[Senate Hearing 106-916]
[From the U.S. Government Printing Office]




                                                        S. Hrg. 106-916

SOLVING THE PROBLEM OF SCHOLARSHIP SCAMS: THE COLLEGE SCHOLARSHIP FRAUD 
                         PREVENTION ACT OF 1999

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   on

                                S. 1455

    A BILL TO ENHANCE PROTECTIONS AGAINST FRAUD IN THE OFFERING OF 
               FINANCIAL ASSISTANCE FOR COLLEGE EDUCATION

                               __________

                            OCTOBER 6, 1999

                               __________

                          Serial No. J-106-52

                               __________

         Printed for the use of the Committee on the Judiciary

                    U.S. GOVERNMENT PRINTING OFFICE
70-309 CC                   WASHINGTON : 2001




                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman

STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri              RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan            ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama               CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire

             Manus Cooney, Chief Counsel and Staff Director

                 Bruce A. Cohen, Minority Chief Counsel

                                  (ii)




                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Abraham, Hon. Spencer, U.S. Senator from the State of Michigan...     1
Feingold, Hon. Russell D., U.S. Senator from the State of 
  Wisconsin......................................................    28
Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........    33
Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont...    33

                    CHRONOLOGICAL LIST OF WITNESSES

Panel consisting of Sheila F. Anthony, commissioner, Federal 
  Trade Commission, Washington, DC; Susan O'Flaherty, director of 
  financial aid and scholarships, Western Michigan University, 
  Kalamazoo, MI; Mark Kantrowitz, publisher, Finaid Page LLC, 
  Pittsburgh, PA; and Sanjeev Bery, U.S. Public Interest Research 
  Group Higher Education Associate, U.S. Public Interest Research 
  Group Higher Education Project, Washington, DC.................     4
Prepared statement of Sherri Pickett, senior at the University of 
  Wisconsin-Madison..............................................    30
Prepared statement of Dale P. Kelberman, Assistant U.S. Attorney.    38

               ALPHABETICAL LIST AND MATERIALS SUBMITTED

Anthony Sheila F.:
    Testimony....................................................     4
    Prepared statement...........................................     6
        Attachments: Summary of FTC Cases, and FTC ``Teaser'' Web 
          Sites..................................................    10
Bery, Sanjeev:
    Testimony....................................................    25
    Prepared statement...........................................    27
Kantrowitz, Mark:
    Testimony....................................................    20
    Prepared statement...........................................    22
Kelberman, Dale P.: Prepared statement...........................    38
O'Flaherty, Susan:
    Testimony....................................................    16
    Prepared statement...........................................    18
Pickett, Sherri: Prepared statement..............................    30

                                APPENDIX

                          Proposed Legislation

S. 1455, a bill to enhance protections against fraud in the 
  offering of financial assistance for college education.........    41

                         Questions and Answers

Responses of Sheila F. Anthony to Questions From Senators:
    Hatch........................................................    47
    Thurmond.....................................................    47
Responses of Susan O'Flaherty to Questions From Senators:
    Leahy........................................................    49
    Thurmond.....................................................    50
    Hatch........................................................    50
Responses of Mark Kantrowitz to Questions From Senators
    Hatch........................................................    52
    Thurmond.....................................................    53
    Leahy........................................................    54
        Various Attachments to the Answers of Mark Kantrowitz....    56


 
SOLVING THE PROBLEM OF SCHOLARSHIP SCAMS: THE COLLEGE SCHOLARSHIP FRAUD 
                         PREVENTION ACT OF 1999

                              ----------                              


                       WEDNESDAY, OCTOBER 6, 1999

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:10 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Spencer 
Abraham presiding.
    Also present: Senator Feingold.

 OPENING STATEMENT OF HON. SPENCER ABRAHAM, U.S. SENATOR FROM 
                     THE STATE OF MICHIGAN

    Senator Abraham. We will begin the hearing, and I want to 
welcome everybody to this hearing of the Senate Judiciary 
Committee on solving the problem of scholarship scams, S. 1455, 
the College Scholarship Fraud Prevention Act of 1999.
    Just to give everybody a brief glimpse of the format here, 
basically I am going to make a few opening remarks as part of 
an opening statement and then if there are other members here 
at that point, we will turn to them for their opening 
statements. Then we will begin to hear from the panel, assuming 
the panel is here. I don't know the panelists, but if you are 
here, you actually can come up now, if you would like, and take 
seats. And then we would go to questions to the panel at that 
point from whichever members would be present at that occasion.
    Today, as I said, we are here to discuss the College 
Scholarship Fraud Prevention Act of 1999, legislation which 
Senator Feingold and I have introduced to try to help fight 
fraud in the offering of college financial assistance.
    As the panel will soon detail, schemes by which criminals 
defraud unsuspecting students of so-called application or 
administrative fees are widespread, constantly changing, and 
often quite effective. These scams are hampering the process of 
matching financial assistance with those in need, and 
perversely deliver the most harm upon those whose need is the 
greatest. But even worse than the financial loss, the victim's 
feeling that they have been had by one of these scams lasts 
much longer and is a demoralizing experience that causes those 
victims to become disenchanted with the financial assistance 
process altogether.
    The decision to pursue a college education constitutes one 
of the most important investment decisions a person can make. 
Although college is often thought of as a training ground for 
an individual's future career, in reality it is much more, as 
we all know. College is also a place at which a young person 
begins his or her journey into adulthood.
    The college experience forces young people to develop the 
skills and habits they need to become productive leaders in our 
economy and in our communities. Earning a college degree is a 
challenge in its own right. Clearly, no American deserves the 
additional obstacle of being defrauded out of his or her 
opportunity to attend a university.
    Skyrocketing tuition presses students and their families to 
seek creative ways to finance higher education. America's 
greatest economic asset has long been the ability to find 
creative solutions to problems. In fact, many companies and 
organizations are dedicated to legitimately helping students 
and their families. Many of these organizations perform an 
invaluable service by either directly providing educational 
financing themselves or by directing students to other provider 
institutions.
    Unfortunately, however, a growing number of profiteering 
con artists are taking advantage of students' financial 
vulnerabilities. Their tactics vary widely, but most center 
around misrepresentations and fraud. The schemes are 
everywhere, using the U.S. mail, 800 numbers, and the Internet 
to facilitate illegal activities. The standard practice is to 
lead the student along, promising financial assistance only if 
the student sends payment covering application or processing 
fees.
    For example, the National Scholarship Foundation sent 
hundreds of thousands of postcards to potential college 
students. Students were then encouraged to call an 800 number 
for more information, at which time they were told that the NSF 
would guarantee them $1,000 or more in scholarship money. Of 
course, there was a catch, and in this case the students had to 
pay a $189 fee that would be refunded if they did not receive 
the guaranteed scholarship money.
    As it turns out, the students received only general 
information about the college application process and about the 
cost of a college education--information that they already had 
or could have received without these scam artists. The 
guaranteed money never materialized and the company never 
provided refunds.
    The Federal Trade Commission has been aware of this growing 
problem, and in 1996 it initiated Project ScholarshipScam, a 
nationwide crackdown on fraudulent financial assistance 
services. But although the FTC is dedicated in stopping these 
con artists, it can only file civil charges seeking redress to 
defrauded consumers and injunctions prohibiting or restricting 
future activity. Regardless of the clarity of proof and the 
seriousness of the wrongdoing, the FTC simply lacks the 
authority to prosecute scholarship scam artists on criminal 
charges.
    The Department of Justice is responsible for the criminal 
prosecution of these fraudulent activities, but unfortunately 
criminal prosecution is quite rare, even in the face of 
widespread criminal behavior. In one of the few cases which 
occurred right next door, in Maryland, a Federal jury convicted 
Christopher Nwaigwe of defrauding more than 50,000 college 
students of more than $500,000. He launched his scheme by 
mailing letters announcing scholarship offers of $2,500 to 
$7,500. The catch was that students had to send him $10, 
described as a processing fee. The students received nothing in 
return. However, Mr. Nwaigwe was not so fortunate; he received 
36 months in prison for his service.
    Despite its successful disposition, this case demonstrates 
a distressing fact. The current system does not deter 
criminals. In 1993, Mr. Nwaigwe was ordered by the U.S. Postal 
Service to stop sending misleading letters, an order he 
ignored. In 1996, he was the subject of a civil action in U.S. 
District Court in Baltimore, in which he was permanently 
enjoined from using his materials to solicit money from 
students. But it was not until this year that he was finally 
facing criminal prosecution.
    Senator Feingold and I introduced this bill because we 
believe the continued plague of scholarship fraud warrants a 
renewed Federal effort. Our legislation has three major 
components.
    First, this bill will provide an additional 10 years 
imprisonment and/or heavier fines in fraud cases involving the 
offering of education services. We believe this enhancement 
will serve a dual purpose, encouraging the Department of 
Justice to pursue and prosecute more of these cases, while 
chilling the fraudulent industry as a whole.
    Second, the bill will improve the FTC's ability to enforce 
orders for disgorgement and redress to consumers by excluding 
debts associated with college financial aid fraud convictions 
from the list of permissible exemptions from a bankruptcy 
estate. In this context, beneficiaries of scholarship scam 
operations use their fraudulent gains to buy residential 
properties. When caught, they file for bankruptcy, and because 
many States exempt residential properties from bankruptcies, 
many of these con artists who have been found guilty by a court 
are permitted to retain their homes, no matter how great the 
value.
    After the bankruptcy proceedings clear their debt, these 
operators then are free to sell their homes and keep the money 
they defrauded out of students. In using a narrow exception 
patterned after the response to the savings and loan crisis, 
our bill prevents crooks from further abusing the public trust 
while maintaining legitimate protections for those honestly in 
need of bankruptcy protection.
    Finally, our view is that simply deterring the con artists 
is not enough. We must also help students and their families 
obtain financing help from legitimate companies, making it 
easier for students and their families to differentiate the 
legitimate companies from the con artists.
    Currently, the FTC and the Department of Education 
independently warn students about fraudulent scholarship 
services. This legislation will enhance those efforts, calling 
for a coordinated effort in educating our students. For that 
purpose, this bill would require that the Secretary of 
Education consult with the FTC and post financial assistance 
fraud information on the Department of Education's Internet Web 
site. It is our hope that this Department of Education/FTC 
collaboration will further expose the con artists and help to 
raise public awareness of their tactics.
    With that, I am pleased to welcome the members of our first 
panel. We appreciate your all being here, and let me begin by 
introducing them from, I guess, my left to right. We will first 
hear from Ms. Sheila Anthony, whom we welcome today. She is a 
Commissioner of the Federal Trade Commission here in 
Washington.
    We will then hear from Ms. Susan O'Flaherty, who is the 
Director of Financial Aid and Scholarships for Western Michigan 
University, in Kalamazoo, MI. Incidentally, I am pleased to 
note that Western Michigan is also located in the congressional 
district of Congressman Fred Upton, who is the lead sponsor of 
the companion legislation on this issue in the House of 
Representatives.
    Next is Mr. Mark Kantrowitz. Mr. Kantrowitz is the 
publisher of FinAid as well as eduPASS Web sites. FinAid has 
been named the top college financial aid site by numerous 
publications, including Yahoo, Internet Life, and Time 
Magazine.
    Finally, we will hear from Sanjeev Bery, who is a higher 
education associate for the U.S. Public Interest Research 
Group, or PIRG. U.S. PIRG is the national lobby office for 
student-led public interest organizations in 25 States across 
the country, including Michigan.
    So we will begin. What we do normally here is kind of post 
through this clock system about a 5-minute time frame for 
opening statements. The orange light will come on at 4 minutes, 
the red light at 5. We are usually pretty flexible in terms of 
letting people finish the points they are making after the 5 
minutes. If you have longer statements, though, we will include 
the total statement in the record, but would urge people to--
not that I set a particularly good example here today, but 
would urge you to try to stay at least reasonably within the 5-
minute limit.
    Commissioner Anthony, we will start with you, and we 
welcome and thank you for being here today.

 PANEL CONSISTING OF SHEILA F. ANTHONY, COMMISSIONER, FEDERAL 
TRADE COMMISSION, WASHINGTON, DC; SUSAN O'FLAHERTY, DIRECTOR OF 
 FINANCIAL AID AND SCHOLARSHIPS, WESTERN MICHIGAN UNIVERSITY, 
  KALAMAZOO, MI; MARK KANTROWITZ, PUBLISHER, FINAID PAGE LLC, 
PITTSBURGH, PA; AND SANJEEV BERY, U.S. PUBLIC INTEREST RESEARCH 
GROUP HIGHER EDUCATION ASSOCIATE, U.S. PUBLIC INTEREST RESEARCH 
         GROUP HIGHER EDUCATION PROJECT, WASHINGTON, DC

                 STATEMENT OF SHEILA F. ANTHONY

    Ms. Anthony. Thank you, Senator. I am pleased to have this 
opportunity to describe the Commission's consumer protection 
activities in the area of scholarship scams. The Commission 
applauds you, Senator Abraham, and also Senator Feingold for 
focusing on this area of serious law enforcement issues raised 
by fraudulent purveyors of scholarship services.
    In the fall of 1996, the Commission launched Project 
ScholarScam, a joint law enforcement and consumer education 
effort aimed at the fraudulent purveyors of so-called 
scholarship services. At that time, the Commission announced 
six law enforcement cases against companies we alleged falsely 
promised scholarships to students and their parents nationwide.
    In November 1997, the Commission followed through with two 
additional cases, known as Scholarscam II. The Commission 
obtained the most recent settlements in the fall of 1998. These 
cases were filed in Federal district courts in Florida, 
Maryland, Georgia, and New York, and a summary of these cases 
can be acquired as an appendix to my written statement.
    The Commission sought and obtained temporary restraining 
orders with asset freezes, and in some cases the appointment of 
a receiver over the corporate defendants. All Commission 
litigation has been concluded, with permanent injunctions 
obtained either through settlements or ordered by the court. 
The orders either ban the defendants from telemarketing or 
providing scholarship services, or they require the defendants 
to post a performance bond in a significant amount. In several 
instances, the Commission obtained partial or complete redress 
for consumers, and in two cases the defendants posted $100,000 
telemarketing bonds pursuant to Florida law.
    We estimate that the companies involved in these scams have 
scammed, in total, approximately 175,000 consumers, to the tune 
of about $22 million. Tough penalties are needed for these scam 
artists. The civil remedies afforded by an FTC action can 
deprive defendants of their ill-gotten gains through 
restitution, but only if the victims' money can be found.
    The penalties resulting from criminal prosecutions by the 
U.S. Department of Justice and State authorities sends the 
strongest possible message, which is particularly needed here 
because there is a never-ending pool of potential victims, 
college-bound students and their families.
    The Commission has undertaken extraordinary efforts to 
educate consumers about scholarship scams. As part of this 
effort, we teamed up with a variety of private and public 
partners, including Sallie Mae, Who's Who Among American High 
School Students, the College Board, and the Educational Testing 
Service, which administers the SAT exams.
    Our consumer education materials include bookmarks, 
posters, and consumer alerts warning students and their parents 
of the red flags to look for when evaluating scholarship 
service sales material and sales pitches. The six signs that 
your scholarship is sunk are the scholarship is guaranteed or 
your money back. You can't get this information anywhere else. 
Number three, may I have your credit card or bank account 
number to hold this scholarship. Number four, we will do all 
the work. Number five, the scholarship will cost some money. 
Number six, you have been selected by a national foundation to 
receive a scholarship, or you are a finalist in a scholarship 
contest.
    We have distributed over 2.5 million pieces of consumer 
education materials, including mass mailings of bookmarks 
listing these six red-flag signs, to 2,000 college bookstores 
across the country, and have materials posted on our Web site. 
In addition, we have posted a Web page of a fictitious 
scholarship service company that had typical claims that we saw 
in our cases. And when consumers clicked to sign up for the 
services, they were warned that they too could be scammed. We 
call these teaser Web site pages, and we have used these to 
help disseminate our message on the Internet.
    The Commission continues to monitor the industry and to 
provide both consumer and business education. In May this year, 
we issued a new consumer alert to inform consumers about a 
recent trend, the seminar for financial aid or scholarships. 
Instead of telemarketing, the scam artists now invite students 
and their families to a free seminar in some local hotel and 
then give them a hard sales pitch to get them to sign up for 
the scholarship service at a fee of approximately $800 to 
$1,200, which is quite a lot of money for some families.
    The story of Project Scholarscam has garnered tremendous 
coverage in the media, and through this coverage and by 
enlisting those who are on the front lines, financial aid 
advisers and guidance counselors, we have spread the word about 
these pernicious scams. We hope the Commission's strong record 
of enforcement and education has served as an effective 
deterrent in this industry. But as education costs continue to 
rise, and given the unlimited supply of potential victims, 
fraudulent operators will always have an interested audience 
and an enticing sales pitch. Thus, we will continue our 
efforts, and we will also continue to provide cooperation to 
any criminal investigation or prosecution of a Scholarscam 
defendant.
    Thank you.
    Senator Abraham. Thank you very much. Actually, during the 
last year I have visited a number of campuses in our State with 
those do's and don't's lists to try, on a campus-by-campus 
basis, to make sure we got more information out. I have visited 
several throughout the State and hope to do more of them, and 
tried to point out why each of those statements you read 
clearly couldn't possibly be true--the idea that you don't have 
to do any work yourself and that somehow a scholarship is going 
to be made available, things like that.
    [The prepared statement of Ms. Anthony follows:]

                Prepared Statement of Sheila F. Anthony

                            I. INTRODUCTION
    Mr. Chairman and members of the Subcommittee, I am Sheila F. 
Anthony, a Commissioner of the Federal Trade Commission (``FTC'' or 
``Commission''). I am pleased to have this opportunity to describe the 
Commission's consumer protection activities in the area of scholarship 
services.\1\ The Commission applauds Senator Abraham and Senator 
Feingold for focusing on the serious law enforcement issues raised by 
fraudulent purveyors of scholarship services.
---------------------------------------------------------------------------
    \1\ This written statement presents the views of the Federal Trade 
Commission. Responses to questions reflect my views and do not 
necessarily reflect the views of the Commission or the other 
Commissioner.
---------------------------------------------------------------------------

            II. THE COMMISSION'S CONSUMER PROTECTION MISSION
    The FTC is a law enforcement agency whose mission is to promote the 
efficient functioning of the marketplace by protecting consumers from 
unfair or deceptive acts or practices and increasing consumer choice by 
promoting vigorous competition. The Commission's primary legislative 
mandate is to enforce the Federal Trade Commission Act (``FTCA''), 
which prohibits unfair methods of competition and unfair or deceptive 
acts or practices in or affecting commerce.\2\ The FTCA generally 
provides the Commission with broad law enforcement authority over 
entities engaged in, or whose business affects, commerce and with the 
authority to gather information about such entities.\3\ The Commission 
also has responsibility under approximately forty additional statutes 
governing specific industries and practices.\4\
---------------------------------------------------------------------------
    \2\ 15 U.S.C. Sec. 45(a).
    \3\ 15 U.S.C. Sec. Sec. 45(a), 46(a).
    \4\ These include,, for example, the Truth in Lending Act, 15 
U.S.C. Sec. Sec. 1601 et seq., which mandates disclosures of credit 
terms, and the Fair Credit Billing Act, 15 U.S.C. Sec. Sec. 1666 et. 
seq., which provides for the correction of billing errors on credit 
accounts. The Commission also enforces over 30 rules industries and 
practices.
---------------------------------------------------------------------------

                        III. PROJECT SCHOLARSCAM
    In the fall of 1996, the Commission launched ``Project 
Scholarscam,'' a joint law enforcement and consumer education effort 
aimed at fraudulent purveyors of so-called ``scholarship services.'' At 
that time, the Commission announced six law enforcement cases against 
companies we alleged falsely promised scholarships to students and 
their parents nationwide. In November 1997, the Commission followed up 
with two additional cases known as ScholarScam II. The Commission 
obtained the most recent settlements in the fall of 1998.
    These companies employed similar tactics: the sales pitch usually 
started with a postcard proclaiming ``FREE MONEY FOR COLLEGE'' and 
providing a toll free number for students or their parents to call. A 
telemarketing sales pitch ensued whereby the company told students and 
parents that, for an up-front fee $100 to $400, the defendant would 
guarantee that the student would get a scholarship or the company would 
refund the up-front fee. To further entice the students, telemarketers 
claimed the student had prequalified for scholarships and that the 
company would ``do all the work'' necessary to obtain the scholarship. 
Getting the scholarships was easy, the telemarketers explained, because 
the company would match the student's qualifications with a database of 
scholarships and would send the student a list of sources tailored to 
that student. The telemarketers proclaimed that the company had 
``information you can't get anywhere else.''
    Naturally, the telemarketer would impress upon the student the need 
to act quickly and typically would press the student or parent to 
provide over the telephone a credit card number or checking account 
number. Once students and their parents paid the up-front fee, they 
would complete a questionnaire detailing their interests, school 
activities and other personal information. Subsequently, they would 
receive a list of available scholarships and sources of money--but the 
list was hardly ``tailored'' to the student's qualifications. In fact, 
as the Commission alleged, it was a useless list--containing outdated 
information, scholarships whose deadlines had passed, entries that were 
not even scholarships but were student loan programs, and scholarships 
that the student clearly could not qualify for (for example, a 
scholarship for children of veterans or residents of a particular state 
when the student was neither).
    When consumers sought refunds for these useless lists, the 
defendants foiled their attempts by putting hurdles up at every turn 
instead of honoring their much-heralded and unconditional ``money-back 
guarantee.'' Students were required, the defendants said, to apply to 
each and every source on the list and to obtain and send to the company 
all rejection letters received. In reality, this was an impossible 
condition to fulfill because scholarship organizations typically notify 
only those who are selected as recipients. In addition, because the 
list contained scholarships for which the students could not qualify, 
students had no reason to apply to those sources. In one FTC case, the 
defendant stopped providing any lists at all--leaving consumers to 
write futile complaint letters to a nonexistent ``scholarship 
foundation.''
    These cases were filed in federal district courts in Florida, 
Georgia, Maryland, and New York. A summary of these cases is provided 
to the Committee as an Appendix to my written statement. The Commission 
sought and obtained temporary restraining orders with asset freezes 
and, in some cases, the appointment of a receiver over the corporate 
defendants. All Commission litigation has been concluded with permanent 
injunctions obtained either through settlements or ordered by the 
court. The orders obtained either ban defendants from engaging in 
telemarketing or providing scholarship services or require defendants 
to post performance bonds in significant amounts to protect consumers 
from future fraudulent practices should defendants resume telemarketing 
of scholarship services.
    In several instances, the Commission obtained partial or complete 
redress for consumers. In two cases, the defendants posted $100,000 
telemarketing bonds pursuant to Florida law, which requires all 
telemarketers to make such commitments. We worked with the Florida 
Department of Agriculture and Consumer Services to revoke the bonds 
and, for the first time, Florida consumers received refunds derived 
from a Florida telemarketing bond. In another case, as part of the 
settlement, the defendant relinquished mail containing checks from 
almost 500 consumers which enabled the Commissioner to provide full 
refunds to those consumers. In many FTC cases, however, the defendants 
have depleted the monies received, leaving little, if any, for consumer 
redress. In addition, FTC defendants frequently attempt to use 
bankruptcy laws to avoid paying consumer redress required by our 
orders.
    We estimate that the companies involved in these cases scammed, in 
total, approximately 175,000 consumers to the tune of $22 million. In 
addition, one of the Scholarscam defendants, Christopher Nwaigwe, was 
criminally prosecuted by the U.S. Attorney's Office in Baltimore, 
Maryland. Commission staff provided substantial assistance to the U.S. 
Attorney's Office, including having a staff attorney testify at trial. 
Nwaigwe was convicted of seven counts of mail fraud in March of this 
year and in June was sentenced to 36 months in prison. Tough penalties 
are needed for these scam artists. The civil remedies afforded by an 
FTC action can deprive defendants of their ill-gotten gains through 
restitution, but only if the victim's money can be found. The penalties 
resulting from criminal prosecutions by the U.S. Department of Justice 
and state authorities send the strongest possible message, which is 
particularly needed because there is a never-ending pool of potential 
victims: college-bound students and their parents.
    The Commission has undertaken extraordinary efforts to educate 
consumers about scholarship scams. As part of this effort, we teamed up 
with a variety of private and public partners, including:

   Sallie Mae
   College Parents of America
   Who's Who Among American High School Students
   The College Board
   Educational Testing Service
   National Association of Student Financial Aid Administrators
   National Association of Secondary School Principals
   National Association of College Stores

Our consumer education materials include bookmarks, posters, and 
consumer alerts warning students and their parents of the red flags to 
look for when evaluating scholarship service sales materials and sales 
pitches. We have distributed over 2\1/2\ million pieces of our consumer 
education materials, including a mass mailing of bookmarks to 2,000 
college bookstores across the country and have the materials posted on 
our Web site. In addition, we posted a Web page of a fictitious 
scholarship service company that had the typical claims we saw in our 
cases and, when consumers clicked to sign up for the service, they were 
warned that they could have been scammed. We call this a ``teaser Web 
site'' and have used it to help disseminate our message on the 
Internet.
    The Commission continues to monitor the industry and to provide 
both consumer and business education. In May, we issued a new Consumer 
Alert to inform consumers about a recent trend: the seminar for 
financial aid or scholarships. We warn consumers to take their time 
when attending these seminars and to avoid high-pressure sales pitches 
that require them to buy now or risk losing out on the opportunity. 
Consumers should investigate the organization by talking with a high 
school or college guidance counselor or financial aid advisor before 
spending money--many colleges and universities are offering Web-based 
scholarship searches for free to potential students. Consumers 
shouldn't rely solely on ``success stories'' or testimonials of 
extraordinary success offered by the seminar company. Instead, they 
should ask for a list of three local families who have used the service 
in the last year and then contact them to find out if they were 
satisfied with the products and services received. As always, consumers 
should keep in mind that they may never recoup the money they give to 
an unscrupulous operator, despite stated refund policies.

                        IV. PROPOSED LEGISLATION
    S. 1455, the ``College Scholarship Fraud Prevention Act of 1999,'' 
provides some useful tools to help combat scholarship fraud. It would 
enhance criminal penalties for fraud in connection with the obtaining 
or providing of scholarships. Also, it would prevent purveyors of 
college scholarship fraud from using the bankruptcy laws to shield 
their ill-gotten gains while their victims go without recompense. The 
Bankruptcy Code allows debtors to retain certain property even when 
their creditors receive little or no recompense. In particular, debtors 
can use state-law exemptions, including homestead exemptions that in 
some states can have no dollar limit, to shield their assets. S. 1455 
would deny these exemptions to the extent that debts resulted from 
college scholarship fraud.

                             V. CONCLUSION
    The story of Project ScholarScam has garnered tremendous coverage 
in the media. Through this coverage and by enlisting those who are on 
the front lines--financial aid advisors and guidance counselors--we 
have spread the word about these pernicious scams. The Commission's 
strong record of enforcement and education has served as an effective 
deterrent in this industry. But, as education costs continue to rise 
and, given the unlimited supply of potential victims, fraudulent 
operators will always have an interested audience and an enticing sales 
pitch. Thus, we will continue our efforts and will also continue to 
provide cooperation to any criminal investigation or prosecution of 
``ScholarScam'' defendants.
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    Senator Abraham. So we will turn now to Ms. O'Flaherty 
here, and she will undoubtedly reinforce the notion that 
students will be getting scholarships without having done a 
lick of work themselves because that probably doesn't happen at 
Western Michigan.

                 STATEMENT OF SUSAN O'FLAHERTY

    Ms. O'Flaherty. It doesn't happen.
    Senator Abraham. Thank you for being here.
    Ms. O'Flaherty. Thank you. I appreciate this opportunity. I 
must tell you how personally and professionally pleased I am to 
see a bill that is focused on creating greater protection for 
consumers against scholarship fraud. I applaud your efforts and 
Senator Feingold's efforts, and I offer you my support and 
assistance as this legislation makes its way through the 
Senate.
    I am Director of Financial Aid and Scholarships at Western 
Michigan University, in Kalamazoo, MI. Western Michigan enrolls 
over 27,000 students, 72 percent of whom receive some form of 
financial aid. Student loan volume at Western approaches $70 
million. So as you might imagine, helping students locate and 
ultimately obtain non-loan dollars such as scholarships is of 
primary interest to our university.
    Just so that you are aware, I have been in financial aid 
most of my life and in various parts of the country, and I 
could not count the number of financial aid and scholarship 
nights that I have done for parents and high school counselors. 
And I don't recall any such event in which this issue has not 
been raised during all of those years.
    The need for action on this issue cannot be overstated. 
Scholarship fraud is out there; it is rapidly evolving with 
new, innovative scams and is scaring off students and 
legitimate services who must suffer because of the acts of an 
unscrupulous population. I believe the problem is best exposed 
through examples, and I will share a few of those with you. You 
may be aware of some of these cases, as they are becoming more 
public. I would like to make you aware that these are not cases 
from press accounts, but cases and descriptions of situations 
that have occurred in my office.
    My staff and I have spoken with families who have received 
a mailing that boasts that in exchange for $12.95, they would 
be guaranteed money for college. What they receive is a list of 
scholarships available in the area, and mostly general 
information about applying for financial aid through the 
regular process.
    It surprised me to hear about this particular opportunity 
because we normally see this type of guarantee associated with 
a charge of anywhere from $49.99 to $500. Our discussion in the 
office was that by lowering the charge to $12.95, the scam 
artist could get a significant number of bites and their 
revenues would increase dramatically on the high-volume 
business. This is an interesting point to me and I feel real 
strong about the advertisement of this type of thing to 
families because very often high-cost charges are associated 
with scams, versus the low-cost charges.
    We have seen high school seniors receive letters on red, 
white and blue letterhead with an official-looking seal, 
inviting them to send money and complete a profile. They 
guarantee funds for college. What the students receive is a 
list of names that they have to contact requesting an 
application. Any scholarship search, good or bad, must rely on 
the student or family to do all the work.
    The actual match is the easy part. Once a student receives 
a list of matches, they must contact each donor and obtain the 
application, criteria and deadline information. After 
completing the application, they need to mail the form. There 
are no requirements that donors respond to each applicant, so 
there is no guarantee that the student will ever hear from a 
particular donor.
    More typically, the scholarship organization will only 
notify the winners. For scholarship search organizations who 
advertise a money-back guarantee, the fine print will normally 
say something like students must apply for all scholarship 
matches and receive a negative response back from each source 
before a refund will even be considered.
    Another one that is very popular these days is an approach 
for a college night offered by College Forum, a national 
college program. I personally have been approached by this for 
one of my own children. We are asked to call an 800 number and 
reserve a place on an already preassigned date and location, 
and they do offer help with assistance for the admissions and 
the financial aid for a mere $650.
    I can go on with more of those, but in my experience I have 
spoken with many families from a variety of incomes who have 
fallen prey to these scholarship scams. I have spoken with 
families who are bright and educated themselves, who are just 
inquiring about what scholarship search organizations can be 
trusted enough to recommend, without getting into a dialogue 
about the mysteries and myths of financial aid.
    We speak to many low- and middle-income families who, for 
one reason or another, do not have the savings necessary for 
their children's education and are just seeking any possible 
way to find help. They understand the value of higher education 
today and want that for their children. Families waste good 
money on scholarship search scams that could have been used for 
college expenses. It seems to me that these companies prey on 
exactly the kind of family that Congress took such great care 
to ensure access to funds for higher education by eliminating 
the fee that used to be associated with filing the financial 
aid application.
    In terms of Senate bill 1455, I support the greater 
penalties for those convicted of these crimes, which I believe 
will have a cooling effect on the fraudulent element of the 
financial assistance industry. We recognize that there are 
organizations that provide good services for students, but urge 
that consumers continue to be educated on how to detect 
potential fraud companies.
    Above all else, scholarship searches are nothing more than 
a database match. The only thing that a company, good or bad, 
can supply a student with is a list of possible opportunities. 
It is the consumer that has to do the work and the follow-up 
with every possible donor.
    I also support the bill's provisions which seek to raise 
public awareness of scam artists. In my opinion, families, aid 
administrators and high school counselors would welcome a 
centralized Internet source that identifies businesses that go 
through some kind of screening process. Collections of 
information similar to Mr. Kantrowitz' Web site are a valuable 
resource, and the information contained within these resources 
should be made available through multiple media. The Department 
of Education already has a mechanism in which it communicates 
to all financial aid applicants who submit a FAFSA. Although 
the timing may not work out, this may be a means of providing 
some information to a public seeking assistance.
    I would like to offer one suggestion to further enhance 
student protection. Just as colleges and universities that 
receive Federal funds must meet certain requirements in order 
to participate in Federal programs, it seems to me that a 
company providing match results that include Federal programs 
should also be required to disclose certain information to 
applicants in clear and understandable terms. They should be 
required to state up front how families can obtain free 
information about the Federal programs without paying for the 
match. The price, so to speak, for these companies to use 
Federal information in their scams should be the requirement 
that they direct students to a variety of free sources of 
information in their marketing literature.
    Again, I thank you for this opportunity to speak to you 
about this topic today and I would be happy to answer any 
questions you may have.
    Senator Abraham. Thank you very much.
    [The prepared statement of Ms. O'Flaherty follows:]

                 Prepared Statement of Susan O'Flaherty

    Mr. Chairman, members of the Senate Judiciary Committee, thank you 
for the invitation to speak to you today regarding Senate bill 1455, 
the Scholarship Fraud Prevention Act of 1999. I appreciate this 
opportunity and must also tell you how personally and professionally 
pleased I am to see a bill that is focused on creating greater 
protection for consumers against scholarship fraud. I applaud the 
efforts of Senators Abraham and Feingold, and I offer them my support 
and assistance as this legislation makes its way through the Senate.
    I am Director of Financial Aid and Scholarships at Western Michigan 
University in Kalamazoo, Michigan. Western Michigan University enrolls 
over 27,000 students, 72 percent of whom receive some form of financial 
aid. Student loan volume at Western Michigan alone approaches $70 
million dollars; as you might imagine, helping students locate and 
ultimately obtain ``non loan'' funds, such as scholarships, is of 
primary interest to my university, and to me personally.
    Before I begin my actual testimony, I want to let you know that I 
have worked in financial aid since 1973 and have had the opportunity of 
not only working for Western Michigan University but also for the 
University of Colorado, California Polytechnic State University and 
several private colleges in the East where I grew up.
    I could not count the number of financial aid and scholarship 
workshops I have facilitated to families and also to high school 
guidance counselors over those years. I can tell you that I honestly 
cannot recall one workshop in which a parent or a high school guidance 
counselor did not raise a question about scholarship search 
opportunities and which ones were ``good ones''. In my experience it is 
clearly an issue for many, many families.
    The need for action on this issue cannot be understated; 
scholarship fraud is out there, it is rapidly evolving with new, 
innovative scams, and it is scaring off students and legitimate 
services who must suffer because of the acts of an unscrupulous 
population. I believe the problem is best exposed through examples, and 
at this point I would like to share some of my personal experiences 
with various, questionable scholarship search approaches. You may be 
familiar with several of these cases, as they have affected literally 
thousands of students across the country, and most have received some 
degree of press attention. However, I'd like to make it clear that I am 
not relaying press accounts; each of these descriptions represent 
personal situations that families have shared with my office.

   My staff and I have spoken with many families who have 
        received a mailing boasting that in exchange for $12.95, they 
        would be guaranteed money for college. What they in fact 
        received was a list of scholarships available in their area, 
        and general information about applying for financial aid 
        through the FAFSA, the Free Application for Federal Student 
        Aid. It surprised me to hear about this particular 
        ``opportunity'' because we normally see this type of guarantee 
        costing families anywhere from $49.99 to $500. However, after 
        discussion with my staff, we came to the obvious business 
        conclusion that was reached much earlier by the crooks--that by 
        lowering the charge to $12.95, these scam-artists would get a 
        significant number of ``bites''--and their revenues would 
        increase dramatically on high-volume ``business''. I think this 
        is interesting and important in part because it illustrates 
        that not all scholarship scams can be identified as being 
        ``high-cost''. Furthermore, in this example, the student is 
        guaranteed ``money'', not ``scholarships''--but truth of the 
        matter is that all students are eligible for either a 
        subsidized or unsubsidized federal student loan. The guarantee 
        has been met, but by the Federal Government, not the scam 
        artist. The student paid for information that is already 
        available to them free of any charge.
   ``Come to a night about paying for college'' is a standard 
        advertising hook-phrase in this industry, and quite often, 
        these programs are held in a rented facility on a college 
        campus. The college financial aid office typically does not 
        authorize these programs, but parents and students commonly 
        hold the perception that if the workshop is held on a college 
        campus, then it must be legitimate. I am hopeful that many 
        colleges will catch on to this scam, as these organizations 
        prey on the fact that it is not unusual for legitimate 
        financial aid seminars to be held on campus. And the goal of 
        these programs? To convince people that for a fee, funds can be 
        secured.
   We have seen high school seniors receive letters on red, 
        white and blue letterhead with an official-looking seal 
        inviting them to send money and complete a profile form for 
        scholarship dollars. They guarantee funds for college. What the 
        student receives is a list of names that they then have to 
        contact requesting an application. Any scholarship search, good 
        or bad, must rely on the student or family to do a lot of the 
        work. The actual match is the easy part. Once the students 
        receive the list of matches, they must contact each donor and 
        obtain the application, criteria, and deadline information. 
        After completing the application for each donor, they then need 
        to mail the form. There are no requirements that donors respond 
        to each applicant so there is no guarantee that the student 
        will ever hear from a particular donor. More typically the 
        scholarship organization will only notify the winners. For 
        scholarship search organizations who advertise a money back 
        guarantee, the fine print will normally say something like: 
        ``student must apply for ALL scholarship matches (including 
        doing all the work as indicated above) and receive a negative 
        response from each source before a refund application can be 
        processed''.
   Another current and popular approach these days is the 
        scholarship search that is attached to a ``college night'' 
        program offered by some ``National College Program''. In this 
        case, the families are asked to call an ``800'' number and 
        reserve a place on an already pre-assigned date and location. 
        These are often at hotels within an hour or so of the family 
        residence. In this case, they are offered assistance with the 
        admissions application AND for finding funds for going to 
        college. I have heard of costs as high as $650 in this case. 
        You may have seen the segment on a recent news program 
        highlighting problems that families have encountered.
   One especially innovative scam is accomplished through tying 
        the scholarship dollars to a life insurance policy. In this 
        example, families are urged to sign up for a life insurance 
        policy and in exchange their student-children are guaranteed 
        funds for college. Once again, those ``funds'' are those 
        federal funds that the student would normally receive by 
        applying through the FAFSA.

    In my experience, I have spoken with many families from a variety 
of incomes who have fallen prey to these scholarship scams. I have 
spoken with families who are bright and educated themselves, who are 
just inquiring about what scholarship search organizations can be 
trusted enough to recommend. Without getting into a dialogue about the 
``mysteries and myths of financial aid'', we speak to many low and 
middle income families who for one reason or another do not have the 
savings necessary for their children's education and are just seeking 
any possible way to find help. They understand the value of a higher 
education today and want that for their children. Families waste good 
money on scholarship search scams that could have been used for college 
expenses. It seems to me that these companies prey on exactly the kind 
of family that Congress took such great care to ensure access to funds 
for higher education by eliminating the fee that used to be associated 
with filing a financial aid application.
    In terms of the Senate bill 1455, I support a greater penalty for 
those convicted of these crimes, which I believe will have a ``cooling 
effect'' on the fraudulent element of the financial assistance 
industry. We recognize that there are organizations that provide good 
services for students but urge that consumers continue to be educated 
on how to detect a potential fraud company. Above all else, scholarship 
searches are nothing more than a data base match. The only thing that 
any company, good or bad, can supply a student with is a list of 
possible opportunities. It is the consumer that has to do the work and 
follow up with every possible donor. How can a company guarantee funds 
based on the consumer needing to do extensive follow up? In my opinion, 
there can never be a guarantee of any type associated with any 
scholarship search. As criteria and as a warning for consumers, it 
should be an automatic sign of possible fraud.
    I also support the bill's provisions which seek to raise public 
awareness of scam artists. In my opinion, families, aid administrators, 
and high school counselors would welcome a centralized Internet source 
that identifies businesses that go through some kind of screening 
process. Collections of information similar to Mr. Kantrowitz's website 
are a valuable resource, and the information contained within these 
resources should be made available through multiple media. The 
Department of Education already has a mechanism in which it 
communicates to all financial aid applicants who submit a FAFSA. 
Although the timing may not work out in all cases, the FAFSA 
application process it may be a way to provide general information to a 
public that is already seeking assistance.
    I would like to offer one suggestion to further enhance student 
protections. Just as colleges and universities that receive federal 
funds must meet certain requirements in order to participate in the 
federal programs, it seems to me a company providing match results that 
include federal programs should also be required to disclose certain 
information to applicants in clear and understandable terms. They 
should be required to state up-front how families can obtain free 
information about the federal programs without paying for the match. 
The ``price'', so to speak, for these companies to use free federal 
information in their scam should be the requirement that they direct 
students to a variety of free sources of information in their marketing 
literature. Mr. Chairman, I again thank you and the cosponsors of this 
legislation for providing a forum in which we may discuss this 
important issue, and I would be happy to answer any questions you or 
any other Senator may have.

    Senator Abraham. As you all have heard some bells going off 
behind you the last couple of minutes, there is a vote taking 
place on the Senate floor right now which I have to go cast. So 
what I am going to do is just temporarily recess the hearing 
before we hear from our last two panelists here while I run 
over, vote and come back. I hope that won't take very long, but 
please bear with us and we will resume the hearing very 
shortly.
    [The committee stood in recess from 2:35 p.m. to 2:50 p.m.]
    Senator Abraham. We will resume the hearing at this time. 
As everybody can see, we have been joined by Senator Feingold, 
who is the other original cosponsor of this legislation, and I 
appreciate his support. As always, when we work together on 
things, I appreciate that as well.
    What we are going to do is let our final two witnesses 
testify or make your statements and then we will turn to 
Senator Feingold for his statement and then we will pursue 
questioning after that.
    So it is your turn, Mr. Kantrowitz. We appreciate your 
being here today, and welcome you and turn to you for your 
statement at this time.

                  STATEMENT OF MARK KANTROWITZ

    Mr. Kantrowitz. Mr. Chairman, I thank you for convening 
this hearing on the College Scholarship Fraud Prevention Act of 
1999 and for inviting me to testify before the Senate Judiciary 
Committee this afternoon.
    My name is Mark Kantrowitz and I am the publisher of the 
FinAid and eduPASS Web sites, free resources that exist to aid 
students in navigating the sea of financial aid and to combat 
the type of fraud the Abraham-Feingold legislation addresses. 
The FinAid site had more than 2 million visitors last year. I 
am pleased to have the opportunity to share my experiences with 
the committee today.
    Every year, several hundred thousand students and parents 
are defrauded by scholarship scams. The victims of these scams 
lose more than $100 million annually. These are conservative 
estimates. The most common types of scholarship scams include 
scholarships for profit and guaranteed scholarship search 
services.
    The first type charges an application fee for scholarships 
that never materialize or are less than advertised or disburses 
less money in scholarships than is received in application 
fees. They make a profit off of the scholarships. The second 
type charges a fee to match student information against a 
database of scholarships and guarantees that the student will 
actually receive money. There are other types such as Susan 
mentioned where they have seminar scams. My cat receives 
invitations for these all the time.
    Scholarship scams succeed by giving families an 
unreasonable expectation of success in using their services to 
obtain financial aid. Several of the most common 
misrepresentations include, first, the unclaimed aid myth which 
falsely states that millions or billions in aid went unclaimed 
last year and promises to get the student their fair share. 
This is an extremely pernicious myth because it not only 
defrauds consumers, but it also suggests to private sector 
benefactors that there is no need for them to create new 
scholarships. After all, if money is unclaimed, they don't need 
to create new ones.
    Second, bogus guarantees which often include restrictions 
that render them meaningless, such as requiring the student to 
submit rejection letters--sponsors do not provide students with 
rejection letters; they only notify the winners--or which 
include Federal aid as part of the total.
    And, third, false claims of government or Better Business 
Bureau approval. One scam even created its own bogus BBB. 
Others misrepresent the nature of their business by using an 
eagle and a formal seal as a logo or words like ``national,'' 
``administration,'' ``foundation'' and ``federal'' in their 
names.
    I support the College Scholarship Fraud Prevention Act 
because it addresses the problem through a combination of law 
enforcement and consumer education. I would like to suggest a 
few ways in which the legislation could be enhanced.
    First, in section 5, restrict the listings to organizations 
that provide information and services for free, at no charge to 
the student. The Higher Education Act already includes such a 
requirement. There are numerous high-quality sources of free 
information about financial aid, including the FinAid, Fast-
Web, College Board, and Peterson's Web sites.
    Second, in section 5, require the organizations to publish 
a privacy policy on their Web sites, and require the 
organizations to provide the consumer with the ability to opt 
out of any mailing lists as part of the registration process.
    Third, in section 5, allow the U.S. Department of Education 
to exclude businesses which are being prosecuted by State 
attorneys general, not just the FTC.
    Fourth, in section 5, give the U.S. Department of Education 
broader discretionary power in determining which organizations 
should not be listed, since a listing on the ed.gov Web site 
will be viewed by consumers as an implicit endorsement.
    Fifth, in section 5, add language directing the U.S. 
Department of Education's consumer hotline, the Federal Student 
Aid Information Center, 1-800-4-FED-AID, to provide similar 
information to consumers who call with questions about the 
legitimacy of a particular financial aid business.
    Sixth, expand the language of the legislation to include 
organizations that provide information about student financial 
aid, in addition to organizations that claim to offer financial 
assistance.
    An additional idea for improving the legislation concerns 
scholarships for profit or organizations that offer 
scholarships with an application fee. Students apply for these 
awards thinking that the organization is involved in 
philanthropy when, in reality, the organization is enriching 
itself through the application fees. Philanthropy should be 
about giving money, not getting money. I recommend making it 
illegal to misrepresent what amounts to little more than a 
raffle or a lottery as a scholarship by making it illegal to 
charge student fees to apply for scholarships. If they want to 
call it a scholarship or fellowship, they must not be allowed 
to charge students any fees.
    Alternatively, I would recommend requiring any organization 
that charges students an application fee for scholarships to 
disclose certain information on the application form and to the 
general public, including the number of applicants, the total 
application fee revenue, and the total amount disbursed in 
scholarships. The consumer can then use this to see that the 
organization is making a profit off of the scholarship.
    Mr. Chairman, I once again thank you and the committee for 
taking an interest in the issue of student financial assistance 
fraud and for inviting me to share my thoughts on the matter. I 
would be happy to answer any questions you may have.
    Senator Abraham. Thank you very much, and we will look 
closely at your recommendations as we move forward 
legislatively.
    [The prepared statement of Mr. Kantrowitz follows:]

                 Prepared Statement of Mark Kantrowitz

    Mr. Chairman, I thank you for convening this hearing on S. 1455, 
the College Scholarship Fraud Prevention Act of 1999, and for inviting 
me to testify before the Senate Judiciary Committee this afternoon. My 
name is Mark Kantrowitz, and I am the publisher of the FinAid and 
eduPASS web sites, resources that exist to aid students in navigating 
the sea of financial aid and combat the type of fraud the Abraham-
Feingold legislation addresses. I am pleased to have the opportunity to 
share my experiences with the Committee today.
    Every year, several hundred thousand students and parents are 
defrauded by scholarship scams. The victims of these scams lose more 
than 100 million dollars annually.
    Most families are afraid of the high cost of a college education 
and find the student financial aid process to be overwhelming. 
Financial aid even has its own language, an alphabet soup of acronyms 
like EFC and FAFSA and terms like need analysis and professional 
judgment. In such an environment, scams can thrive. When families are 
approached by outfits that promise to get the student all the money he 
or she needs to pay for college, they are so desperate that they lose 
their sense of caution. After all, many scholarship scams guarantee 
success and tell consumers that their services are completely without 
risk.
    The most common types of scholarship scams include the following:

   Scholarships for Profit. These are scholarships with an 
        application fee or other fees, but no money is ever awarded, 
        the amounts disbursed are less than advertised, or the 
        scholarship sponsor receives more money in fees than is 
        returned to the students in the form of scholarships.
   Guaranteed Scholarship Search Services. These are 
        information brokers who charge a fee to match student 
        information against a database of scholarships and guarantee 
        that the student will receive at least $1,000 or $2,000 in 
        scholarships.

    Other types of scholarship scams include:

   Guaranteed Financial Aid Consultants. These outfits promise 
        to maximize eligibility for need-based student aid by 
        decreasing the Expected Family Contribution (EFC) and guarantee 
        success, suggesting that they can send the student to college 
        for free. Although there are legitimate strategies for 
        decreasing the EFC, such as paying off consumer debt (e.g., 
        credit cards and auto loans) and shifting assets from the 
        student's name to the parent's name, the typical decrease in 
        the EFC is only $1,000 and is often realized in the form of 
        loans. Some outfits may advocate that the families provide 
        false information on the FAFSA and may fail to sign in the paid 
        preparer section of the form.
   Student Loans with an Up-Front Fee. These scams charge an 
        ``application'', ``processing'', it origination'', or 
        ``guarantee'' fee up-front, but the promised loans never 
        materialize. Federal education loans do not have application 
        fees and always deduct the origination and guarantee fees from 
        the disbursement check.
   Seminar Scams. These outfits advertise a free financial aid 
        seminar, often in letters mailed directly to parents. The 
        seminar turns out to be a high pressure sales pitch for 
        expensive financial aid products and services. What little 
        financial aid information is presented is often inaccurate or 
        obsolete. They do not provide the families with practical 
        advice.
   Linked Product Scams. These scams state or suggest that the 
        family must purchase a particular product, typically student 
        life insurance or an annuity, in order to get access to federal 
        student aid.

    Scholarship scams succeed by giving families an unreasonable 
expectation of success in using their services to obtain financial aid. 
Several of the most common misrepresentations include:

   The unclaimed aid myth. This myth states that ``$6.6 billion 
        in aid went unclaimed'' and promises to get the student their 
        fair share. Other common variations include $2.7 billion and 
        $135 million. This is an extremely pernicious myth, because it 
        not only defrauds consumers, but suggests to private sector 
        benefactors that there is no need for them to create new 
        scholarships. The $6.6 billion version of the myth is based on 
        a 1976-77 academic year study in which the National Institute 
        of Work and Learning estimated that $7 billion was potentially 
        available from employers in the form of employee tuition 
        assistance, but that only an estimated $400 million was used. 
        Nobody has ever substantiated that any scholarship money 
        available to the general public has ever gone ``unclaimed''. If 
        there were such an unclaimed award, it would only need to be 
        listed in one of the free national scholarship databases to 
        obtain thousands of qualified applicants.
   High success rates. A guaranteed scholarship matching 
        service might advertise a 96 percent success rate. The National 
        Post-secondary Student Aid Study (NPSAS) conducted by the 
        National Center for Education Statistics at the U.S. Department 
        of Education found that only one in twenty-five students (4 
        percent) receives a private sector scholarship, and the average 
        amount is only about $1,600.
   Bogus Guarantees. A scholarship matching service might offer 
        a guarantee that the student will receive a minimum amount of 
        aid, typically $1,000 or $2,000. Such guarantees often come 
        with restrictions that render them meaningless, such as 
        requiring the student to submit rejection letters (most 
        sponsors only notify winners), or include federal aid as part 
        of the total.
   False claims of government, Chamber of Commerce, or BBB 
        approval. One scam even created their own bogus BBB. Another 
        stated that they are listed in the U.S. Library of Congress. 
        Others misrepresent the nature of their business by using an 
        eagle in a formal seal as their logo, and words like 
        ``National'', ``Administration'', ``Foundation'' and 
        ``Federal'' in their names.
   False claims of special influence with or special access to 
        scholarship sponsors.

    The Federal Trade Commission initiated law enforcement activity 
against scholarship scams in the Fall of 1996. To date the FTC has 
brought actions against eight companies that collectively have 
defrauded 175,000 consumers out of an estimated 22 million dollars. The 
FTC initiative spurred the Attorneys General in several states to take 
action against scholarship scams operating in their states. The FTC 
also launched a consumer education campaign with their ``Six Signs Your 
ScholarShip is Sunk'' brochure.
    But this is just the tip of the iceberg. I estimate that there are 
900 to 1,000 scholarship scams of all types still in operation, with 
new scams being created every year. The typical scam charges fees 
ranging from $2 to $800, and has 5,000 to 10,000 victims. Some scams 
have charged fees as high as $5,000, and some have had as many as 
100,000 victims.
    I support the College Scholarship Fraud Prevention Act because it 
addresses the problem through a combination of law enforcement and 
consumer education.
    With regard to S. 1455, I would like to suggest a few ways in which 
the legislation could be enhanced:

   In section 5, require that only organizations which provide 
        information and services for free be listed. In the Higher 
        Education Amendments of 1998, Section 485(d) of the Higher 
        Education Act of 1965 was amended to direct the U.S. Department 
        of Education's web site to include direct links to databases 
        that contain information on public and private financial 
        assistance programs, and further stated ``The Secretary shall 
        only provide links to databases that can be accessed without 
        charge and shall make reasonable efforts to verify that the 
        databases included in a direct link are not providing 
        fraudulent information.'' There are numerous high quality 
        sources of free information about financial aid, including the 
        FinAid, FastWeb, College Board, and Peterson's web sites.
   In section 5, require the organizations to publish a privacy 
        policy on their web site and require the organizations to 
        provide the consumer with the ability to opt out of any mailing 
        lists as part of the registration process.
   In section 5, allow the U.S. Department of Education to 
        exclude businesses which are under investigation or being 
        prosecuted by State Attorneys General.
   In section 5, give the U.S. Department of Education broader 
        discretionary power in determining which organizations should 
        not be listed, since a listing on the www.ed.gov site will be 
        viewed by consumers as an implicit endorsement. One possibility 
        would be to have the Department assemble an advisory committee 
        of respected college financial aid personnel and other 
        financial aid experts to set standards for inclusion on the 
        Department's web site.

    In section 5, add language directing the U.S. Department of 
Education's consumer hotline, the Federal Student Aid Information 
Center (1-800-4-FED-AID), to provide similar information to consumers 
who call with questions about a financial aid business's legitimacy.

   Expand the language of the legislation to include 
        organizations that provide information about student financial 
        aid in addition to organizations that offer financial 
        assistance.

    One additional suggestion concerns what I call ``scholarships for 
profit'' or organizations that offer scholarships with an application 
fee. (Note that I'm not talking about organizations that provide 
information about scholarships, such as scholarship databases and 
books, but rather organizations that claim to give money to students 
but charge an application fee or other fees.) Students apply for these 
awards, thinking that the organization is involved in philanthropy, 
when in reality the organization is a for-profit business making a 
substantial amount of money off of application fees. If the application 
fee revenue exceeds the amount disbursed in scholarships, the outfit is 
making a profit by offering the scholarships. Even if the application 
fee revenue is less, the organization is effectively recirculating 
student money in the form of scholarships, or getting the students to 
cover administrative expenses such as salaries. In many cases the 
students would be better off playing the lottery, where at least 
there's a 50 percent payout.
    To give a concrete example, suppose a scholarship program gives 
away fifty $1,000 scholarships a year, but charges a $10 application 
fee and gets 10,000 applications. They receive a total of $100,000 in 
application fees, and give out $50,000 in scholarships, for a net 
profit of $50,000. Or let's suppose the application fee is only $5, in 
which case the $50,000 in application fees is given out entirely in 
scholarships. Even in that case it should feel a little odd to you. In 
both cases, fifty of the 10,000 students are well served by the 
scholarships, in that they paid $5 or $10 and got $1,000. But the 
remaining 9,950 students have no benefit for their application fee.
    In some cases the application fees are charged by organizations 
that appear to be merely misguided. For example, in one case a tax 
exempt foundation charged students a $3 application fee, received more 
than 100,000 applications, but only gave away 180 $1,000 scholarships. 
The foundation was able to cover its expenses and also build up a 
rather large nest egg. In this case I was able to convince them to 
eliminate the application fee. But in most cases it is an organization 
or an individual who is deviously defrauding students by making them 
think that the purpose of the organization is to give them money, when 
it really is to enrich the people operating the scam.
    The bottom line is that philanthropy should be about giving money, 
not getting money. The key to these scams is they are able to charge an 
application fee or other fees to apply for their scholarship programs, 
while still being able to call it a scholarship or fellowship. If S. 
1455 were to make it illegal to misrepresent what probably amounts to 
little more than a raffle or lottery as a scholarship, making it 
illegal for an organization that offers a scholarship to charge an 
application fee or other fee (e.g., ``administrative fee'', 
``redemption fee'', or whatever they want to call it) to apply. If they 
use the word ``scholarship'' or ``fellowship'', they should not be able 
to charge the student (or the parent/teacher) money as a requirement 
for the student to submit an application.
    It is important that the language of such a provision carefully 
distinguish such scams from legitimate operations, such as:

   Publishers of scholarship books (e.g., Peterson's, Prentice 
        Hall, McGraw Hill), who charge a fee for a book of information 
        about scholarships. The distinction here is that such 
        publishers are charging for information about a variety of 
        scholarships, not a fee to apply for a scholarship.
   Scholarship management services (e.g., USA Group, Citizen's 
        Scholarship Foundation of America, etc.) who charge the 
        scholarship sponsor a fee to manage their scholarship programs. 
        The distinction here is that the sponsor is getting charged an 
        administrative fee, not the individual students.

    Mr. Chairman, I once again thank you and the Committee for taking 
an interest in the issue of financial assistance fraud, and for 
inviting me to share my thoughts on the matter. I would be happy to 
answer any questions you may have.

    Senator Abraham. Mr. Bery, we welcome you. Thank you for 
being here today. We will turn to you for your testimony.

                   STATEMENT OF SANJEEV BERY

    Mr. Bery. Thank you, Senator Abraham and Senator Feingold, 
for offering me this opportunity to testify, as well as thank 
you for introducing this legislation. My name is Sanjeev Bery 
and I am the higher education associate for U.S. PIRG, U.S. 
Public Interest Research Group.
    The U.S. PIRG Higher Education Project works to expand 
access to higher education. We do so by advocating for 
increased funding for need-based student aid, lower-cost 
student loans, and better service for students who are served 
by Title IV of the Higher Education Act. U.S. PIRG endorses 
Senate bill 1455, the College Scholarship Fraud Prevention Act 
of 1999. I am the U.S. PRIG representative tasked with 
advocating support of this bill, and thank you again for 
introducing this legislation.
    It is my pleasure to talk to you today regarding the 
subject of fraudulent college financial assistance services. My 
experience with college scholarship fraud began with personal 
experience. In 1994, I was a senior at Fred C. Buyer High 
School in Modesto, CA. At the time, I was applying to college 
and looking for sources of financial aid.
    During that period of time, my parents received a postcard 
in the mail advertising a scholarship service. The company was 
named CAP, College Academic Planning, Incorporated. CAP's 
services seemed straightforward. In return for a $200 fee, I 
would receive a detailed list of scholarships tailored to my 
future background and future plans.
    Despite the heavy price tag, my parents and I decided to go 
ahead with the service. Though $200 is indeed a lot of money, 
we thought that if we were missing out on opportunities to 
apply for scholarships that I didn't already know about, that 
would be a problem and something not to miss out on. So my 
parents went ahead and paid the $200 fee.
    I then spoke on the phone with a CAP representative who 
asked me about my background and academic plans. Sometime 
later, I received a booklet in the mail with the results of 
CAP's so-called personalized scholarship search. The product we 
received in return for our $200 was of the poorest quality. The 
scholarships listed had absolutely nothing to do with either my 
personal background or my college pursuits.
    While I intended to study political science, I received a 
list of scholarships dealing with how to apply for scholarships 
dealing with med school. While I am of Indian descent, my 
parents having been born in India, I also received a list of 
scholarships on how to apply for Native American scholarships.
    So when we looked into the refund policy, it became clear 
that we had been ripped off. According to CAP, we would receive 
a refund if we provided proof that I had unsuccessfully applied 
to each of the scholarships they had given information on. But 
obviously with none of the scholarships really relevant to me 
or my personal needs at all, it would have been a complete 
waste of time to do so, even if the scholarship companies had 
actually responded and said that I was rejected.
    In some cases, I didn't even meet the qualifications to 
actually apply for the scholarships, as in the case of the 
Native American scholarships. This made it a complete waste of 
time to apply to each and every scholarship that they provided. 
Not knowing of any other alternative, we decided to accept our 
$200 loss.
    At the time, I had no idea that thousands of other high 
school students across the country and their parents were 
becoming victims of the same company's fraudulent practices. 
When the Federal Trade Commission shut down CAP through legal 
action in 1997, it became known that over 30,000 students and 
families across the country were similarly ripped off. CAP 
earned over $6 million in net sales through its fraudulent 
practices, charging families for a product that had lots of 
promise but little actual value.
    I went on to study at the University of California at 
Berkeley. Though I would never hear from CAP again, I know that 
during my 4 years as an undergraduate, many of my fellow 
classmates must have fallen prey to the same fraudulent 
schemes.
    At UC-Berkeley, like many other college campuses across the 
country, scholarship services place their offers on bulletin 
boards and mail them to students. As mentioned in other 
testimony today, the ads often wrongly state that millions of 
dollars in scholarship aid go unclaimed each year. Some even 
falsely guarantee that students or parents who pay the 
application fee and participate will automatically qualify for 
a scholarship.
    Many students are extremely vulnerable to these kinds of 
tactics. Over the past 20 years, the need for student aid has 
skyrocketed as enrollments and college costs have risen. 
Unfortunately, Federal student aid programs like the Pell 
Grants have not kept pace. This forces many low-income students 
to work long hours and take out large loans to pay for college. 
In this kind of environment, any promise of scholarship aid is 
difficult to resist.
    I strongly support your efforts to protect students and 
fight this fraud. Senate bill 1455, the College Scholarship 
Fraud Prevention Act of 1999, will go a long way toward 
stopping this type of criminal behavior.
    Thank you, Senator Abraham and Senator Feingold, for 
introducing this legislation and for giving me the opportunity 
to testify.
    Senator Abraham. Thank you, Mr. Bery.
    [The prepared statement of Mr. Bery follows:]

                   Prepared Statement of Senjeev Bery

    Thank you, Chairman and Senators, for the opportunity to testify 
before this committee. My name is Sanjeev Bery, and I am the Higher 
Education Associate for U.S. PIRG, the U.S. Public Interest Research 
Group. U.S. PIRG is the national lobby office for the state PIRG's. The 
State PIRG's are student-led public interest organizations in 25 states 
across the country.
    The U.S. PIRG Higher Education Project works to expand access to 
higher education. We do this by advocating for increased funding for 
need-based student aid, lower-cost student loans, and better service 
for students who are served by Title IV of the Higher Education Act. 
U.S. PIRG endorses Senate Bill 1455, The College Scholarship Fraud 
Prevention Act of 1999. I am the lead person at U.S. PIRG responsible 
for advocating in support of this bill.
    It is my pleasure to talk to you today regarding the subject of 
fraudulent college financial assistance services. My experience with 
scholarship fraud begins with personal experience. In 1994, 1 was a 
senior at Fred C. Beyer High School in Modesto, California. At the 
time, I was applying to college and anxiously awaiting a response from 
several universities. While finishing the application process, I was 
also focused on finding sources of financial aid. Because of this, I 
made it a priority to research scholarships, and apply to those that I 
might qualify for.
    During that period, my parents received a postcard in the mail 
advertising a scholarship service. The company was named CAP, College 
Academic Planning, Inc. CAP's services seemed straightforward--in 
return for a $200 fee, I would receive a detailed list of scholarships 
tailored to my personal background and future plans. Despite the heavy 
price tag, my parents and I decided to go ahead with the service. At 
the time, we viewed it as an investment. Though $200 is a significant 
amount of money, I could not pass up the opportunity to receive much 
needed financial aid.
    So my parents went ahead and paid the $200 fee. I then spoke on the 
phone with a CAP employee, who asked me about my background and 
academic plans. Sometime later, I received a booklet in the mail with 
the results of CAP's personalized scholarship search.
    The product we received in return for our $200 was of terrible 
quality. The scholarships listed had absolutely nothing to do with my 
background or planned future pursuits. While I intended to study 
political science, the booklet provided by CAP contained scholarships 
for students pursuing medicine. While I am of Indian descent, my 
parents having been born in India, the scholarship company provided 
information on scholarships for Native Americans.
    When we looked into the refund policy, it became clear that we had 
been ripped off. According to CAP, we would only receive a refund if we 
provided proof that I had unsuccessfully applied to each of the 
scholarships they had given information on. None of the scholarships 
included in the booklet were of any relevance to my background or 
planned pursuits, academic or otherwise. In some cases, I actually did 
not even meet the basic criteria for applying. To apply to a series of 
scholarships that requested written essays and a variety of other 
materials, knowing full well that there was little chance I would 
qualify for anything, would have been a total waste of time. Not 
knowing of any other alternative, we accepted our $200 loss.
    At the time, I had no idea that thousands of other high school 
students and their parents were becoming victims of the same company's 
fraudulent business practices. When the Federal Trade Commission shut 
CAP down through legal action in 1997, it became clear that at least 
30,000 other families had also been ripped off. CAP earned over $6 
million in net sales through its fraudulent practices, charging 
families for a product that had lots of promise, but no value.
    I went on to study at the University of California at Berkeley. 
Though I would never hear from CAP again, I know that during my four 
years as an undergraduate, many of my fellow classmates must have 
fallen prey to similar fraudulent schemes. At UC Berkeley, like many 
other college campuses, scholarship services placed their offers on 
bulletin boards and mailed. them to students. The ads often claimed 
that millions of dollars in scholarship aid went unclaimed each year. 
Some even guaranteed that students who participated would qualify for a 
scholarship. The ads were often personalized, making use of mail order 
lists that provided students' names, interests, and contact 
information.
    Many students are extremely vulnerable to these kinds of tactics. 
Over the past 20 years, the need for student aid has skyrocketed as 
enrollment and college costs have risen. Unfortunately, federal student 
aid programs like the Pell Grant have not kept pace. This forces many 
low-federal students to work long hours and take out large loans to pay 
for college. In this kind of environment, any new promise of 
scholarship aid is difficult to resist. I would go so far as to say 
that many hardworking students and families feel a strong obligation to 
pursue whatever opportunities are available to make that investment in 
a college education.
    I strongly support your efforts to protect students and fight this 
fraud. S. 1455, the College Scholarship Fraud Prevention Act of 1999, 
sponsored by Senator Abraham and Senator Feingold, will help reduce the 
prevalence of these types of crimes.
    The bill's first plank, which toughens the penalties against the 
perpetrators of such fraudulent services, will send the message that 
such behavior will not be tolerated. The second plank removes the 
protective shield of bankruptcy that many financial assistance services 
hide behind when prosecuted. Finally, putting a list of reputable 
services online will provide parents and students with the best defense 
there is: good information.
    I would like to offer two suggestions as to how S. 1455 can be made 
even stronger:
    Require the Department of Education to submit an annual report to 
Congress on fraudulent financial assistance services.--By doing so, 
Congress will ensure that the issue retains high visibility. Such a 
report should include a list of companies that have been investigated 
or have had complaints filed against them. It should also categorize 
the different kinds of fraudulent services that are prevalent. By 
issuing such a report, the Department of Education would raise the 
issue's profile in the education community. In addition, it is likely 
that such a report would be covered by a broad spectrum of media as 
well. Increased awareness of the problem would ultimately benefit 
students and their parents.
    Promote a coordinated effort between the Department of Education 
and the Federal Trade Commission to educate high school students and 
guidance counselors on scholarship fraud.--As mentioned above, good 
information is often the best defense against fraud. Providing guidance 
counselors and high school seniors with tips for avoiding potentially 
fraudulent financial assistance services would go a long way towards 
reducing the prevalence of these crimes. Whether through printed 
materials or otherwise, this would supplement the information that this 
legislation already seeks to place on the World Wide Web.
    The College Scholarship Fraud Prevention Act of 1999 will help 
protect many students and parents from the predatory practices of 
fraudulent college financial assistance services. Providing an annual 
report on the subject and educating high school students and guidance 
counselors would offer even greater protection to potential victims.
    Thank you for this opportunity to testify.

    Senator Abraham. As I said, we will now turn to Senator 
Feingold for his statement.

STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE 
                       STATE OF WISCONSIN

    Senator Feingold. I would like to thank you, Senator 
Abraham, for your efforts to protect our Nation's students from 
scholarship fraud. This is not the first Abraham-Feingold 
effort and the last one was a very successful one and a good 
one, and I appreciate your asking me to work with you on this.
    Senator Abraham. Thank you.
    Senator Feingold. I would also like to thank the chairman 
for holding the hearing.
    My home State of Wisconsin, like its Midwestern neighbor, 
Michigan, is fortunate to have some of the finest higher 
education institutions in the entire United States, and good 
football teams. Although we did not quite beat Michigan, I 
think we can both agree that Wisconsin's defeat of Ohio State 
last week was a pleasure for both of us.
    Senator Abraham. It served a useful purpose.
    Senator Feingold. But in all seriousness, we are extremely 
proud in both of our States of our schools, our higher 
education institutions. Our States also enjoy diverse higher 
education systems, including public colleges and universities, 
community and technical colleges, and independent colleges and 
universities.
    High school students across the United States spend a good 
portion of their junior and senior years dreaming of attending 
one of these fine institutions. I think I am on the phone with 
my daughter, if not with her in person, every other day talking 
about this. She is a junior in high school right now.
    They recognize that a college education is an invaluable 
asset and higher education a truly wonderful experience. 
Students and parents alike are facing the reality that a 
college education is becoming increasingly expensive. And as I 
have indicated, I have personal experience with that, with one 
daughter already enrolled in the University of Wisconsin system 
and another one getting ready to apply.
    A university education is significantly more expensive than 
the costs I faced when I attended the University of Wisconsin-
Madison. The University of Wisconsin-Madison is quite 
affordable compared to other Big 10 universities, but the costs 
are increasing, and students in my State are concerned about 
those costs.
    Fortunately, there are some private and Federal scholarship 
opportunities that help to allow students to realize their 
dream of a college education, but these resources are limited 
and there are not nearly enough for all of those in need. 
Regrettably, some unscrupulous companies are trying to take 
advantage of students by imitating legitimate government 
agencies and grant-giving foundations, and I am dismayed by the 
increasing frequency with which I hear stories of corrupt 
companies and individuals preying on the hopes and dreams of 
America's youth.
    Many of these unscrupulous companies guarantee scholarships 
in exchange for an advance fee. Some of these companies attempt 
to sweeten the deal by providing money-back guarantees which 
lures in unsuspecting students. Still others trick students 
into divulging their checking account number and debit the 
student's account, with or without a student's consent.
    In most cases, the result is the same. The students lose 
valuable time and resources that could have been used toward 
furthering their education. Some students do receive their 
money back, but only after countless hours of phone calls and a 
few months of worry and hassle.
    Sherri Pickett, a senior at the University of Wisconsin-
Madison, paid $45 to a firm called Academic Financial Programs. 
A month later, she received a folder containing 10 grant and 
scholarship opportunities. That is when the problem started. 
First, she noticed that she, as a junior, was ineligible for 
seven out of the 10 scholarships. Then she wondered why she 
filled out the personal profile. Sherri received a few notices 
for freshman scholarships when she was a junior, notices for 
aid available only to those going into the petroleum industry, 
and notices for financial aid for students at private 
institutions.
    Finally, she realized that the acceptance deadline had 
already passed for the three remaining scholarships. Sherri 
spent countless hours trying to reach Academic Financial 
Programs. In the meantime, she contacted each of these 
scholarship opportunities and hoped to get a formal letter of 
rejection so she could simply get her money back. Instead of 
spending her time chasing scholarships she wasn't qualified for 
and leaving countless messages on answering machines, she could 
have devoted her time to studying, working, or enjoying 
college.
    In the end, Sherri did receive her money back, but only 
after many hours of hassle. But Sherri makes an important 
point. She writes, ``They will return your money if you have 
months of time to devote to them, but my money was something I 
already had in the first place.''
    We need to help students like Sherri Pickett who lost 
valuable time and confidence in the system trying to reclaim 
her fee from a corrupt company. Mr. Chairman, I ask that her 
full story be placed in the record.
    Senator Abraham. Without objection.
    [The prepared statement of Ms. Pickett follows:]

   Prepared Statement of Sherri Pickett, Senior at the University of 
                           Wisconsin-Madison

    My name is Sherri Pickett and I am from Madison, Wisconsin and am a 
senior at the University of Wisconsin-Madison. In June of 1998, I was 
contacted by a financial assistance service named Academic Financial 
Programs. The letter describing their service stated that if I sent the 
company a fee of $45, they would identify for me sources of financial 
aid for the upcoming school year. If they could not find identify any 
financial aid, I would be reimbursed for the fee. I felt I could not 
lose. I needed the money badly for school and I thought if there were 
any problems with the process, I would get my money back. I sent in the 
money along with a personal profile of myself, which included my major 
in school and my career interests. This was apparently the criterion 
that was used in order to locate the appropriate scholarships and 
grants.
    About a month later, I received a folder of about ten grant and 
scholarship opportunities. I also received information about how to get 
my money back if none of the identified sources could provide financial 
aid for me. I was anxious to contact these sources because I was 
excited at the opportunity to receive any extra aid. I became skeptical 
as I looked closer at all of the sources. I noticed that I was not even 
eligible for about seven of them. I wondered what the personal profile 
was for if I did not match any of the requirements. I received a few 
notices for freshman scholarships when I was a junior, notices for aid 
available if you were going into the petroleum industry, and notices 
for financial aid for students at private institutions. I never wrote 
anything of the sort in my personal profile. I also received notices 
for aid that was no longer available because the deadlines had all 
ready passed. Academic Financial Program also sent me information on 
aid from the state of Wisconsin, which I would have already received in 
my financial aid package from the university if I were eligible.
    At this point, I was determined to get my money back because I 
could see the program was nothing like I expected. It was now my 
responsibility to write to all of these sources and get rejection 
letters. The Academic Financial Program wanted you to write to the 
identified sources asking about financial aid in general. Instead, I 
told each source up front in letters that I knew I was not eligible for 
their financial aid and I wanted a letter from them stating so in 
return. The few scholarships I was eligible for were already past the 
acceptance deadline.
    I was so frustrated with this program that I called their office in 
San Diego several times telling them to expect my demand for a refund 
in the mail. About half of the times that I tried to contact them, no 
one would answer their phone. This was really starting to scare me 
because I really hated to think that I was being scammed. I finally got 
a hold of someone in the office and expressed my concerns about what I 
received from them. The woman I spoke to seemed helpful, but I was not 
sure how genuine she was. I thought they picked up their phone by 
mistake and would not pick it up again after speaking with me.
    I started to panic and contacted my financial aid advisor. She told 
me that plenty of students were paying far more than I was and not 
being reimbursed by these types of companies. She said she wished I had 
talked to her before I decided to follow through with paying Academic 
Financial Programs. I told her how disappointed I was with the service. 
I could not believe that these people actually have access to your name 
and information to contact you. It was definitely not what I expected. 
I spent several weeks gathering all of the rejection letters in hopes 
that I might possibly get my money back. It was very irritating that I 
had to even bother with the sources I was not eligible for.
    In between the time that I sent all of this information back to San 
Diego and the time that I actually heard back from them, I was 
constantly calling them to see if they received the package yet. I 
finally received the reimbursement in the mail of the full $45 after 
the course of a couple months. I was very fortunate to see that money 
back. I thought that I was probably just one out of the many people who 
even bothered going through the hassle of getting their money back with 
this company. Most students probably did not see the trouble they were 
getting themselves into, they just saw the potential money like I did. 
Although I got my money back as promised, it was a very long and drawn 
out process. I have warned many people about the program to hopefully 
save them the time and aggravated feeling I had after dealing with 
Academic Financial Programs. There is no question that they do not 
deliver what they promise--links to financial aid sources. They will 
return your money if you have months of time to devote to them, but my 
money was something I already had in the first place.
    I urge this committee to pass S. 1455, which would prevent future 
students from going through the ordeal that I dealt with.

    Senator Feingold. Hopefully, with this legislation, we can 
empower the Justice Department, the Federal Trade Commission, 
and the Department of Education to prevent companies from 
scamming students like Sherri.
    I commend the FTC for addressing the issue of scholarship 
scams. In 1996, the FTC initiated Project Scholarshipscam, a 
nationwide crackdown on fraudulent scholarship search services. 
I am particularly pleased about the accessibility of 
information on scholarship scams on the FTC's Web site and look 
forward to hearing from the FTC on its efforts to deal with 
this problem.
    Private organizations have also joined in the effort. Web 
sites such as www.finaid.org provide a valuable service, both 
making students aware of legitimate scholarships and warning 
them of potential scams. I am pleased that Mr. Kantrowitz has 
joined us today. Unfortunately, their efforts are not enough to 
deter scholarship scam artists. According to the National 
Association of Student Financial Aid Administrators, more than 
350,000 people are duped by aid scams each year, losing some $5 
million annually.
    I understand that in one such case, in Baltimore, MD, a 
single individual defrauded 60,000 students for a grand total 
of $600,000. This fraud must stop. Students have a right to 
dream of a college education without worrying about fraud and 
abuse. We must increase awareness of such fraud, protect 
students from scam artists, and deter future criminals.
    I am pleased that this legislation will protect students by 
requiring the Department of Education to create a Web site of 
legitimate sources of scholarship information. It would further 
require the Department of Education to coordinate with the FTC 
in compiling this list. This legislation will protect against 
fraudulent organizations being listed on the site. The Web site 
will hit the ground running, since the FTC has already begun 
the awareness campaign on their site. This Web site will 
provide an invaluable service, making students aware of 
legitimate scholarships and helping them to differentiate 
legitimate companies from con artists.
    I am also pleased that this legislation improves the FTC's 
ability to recover the monies owed students. I understand that 
some scholarship scam artists use bankruptcy to retain their 
ill-gotten gains and avoid paying court judgments. Here is how 
they do it. First, the scam artists use the student's money to 
invest in expensive homes. When the scam artists are hit with 
disgorgement and redress orders, they file for bankruptcy. The 
scam artists take advantage of the bankruptcy estate exemption 
for residential property to keep the students' money. Then 
after the bankruptcy proceedings clear their debts, the scam 
artists sell their expensive homes and succeed in keeping the 
money they have defrauded from students. This is an outrageous 
abuse of the bankruptcy laws and can't be allowed to continue. 
While I am cautious about eliminating legitimate exemptions 
from bankruptcy for those who need them, I want to be sure the 
scam artists cannot use bankruptcy as a tool to avoid being 
held responsible for their wrongdoing.
    The scams themselves take many forms--the advance fee loan, 
the scholarship prize, the guaranteed scholarship search 
service, to name just a few. Unfortunately, all the scams have 
one common thread; they deprive students of resources that 
could otherwise be used for books or tuition.
    In one scam that has been cited by Senator Abraham and 
others, a bogus organization, the National Scholarship 
Foundation, charged students a $189 processing fee. For their 
hard-earned dollars, students received only general information 
about the general college application process. For those who 
may be reluctant to act on this legislation, I want to make 
clear that these frauds, though they may seem like small 
amounts of money, represent real money to Wisconsin students. 
For $189, students could have taken a sales management course 
at the Milwaukee area technical college, bought books at the 
campus bookstore in Madison, WI, or purchased 10 to 15 hours of 
child care to allow them to be able to attend classes in the UW 
system.
    We in Congress also believe these amounts to be 
significant. For example, the fiscal year 2000 Labor-HHS bill 
contained a $200 increase in the maximum Pell Grant award. We 
would like to do more, but that is supposedly worthwhile, that 
is real money.
    I hope this committee will take up this legislation soon 
and forward it on to the full Senate. We need to protect our 
Nation's college students from unscrupulous companies. This 
legislation is a common-sense first step in preventing 
scholarship fraud, and I again want to thank Senator Abraham 
for his leadership on the issue.
    Thanks for the time.
    Senator Abraham. Senator Feingold, thank you. I think you 
have once again identified some compelling arguments in support 
of what we are trying to do here, and I appreciate your help on 
this very much.
    Senator Feingold. Mr. Chairman, I forgot to ask unanimous 
consent that Senator Leahy's statement be submitted for the 
record.
    Senator Abraham. Of course, without objection.
    Senator Feingold. Thank you.
    Senator Abraham. If other members of the full committee 
wish to submit statements, we will leave the record open for 
them to have that opportunity.
    [The prepared statements of Senators Hatch and Leahy 
follow:]

   Prepared Statement of Hon. Orrin G. Hatch, U.S. Senator From the 
                             State of Utah

    Good morning, and welcome to today's hearing on solving the problem 
of scholarship scams. I first would like to thank Senators Abraham and 
Feingold for their efforts and leadership on this important issue. As 
many of you know, ``The Scholarship Fraud Prevention Act (S. 1455)'' 
was introduced by Senators Abraham and Feingold on July, 28 of this 
year. Also, I would like to thank all of our witnesses today for their 
time and cooperation.
    For those of us who care deeply about education and who promote 
higher education, scholarship scams are particularly offensive because 
they target the very students who are in need of financial help to 
continue their education. I have a long record of supporting the 
integrity of the student loan system, and ensuring that students have 
the broadest possible set of options in financing their educations. I 
am a longstanding supporter of the student loan system, and have worked 
hard to make sure that interest rates on student loans are kept to a 
minimum. I also have undertaken to make sure that scholarships and 
grants remain available to assist those students who need them.
    It is well-known that the cost of a college education today is 
extremely high, and students increasingly must seek financial 
assistance in order to attend. At the same time, fraud in the offering 
of financial assistance to college students has emerged in a wide 
variety of forms, and appears to be a growing problem. I hope that, 
with this hearing, we will better understand the problem of con artists 
who defraud students seeking to finance their college educations, and 
examine appropriate solutions to the problem.
                               __________

  Prepared Statement of Hon. Patrick J. Leahy, U.S. Senator From the 
                            State of Vermont

    One of the singular most important issues facing us today is 
education. Affordable higher education is an opportunity that must be 
made available to all of our young people. To that end, public and 
private scholarships, grants and loans have long assisted our nation's 
students in pursuing college degrees.
    Phony scholarship offerings, scams and frauds do great harm to our 
nation's students. No student seeking to attend a college or university 
should have to worry about whether a scholarship offering is legitimate 
or wonder whether the business to which he or she has mailed an 
application fee actually exists. I am glad we are exploring ways to add 
to the arsenal of our current laws to combat these types of frauds.
    The goals of the proposed bill are laudable: combating scholarship 
scams and promoting the dissemination of information about legitimate 
sources of higher education funding. Nevertheless, I have certain 
questions about whether the proposed bill is the most effective way in 
which to pursue the goals we all share.
    For instance, the bill proposes to raise the long-standing 
statutory maximum punishment of five years for mail and wire fraud to 
ten years in cases of scholarship scams. In light of the fact that 
scholarship scams often involve more than one victim and may result in 
multiple charges, raising, the statutory penalties may not be necessary 
to effectuate punishment goals. A more appropriate and effective 
solution to ensure adequate punishment may be to direct the Sentencing 
Commission to consider whether a guideline enhancement for cases 
involving fraudulent scholarship offerings should be added to the 
Sentencing Guidelines. I would welcome consideration of this issue.
    Similarly, I would be interested to know whether we have 
information to suggest that those criminals who base their schemes on 
scholarship offerings are more likely than those perpetrating other 
types of frauds to shield ill-gotten gains in bankruptcy homestead 
exemptions. I would welcome further information on this issue as well.
    I look forward to reviewing the testimony of our witnesses and 
learning more about these important issues.

    Senator Abraham. I just have a few questions, and really 
they are in part just to follow up on some of the points 
already made. First, I am going to ask Ms. O'Flaherty, 
obviously your office is the center of this activity when it 
comes to identifying and assisting students with respect to 
financial assistance. I assume you also have a relationship 
with high schools in our State that come to you for information 
or that you provide.
    Having now been part of this process, seeing some of these 
fraud schemes, and so on, is it your impression--at least the 
ones who actually charge people to just provide information, 
that essentially the information that they are providing when 
it is simply of that sort is available to students either at a 
financial aid office like yours or often even in their own high 
school?
    I don't want to presume that, but is that typically the 
case? I mean, is there any unique information that these 
services--I guess that is how I should ask the question--that 
these services have that couldn't be obtained at the Western 
Michigan University financial aid office?
    Ms. O'Flaherty. I would say there is very little. On a 
service that is legitimate, there may be some scholarship match 
that we have been unable to do. The State of Michigan has an 
excellent scholarship match on its Web site for free; it is a 
national database.
    Very, very often, the parents that I speak to who are so 
frustrated and have that horrible sense of being taken, they 
come in and it says Federal direct unsubsidized loan and parent 
loan, and we see a lot of that. So, yes, that information is 
available in our office, in most financial aid offices, and on 
numerous Web sites for free.
    Senator Abraham. So the notion that somebody has to pay, 
whether it is $189 or it is $20, to get this so-called inside 
information about scholarships that are out in the world--
basically, that isn't the case. This kind of information is 
available at the place you would probably typically think of to 
begin with.
    Ms. O'Flaherty. Correct, it is, and if it is not right 
there, we can get them to the right resource on the Web.
    Senator Abraham. You indicate in your testimony that as you 
have traveled around to do maybe seminars or whatever that you 
are hearing more and more of these kinds of problems. Has that 
been the case with the students who come into the financial aid 
office itself?
    Ms. O'Flaherty. Yes. I mean, I have been in financial aid 
since 1973 and this has been an issue my whole term. I have 
always heard about it on and off over the years. I just 
returned from a financial aid conference in Cleveland last 
night, and intentionally talked to as many people from various 
States as I could to find out their sense of what was going on. 
And I would say for the most part, the sense is that it 
continues, it is growing, it is changing its face all the time; 
a little bit different twist associated with purchasing 
something. Insurance policies, any variety of things are 
associated with it, so we feel very strongly that it is out 
there in significant amounts.
    Senator Abraham. So whatever we are trying to do or is 
currently being done that might be discouraging hasn't seemed 
to work, and therefore you would conclude that we need to do 
more in terms of the discouragement of this kind of practice, I 
guess.
    Ms. O'Flaherty. Yes, I would, and I really mean it when I 
say I have talked to parents, not even at college nights but 
just in the office or informally. It is a huge issue and a 
question for many, many families.
    Senator Abraham. My sense--and, again, I don't have any 
empirical evidence to back this up, but maybe Mr. Kantrowitz 
would have some insight. But my sense is that as we develop new 
technologies, we, of course, give creative people who want to 
use new technologies in a bad way new opportunities.
    And my suspicion is that some of the reason that this is 
growing is because with the Internet now there is a lot of new 
sort tools, so to speak, available to people to communicate 
with students, and maybe even in a more effective way to some 
extent because there might be a little more--I don't know--a 
mass mailing may just on its face be easy to look at and 
discard, whereas something that maybe shows up through the 
Internet sometimes might have an even more serious look to it 
or be harder to discern immediately if it was not effective. Do 
you think that is a possibility?
    Mr. Kantrowitz. Definitely a possibility. The Internet is a 
new communication channel and just as it can be used by 
legitimate organizations to communicate at less expense, it can 
also be used by scam operations to reach a greater audience.
    Senator Abraham. I want to change gears slightly and go to 
you, Ms. Anthony. First of all, we appreciate what the FTC has 
done both working with our office as we have put the 
legislation together and even before that when we first started 
reading about these problems and hearing from people in 
Michigan. You have been very helpful to give us the kind of 
background needed to both go out on a little tour of my own to 
talk about these warning signals, but also in terms of helping 
us to do a better job here.
    One of the questions I have is right now the issue, I 
guess, is in my mind is with respect to the pursuit of those 
who are engaging in this fraud. Your power is obviously limited 
to sort of civil actions, not to criminal actions.
    Ms. Anthony. That is correct.
    Senator Abraham. At this point, is it typical for the FTC 
to then make criminal referrals to the Department of Justice? 
Is that what would happen if you thought somebody had reached a 
level of misconduct that required that criminal fraud was 
involved? Is that how the process works?
    Ms. Anthony. Yes. We have two options. We can either bring 
a civil action or make a criminal referral to a U.S. attorney's 
office, which we have done.
    Senator Abraham. Do you do that very often at this point, 
or is that sort of a limited use option?
    Ms. Anthony. It depends, I suspect--I would like to defer 
to the staff on this and I will get back to you with that 
question.
    Senator Abraham. That would be fine.
    Ms. Anthony. But it would depend, I suspect, on maybe the 
size of the consumer injury as to whether the U.S. attorney's 
office, who are dealing with drugs and violent crime and other 
matters, would feel that it was worth the resources that they 
would need to expend.
    Senator Abraham. I would be at least interested in knowing 
how that process has worked, and also to the extent you know, 
what follow-up or what percentage of the referrals have 
actually been acted on. I am sure the calculus from the other 
side--that is, from the U.S. attorney's side or from the 
Department of Justice's side--also is to look at the penalties 
that currently exist which are not very severe in terms of the 
criminal side and maybe when they have to make that cost/
benefit analysis between pursuit of other criminals or 
prosecutions versus these.
    One of the arguments we have for our legislation is that by 
increasing the potential criminal penalties, it not only maybe 
discourages people, but it also makes the pursuit of cases in 
this area a little more arguable, or sort of buttresses the 
investments that would be made in terms of resources. So if you 
could get us some information along those lines, that would be 
very helpful.
    Ms. Anthony. I will be happy to do that, Senator.
    Senator Abraham. And we do thank you for the FTC, the full 
agency, your Commission, for what efforts you have already 
engaged in.
    Do you feel that it would be possible to work with the 
Department of Education to put together the kind of site that 
we have talked about that might give students at least a more 
accurate list of the services that are legitimate?
    Ms. Anthony. We would feel delighted to cooperate with the 
Department of Education in any way that we could be of 
assistance. We have made great efforts to send a consumer 
education message, and we feel that we have been fairly 
successful with that, to both businesses and individual 
consumers.
    We would be, of course, deferring to the Department of 
Education, who has a great deal of experience in all sorts of 
financial aid, both loans and work/study and other financial 
aid packages. But as far as helping them with lists, we would 
be happy to lend a hand.
    Senator Abraham. And Mr. Kantrowitz has given us some ideas 
as to other ways that we might want to adjust perhaps the 
process, or at least the sort of criteria, and we will look 
into those.
    Mr. Bery, your personal experience is probably the most 
illuminating sort of testimony we have received in a certain 
sense because it demonstrates that this isn't just kind of an 
imagined problem, but one that hits home to people of modest 
means and causes hardship.
    I think one of the problems, as I have sort of talked to 
people in our State, is that the amount of injury suffered in 
terms of dollar damages to any one person is at a level where 
the pursuit of any kind of redress is to them, at least, more 
expensive, presumably, or more difficult than the loss 
involved.
    We have also noticed in Michigan, at least, that the people 
who have--you know, the law enforcement folks in our State and 
the people in the universities and colleges are having a 
greater difficulty because many times the people involved are 
not around Michigan. They are from Maryland or they are from 
other parts of the country, which is another reason why I think 
having some sort of Federal comprehensive approach makes some 
sense.
    But I am just wondering, in your professional role now, are 
you too encountering an indication of an increased level of 
this sort of activity going on? Is that something in your job 
with PIRG that you are encountering?
    Mr. Bery. Well, as you have said, a lot of times because 
students at an individual--you know, it is so daunting to even 
begin to figure out the process of what to do once you have 
lost anything from $25 to $200. A lot of times, the types of 
complaints that could be logged aren't because students are 
just dismayed by that and move on to other efforts.
    But I think this effort, this bill, will go a long way 
toward sending out a message nationwide to perpetrators of 
these types of crimes that there are significant penalties. And 
it is also good because it provides good information through 
the requirement of a Web site. And I think even further 
developing that and further developing the efforts that 
Commissioner Anthony had mentioned with regard to the FTC 
providing those bookmarks at college bookstores--maybe if the 
Department of Education and the FTC aren't already doing this, 
going so far as to provide information to guidance counselors 
at the high school level, so a high school senior who walks 
into a guidance counselor's office and sees a pamphlet next to 
the FAFSA, the Free Application for Federal Student Aid, that 
says don't get scammed, and a few tips, similar to what the 
poster was that the Commissioner had highlighted for the 
hearing. Those would be good steps to avoid that.
    Senator Abraham. I think some of that does go on, right?
    Ms. Anthony. Yes, it does, and the testing services have 
been cooperative with us in disseminating these sorts of 
warnings to high schools and high school guidance counselors.
    Senator Abraham. Senator Feingold.
    Senator Feingold. Thank you, Mr. Chairman, and thank you to 
all the witnesses for being here. I just have two questions for 
Commissioner Anthony. I have been particularly concerned about 
the availability of financial aid to low- and middle-income 
students, many of whom have contacted me about the Pell Grants. 
Ms. O'Flaherty indicated in her testimony that many of the 
victims of the scholarship scams are students in low- and 
middle-income households.
    Do you find any evidence that these scams are, in effect, 
profiling students and specifically targeting certain economic 
groups?
    Ms. Anthony. Senator, I think these scam artists are 
targeting all American families who have college-age students, 
and I don't necessarily think it depends on the income level 
because nearly every family today is seeking financial aid in 
some way or another because college costs have become so 
expensive. If we do discover any matter of profiling, I will be 
certainly happy to share that information with you.
    Senator Feingold. Fair enough. The other question is if you 
could discuss the extent of the problem with scam artists 
hiding their ill-gotten gains under the residential property 
exemption for estates in bankruptcy proceedings. In your 
experience, have you found that scam artists are hiding their 
ill-gotten gains from bankruptcy courts in other ways, in 
addition to the residential property exemption?
    Ms. Anthony. I am not aware of any. I will be happy to 
consult with the staff and get back to you on that.
    Senator Feingold. Thank you, Commissioner. Thank you, Mr. 
Chairman.
    Senator Abraham. Senator Feingold, thank you.
    As we bring this to an end, oftentimes our hearings are--
because a member has a different view on the issue from our 
committee, they bring in witnesses who are in conflict. Today, 
we don't have much conflict, so our hearing is relatively short 
in length, but not limited in terms of its impact. I think it 
can be very helpful to us as we try to move the bill forward.
    Before we close, I have been actually handed a statement 
which we will include in the record, assuming there is no 
objection, from Assistant U.S. Attorney Dale Kelberman, from 
the District of Maryland, who is the supervisor of the White 
Collar Crime Section and who dealt with one of these cases, the 
one I referenced in my opening statement. He would like to have 
this statement entered into the record as well.
    [The prepared statement of Mr. Kelberman follows:]

    Prepared Statement of Assistant U.S. Attorney Dale P. Kelberman

    Mr. Chairman and Distinguished Members of the Senate Judiciary 
Committee. Thank you for the opportunity to present this statement to 
the Committee regarding the prosecution by our office of the case of 
United States v. Christopher Ebero Nwaigwe aka Christopher Maige 
(Criminal No. WMN-98-0414, D.Md.). I am an Assistant United States 
Attorney for the District of Maryland and the supervisor of the White 
Collar Crime section of the Office. I have been an Assistant since 
October, 1987, and have been a prosecutor for approximately twenty-five 
years at the federal, state and local levels. The Nwaigwe case was 
prosecuted by an Assistant United States Attorney who comes under my 
supervision in the office.
    Our office worked with agents from the United States Postal 
Inspection Service in conducting the investigation which led to the 
charges against Mr. Nwaigwe. The investigation focused upon Mr. 
Nwaigwe's false representations to various members of the public in 
which he represented that he was associated with different college 
scholarship programs including the ``National Health Scholarship 
Program,'' the ``National Nursing Scholarship Program,'' the ``Higher 
Education Scholarship Program,'' and other similarly-named programs. 
Using both his own name and an alias, Christopher Maige, Mr. Nwaigwe 
had opened about a dozen post office boxes in various locations in the 
Baltimore metropolitan area. The post office boxes were represented to 
students and prospective students as ``suites,'' when they were simply 
mail drops. Nwaigwe mailed letters to students from lists he had 
obtained advising them that they had won scholarships, or could win 
scholarships. The solicitation requested that the students fill out 
forms and send them in with a $10.00 processing fee to one of the named 
addresses. In truth, there were no scholarships for any student.
    The $10 fee was deposited to bank accounts Nwaigwe opened at Signet 
Bank, First National Bank of Maryland, and NationsBank. Nwaigwe used 
the funds for his own personal use, although it was difficult to trace 
all the funds because much of it was converted to cash. Nwaigwe 
collected approximately $500,000 from prospective students in this 
fashion.\1\ Mr. Nwaigwe had previously been the subject of a cease and 
desist order from the Postal Service, which order had been issued in 
1993. Nwaigwe also was enjoined from soliciting fees in 1996 in a civil 
action. On October 22, 1998, Mr. Nwaigwe was indicted by a grand jury 
in the District of Maryland on seven counts, each of which charged him 
with the crime of mail fraud, in violation of Title 18, United States 
Code, Section 1341.
---------------------------------------------------------------------------
    \1\ One of the delays in prosecuting this case was the time 
involved in obtaining all the necessary bank records relevant to the 
government's case. In order to identify all possible victims, the 
government issued subpoenas to the three banks for all deposited items 
of $10.00 or more. Given the volume of activity into those bank 
accounts, it took the banks some time to research and copy all of the 
thousands of bank items involved.
---------------------------------------------------------------------------
    Nwaigwe was represented by the Federal Defender's Office in the 
District of Maryland, and went to trial on March 8, 1999 before a jury 
presided over by the Honorable William M. Nickerson. The defendant was 
convicted of all seven counts by the jury on March 15, 1999.
    The trial court ordered a presentence report, and held sentencing 
on June 4, 1999. Because he was convicted of seven counts of mail 
fraud, Mr. Nwaigwe was subject to a maximum statutory penalty of 
thirty-five (35) years imprisonment, a fine of $1,750,000 (7  
$250,000), supervised release, restitution of the amount of the loss, 
i.e. $500,000, and a special assessment of $350.00 (7  
$50.00).
    However, because the Sentencing Reform Act of 1994, which adopted 
the federal sentencing guidelines, applied, Mr. Nwaigwe's sentence was 
based upon the sentencing guideline factors which applied to his case, 
as adjusted based upon his criminal history. In addition to the ``base 
offense level,'' the sentencing guideline factors found to apply by the 
trial judge included: (1) the amount of the loss ($500,000); (2) a two-
level enhancement because there was more than one victim; and (3) a 
two-level enhancement because the defendant falsely represented that he 
was acting on behalf of an educational organization and had violated an 
administrative order. As a result of these factors, the sentencing 
court found the guideline range to be 33 to 41 months incarceration. 
The trial judge departed downward one level from that range because 
Nwaigwe's status as an ``alien'' might subject him to more onerous 
conditions of confinement. The judge imposed a sentence of (36) months 
incarceration, followed by three (3) years of supervised release. The 
court determined that Nwaigwe did not have the ability to pay a fine or 
make restitution, so none was ordered. Mr. Nwaigwe was detained in 
Worcester, Massachusetts shortly after his indictment, and he has 
remained in custody since then.
    Mr. Nwaigwe has filed a notice of appeal to the United States Court 
of Appeals for the Fourth Circuit, which is pending. The defendant has 
not yet filed his brief in the 4th Circuit, so the issues on appeal are 
at this point unclear.

    Senator Abraham. So I want to thank the panel, thank the 
organizations represented as well. And certainly to our 
audience, I appreciate those who have spent a little time with 
us today. We will work together certainly with our colleagues 
here on the committee to try to move this legislation. I think 
it is a constructive step. Hopefully, it can begin the process 
of reducing the abuse that has gone on. And we appreciate those 
of you on the front line and the job you are doing to try to 
help with that as well.
    So we will bring the hearing to a conclusion and we thank 
everybody for their participation.
    [Whereupon, at 3:26 p.m., the subcommittee was adjourned.]
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