reason why I think that the 
local telephone company needs to take on more obligation here.
    I realize your guidelines are going in that direction. But 
why should it not be a requirement that if a consumer 
challenges a charge and says, ``I did not authorize this 
charge. It is completely fraudulent,'' why should that not be 
treated by a telephone company the same way that a credit card 
company would treat it? Why should there not be a requirement 
that the telephone company immediately give a credit on the 
bill or at least hold the charge in abeyance until the issue 
can be investigated and resolved?
    I know Bell Atlantic has adopted that policy, but other 
carriers have not, to my knowledge. Why should that not be done 
across the board?
    Mr. Neel. Well, I think a lot of carriers have done some 
version of that by simply, one, not requiring that charge be 
paid. Some have referred that back through these aggregators. I 
think that as we get into this process, each company is going 
to figure out a way to make it the most consumer friendly.
    You are exactly right. If there is a fraudulent charge, it 
should ultimately be the responsibility of the so-called 
service provider to deal with that, and what we need is the 
most efficient system of getting that back to the loop and 
saying to that service provider, the customer is complaining, 
we are not going to bill that charge, you have got to deal with 
this directly with the customer.
    So we want to make it as friendly as possible and as easy 
to do. there is no question that it is confusing. But there are 
a number of options that are available to the consumer. If 
there is a charge that is suspicious, it just does not look 
like anything they have ever seen or that they have ever 
ordered, they can simply do what one of the consumers did 
earlier in this hearing in one of the charts, is simply write 
on it, ``I did not get this. What in the world is this?'' They 
probably used a word other than that word, but what is this? 
And then that will work its way back through.
    Surely, all 1,000-plus local phone companies have not 
figured out the perfect way to do this yet. But these 
guidelines will go a long way toward helping all of those 
companies do just that.
    In terms of making it a requirement, that may work with a 
company like Bell Atlantic or many other companies, that is the 
best way to do it. A better way may be some verification 
scheme. So there could be any number of options to make this 
easy for the consumer. Give us a chance to make this work, 
these voluntary guidelines, come back and look at this in a 
year or so, or whenever.
    If these complaints continue unabated after these 
guidelines are put into place, then we have got another issue 
to deal with. All I am calling for is to not give this a force 
of law to freeze any one particular solution that would apply 
to every case like this.
    Senator Collins. I am going to ask one additional question 
before I yield to Senator Durbin, and then I have a few more 
questions. The States generally have been more active in 
bringing enforcement actions against crammers than has the 
Federal Government thus far, and I am wondering if the reason 
for that is the joint jurisdiction.
    As I understand it, and correct me if I am wrong, Mr. 
Strickling, the FCC has jurisdiction over any 
telecommunications carrier or the local telephone company and, 
Ms. Harrington, the FTC has jurisdiction over the billing 
company. Is that generally correct, that there is a difference 
in your jurisdiction, even though you may have some of the same 
players involved?
    Mr. Strickling. Yes. I would suggest that the problem is 
not the overlap in the jurisdiction, it is the potential gaps 
in jurisdiction.
    Senator Collins. That was going to be my next point. Would 
it not be better to vest jurisdiction in one agency, so that 
you do not have the problem--well, you would avoid two 
problems; one is the gaps in enforcement. But the second is the 
problem of who is on first, and the problem for the consumer of 
whom do I go to, who is going to take action. Divided 
jurisdiction concerns me because I worry that neither agency 
will act aggressively if it is some other agency's personal 
responsibility.
    Mr. Strickling.
    Mr. Strickling. Right. I am not concerned about the overlap 
in jurisdiction. I think it would be a mistake to divide 
jurisdiction. In addition to the FTC and the FCC, we have a 
number of other players not at the table today who have a role 
in law enforcement in this regard. We have the State Attorneys 
General, we have the State Public Utility Commissions and, 
frankly, when you are dealing with an issue of consumer 
protection, are not more options for consumers better? So that, 
if they call the FTC--I think the worst thing we can do to 
consumers is to have them call the agency that makes sense for 
them to call, only to be told, ``Oh, we are not the right 
people. You have got to call somebody else.''
    So what we have proposed in our legislative recommendations 
to the Committee is that we should make sure that there are no 
gaps in jurisdiction, but that either the FCC or the FTC could 
pursue the bad actors, where appropriate. There is no question 
the FTC has special expertise in marketing practices, and 
consumer fraud. We have special expertise in the telephone 
network and how it works, and I think it should be incumbent 
upon the Committee and Congress to find ways to merge our 
respective expertise so that no bad actor escapes the system.
    Senator Collins. I am concerned about the frustrating 
situation where I, as a consumer, see a fraudulent charge on my 
phone bill. I call my local telephone company, the telephone 
company is not Bell Atlantic, so I do not get a credit. I am 
told, ``Well, gee, this is not our problem. You need to call 
the billing company.'' I call the billing company, and they 
say, ``Well, we were just carrying out the order of the 
original company.'' So I call that company, and they hang up on 
me. They will not even deal with me.
    So then I am very frustrated. I have gone through all of 
these steps. Nobody has helped me. I call the FCC, and the FCC 
says, ``Sorry, this is not really the local telephone company 
here. This is a billing consolidator who did this to you. Call 
the FTC.''
    At that point, I would give up and pay the--particularly if 
it is a small fee. I would give up and pay it.
    Mr. Strickling. That is why we have asked the Congress to 
extend our jurisdiction, so that when they call us, we have the 
ability, if it went on the telephone bill, to go after the 
clearinghouse, the service provider, and the local telephone 
company, if appropriate. That is the gap in our jurisdiction 
right now.
    The gap in Eileen's jurisdiction is that if they call her 
and the company involved in the fraud purports to be a common 
carrier, then they do not have jurisdiction. We are 
recommending eliminating that gap, so that when the consumer 
calls either of us, both agencies, either agency is prepared to 
take action to help that consumer. That is what neither of us 
is fully able to do today, depending on these jurisdictional 
definitions.
    Senator Collins. Ms. Harrington, do you want to add 
anything to that?
    Ms. Harrington. Yes. I think the FTC would never cede 
jurisdiction, even if the company calls itself a common 
carrier, although some courts have--because of the way that our 
statute is written--have challenged the notion of FTC 
jurisdiction for deceptive practices by ostensibly common 
carriers. But we would not concede that we lack jurisdiction. I 
think that Mr. Strickling's suggestion, though, that that be 
clarified in the statute is a very helpful suggestion.
    In terms of the consumer situation that you describe, I 
think you are absolutely right. Consumers do not know who to 
call. They do not where to call. They do not know quite what 
this is, and we have worked very closely with our colleagues in 
the States, the Attorneys General, the Utilities Commissioners, 
and the FCC to make sure that whoever a consumer contacts gives 
them the full measure of information about what they need to 
do. I think it is absolutely unacceptable for a consumer to 
call any public office and hear, ``That is not our problem. 
That is not our jurisdiction.''
    At the FTC, we run a Consumer Response Center, and I can 
guarantee you that nobody who calls the FTC's Consumer Response 
Center with questions about a common carrier hears that we do 
not do common carriers here. We tell people what they need to 
know, help them out, and send them on their way, and I think 
that there is a great willingness on everyone's part to just 
that. Certainly, at the FCC Call Center in Gettysburg it would 
be the same story.
    We are working very closely, as I mentioned, with the State 
Attorneys General. We participate in their multi-State work 
group and often convene it to discuss these cramming problems, 
and we are particularly impressed with the work that the 
Illinois Attorney General's Office and Assistant Attorney 
General Debbie Hagan in Illinois have done to bring actions 
against these crammers.
    We have taken the same approach here as we have done in the 
telemarketing fraud and other areas, where we have what we call 
a target-rich environment. There are plenty of problems to go 
around here, and so what we do is make sure that everybody who 
has a role to play in protecting consumers is operating off of 
the same page.
    The FTC operates something called Consumer Sentinel. It is 
an online data base made available to hundreds of law 
enforcement officials all over the continent, not just in the 
United States, but Canada, too. So that just with a point-and-
click on the World Wide Web, law enforcers can check very 
quickly to see what kinds of complaints they have from folks in 
their States or in their jurisdictions about this or any other 
fraud-related problem.
    They can identify the victims, identify the bad actors, 
find out whether other law enforcement agencies are conducting 
investigations or have brought suits. Find out whether there 
are other pieces of evidence available in a law-enforcement 
network. A lot of these cramming cases that the States have 
brought have been brought as a result of their ability to get 
this access to the data in one shared place.
    We think that working together is the key, regardless of 
how the statutes are written or the rules are written or who 
has got leading jurisdiction or follow-on jurisdiction. The key 
here is for everyone who has the authority to protect consumers 
to use it and to use it aggressively.
    Mr. Strickling. Senator, I do not mean to belabor the 
point, but I would like to just add one footnote to this, which 
is that there is something of a difference in what we do with 
the complaints we get as compared to what the FTC does, which I 
think also argues for continuing the shared jurisdiction and 
eliminating the gaps.
    Every consumer complaint we receive in Washington, we send 
out to the carriers involved to seek some sort of redress for 
that individual consumer, usually in the form of some credit on 
their bill.
    To my knowledge, we're the only Federal agency that does 
that kind of consumer protection, taking individual complaints 
and sending them out to the carriers that are involved, and 
seeking redress for the individual consumer.
    Now, we also, much like the FTC, the FTC generally will 
assemble a series of complaints and launch a Federal court 
action seeking sizable fines and injunctions, and that has 
absolutely got to be part of the process as well. But if you 
evaluate what each agency is doing, we are approaching the 
consumer protection in slightly different ways, and I do not 
think you want to lose that. I think you want to have both 
approaches in place.
    Senator Collins. Thank you. Senator Durbin.
    Senator Durbin. Thank you, Madam Chairman.
    May I ask a few preliminary questions here? Because there 
are things that are unanswered in my own mind. How profitable 
is scamming? Do you have any examples?
    Ms. Harrington. Scamming, generally, or cramming or?
    Senator Durbin. Let us zero in on the cramming part of it. 
How profitable is it? Have you been able to identify one 
company and how much money they have made with cramming 
practices?
    Ms. Harrington. Let us talk for a minute about Hold 
Billing. You have seen some bills that they have issued, and 
that is one of the companies, one of the aggregators, that we 
sued.
    We estimate, and we are in the process, of course, of 
litigating that case, but we estimate, I believe, that they may 
have taken in this, in this VOAA scheme, what, about over $5 
million or $2.2 million in the VAA Hold Billing scheme.
    Senator Durbin. Over what period of time?
    Ms. Harrington. Oh, less than a year. The other case that 
we brought, I think that we estimate now, and we have a better 
estimate there because the Court appointed, at our request, a 
temporary receiver to take over On-Line Communications, and on 
that one--is that the one that is $5? That is in excess of $5 
million just this year, this calendar year, and that is just 
for one client.
    These billing aggregators that are named in the two actions 
that we recently filed, work for lots of clients. I would note 
that some of the clients that they do collection for are common 
carriers, purportedly, who have filed tariffs and are selling 
and billing on a monthly basis for a telephone calling card, 
not a stored value card, but something like a telephone credit 
card, and that is where this statutory issue becomes relevant, 
the jurisdictional issue.
    Senator Durbin. I want to ask a few more preliminary 
questions. In most of the cases we have seen here, the bills 
have charges in the range of $3, $5, or $8. Someone mentioned a 
$75 charge here earlier.
    Ms. Harrington. Yes.
    Senator Durbin. Can you tell me is it more common for these 
crammers to be bringing in a lot of customers at a low charge 
that may escape the attention of that customer or do we have 
some that really range at a much higher level?
    Ms. Harrington. We have some that range in a much higher 
level. There are a lot of different things happening here. Let 
me just point to a very fundamental problem, and that is the 
capture of a phone number and its use to generate billing 
information.
    We saw the low-tech example where the contest box was used, 
but in the case that I mentioned where the charges typically 
were $75 per transaction, the charge was generated by ANI 
capture, Automated Number Identification, which is similar to 
the technology or the same technology, I guess, that makes 
caller ID possible.
    So simply by placing a telephone call to an 800 number that 
was purportedly not only free, 800 numbers are call, but the 
service, underlying service, was purportedly free. Just by 
placing the call, the bad guy was able to snare enough 
information to cause a charge to be generated, and in that 
instance, it was purportedly for a collect call from Deerfield 
Beach, Florida, to the phone line of the line subscriber, and 
typically those charges ran--it was $3.99 a minute, but the way 
that they did it was to keep people on the phone for a while, 
and the typical charge was $75, and many consumers had multiple 
$75 charges.
    Senator Durbin. One last preliminary question. We talk 
about this in terms of unsuspected residential consumers. Have 
businesses also been stung by these crammers?
    Ms. Harrington. Oh, yes. Businesses, school districts. In 
one of our cases, the line that was billed was in a school that 
was locked up. The purported collect call was placed in the 
middle of the night on a Saturday night, and the security 
forces for the school testified that no one could possibly have 
been there.
    We have law firms--and I suppose there is not a great deal 
of sympathy for law firm victims---- [Laughter.]
    Ms. Harrington. But a law firm up in New York tells us that 
a bunch of phone numbers that they had reserved for their 
firm's use, but had not even put into use yet, there were no 
phones, nothing was ringing, those lines got billed, got 
crammed.
    We have somebody else--in fact, lots of other somebody 
elses--who say that their dedicated fax lines were billed, were 
crammed.
    Senator Durbin. Let me go to the next question. How many 
local exchange carriers are there?
    Mr. Neel. There are about 1,200 local phone companies. 
About 15 of them are what you would consider large companies, 
and the rest are fairly small.
    Senator Durbin. And how many end-user customers are there?
    Mr. Neel. About 100 million.
    Senator Durbin. Let me ask you, Mr. Strickling, I have the 
same concerns that the Chairman does about these voluntary 
guidelines. First, I think they are a good first step. You 
misspoke at one point and said, you referred to sweepstakes, 
and you said they are, ``Illegal under our guidelines.''
    Mr. Strickling. Senator, I was referring to our slamming 
rules. It is illegal under the slamming rules to use that as a 
technique to slam somebody's long distance carrier.
    Senator Durbin. But something can't be illegal under 
guidelines, could it?
    Mr. Strickling. I agree.
    Senator Durbin. And in this situation here, we are talking 
about best practices guidelines that were promulgated by the 
industry, with the FCC, by bringing together some of the major 
players and talking about the problem. Now that was May 20, was 
it not? Is that when they were issued, the guidelines were 
issued?
    Mr. Strickling. The guidelines were released yesterday. The 
work effort started on May 20.
    Senator Durbin. So would you say that most local exchange 
carriers were at least aware of this discussion before 
yesterday? They knew that these guidelines were being 
discussed, even if they weren't at the table?
    Mr. Strickling. The U.S. Telephone Association, Roy's 
association, was a participant in the process, and I think they 
kept their members informed, yes.
    Senator Durbin. There is some wording in here, very careful 
wording. I can see there are some lawyers at the table. There 
is some very careful wording that says, ``Although the 
guidelines were jointly developed by the participants, the 
decision of whether and to what extent to implement any or all 
of these guidelines is an individual company decision to be 
made by each LEC unilaterally.''
    So we have over a 1,000--according to Mr. Neel, 1,200--
Local Exchange Carriers out there. What do you consider to be a 
reasonable compliance of the industry now to these guidelines?
    How many would you think should sign up for these 
guidelines, for us to say this is a successful effort?
    Mr. Strickling. We had, at the table, all of the largest 
companies, the RBOCs, GTE, Sprint, Southern New England, 
Cincinnati Bell. I think, when you add up the access lines, 
that they account for over 90 percent of the access lines in 
this country. Every one of those companies is committed to 
adopting the portions of the guidelines that make sense for 
them. I would view that as substantial compliance.
    Senator Durbin. Well, let me tell you, as a lawyer, you 
have just given some weasel words in there that worry me. They 
have agreed to adopt those portions that make sense to them. 
Going back to the Chairman's point, it appears that we will not 
have any uniform national standard for this 90 percent of 
service. We may have some, as she says, the Chinese menu 
approach, that picks some parts and leave other parts out.
    Some of the guidelines, and, though, they are all advisory, 
really get down to the bottom line here. Is the local exchange 
carrier going to check out the marketing programs? Is the local 
exchange carrier going to screen the products that are being 
offered? Is the local exchange carrier going to go into 
approval process for the service providers?
    If they decide they like some of those and do not like 
others, we are going to have a patchwork quilt here that may or 
may not work. Now, there is something to be said for 
experimentation and determine what the best outcome is, but I 
think what troubles me is the suggestion in your opening 
testimony that you went the guideline route because the FCC did 
not want to get bogged down with this promulgation of 
regulations. Is that not what you do for a living?
    Mr. Strickling. Yes, sir, and it takes us about a year to 
do that.
    Senator Durbin. And so is the problem the regulation 
process here that you cannot develop regulations in a timely 
manner to respond to these crises?
    Mr. Strickling. I think, yes, sir. The Administrative 
Procedures Act and the involvement of all parties to the 
process who understand how to delay and obfuscate proceedings 
makes it very difficult to issue regulations as timely as 
consumers needed the protections here.
    Senator Durbin. Well, far be it for me in my business to 
suggest we pass laws on a timely basis, but let me say that it 
troubles me to have a regulatory agency come in and say, ``You 
know, we cannot regulate, so here we have got a better idea. We 
are going to try some guidelines that some of these companies 
may sign up, if they want to, and then we are going to kind of 
watch it and see how it works out.''
    I am worried, from the position of the consumer, while we 
are going through this great experiment, this Chinese menu 
experiment on guidelines with some companies adopting some 
parts and not adopting others, what is the consumer's recourse?
    I read these guidelines, and I am not sure, from a 
consumer's recourse, where I am to turn. I am going to lodge my 
complaint. Let us assume I have been stung for $10 or $20. I 
may get my bill resolved. But let us assume something worse. 
Let us assume that they had been after me for 2 years before I 
discovered it. Let us assume that my liability is now $200, 
$500, or $1,000, and I now have just discovered that I have 
been scammed here. I do not have much of a recourse, do I?
    Mr. Strickling. I, respectfully, disagree, Senator.
    Senator Durbin. Tell me what I do.
    Mr. Strickling. The service provider who is committing the 
fraud is breaking the law. If it is a common carrier, our 
Communications Act allows us to proceed against them, whether 
or not we have these guidelines. We are investigating companies 
who fit that very description, including some of the ones we 
have talked about today. We are prepared and will be bringing 
sizable forfeiture cases against those companies.
    At the same time, Ms. Harrington described to you the 
action her agency is bringing against the service providers. 
The guidelines deal with the billing agent, the local telephone 
company.
    What is key here, Senator, is we want the number of 
complaints to go down over time. We want the money not to get 
to the crammers. I absolutely believe there are a variety of 
approaches that can achieve that goal, and that is our goal, to 
stop the complaints from coming in because the practices have 
ceased, and to keep the money from getting to these people. 
That, I think, is what we will be looking to see in terms of 
these guidelines. But, in no way, will we back away from our 
obligation to enforce the law against the fraudulent parties.
    Senator Durbin. Who is liable?
    Mr. Strickling. The liability would be on the part of the, 
in our case, we can proceed against any common carrier who was 
engaging in the cramming behavior as a violation of the 
Telecommunications Act, and we will do so.
    Senator Durbin. So that would be the local exchange 
carrier?
    Mr. Strickling. If there's a situation where they are 
cramming, yes, they could be a defendant in such a matter.
    Senator Durbin. A clearinghouse?
    Mr. Strickling. Today, we do not have jurisdiction over the 
clearinghouses.
    Senator Durbin. Service provider?
    Mr. Strickling. If they are a common carrier, yes.
    Senator Durbin. So if I am out $1,000 over the last 2 
years, and I just discovered it, what is the procedure? How 
long do you think it is going to take before I get my day in 
court?
    Mr. Strickling. With us, if you had written us a complaint, 
it would have been sent to the carrier, again, assuming a 
common carrier was involved, and you would have your day in 
court very promptly, in terms of the informal complaint process 
that we administer.
    Senator Durbin. Give me some kind of time frame. What would 
I expect if I finally found the FCC and discovered I had been 
ripped off for a thousand dollars?
    Mr. Strickling. We are shooting to be able to do that in 60 
to 90 days.
    Senator Durbin. So the hearing would take place where?
    Mr. Strickling. It is not a hearing, sir. What happens is 
you would send a written complaint in. We get tens of thousands 
of these complaints each year. There is no way, with our 
resources, that we could hold a hearing on each one. The 
process is to send each complaint to the carriers that are 
involved in the alleged fraud and seek response and redress for 
the consumer for that.
    Then the respectable people in this industry will generally 
provide credits upon the receipt of that letter if they have 
not already done so, and many have provided credits even before 
we send those complaints out to them.
    The recalcitrant ones we would bring enforcement actions 
against and seek fines against.
    Senator Durbin. I want to make sure the record is clear for 
those who are watching and wondering. If I am out $1,000 and 
contact the FCC and, clearly, I have been ripped off by a 
crammer, I can expect to get some resolution of my complaint in 
90 days.
    Mr. Strickling. That is our goal, sir. I have to tell you 
we are not there yet, but we are improving our processes.
    Senator Durbin. Where are you, if you are not there yet?
    Mr. Strickling. I cannot say, sir. But we are trying to get 
it to 60 to 90 days.
    Senator Durbin. Mr. Neel, did you want to say something? I 
am sorry.
    Mr. Neel. I would just point out that if you have not paid 
the bill yet, you should not pay it. You are not going to lose 
your local phone service.
    Senator Durbin. I understand that. But I am talking about 
people who have discovered this has been happening for a long 
time.
    Mr. Neel. If you have already paid it, and it is after the 
fact, it is going to be a little more difficult to get your 
money back, just as it would if you paid a credit card bill, 
and you discovered it several months later. So those situations 
are always going to be with us.
    Senator Durbin. I think the point I was trying to drive at, 
as long as we are dealing with voluntary guidelines, and 
possibilities, and probabilities, and some companies will and 
some companies will not, in the meantime, while we are working 
out a good approach to this, with this experimental method, I 
am just wondering what the recourse for the consumer is while 
we are in this never-never land of not regulating and not 
putting this into laws.
    Mr. Neel. If we are talking about the period in which these 
voluntary guidelines have been put out there, one, as Larry was 
pointing out, 90-95 percent of every consumer in the country 
would be served by a company that was a party to the actual 
development of these, and our association representing the rest 
of them.
    There will be no company that will not put in place some 
guideline that works to protect consumers. Every local 
telephone company will do that, and will do it very shortly.
    Senator Durbin. Ms. Harrington, may I ask you about the 
question of on-site inspections? It has been suggested here 
that at some point someone would have the responsibility to 
determine whether the service provider was anything more than a 
mailbox or a drop box or some phony address providing a service 
that never existed. Is there any requirement for on-site 
inspection under the current law?
    Ms. Harrington. No, there is not. There actually is not, 
under the credit card payment system either. But if I could 
just take a moment to explain what the parties in that system 
have done to try to keep fraudulent actors from coming into the 
system, it might be helpful.
    In the telemarketing area, from about 1989 until 1990, we 
saw tremendous problems with fraudulent telemarketers making 
use of the credit card billing and collections system. The 
banks that control those systems were very slow to realize 
their role in preventing the access to the, in making easy, 
really, the access to that payment system by the bad guys, but, 
ultimately, they realized that they had, not only a very 
significant role to play in preventing telemarketing fraud, but 
they were losing a whole lot of money by letting these 
fraudulent actors use the payment system.
    In the Association's--Visa and Master Card--in their rules, 
which are incorporated in the contracts that they have with all 
of their licensee banks, they require that merchant banks, the 
banks that make it possible for businesses to accept credit 
cards in payment by letting the businesses deposit those 
transactions into the bank and then the bank puts it through 
the system for them, the merchant banks now go out and do on-
site inspection for all of certain kinds of businesses, 
including businesses that engage in distance selling, like 
telemarketing.
    And so, in order to get a merchant account with a bank that 
is licensed by Visa or Mastercard, the merchant, if they do 
telemarketing, has to demonstrate that they are there, that 
they are a real business, that they have a real product, that 
they have real mechanisms for fulfillment and so on and so 
forth.
    Senator Durbin. But that does not exist in this situation?
    Ms. Harrington. It does not, and it does not exist in the 
credit card situation by law. It exists by contract.
    Senator Durbin. I notice, also, that in the guidelines here 
there is no boundary to these service providers. They basically 
say, ``We are in business, and here is who we are, and where we 
do business. We are legal under the laws of this State. But, 
frankly, there is no evidence of any kind of capitalization on 
their part or any kind of recourse.''
    Ms. Harrington. And that is required in the credit card 
payment situation as well. And, in addition, there are 
reserving requirements that a lot of merchants have to meet. So 
that when charge-backs come in, 30 or 60 or 90 days out, there 
is some money there to pay back consumers and send the money 
through the system.
    I think that if we have one criticism of the telephone 
industry as it has opened its billing process to others, it 
would be that there just are not the kinds of fraud controls 
and risk assessment mechanisms in place that an industry that 
is running a payment system ought to put in place.
    Now we see a lot in the guidelines, which I really have not 
had a chance to study in their current version in detail 
because they were just released. We see, though, that there are 
some steps being taken to putting those kinds of fraud controls 
in place.
    Senator Durbin. I have taken too much time, and I have to 
end here, and I will turn it back over to the Chairman, and I 
thank her for this, but I share that concern. I really think 
the bottom line here, as good as voluntary guidelines can be, 
unless you have compliance from a major portion of the carriers 
who are involved in this billing, that we may find ourselves, 
months from now or years from now, saying this just did not do 
it, and then, Mr. Strickling, we would start talking about, 
well, maybe there ought to be rulemaking that will take a year.
    It just strikes me that I want to work with the industry, 
but I would think it is in the industry's best interests to 
have these guidelines established as a standard, and to set a 
goal as to what the compliance will be, and to make sure that 
it works. In the meantime, I think we are going to continue 
this Chinese-menu-approach, and I am not sure that is best for 
the consumers.
    Mr. Strickling. Senator, if I could briefly respond. We are 
not going to wait a year. We are going to be monitoring these 
guidelines from now on. I will also tell you that if we decide 
a rulemaking is required, the fact that this work has been done 
as quickly as it has been done will allow us to conduct a 
rulemaking much faster than the normal processes would allow us 
to do.
    So I do not think we have lost any time here. I think what 
we have done is found a way to get some immediate consumer 
protection put in place here. We will evaluate it, and we will 
put the rules in place if these do not work.
    Senator Durbin. Let me just say I hope you have established 
some consumer protection, but you have no way of knowing. Some 
of these companies are coming forward, and we are glad to see 
it. You say it is in the name of competition, and that is all 
well and good. But it is far short of what happened in the 
credit card industry, where we established a legal standard 
across the Nation, so that everyone knew what the rules were.
    Senator Collins. Thank you. Mr. Strickling, how many 
enforcement actions related to cramming has the FCC taken?
    Mr. Strickling. We have brought none so far, but we have 
several companies under active investigation who are engaged in 
both slamming and cramming.
    Senator Collins. Your answer that there have been no 
enforcement actions taken to date is part of the basis of 
Senator Durbin's and my concerns. In addition, when we looked 
at the slamming situation, again, it was very slow before the 
FCC took action. So I just want to raise that as a red flag. I 
just have one final question for all three of you to follow-up 
on the concerns that Senator Durbin and I have expressed.
    What measurement, specifically, are you going to use to 
assess the success or effectiveness of these voluntary 
guidelines and how long are you going to give the industry to 
clean up its act? We have seen this enormous surge in cramming 
complaints in just the past 6 months. You have the statistics--
6,000 in one case, 15,000 in another. What specific 
measurements are you going to use to declare either the success 
or the failure of these voluntary guidelines?
    Mr. Neel, I am going to start with you.
    Mr. Neel. Well, we would consider the efforts a success if 
complaints dropped to nominal, at best, and our intention is to 
make sure that all of our companies are well aware of these 
guidelines, will serve as a clearinghouse to put them together 
with other companies if they want to know how to do it.
    We do not have, obviously, enforcement authority of any 
kind, but we will make darn sure, and we will be prepared to 
report to the Subcommittee the degree to which our companies 
are adopting any kind of guideline to protect consumers.
    Senator Collins. Can you put a number on it for me? I mean, 
if the FCC is still getting 5,000 consumer complaints in the 
next 6 months, would you say that we need to go the mandatory 
regulatory route?
    Mr. Neel. Well, I think it will take a while, we hope a 
short while, for this to take effect. It cannot be overnight, 
obviously because consumer education is a critical part of 
this. So we empower consumers to challenge these.
    Senator Collins. You know, that really troubles me to hear 
you go back to saying it is the consumer's responsibility 
because we can show you example, after example where there is 
no way the consumer could tell that the charges were 
fraudulent. They are deliberately placed on the bill with very 
deceptive-sounding names. This is not the consumer's fault.
    Mr. Neel. No, but the point I am making is to educate the 
consumer as to what their rights are, not to educate them to 
take it in their own hands, resolve the problem by themselves. 
But one piece of it, and we will take the responsibility for 
that, is making sure that they are able to contest this and an 
effective means to avoid these outrageous $75 charges or even 
$2 charges. It is in our interests to do that.
    I would reassert that the local telephone companies are not 
the perpetrators of this. It is in our interest to fix this 
problem, and every time we have an unhappy customer from 
slamming, cramming, or whatever that shows up on our bill, it 
threatens our relationship with that customer for our core 
business local telephone service.
    So I can guarantee you that we will work as aggressively as 
we can to reduce these complaints to zero. Obviously, we will 
never have zero because there are clever con artists out there. 
But I cannot define a number of success. That is best left to 
you and to both Commissions. But all I can do is make a 
commitment that our companies will implement these guidelines, 
so it will get at this problem.
    Senator Collins. Mr. Strickling, what specific measures are 
you going to use to evaluate the success of the guidelines?
    Mr. Strickling. I think, first and foremost, as Roy 
indicated, we have to look at the number of complaints that are 
being raised. But then I think we have to go another level 
down. We will begin to benchmark companies against each other 
because I think, to the extent all of these companies do not 
adopt all of the guidelines, we want to evaluate whether that 
seems to make a difference in the complaint levels, and we will 
also want to look at the substance of the complaints that we 
continue to get over time.
    I would hope that we will not see any more sweepstakes-type 
complaints because I expect the companies not to bill for those 
services in the future, but we may see some new type of fraud 
that we have not envisioned. So we will be watching the 
substance very closely as well.
    I think, timeline, we probably need to give it about 6 
months because we find that we are getting complaints today for 
fraudulent activities that took place in the January/February/
March time frame. It takes consumers oftentimes that long 
before they actually send the complaints to us. So there will 
be a time lag, in all likelihood, before we see the kind of 
decline we would expect to see and complaints from the adoption 
of these guidelines today.
    Senator Collins. Ms. Harrington.
    Ms. Harrington. We brought our first enforcement action in 
this area in April. We brought three separate actions against a 
total of six companies, and we have many more in the pipeline, 
and they will be coming out quickly.
    The measure, first of all, of the effect of law enforcement 
is found in the deterrent effect that those cases have. We have 
had a large number of telephone calls from lawyers representing 
other billing entities, and they are streaming in and out of 
our office, and I take that as a measure of some deterrent 
effect from the law enforcement that we have done.
    Second, as I mentioned, we are doing a rulemaking on this, 
and the greatest measure of our success, I think, will be the 
day, and it should come pretty soon, when we have in place a 
legal requirement that any billing entity, whether it is a LEC 
or a billing aggregator or a vendor who generates a bill, that 
any billing entity be able to prove that the customer, whose 
account is billed expressly, expressly authorized that billing. 
Until we have some kind of legal requirement in place, we are 
going to be working really hard to get it in place.
    And, third, we will be studying our complaint data. As I 
mentioned, we have our Consumer Response Center that handles 
every consumer complaint that comes into the Commission, and 
all of that complaint data is available to me and every 
manager, lawyer, and investigator at the FTC, at their desk 
top. So I am looking at that every day to see whether the 
numbers are up and down and how much money consumers are 
losing.
    And, fourth, the specific measure of the success of our law 
enforcement is how much money we get back for consumers. In 
these cases that we mentioned, consumers have lost millions of 
dollars, and our primary objectives, in bringing law 
enforcement, are to stop that ongoing fraud, and to return the 
money to consumers, and so I think everybody ought to judge us 
on our ability to do that.
    Senator Collins. Thank you. I want to thank all of our 
witnesses this morning. I hope that you will continue to work 
very closely with the Subcommittee.
    I do not view cramming as a small inconvenience. I view it 
as a growing consumer fraud. We have to act together and figure 
out how we can stop this rip-off of consumers using their 
telephone bills. I know that all of you share that objective, 
that goal. We may differ on the most effective means to get 
there. I do hope that the voluntary effort that has been 
undertaken, which I do view as a good first step, will be 
successful, but I am very concerned that unless we have very 
tough enforcement and a clear regulatory scheme to support that 
enforcement, that we may not get a handle on this problem.
    So we will be continuing our oversight activities. We will 
be continuing to work with you, and I very much appreciate all 
of you taking the time to be here today. So I thank you very 
much.
    I also want to thank the Subcommittee staff who have worked 
very hard on this investigation, including Tim Shea, John 
Neumann, Linda Algar, Mary Robertson, and Lindsey Ledwin. I 
feel very fortunate to have a staff that shares my very strong 
commitment in the area of consumer fraud, and this is part of a 
series of hearings that we are doing.
    The hearing record will remain open for 10 additional days, 
so that we may have some additional questions for all of the 
witnesses and any exhibits will be included in the hearing 
record.
    Thank you for your cooperation, and this hearing is now 
adjourned.
    [Whereupon, at 12:22 p.m., the Subcommittee was adjourned, 
subject to the call of the Chair.]



                            A P P E N D I X

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