[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]



              ON-LINE FRAUD AND CRIME: ARE CONSUMERS SAFE?

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 23, 2001

                               __________

                           Serial No. 107-37

                               __________

      Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                   U.S. GOVERNMENT PRINTING OFFICE
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_______________________________________________________________________
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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

        Subcommittee on Commerce, Trade, and Consumer Protection

                    CLIFF STEARNS, Florida, Chairman

NATHAN DEAL, Georgia                 EDOLPHUS TOWNS, New York
  Vice Chairman                      DIANA DeGETTE, Colorado
ED WHITFIELD, Kentucky               LOIS CAPPS, California
BARBARA CUBIN, Wyoming               MICHAEL F. DOYLE, Pennsylvania
JOHN SHIMKUS, Illinois               CHRISTOPHER JOHN, Louisiana
JOHN B. SHADEGG, Arizona             JANE HARMAN, California
ED BRYANT, Tennessee                 HENRY A. WAXMAN, California
STEVE BUYER, Indiana                 EDWARD J. MARKEY, Massachusetts
GEORGE RADANOVICH, California        BART GORDON, Tennessee
CHARLES F. BASS, New Hampshire       PETER DEUTSCH, Florida
JOSEPH R. PITTS, Pennsylvania        BOBBY L. RUSH, Illinois
GREG WALDEN, Oregon                  ANNA G. ESHOO, California
LEE TERRY, Nebraska                  JOHN D. DINGELL, Michigan,
W.J. ``BILLY'' TAUZIN, Louisiana       (Ex Officio)
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Charney, Scott, Principal, Digital Risk Management and 
      Forensics, PricewaterhouseCoopers..........................    61
    Grant, Susan, Director of the Internet Fraud Watch, National 
      Consumers League...........................................    66
    Harrington, Eileen, Associate Director of Marketing 
      Practices, Bureau of Competition, Federal Trade Commission.    17
    Kubic, Thomas T., Deputy Assistant Director, Criminal 
      Division, Federal Bureau of Investigation..................     6
    MacCarthy, Mark, Senior Vice President, Public Policy, Visa 
      U.S.A. Incorporated........................................    54
    Swartz, Bruce, Deputy Assistant Attorney General, Criminal 
      Division, U.S. Department of Justice.......................    31
    Townsend, Bruce A., Special Agent in Charge, Financial Crimes 
      Division, United States Secret Service.....................    12
Material submitted for the record by:
    Sollitto, Vincent, Vice President, Corporate Communications, 
      PayPal, letter dated June 29, 2001, enclosing response for 
      the record.................................................    75

                                 (iii)

  

 
              ON-LINE FRAUD AND CRIME: ARE CONSUMERS SAFE?

                              ----------                              


                        WEDNESDAY, MAY 23, 2001

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                   and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Cliff Stearns 
(chairman) presiding.
    Members present: Representatives Stearns, Upton, Deal, 
Shimkus, Bryant, Terry, Bass, Tauzin (ex officio), Towns, 
DeGette, and Harman.
    Staff present: Ramsen Betfarhad, policy coordinator and 
majority counsel; Brian McCullough, professional staff; David 
Cavicke, majority counsel; Kelly Zerzan, majority counsel; 
Shannon Vildostegui, professional staff; and Will Carty, 
legislative clerk.
    Mr. Stearns. Good morning. Welcome to the Commerce, Trade 
and Consumer Protection Subcommittee hearing on cyber fraud and 
crime. I want to thank all of our witnesses for appearing 
before the committee this morning and I am especially pleased 
that we have four of our top Federal law enforcement agencies 
charged with combatting cyber fraud and crime present this 
morning.
    I understand that as I speak, the FBI, in conjunction and 
coordination with the Secret Service, the IRS, the U.S. Customs 
and U.S. Postal Service and a myriad of State and local law 
enforcement agencies are arresting as many as 90 suspects as 
part of a nationwide sweep combatting fraud. The breadth and 
scope of this operation is very impressive. I commend the FBI 
and all the other Federal and local law enforcement agencies 
for undertaking such an important law enforcement action.
    The Internet fraud schemes exposed as part of this 
investigation represent over 56,000 victims nationwide who 
suffered cumulated losses in excess of $117 million. I know 
we'll hear more about that this morning.
    I believe that effective enforcement in tandem with greater 
consumer education and awareness and industry action spells out 
an effective recipe for protecting against and combatting cyber 
fraud and crime. It is no great revelation that fraudulent and 
criminal activities have colored the human experience 
throughout history. With any major technological development, 
new types or forms of fraud and crime make their debut as older 
forms are adapted to take advantage of this new technology, 
that is, no telemarketing fraud without a telephone network.
    One cannot argue that fraud or crime lacked from a want of 
innovation of creativity. The Internet, as a sweeping new 
technology, is no exception. With the advent of the Internet, a 
global ubiquitous communications network offering virtual 
anonymity, old-style fraudulent and criminal activities have 
made their way into the Internet as new frauds have evolved to 
take advantage of the Internet's unique properties.
    The Internet fraud schemes highlighted today by the FBI 
nationwide sweep and FTC's top Internet scam list indicate that 
most of the scams are old fashioned, but there are some that 
are new and enabled by the Internet.
    Although both the old-fashioned scams as executed on-line 
and the new on-line specific scams pose difficult challenges 
for law enforcement, today's testimony clearly suggests that 
those challenges are definitely surmountable. Yet, combatting 
these new challenges may require new thinking on the part of 
law enforcement in conjunction with substantially greater 
cooperation between Federal, local and indeed international law 
enforcement agencies.
    A more significant deterrent to cyber fraud and crime is 
consumer education and awareness. As our knowledge as on-line 
users increases, the risk of us being taken by fraudulent 
activity decreases dramatically.
    Today's hearing is an important step in informing the 
American consumer as to what is transpiring on-line. The 
hearing highlights the types of fraud being propagated without 
the fanfare which some of the media outlet provide and this is 
good. The testimony today is a good source of straight facts.
    And finally, my colleagues, industry has an important role 
in undertaking security measures to protect their on-line 
systems from fraudulent and criminal activities. Today's 
testimony merely highlights a snapshot of all efforts 
undertaken by industry to protect and make secure their on-line 
system. They clearly recognize that preservation and 
enhancement of on-line security is good for business.
    I very much look forward to the testimony and again want to 
congratulate the FBI and the other law enforcement agencies who 
are undertaking nationwide sweep combatting cyber fraud and 
crime.
    And at this point I'll ask the distinguished ranking member 
from New York for his statement.
    Mr. Towns. Thank you very much, Mr. Chairman. I want to 
thank you for holding this important hearing.
    This committee has a special responsibility to protect 
consumers against fraudulent commercial practices wherever they 
occur. Clearly, Internet transactions present unique 
opportunities for those who want to take advantage of 
consumers. In many ways, the Internet makes an on-line retailer 
anonymous to a consumer. The seller's actual location may not 
be known. Representation the seller makes are largely 
unverifiable. The quality of goods or services that are being 
sold may not be identifiable. Information the consumer divulges 
in the course of conducting an Internet transaction may be used 
in ways the consumer does not approve and the consumer may have 
no idea of how to obtain recourse for harm he or she suffers.
    It is clear to me that unless we satisfy consumer concerns 
about these and other problems, consumers will limit their 
Internet transactions and Internet will not realize its full 
and proper potential. This would be truly unfortunate. Many of 
us understand the tremendous benefits consumers stand to gain 
from on-line retailing and other transactions, especially today 
as the attention of more and more of us is being directed to 
the need to conserve energy in as many ways as possible. On-
line shopping offers the potential for real energy savings that 
are too attractive to ignore.
    In addition, on-line shopping can provide the consumer with 
a far greater range of choices than traditional retailing can 
provide.
    I therefore look forward to hearing from our witnesses 
about what action this subcommittee should be considering to 
help make the consumer secure and confident about his or her 
on-line transactions.
    Many have taken a wait and see attitude on the need of 
protecting phone line transactions. My personal view is that we 
have seen enough at this time. It is time now for action. In 
much the same way this committee acted not too many years ago 
to protect consumers against telemarketing fraud, it is now 
time to act against on-line fraud. This is not a partisan 
issue. No one is safe. There have been reports of on-line 
fraud, identity and other wrongful acts affecting virtually 
every member of our society including CEOs of major 
corporations. Towhead must stop. And I would hope that this 
subcommittee will take the lead in bringing the fraudulent 
practices that occur on-line to an end.
    Mr. Chairman, again, I want to thank you for holding this 
hearing.
    Mr. Stearns. I thank my colleague, and now the 
distinguished Chairman of the full committee, Mr. Tauzin.
    Mr. Tauzin. Thank you, Mr. Chairman, and I want to thank 
you for this hearing today because we focus today on cyber 
fraud and cyber crime, on what it is and what the appropriate 
law enforcement agencies are doing about it. And I'm 
particularly pleased that will hear today from the agencies 
that are charged with enforcing the current law, like the 
identity thefts and the assumption of the Deterrence Act of 
1998 that was authored by John Shadegg. Although similar to 
traditional fraud in many ways, Internet fraud poses rather 
unique problems. Just as privacy has always been an issue for 
us in the brick and mortar world, privacy poses unique problems 
on the Internet and so it is with fraud.
    Fraud is nothing new, Mr. Chairman. You know, there have 
been sham artists and shake down artists who visited our homes 
as traveling salesmen or catalog frauds or mail order frauds of 
all types, but the Internet gives miscreants special 
capabilities because they can hide a lot better on the Internet 
and they can deceive a lot better on the Internet in many ways. 
Predators can mask their identifies. They can hide their 
locations and they can easily cover their tracks. Websites can 
be put up and then removed in seconds, allowing criminals to 
strike quickly and run even faster. Bonnie and Clyde would have 
loved this environment.
    Internet fraud has taken many forms, many which we'll 
discuss here today, including on-line auction fraud, identity 
theft and pretexting and Internet fraud can reduce consumer 
confidence in the safety of on-line transactions. And if 
there's one thing I think we all need to be paying special 
attention to, it's how well we enforce the law, how well we 
prevent the fraud on the Internet from damaging its potential 
as a place for Americans and people in the world to do 
business.
    This low consumer confidence ends up meaning fewer 
transactions, slower economic growth and you know the rest.
    I'm pleased that the agencies charged with battling 
Internet fraud are here today and Eileen, I'm particularly 
pleased again to see you. You've been so helpful to us in all 
the work you've done with the FTC. I'm pleased that we have 
representatives from private companies here to tell us how they 
intend to battle on-line fraud. Private companies with an on-
line presence know how dangerous this is because they see the 
enormous value in protecting information about their customers 
and protecting their customers from miscreants.
    Security is a priority and businesses are responding. I'm 
going to have to leave right when I finish, Mr. Chairman, to go 
upstairs. We've got a hearing on the capacity to hack into the 
HICFA websites and the lack of security on those websites and 
the potential for harm and damage and fraud in our important 
Medicare fund systems.
    The bottom line is with increasing technologies, the 
Internet world is increasingly less safe unless we are 
increasingly vigilant. And today, we'll learn about how we can 
be better enforcers of the law and more vigilant in protecting 
against fraud that would rob Americans of the great potential 
of the e-commerce.
    I want to thank you, Chairman Stearns, for holding the 
hearing. As usual, you have prepared an informative and 
educational set of panels and as Chairman of the full committee 
I want to extend the appreciation of all the members of our 
committee for the fine work you're doing in this series of 
hearings.
    Thank you and I yield back my time.
    Mr. Stearns. I thank the chairman. Now we will recognize 
Mr. Shimkus from Illinois.
    Mr. Shimkus. One of the few times I get to go before 
Chairman Upton. I'm going to be very, very brief. Crooks are 
crooks and we just have to stay ahead of them or at least we 
have to stay equal to what their ability to get in. There's 
also an issue of the thrill of the challenge. I think that's 
all part of this, especially with our young. I always like when 
we have some young kids in the audience and there's two about 
halfway back, very young girls and that's the exciting age of 
computer activity that advances way past most of us 
policymakers. They're the ones who may get in the wrong crowd 
and start playing around and being able to do a lot more 
things. It's hard to get our generation, the old fogies up to 
speed to meet the challenge technologically of the software and 
the encryption and the keys and all the other stuff. Law 
enforcement and individuals are of a different generation than 
the generation today. So that's the challenge. The challenge is 
keeping pace with the bad guys and there's always going to be 
bad guys.
    So I look forward to the hearing today to hear what we're 
doing as Federal agencies to try to keep pace with the bad guys 
and also, of course, the private sector is going to have a 
tremendous role because really, they've got to protect their 
bottom line. So they're going to be investing a lot of money to 
attempt to do that. Identity theft, pretexting and on-line 
consumer fraud are probably the big three. I look forward to 
the hearing today and with that, Mr. Chairman, I yield back my 
time.
    Mr. Stearns. I thank my colleague. Now the distinguished 
chairman of the Telecommunications Subcommittee, Mr. Upton.
    Mr. Upton. Thank you, Mr. Chairman, and I want to thank you 
also. We were hoping to have a witness from the State of 
Michigan and at the very last moment he was not able to come 
and I appreciate your willingness to include him as part of the 
second panel. This is an important hearing.
    Last year, a resident of my District had her credit card 
and other sensitive materials stolen by a home improvement 
contractor installing tile at her house and the contractor used 
the information to order literally thousands of dollars worth 
of merchandise over the Internet. Because of quick police 
action, expertise and effectiveness of Michigan's high tech 
crime unit, just last week the perpetrator pled guilty. This 
story had a happy ending, but there are a lot of them out there 
that don't. Literally thousands of these crimes go unsolved and 
unfortunately high tech crimes are quickly becoming 
commonplace.
    While we all can do more to protect ourselves from on-line 
crimes, we must also take preemptive action to make sure that 
law enforcement has the tools and the training that they need 
to catch the bad folks.
    Currently, Michigan is one of only a handful of States that 
have a high tech crimes unit and according to the FBI cyber 
crimes perpetrated by individuals in Michigan already account 
for 3.2 percent of those committed in the United States. I've 
been told that since its establishment in 1999, the unit had 
over 1500 complaints and tried cases from the sale of date rape 
drugs over the Internet, an issue that I tried to take care of 
with legislation last year, to child pornography and yes, even 
murder. But the biggest obstacle faced by law enforcement 
agencies investigating alleged cyber crime is distance. Because 
these types of crimes are committed via the Internet, often the 
victim and the perpetrator are thousands of miles away from 
each other, even perhaps on the other side of the globe. For 
all the promise of new technology, there are also new dangers 
that most of us would never think of and that's why today's 
hearing is so important.
    I look forward to hearing from the witnesses and 
interacting throughout the day and I yield back the balance of 
my time.
    Mr. Stearns. I thank the gentleman. The gentleman from 
Nebraska, Mr. Terry. No opening statement.
    At this point we'll move to Panel 1. Mr. Bryant, the 
gentleman from Tennessee is interested in an opening statement 
before we begin. Pass. All right.
    We have in Panel 1 Mr. Bruce Swartz, Deputy Assistant 
Attorney General, Criminal Division, U.S. Department of 
Justice. We have Thomas Kubic, Deputy Assistant Director, 
Criminal Division, Federal Bureau of Investigation; Ms. Eileen 
Harrington, Associate Director of Marketing Practices, Bureau 
of Competition, the Federal Trade Commission; and Mr. Bruce 
Townsend, Special Agent in Charge of Financial Crimes Division, 
United States Secret Service.
    I welcome all of you and we'll just go from my left to the 
right and start with you, Mr. Kubic, for your opening 
statement.

   STATEMENTS OF THOMAS T. KUBIC, DEPUTY ASSISTANT DIRECTOR, 
 CRIMINAL DIVISION, FEDERAL BUREAU OF INVESTIGATION; BRUCE A. 
 TOWNSEND, SPECIAL AGENT IN CHARGE, FINANCIAL CRIMES DIVISION, 
  UNITED STATES SECRET SERVICE; EILEEN HARRINGTON, ASSOCIATE 
DIRECTOR OF MARKETING PRACTICES, BUREAU OF COMPETITION, FEDERAL 
 TRADE COMMISSION; AND BRUCE SWARTZ, DEPUTY ASSISTANT ATTORNEY 
     GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

    Mr. Kubic. Good morning, Mr. Chairman, and members of the 
subcommittee. In view of the limited time I have prepared a 
full statement which I submit for the record.
    Mr. Stearns. By unanimous consent, so directed.
    Mr. Kubic. Thank you. Today as you mentioned, the FBI and 
the Department of Justice announced the results of a series of 
investigations that have been on-going nationwide under the 
code name of ``Operation Cyber Loss.'' These cases were based 
on information initially developed through the Internet Fraud 
Complaint Center. The effort was coordinated among our field 
offices, along with the active participation of the U.S. Postal 
Service, the U.S. Secret Service, the Internal Revenue Service, 
the U.S. Attorneys and numerous State and local law enforcement 
officials.
    Internet fraud schemes exposed during these investigations 
involved more than 56,000 victims nationwide with losses 
exceeding $117 million. Some of the fraud schemes investigated 
during ``Operation Cyber Loss'' were those involving on-line 
auction fraud which was previously mentioned, the nondelivery 
of merchandise purchased over the Internet, as well as credit 
card fraud and identity fraud.
    Ninety subjects have been charged with wire fraud, mail 
fraud, money laundering, bank fraud and software piracy. In 
all, there were 26 FBI field offices involved in these 
investigations.
    The efforts today are, in fact, a response to the perceived 
rise in crime and fraud on the Internet. The Internet, as 
mentioned, is in fact a perfect medium for which the fraudsters 
can reach a large number of people and maintain a cloak of 
secrecy over their identity. As a point of reference, the FBI 
defines Internet fraud as any fraudulent scheme in which the 
Internet plays a significant role in either the offering of 
nonexisting goods or services or the payment for those goods 
and services on-line.
    Recognizing this emerging crime problem, the FBI joined in 
some discussions with the National White Collar Crime Section, 
rather the White Collar Crime Center, and those discussions led 
to the May 8, 2000 opening of the Internet Fraud Complaint 
Center.
    Over the past 12 months the Internet Fraud Complaint Center 
has developed as the central repository for Internet fraud 
complaints. This Center has advantages over the decentralized 
system that previously existed. Often a complaint would be 
received in a particular police department, initially reviewed, 
and if it did not reach the standard for a formal criminal 
investigation, it was merely left there for no further analysis 
as to other similar and related incidents.
    Today, suspected fraud schemes can be reported on-line as 
they occur by victims throughout the United States and in fact, 
worldwide. What happens at the Internet Fraud Complaint Center 
is the supervisory Special Agents, along with Internet fraud 
specialists review those complaints when they come in and they 
link those complaints with others that may have been previously 
received. This information is then quickly disseminated to law 
enforcement agencies on both the Federal, State and local 
level.
    Let me give you some idea as to the extent of the Center's 
operation. Over the past year, there were 36,410 complaints 
that were received at the Center. An analysis of those 
complaints led to 30,000 validated complaints and referrals to 
many law enforcement jurisdictions throughout the United 
States.
    The IFCC has done further research and developed a 
formalized reporting system called an Internet Investigative 
Report which does, in fact, link the cases, put in the 
identities of subjects as known and submits that information to 
law enforcement officers throughout the U.S.
    Let me wrap up with making a couple of quick points. 
Similar in nature to the Neighborhood Community Watch, the 
Internet Fraud Complaint Center serves as a cyber neighborhood 
watch where 24 hours a day, 7 days a week, individuals who are 
victimized by these fraudsters can make a report. That report 
is then processed and quickly disseminated to the respective 
jurisdictions.
    Second, all of these complaints are very important. One 
complaint standing alone may not appear to be related, but as 
demonstrated from the investigations and the arrests made 
today, a small dollar amount can quickly escalate with the 
victims' number in the thousands.
    In conclusion, the IFCC was an important first step in 
addressing the threat of Internet fraud. The end result of this 
effort, I believe will be an Internet where everyone is safe, 
but the fraudsters.
    Thank you.
    [The prepared statement of Thomas J. Kubic follows:]

   Prepared Statement of Thomas T. Kubic, Deputy Assistant Director, 
                    Federal Bureau of Investigation

    Good morning, Chairman Stearns, and members of the Subcommittee on 
Commerce, Trade and Consumer Protection. I am pleased to appear today 
on behalf of the Federal Bureau of Investigation and share with your 
subcommittee the FBI's perspective on the Internet fraud crime problem.
    Let me begin by emphasizing that the FBI places a high priority on 
investigating Internet fraud matters and is committed to working with 
this subcommittee and all of Congress to ensure that law enforcement 
and the private sector have the necessary tools and protections to 
combat these crimes. It is only with the valuable cooperation of 
private sector companies such as those represented here today that 
efforts to combat Internet fraud will succeed. The FBI recognizes and 
appreciates the interest and efforts of these and other companies in 
preventing Internet fraud as well as their willingness to work with law 
enforcement to address the problem.
    I would like to first discuss results of a series of investigations 
against Internet fraud announced today by the FBI and department of 
justice, followed by an FBI perspective as to the extent of the 
Internet fraud crime problem along with the unique challenges faced by 
law enforcement in addressing it, and then give you an overview of what 
the FBI is doing to address the problem including details concerning 
the Internet fraud complaint center.
    As noted above, today, the FBI and the Department of Justice is 
announcing a nationwide sweep into Internet fraud, code named 
``Operation Cyber Loss,'' initiated by the FBI's Internet Fraud 
Complaint Center (IFCC) and coordinated by FBI offices, U.S. Postal 
Inspection Service (USPIS), Internal Revenue Service-Criminal 
Investigative Division, U.S. Customs Service, United States Secret 
Service, and numerous state and local law enforcement entities. The 
Internet fraud schemes exposed as part of this investigation represent 
over 56,000 victims nationwide who suffered cumulative losses in excess 
of $117 million. Among the Internet fraud schemes highlighted by 
operation cyber-loss were those involving on-line auction fraud, 
systemic non-delivery of merchandise purchased over the Internet, 
credit/debit card fraud, identity theft, various investment and 
securities frauds, multi-level marketing and ponzi/pyramid schemes. 
Approximately 90 subjects have been charged as a result of operation 
cyber-loss for wire fraud, mail fraud, conspiracy to commit fraud, 
money laundering, bank fraud, and intellectual property rights 
(software piracy). Twenty-six different FBI field offices throughout 
the country have been involved in the cyber loss investigation. As is 
true of Internet fraud in general, subjects and victims involved in 
this operation were scattered throughout the world. Action taken this 
week in connection with this operation represents only a small fraction 
of cases referred by the IFCC and only represent cases culminating in 
significant prosecutive action.
    The schemes identified as part of Operation Cyber-Loss vary widely 
in type and complexity. They tend to be multi-jurisdictional with 
subjects and victims scattered across the United States and the world. 
While many of the schemes involved an element of on-line auction fraud, 
this was often only one aspect of a subject's fraudulent activities. 
The cases reflect the nature of fraudsters to migrate from one 
fraudulent scheme to another, and is indicative of criminal behavior 
that would only continue to expand if left unaddressed. We will attach 
to our statement for the record summaries of some of the fraud schemes 
exposed as part of this operation. It should be pointed out that these 
summaries do not reflect all of the cases included as part of Operation 
Cyber Loss since a number of these cases are ongoing and details cannot 
be provided at this time due to matters being under seal and/or so as 
not to compromise the investigation.
    The IFCC is a joint operation with the FBI and the National White 
Collar Crime Center (NW3C). The NW3C is a non-profit organization which 
is partially funded by the Department of Justice. The mission of NW3C 
is to provide a nationwide support system for the prevention, 
investigation and prosecution of economic crimes.
    A little over a year ago, on May 8, 2000, the IFCC opened its doors 
to combat the growing problem of fraud over the Internet. The Internet 
is changing the world as we know it, and promises to change how we buy 
things, how we communicate, where we get entertainment, news, and 
weather, where we work, and much, much more while bringing enormous 
benefits to society. The growth and utilization of the Internet as a 
communications and commerce tool is unsurpassed in modern history. 
Current trends reflect this remarkable growth:

 Internet users in the U.S. reached 65 million in 1998, over 
        100 million in 1999, and is expected to exceed 200 million this 
        year 1
---------------------------------------------------------------------------
    \1\ New York Times, November 12, 1999
---------------------------------------------------------------------------
 Business-to-business e-commerce totaled over $100 billion in 
        1999 (more than doubling from 1998) and is expected to grow to 
        over one trillion dollars by 2003. Worldwide net commerce, both 
        business-to-business and business-to-consumer, will hit an 
        estimated $6.8 trillion in 2004.2
---------------------------------------------------------------------------
    \2\ Source: Forrester Research, Inc., 
---------------------------------------------------------------------------
    The vast majority of communication and commerce conducted via the 
Internet is for lawful purposes. However, the Internet is increasingly 
utilized to foster fraudulent schemes. Just as prior technological 
advances have brought dramatic improvements for society, they have also 
created new opportunities for wrongdoing. As worldwide dependence on 
technology increases, high-tech crime is becoming an increasingly 
attractive source of revenue for organized crime groups, as well as an 
attractive option for them to make commercial and financial 
transactions that support criminal activity. Criminal activity in the 
cyber world presents a daunting challenge at all levels of law 
enforcement. In the past, a nation's border acted as a barrier to the 
development of many criminal enterprises, organizations and 
conspiracies. Over the past five years, the advent of the Internet as a 
business and communication tool has erased these borders. Cyber 
criminals and organizations pose significant threats to global commerce 
and society.
    The use of the Internet for criminal purposes is one of the most 
critical challenges facing the FBI and law enforcement in general. 
Understanding and using the Internet to combat Internet fraud is 
essential for law enforcement. The fraud being committed over the 
Internet is the same type of white collar fraud the FBI has 
traditionally investigated but poses additional concerns and challenges 
because of the new environment in which it is located. Internet fraud 
is defined as any fraudulent scheme in which one or more components of 
the Internet, such as web sites, chat rooms, and e-mail, play a 
significant role in offering non-existent goods or services to 
consumers, communicating false or fraudulent representations about the 
schemes to consumers, or transmitting victims' funds, access devices, 
or other items of value to the control of the scheme's perpetrators. 
The accessability of such an immense audience coupled with the 
anonymity of the subject, require a different approach. The Internet is 
a perfect vehicle to locate victims and provide the environment where 
the victims don't see or speak to the fraudsters. The Internet 
environment often creates a false sense of security among users leading 
them to check out opportunities found on the Internet less thoroughly 
than they might otherwise. Anyone in the privacy of their own home can 
create a very persuasive vehicle for fraud over the Internet. The 
expenses associated with the operation of a ``home page'' and the use 
of electronic mail (e-mail) are minimal. Con artists do not require the 
capital to send out mailers, hire people to respond to the mailers, 
finance and operate toll free numbers. This technology has evolved 
exponentially over the past few years and will continue to evolve at a 
tremendous rate.
    Internet fraud does not have traditional boundaries as seen in the 
traditional schemes. No one knows the full extent of the fraud being 
committed on the Internet. Not all victims report fraud, and those who 
do, do not report it to one central repository. For traditional fraud 
schemes the FBI has systems in place to identify and track fraud 
throughout the country. For example, a con man opens up shop in 
Chicago, finds a location, obtains phones, hires personnel, and begins 
to defraud people. When victims don't receive what they were promised 
and realized that they have been defrauded, they will contact their 
local field office of the FBI, and provide the complaint information, 
which will be forwarded to the chicago office (where the fraud is 
occurring). The FBI in Chicago receives a number of these complaints 
and initiates an investigation. Fraud over the Internet does not need a 
physical location, nor personnel, nor telephones. Internet fraud is 
disjointed, and spread throughout the country. The traditional methods 
of detecting, reporting, and investigating fraud fail in this virtual 
environment. Victims of fraud have been unsure of how or where to 
report what they see or what they have experienced on the Internet. Law 
enforcement agencies have received complaints in a piecemeal fashion, 
most not reaching a level to advance the complaint to an investigation. 
Another problem is venue, without some technical investigatory steps it 
is difficult to identify the location of a website or the origin of an 
e-mail.
    What makes Internet fraud even more of a concern for law 
enforcement authorities is the changing demographics of Internet users. 
In general, according to a recent study, the online population tends to 
be younger, more affluent, and better educated than the general adult 
population.3 But while the 18-34 age group is the largest 
single age group online--representing 39 percent of the world wide web 
population4--the consensus is that the 50-and-older age 
group is the fastest-growing age group online.5 Moreover, 
according to a recent survey, the 50-and-older group surfed the web 19 
percent longer than all web users combined.6 If older adults 
spend more time on the Internet, and have more assets than younger 
adults that are available for discretionary uses such as investment 
opportunities, they may be more likely to be sought out by online 
fraudulent schemes, as law enforcement authorities have found with 
traditional telemarketing fraud schemes. It should therefore not be 
surprising that a number of older adults who use the Internet are 
concerned about such schemes preying on their age group.7
---------------------------------------------------------------------------
    \3\ See Rebecca Fairley Raney, ``Studies Reach Contradictory 
Conclusions About the Internet Population,'' N.Y. Times on the Web, May 
10, 1998, .
    \4\ See Matthew Broersma, supra note 4.
    \5\ See Erin Kelly, ``Mom's Online!,'' Time,  (printed May 12, 
1998). Since 1994, surveys have shown that the percentage of 50-and-
older Internet users in the United States has increased from 13 percent 
in 1994 to 16 percent in 1997. See Amy Harmon, ``Guess Who's Coming 
Online,'' N.Y. Times on the Web, March 26, 1998,  
(printed April 23, 1998).
    \6\ See ``Older Netizens,'' Los Angeles Times, May 11, 1998, 
.
    \7\ See Erin Kelly, supra note 17.
---------------------------------------------------------------------------
    The Internet provides criminals with a tremendous way to locate 
numerous victims at minimal costs. The victims never see or speak to 
the subjects, and often don't know where the subjects are actually 
located. Crimes committed using computers as a communication or storage 
device have different personnel and resource implications than similar 
offenses committed without these tools. Electronic data is perishable--
easily deleted, manipulated and modified with little effort. The very 
nature of the Internet and the rapid pace of technological change in 
our society result in otherwise traditional fraud schemes becoming 
magnified when these tools are utilized as part of the scheme. The 
Internet presents new and significant investigatory challenges for law 
enforcement at all levels. These challenges include: the need to track 
down sophisticated users who commit unlawful acts on the Internet while 
hiding their identities; the need for close coordination among law 
enforcement agencies; and the need for trained and well-equipped 
personnel to gather evidence, investigate, and prosecute these cases. 
Victims are often scattered around the country in different 
jurisdictions or countries than the subject(s). Subjects located in 
other countries are increasingly targeting victims in the U.S. 
utilizing the Internet. Evidence can be stored remotely in locations 
not in physical proximity to either their owner or the location of 
criminal activity. In addition, losses suffered by victims in 
individual jurisdictions may not meet prosecutive thresholds even 
though total losses through the same scheme may be substantial. In 
order to subpoena records, utilize electronic surveillance, execute 
search warrants, seize evidence and examine it in foreign countries, 
the FBI must rely upon local authorities for assistance. In some cases, 
local police forces do not understand or cannot cope with technology. 
In other cases, these nations simply do not have adequate laws 
regarding cyber crime and are therefore limited in their ability to 
provide assistance. Our legal attache program provides critical 
contributions in these matters.
    Cyber crime exists across FBI program boundaries and without regard 
to international borders. Among the FBI program areas impacted by cyber 
crime are: securities and commodities transactions, prime bank schemes, 
telemarketing schemes, online banking frauds, government program and 
private health care fraud schemes, online pharmacy schemes, online 
auction frauds, identity theft, intellectual property theft, business-
to-business frauds, non-delivery of services, Nigerian letter 
solicitations, credit card fraud, e-commerce and trading, e-commerce 
and government procurement, online gambling, organized crime/drugs, 
terrorism, fugitives, purchase and sale of stolen/counterfeit 
merchandise, child pornography, denial of service attacks, intrusions, 
money laundering, and as a business tool to transact criminal activity.
    To this point, we have discussed in general the potential threat 
posed by cyber crime, why it has become and will continue to be one of 
the most significant crime problems, and briefly described some of the 
myriad facets of cyber crime. I would like to now focus the discussion 
on the Internet fraud schemes and what the FBI is doing to address this 
area of cyber crime.

                 INTERNET FRAUD COMPLAINT CENTER (IFCC)

    The development of a proactive strategy to investigate Internet 
fraud through the establishment of an Internet Fraud Complaint Center 
(IFCC) as a central repository for complaints was essential. The IFCC 
was necessary to adequately identify, track, and prosecute new 
fraudulent schemes on the Internet on a national and international 
level. It serves as a clearinghouse for the receipt, analysis, and 
dissemination of complaints concerning frauds perpetrated over the 
Internet. IFCC personnel collect, analyze, evaluate, and disseminate 
Internet fraud complaints to the appropriate law enforcement agency. 
The IFCC provides a mechanism by which the most egregious schemes are 
identified and addressed through a criminal investigative effort.
    The IFCC provides a central analytical repository for complaints 
regarding Internet fraud, and it acts as a resource for enforcement 
agencies at all levels of government to include regulatory agencies. It 
provides analytical support, and aids in the development and provides 
training modules to address Internet fraud. The FBI and the national 
white collar crime center (nw3c) cosponsor the IFCC. This partnership 
is mutually beneficial for both entities in that it allows both 
agencies to share staffing responsibilities and, by forwarding 
complaints to FBI field divisions, utilize the FBI's investigative 
resources to address this new techno crime.
    The IFCC identifies current crime problems, and develops 
investigative techniques to address newly identified crime trends. The 
information obtained from the data collected is providing the 
foundation for the development of a national strategic plan to address 
Internet fraud.
    IFCC's mission is to develop a national strategic plan to address 
fraud over the Internet, and to provide support to law enforcement and 
regulatory agencies at all levels of government for fraud that occurs 
over the Internet. IFCC's purpose is the following:

 To develop a national strategy to address Internet fraud;
 To develop criminal Internet fraud cases and refer for 
        criminal prosecutions companies and individuals responsible;
 To reduce the amount of economic loss by Internet fraud 
        throughout the United States;
 To provide an analytical repository for Internet fraud 
        complaints;
 To receive, analyze and refer all fraudulent activity 
        identified on the Internet;
 To identify current crime trends over the Internet;
 To develop investigative techniques to address those 
        identified crime problems;
 To track fraud facilitated by the Internet and provide 
        analytical support of Internet crime trends;
 To act as an investigative resource for Internet fraud;
 To develop training modules to investigate Internet fraud;
 To develop information packets from complaints generated and 
        forward that information to the appropriate law enforcement 
        agencies.
    Public awareness of the existence and purpose of the IFCC is 
paramount to the success of this effort. The IFCC provides a convenient 
and easy way for the public to alert authorities of a suspected 
criminal activity or civil violation. Victims of Internet crime are 
able to go directly to the IFCC web site (WWW.IFCCFBI.GOV) to submit 
their complaint information, relieving considerable frustration for the 
victim in trying to decide which law enforcement agency should receive 
the complaint. The FBI web page also aids in this effort. A detailed 
explanation of the complaint center, its purpose and contact numbers, 
is provided so that consumers can report Internet fraud. The FBI web 
page provides victims with a hyperlink to the IFCC web page. Many other 
consumer protection web sites which provide information on fraud 
matters contain links to the IFCC web site.
    The FBI has also established an Internet fraud council working 
group consisting of federal and state law enforcement agencies, 
international law enforcement agencies, federal and state enforcement 
agencies, and representatives of the private business sector. The 
group's purpose is to create a network to share information, discuss 
pertinent issues, recommend legislative solutions, and obtain the 
maximum benefit for all participating members.
    During the start-up phase of IFCC, the entire staff processed 
incoming complaints and forwarded them to law enforcement agencies. In 
its first year of operation, the IFCC received 36,410 complaints, of 
those complaints, 5,907 were invalid, incomplete or duplicative, 
resulting in 30,503 valid criminal complaints. Those complaints were 
referred to an average of two to three law enforcement agencies. This 
referral process has spawned hundreds of criminal investigations 
throughout the country. The FBI staff at the IFCC have begun to use the 
data to identify multiple victims, various crime trends and same 
subject cases thus initiating the investigative phase of the center's 
operations. This process wasn't fully functional until January 1, 2001. 
Utilizing this process in which the IFCC staff draft Internet 
investigative reports and forwards those reports to multiple law 
enforcement agencies, the IFCC has investigated and referred 545 
investigative reports encompassing over 3,000 complaints to 51 of 56 
FBI field divisions and 1,507 local and state law enforcement agencies. 
IFCC has also referred 41 cases encompassing over 200 complaints to 
international law enforcement agencies. The IFCC has received 
complaints of victims from 89 different countries.
    Auction fraud is by far the most reported Internet fraud, 
comprising nearly two-thirds of all complaints. Payment for merchandise 
that was never delivered accounts for 22% of complaints, and credit and 
debit card fraud makeup almost 5% of complaints. Another 5% of 
complaints stem from various types of investment frauds and confidence 
fraud schemes such as home improvement scams and multi-level marketing 
schemes. It has been the experience of the FBI that further 
investigation into these complaints often reveals a variety of frauds 
being perpetrated by subjects. Subjects engaged in one type of fraud 
scheme such as on-line auction fraud are frequently involved in other 
types of fraud schemes such as bank fraud, investment frauds and/or 
ponzi/pyramid schemes.
    Businesses that conduct a significant amount of commerce over the 
Internet are exposed to losses in the millions of dollars due to 
various fraud schemes. With assistance from the private sector, the 
IFCC is developing a business-friendly system for rapid data transfer 
of multiple complaints in an effort to better serve these crime victim-
companies' needs. This process will permit the Internet companies that 
are experiencing these losses to file bulk complaints and those 
complaints will then be distributed by IFCC to the appropriate law 
enforcement agencies.
    In effect, the IFCC operates as part of a cyber community watch in 
which the self policing efforts of honest and vigilant Internet users 
and Internet service providers result in potential fraudulent activity 
over the Internet being brought to the attention of law enforcement 
through the IFCC. The IFCC does much more than just collect complaint 
information. It ensures that the information, along with additional 
investigative information developed by IFCC personnel, is disseminated 
to the appropriate agencies, and that identified fraud schemes can be 
prevented or mitigated. The IFCC processes all complaints it receives 
regardless of the alleged dollar loss. Many of the complaints received 
do not allege losses which meet minimum dollar thresholds for federal 
prosecution, but they can often be successfully worked by local law 
enforcement agencies. At a minimum, they form part of a database which 
enables IFCC to potentially connect them with a widespread fraud scheme 
and/or organized criminal group. In this light, all complaints alleging 
fraud over the Internet are important. No victim should feel like any 
loss they suffered is too insignificant to report. It is only by 
victims and businesses reporting potentially fraudulent activity that 
law enforcement becomes aware of it and can take action. This point is 
made clear by action taken today by the FBI and other law enforcement 
agencies.

                          OPERATION CYBER-LOSS

    The success of the IFCC was demonstrated through IFCC's key role in 
operation cyber-loss.
    The FBI recognizes that the IFCC and initiatives such as operation 
cyber loss, while important first steps in addressing Internet fraud, 
represent merely the tip of the iceberg when it comes to the threat 
posed by cyber crime. They are a piece of a developing comprehensive 
FBI strategic plan addressing all aspects of cyber crime which will 
allow the FBI and law enforcement to effectively and efficiently 
maintain a high level response capability and prosecutorial success in 
areas where either: (1) a computer system and/or the Internet are used 
in furtherance of a crime; or (2) a computer system is the victim of a 
crime. The use of a computer system or the Internet in furtherance of 
crime is not limited to one FBI program area but is increasingly found 
in criminal investigative division and national infrastructure 
protection center cases. In many instances where a computer system is 
seriously targeted, the purpose of the attack is to facilitate ongoing 
criminal activity.
    The FBI is committed to ensuring the safety and security of those 
who use the Internet while maintaining an appreciation of the Internet 
as an important medium for commerce and communication. Focused law 
enforcement efforts will promote greater consumer confidence and trust 
in the Internet as a safe and secure medium of commerce and 
communication. The IFCC serves as an example of an innovative approach 
to an emerging crime problem. It provides the benefits of community 
policing, forging an effective partnership between law enforcement at 
all levels, ordinary citizens, consumer protection organizations such 
as the NW3C, and the business community. Addressing the emerging and 
dynamic threat of Internet fraud requires contributions from all 
segments of our society. The FBI serves to facilitate and coordinate 
this collaborative effort. Thank you.

    Mr. Stearns. Thank you.
    Mr. Townsend.

                 STATEMENT OF BRUCE A. TOWNSEND

    Mr. Townsend. Mr. Chairman, members of the subcommittee, 
thank you for the opportunity to address the subcommittee on 
the subject of on-line fraud and associated crimes and the 
Secret Service's efforts to combat this problem.
    I've prepared a comprehensive statement for the record and 
with the subcommittee's permission I will summarize it at this 
time.
    Mr. Stearns. By unanimous consent, so entered.
    Mr. Townsend. In addition to providing the highest level of 
physical protection to our Nation's leaders, the Secret Service 
exercises broad, investigative jurisdiction over a variety of 
financial crimes. As the original guardian of our Nation's 
financial payment systems, the Secret Service has a long 
history of pursuing those who victimize our financial 
institutions and law abiding citizens.
    In recent years, the combination of the information 
technology revolution and the effects of globalization have 
caused the investigative mission of the Secret Service to 
evolve in a manner which cannot be overstated.
    Mr. Chairman, we in the Secret Service applaud your efforts 
in convening this hearing today. We stand ready to work with 
you and all the members of the subcommittee in addressing this 
issue.
    It is our belief that hearings such as this will be the 
catalyst to bring together the resources of the State and 
Federal Governments in addition to the private sector in the 
unified response to this issue.
    Burgeoning use of the Internet and advanced technologies 
has promoted greater competition within the financial sector. 
Although this provides benefits to the consumer through readily 
available credit and consumer-oriented financial services, it 
also creates a rich environment for today's sophisticated 
criminals, many of whom are organized and operate across 
international borders.
    Information collection has become a common by-product of 
the newly emerging e-commerce. Internet purchases, credit card 
sales and other forms of electronic transactions are being 
captured, stored and analyzed by entrepreneurs intent on 
increasing their market share. The result is an entirely new 
business sector being created which promotes the buying and 
selling of personal information.
    With the advent of the Internet, companies have been 
created for the sole purpose of data mining, data warehousing 
and brokering of this information. These companies collect a 
wealth of information about consumers, including information as 
confidential as their medical histories.
    Consumers routinely provide personal, financial and other 
types of information to companies engaged in business on the 
Internet. Consumers may not realize that the information they 
provide in credit card applications, loan applications or with 
merchants they patronize is a valuable commodity in this new 
age of information trading.
    The Internet provides the anonymity all criminals desire. 
In the past, fraud schemes required false identification 
documents and necessitated some face to face exchange of 
information. Now with a laptop and modem, criminals are capable 
of perpetrating a variety of financial crimes without identity 
documents through the use of stolen personal information.
    The Secret Service has investigated cases where cyber 
criminals have hacked into Internet merchant sites and stolen 
personal information and credit card account numbers of their 
customers. These account numbers are then used with supporting 
personal information to order merchandise which can be sent 
throughout the world. Many account holders are not aware that 
their credit card account has been compromised until they 
receive their billing statement.
    Today, we are faced with another new challenge, that of 
identity theft. Time and time again criminals have demonstrated 
the ability to obtain information from businesses conducting 
business on the Internet. The information has been used to 
facilitate account takeover schemes and other similar frauds.
    It has become a frightening reality that one individual can 
literally take over another individual's financial identity 
without the true victim's knowledge. Using compromised 
financial identities of people from all walks of life, 
criminals purchase everything from cars to computers to homes. 
Presently, Secret Service Agents are investigating an identity 
theft case involving fraudulent credit card purchases. During 
the course of the investigation, agents have determined that 
the suspects used a stolen identity of an innocent party to 
obtain a $400,000 mortgage to purchase a home. Further 
investigation has determined that the suspects were in the 
process of obtaining seven additional home loans, using other 
identities with an aggregate value of $2.1 million.
    The Secret Service has a long history of conducting 
investigations into various fraud schemes and high tech crimes, 
from hackers, freakers and carders in the mid-1980's to the 
masters of deception group in the early 1990's, to the New York 
busboy CEO identity theft case in recent weeks. The Secret 
Service has been among those at the forefront of cyber crime 
investigations.
    We in the Secret Service pledge to continue to work with 
the Congress, with our domestic and global law enforcement 
partners and with the private sector to stay abreast of 
emerging high tech threats to the citizens we serve.
    Mr. Chairman, this concludes my prepared statement. I'd be 
happy to answer any questions that you or other members of the 
subcommittee may have.
    Thank you.
    [The prepared statement of Bruce A. Townsend follows:]

   Prepared Statement of Bruce A. Townsend, Special Agent in Charge-
             Financial Crimes Division, U.S. Secret Service

    Mr. Chairman, members of the Subcommittee, thank you for the 
opportunity to address the Subcommittee on the subject of on-line fraud 
and associated crimes and the Secret Service's efforts to combat this 
problem.
    In addition to providing the highest level of physical protection 
to our nation's leaders, the Secret Service exercises broad 
investigative jurisdiction over a variety of financial crimes. As the 
original guardian of our Nation's financial payment systems, the Secret 
Service has a long history of pursuing those who would victimize our 
financial institutions and law abiding citizens. In recent years, the 
combination of the information technology revolution and the effects of 
globalization have caused the investigative mission of the Secret 
Service to evolve in a manner that cannot be overstated.
    Mr. Chairman, we in the Secret Service applaud your efforts in 
convening this hearing today. We stand ready to work with you and all 
the members of the subcommittee in addressing this issue. It is our 
belief that hearings such as this will be the catalyst to bring 
together the resources of the state and Federal Governments, and the 
private sector in a unified response to this issue.
    Burgeoning use of the Internet and advanced technologies has 
promoted greater competition within the financial sector. Although this 
provides benefits to the consumer through readily available credit, and 
consumer oriented financial services, it also creates a rich 
environment for today's sophisticated criminals, many of whom are 
organized and operate across international borders.
    Information collection has become a common byproduct of the newly 
emerging e-commerce. Internet purchases, credit card sales, and other 
forms of electronic transactions are being captured, stored, and 
analyzed by entrepreneurs intent on increasing their market share. The 
result is a growing business sector for promoting the buying and 
selling of personal information.
    With the advent of the Internet, companies have been created for 
the sole purpose of data mining, data warehousing, and brokering of 
this information. These companies collect a wealth of information about 
consumers, including information as confidential as their medical 
histories.
    Consumers routinely provide personal, financial, and health 
information to companies engaged in business on the Internet. Consumers 
may not realize that the information they provide in credit card 
applications, loan applications, or with merchants they patronize, is a 
valuable commodity in this new age of information trading.
    The Internet provides the anonymity all criminals desire. In the 
past, fraud schemes required false identification documents, and 
necessitated a ``face to face'' exchange of information and identity 
verification. Now with just a laptop and a modem, criminals are capable 
of perpetrating a variety of financial crimes without identity 
documents through the use of stolen personal information.
    The Secret Service has investigated several cases where cyber 
criminals have hacked into Internet merchants' sites and stolen the 
personal information and credit card account numbers of their 
customers. These account numbers are then used with supporting personal 
information to order merchandise that is then shipped throughout the 
world. Most account holders are not aware that their credit card 
accounts have been compromised until they receive their billing 
statement.
    In an investigation conducted in April 2001, Secret Service Agents 
from the Lexington, Kentucky, Resident Office, along with their local 
law enforcement partners from the Richmond, Kentucky, Police 
Department, arrested a suspect who was operating an on-line auction 
selling counterfeit sports memorabilia. During this investigation it 
was learned that the suspect had fraudulently opened a number of credit 
card accounts utilizing the personal information of individuals with 
whom he had dealt over the Internet.
    Cyber criminals are also using information hacked from sites on the 
Internet to extort money from companies. It is not unprecedented for 
international hackers to hack into business accounts, steal thousands 
of credit card account numbers along with the accompanying personal 
identifiers, then threaten the companies with exposure unless the 
hackers are paid a substantial amount of money.
    Today we are faced with another new challenge--that of identity 
theft. Time and time again, criminals have demonstrated the ability to 
obtain information from businesses conducting commerce on the Internet. 
This information has been used to facilitate account takeover schemes 
and other similar frauds. It has become a frightening reality that one 
individual can literally take over another individual's financial 
identity without the victim's knowledge.
    We in the Secret Service view identity theft as a disturbing 
combination of old schemes and abuse of emerging technologies. However, 
it should be clear--this crime is about more than the theft of money or 
property. This crime is about the theft of something that cannot be so 
easily replaced--a person's good name, a reputation in the community--
years of hard work and commitment to goals. Make no mistake about it, 
this crime is a particularly invasive crime that can leave victims 
picking up the pieces of their lives for months or years afterward.
    In an investigation that illustrates the potential for significant 
losses to the public, agents of the Secret Service Los Angeles 
International Fraud Task Force recently arrested four suspects for 
their role in a scheme that involved fraudulently opening lines of 
credit for six different businesses. Further investigation revealed 
that the businesses were fictitious, and the individual identities 
associated with them had been fraudulently taken over by the suspects. 
It was also discovered that the suspects had used the personal 
identifiers of these supposed company officers to obtain auto and 
business loans, student loans, and open credit card accounts, resulting 
in an actual loss of more than $1.4 million. Pursuant to the execution 
of several seizure warrants, more than $360,000 cash and three luxury 
vehicles were seized from the suspects for forfeiture. A fifth suspect 
could not be located, and it has since been determined that he has fled 
to Nigeria.
    Congress has already taken an important step in providing increased 
protection for the victims of identity theft through the enhancements 
made to Title 18, United States Code, Section 1028 by the Identity 
Theft and Assumption Deterrence Act, which was signed into law in 
October of 1998.
    This law accomplished four things simultaneously. First, it 
identified people whose credit had been compromised as true victims. 
Historically with financial crimes such as bank fraud or credit card 
fraud, the victim identified by statute, was the person, business or 
financial institution that lost the money. All too often the victims of 
identity theft whose credit was destroyed, were not recognized as 
victims. This is no longer the case.
    Second, this law established the Federal Trade Commission (FTC) as 
the one central point of contact for these victims to report all 
instances of identity theft. This collection of data on all ID theft 
cases allows for the identification of systemic weaknesses and the 
ability of law enforcement to retrieve investigative data from one 
central location. It further allows the FTC to provide people with the 
information and assistance they need in order to take the steps 
necessary to correct their credit records.
    Third, this law provided increased sentencing potential and 
enhanced asset forfeiture provisions. These enhancements help to reach 
prosecutorial thresholds and allow for the return of funds to victims.
    Lastly, this law closed a loophole in Title 18, United States Code, 
Section 1028 by making it illegal to steal another person's personal 
identification information with the intent to commit a violation. 
Previously, under Section 1028 only the production or possession of 
false identity documents was prohibited. With advances in technology 
such as E-Commerce and the Internet, criminals today do not need actual 
documents to assume an identity.
    We believe this legislation is an important factor in bringing 
together the Federal and state governments in a focused and unified 
response to the identity theft problem. Today, law enforcement, 
regulatory and community assistance organizations have joined forces 
through a variety of working groups, task forces, and information 
sharing initiatives to assist victims of identity theft. Victims no 
longer have to feel abandoned, with no where to turn.
    A case in point concerns the investigation recently conducted by 
our New York Field Office's Electronic Crimes Task Force and the New 
York City Police Department concerning the compromised credit accounts 
of high profile businessmen. The investigation originated in December 
of 2000, when the office was notified that an Assistant United States 
Attorney for the Southern District of New York had a personal credit 
card account compromised. In February, the office was contacted again 
by a private party investigating the identity takeover and attempted 
brokerage account theft of a prominent corporate CEO in California. A 
subsequent joint investigation by the Secret Service Field Office and 
the New York Police Department determined that the credit card accounts 
of many of America's wealthiest Chief Executive Officers, as well as 
many other citizens, had also been compromised. This investigation 
determined that by utilizing the Internet and cellular telephones, the 
perpetrators were able to obtain the account numbers and had then 
established fictitious addresses for the corporations in order to 
conduct fraudulent transactions. Furthermore, attempts were also made 
to transfer approximately $22 million from legitimate brokerage and 
corporate accounts belonging to the victims, into fraudulently 
established accounts for conversion to the perpetrators' own use.
    The Secret Service continues to attack identity theft by 
aggressively pursuing core violations. It is by the successful 
investigation of criminals involved in financial and computer fraud 
that we are able to identify and suppress identity theft.
    Using compromised financial identities of people from all walks of 
life, criminals purchase everything from cars to computers to homes. 
Agents in our Birmingham Field Office are working an identity theft 
case involving $40,000 in fraudulent credit card purchases. During this 
investigation, agents have determined that the suspects used the stolen 
identity of an innocent party to obtain a $400,000 mortgage to purchase 
a home in the Birmingham area. Further investigation has determined 
that the suspects were in the process of obtaining seven additional 
home loans using other identities, with an aggregate value of $2.1 
million.
    As stated earlier, identity theft, and the use of false 
identification has become an integral component of most financial 
criminal activity. In order to be successful in suppressing identity 
theft, we believe law enforcement agencies should continue to focus 
their energy and available resources on the criminal activities that 
incorporate the misuse or theft of identification information. The 
Secret Service has achieved success through a consistent three -tiered 
process of aggressive pro-active investigations, identification of 
systemic weaknesses, and partnerships with the financial sector.
    Our investigative program focuses on three areas of criminal 
schemes within our core expertise. First, the Secret Service emphasizes 
the investigation of counterfeit instruments. By counterfeit 
instruments, I am referring to counterfeit currency, counterfeit 
checks--both commercial and government--counterfeit credit cards, 
counterfeit stocks or bonds, and virtually any negotiable instrument 
that can be counterfeited. Many counterfeiting schemes would not be 
possible without the compromise of the financial identities of innocent 
victims. Second, the Secret Service targets organized criminal groups 
that are engaged in financial crimes on both a national and 
international scale. Again we see many of these groups, most notably 
the Nigerian and Asian organized criminal groups, prolific in their use 
of stolen financial and personal information to further their financial 
crime activity.
    Finally, we focus our resources on community impact cases. The 
Secret Service works in concert with the state, county, and local 
police departments to ensure our resources are being targeted to those 
criminal areas that are of a high concern to the local citizenry. 
Further, we work very closely with both federal and local prosecutors 
to ensure that our investigations are relevant, topical and 
prosecutable under existing guidelines. No area today is more relevant 
or topical than that of identity theft.
    It has been our experience that the criminal groups involved in 
these types of crimes routinely operate in a multi-jurisdictional 
environment. This has created problems for local law enforcement who 
generally respond first to criminal activities. By working closely with 
other federal, state, and local law enforcement, as well as 
international police agencies, we are able to provide a comprehensive 
network of intelligence sharing, resource sharing, and technical 
expertise that bridges jurisdictional boundaries.
    This partnership approach to law enforcement is exemplified by our 
financial crimes task forces located throughout the country. Each of 
these task forces pools the personnel and technical resources to 
maximize the expertise of each participating law enforcement agency.
    In addition to our interdependent working relationship with law 
enforcement on all levels, our partnership with the private sector has 
proved invaluable. Representatives from numerous commercial sectors, 
including the financial, telecommunications, and computer industries, 
have all pledged their support for finding ways to ensure consumer 
protection while minimizing corporate losses. The Secret Service has 
entered into several cooperative efforts with representatives of the 
financial sector to address challenges posed by new and emerging 
technologies.
    In conjunction with these technological advances, the Secret 
Service is actively involved in a number of government sponsored 
initiatives. At the request of the Attorney General, the Secret Service 
joined an Identity Theft Subcommittee of the Attorney General's White 
Collar Crime Council.
    This group, which is made up of federal and state law enforcement, 
regulatory, and professional agencies, meets regularly to discuss and 
coordinate investigative and prosecutorial strategies as well as 
consumer education programs.
    The Secret Service has a long history of conducting investigations 
into hi-tech crimes. From ``hackers,'' ``freakers,'' and ``carders,'' 
in the mid 1980s to the ``Masters of Deception'' group in the early 
1990s, to the New York ``Busboy'' CEO identity theft case described 
above, the Secret Service has been among those at the forefront of 
cybercrime investigations.
    We in the Secret Service pledge to continue to work with the 
Congress, with our domestic and global law enforcement partners, and 
with the private sector, to stay abreast of emerging hi-tech threats to 
the citizens we serve.
    Mr. Chairman, this concludes my prepared statement. I would be 
happy to answer any questions that you or any other member of the 
subcommittee may have. Thank you.

    Mr. Stearns. I thank you.
    Ms. Harrington?

                 STATEMENT OF EILEEN HARRINGTON

    Ms. Harrington. Thank you, Mr. Chairman. I am Eileen 
Harrington of the FTC's Bureau of Consumer Protection. The 
Commission's full statement has been submitted for the record 
and I will summarize.
    We have a 6 point strategy at the FTC for combatting on-
line fraud. First, know and analyze the problem. Second, use 
targeted law enforcement actions to halt egregious fraud. 
Third, give consumers easy access to fraud prevention 
information and a simple way to tell law enforcement when they 
fall victim to on-line or off-line fraud. Fourth, share 
complaint data with U.S. and worldwide law enforcers. Fifth, 
provide onsite, hands on Internet investigation training for 
our law enforcement partners. And last, strengthen working 
relationships throughout the international consumer protection 
law enforcement network to address the increasing trend toward 
cross border on-line fraud.
    Here is how we are implementing this strategy. In 1995, the 
Commission held several weeks of hearings to explore the impact 
of new technologies and globalization on competition and 
consumer protection. We gathered the best minds from every 
sector to share their expertise as we set about developing a 
plan to attack what we already saw as a boom in high tech 
fraud.
    From those hearings we developed our plan and set about our 
work. And since those first hearings, the FTC has held numerous 
follow-up workshops bringing together law enforcers, 
regulators, policymakers and business and consumer groups to 
study and make recommendations on specific on-line issues such 
as pretexting and identity theft.
    As the Nation's leading consumer protection agency, the FTC 
is committed to the on-going work of study and analysis of the 
enormous benefits and worrisome problems that flow from e-
commerce.
    The FTC brought the first Federal law enforcement action 
against a scam using the Internet. That was in 1994 before 
there was even a worldwide web. Since then, we have brought 
over 150 additional actions to stop almost 600 defendants who 
are engaged in fraud and deception using the Internet. In these 
cases Federal courts have ordered more than $180 million in 
restitution to victims and at the FTC's request, have frozen 
millions and millions of dollars of additional proceeds in 
cases still in litigation.
    In addition, the FTC has organized and led nine enforcement 
sweeps targeting various kinds of on-line fraud and deception 
and these sweeps have resulted in hundreds of other actions by 
our enforcement partners. For example, in 2000, the FTC 
organized topten.com, the first international law enforcement 
targeting Internet fraud. In this year-long effort, law 
enforcers from five Federal agencies, nine other countries and 
23 States brought 251 enforcement actions against on-line 
scammers.
    In 1997, the FTC established its Consumer Response Center 
to provide consumers with immediate access to fraud prevention 
and other consumer information and a one stop shop for filing 
consumer complaints. Consumers can reach the FTC's Consumer 
Response Center by calling our toll free number, by going on-
line to file a complaint or by using traditional means like fax 
and letters. Today, the FTC handles 50,000 complaints and 
inquiries from consumers each month.
    Also, in 1997, the Commission launched the Consumer 
Sentinel which is a web-based fraud complaint data base. The 
FTC provides free real-time access to this fully searchable 
data base which with over 300,000 fraud complaints is the 
largest of its kind in North America. Every law enforcement 
agency in the United States and Canada and over 300 agencies 
now use Consumer Sentinel.
    The data base and the analytical tools that come with it 
enable law enforcers to know immediately when consumers in 
their jurisdictions complain of fraud or when subjects in their 
jurisdictions are complained of. And it also enables law 
enforcers to alert one another to on-going investigations and 
to pool other investigational resources. In short, Consumer 
Sentinel uses the Internet technology to give law enforcement a 
leg up in catching Internet crooks.
    Since 1999, the FTC has operated the National Clearinghouse 
for ID Theft complaints and just last year alone we received 
about 50,000 complaints about ID theft. Consumers can call our 
toll-free ID Theft Hotline for information about what to do if 
they fall victim to ID theft and they immediately receive 
expert counseling about steps that they should take. Their 
complaints are also made available immediately through Consumer 
Sentinel.
    The Commission has pioneered new investigative techniques 
to track down those responsible for fraud on the Internet and 
FTC staff conducts Internet training, Internet investigation 
training, throughout the country and in other parts of the 
world on an on-going basis. For example, in the past year, we 
provided training to enforcers in Illinois, in Tennessee, in 
California and today, Mr. Chairman, coincidentally, our 
trainers are in Tallahassee conducting a training session.
    We've also trained authorities from our law enforcement 
partner agencies throughout the world. Twenty-three other 
countries have received Internet investigation training from 
the FTC.
    In 1996, we developed the law enforcement surf protocol and 
since then we have organized and led 27 law enforcement surfs, 
looking at particular problems on the Internet and sending the 
warning message to on-line crooks that law enforcement is there 
and will follow-up with tough enforcement.
    The FTC's Internet Rapid Response Team uses all of these 
tools to respond quickly when we see particularly egregious 
high tech fraud. For example, last October in the space of a 
few days, we received hundreds of complaints about a 
sophisticated on-line billing scam, and within a matter of 
weeks, fully investigated it, went to court, got an order 
halting the scam and located the perpetrators in Great Britain 
and Australia and used our international enforcement network to 
get service on them and freeze their assets.
    We continue to work closely at the FTC with other 
enforcement agencies. At present we have an Inspector from the 
United States Postal Inspection Service on detail who is the 
manager of our Consumer Sentinel project and we are very 
pleased that we are being joined at the FTC by an Agent on 
detail from the Secret Service to work exclusively on the ID 
theft area which we commend the Secret Service for taking the 
lead in.
    We are a small agency with a big mission. As we often say, 
we live in a target rich environment and only by working 
collaboratively can enforcers here and throughout the world 
give their citizens the confidence and protection they deserve 
as they increasingly turn to the Internet to conduct their 
life's business.
    Thank you, Mr. Chairman.
    [The prepared statement of Eileen Harrington follows:]

 Prepared Statement of Eileen Harrington, Associate Director, Division 
 of Marketing Practices, Bureau of Consumer Protection, Federal Trade 
                               Commission

    Mr. Chairman, I am Eileen Harrington, Associate Director of the 
Division of Marketing Practices in the Federal Trade Commission's 
Bureau of Consumer Protection.\1\ At the Committee's request, my 
remarks will focus primarily on the FTC's efforts to combat fraud on 
the Internet. I will also touch on two other specific areas of concern 
both to the Committee and the Commission, namely, identity theft and 
``pretexting.''
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    \1\ The views expressed in this statement represent the views of 
the Commission. My responses to any questions you may have are my own 
and are not necessarily those of the Commission or any Commissioner.
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    Fraud--whether on the Internet or in the ``brick and mortar'' 
world--probably needs little explanation, but it may be useful to 
clarify what the terms ``identity theft'' and ``pretexting'' signify. 
Identity theft is use by a thief, unbeknownst to his victim, of the 
victim's name, social security number or other personal identifying 
information, to open accounts and rack up huge debts for goods and 
services. Identity theft certainly predates the Internet, and although 
identity thieves are finding ways to exploit this new tool, often this 
pernicious practice utilizes rather primitive low-tech means, such as 
intercepting a victim's mail, or scavenging personal information from a 
victim's trash. ``Pretexting'' is a term coined by the private 
investigation industry, and refers to the practice of obtaining 
personal information under false pretenses. For example, an 
investigator who obtains a bank account balance by posing as the 
account holder would be engaged in pretexting. This tactic is perhaps 
as old as the private investigation industry itself. But it appears to 
be gaining in popularity--especially in the burgeoning Internet 
marketplace--because of the booming market for comprehensive personal 
information.

                     I. INTRODUCTION AND BACKGROUND

A. The FTC and its Law Enforcement Authority
    The FTC is the federal government's primary consumer protection 
agency. While most federal agencies have jurisdiction over a specific 
market sector, the Commission's jurisdiction extends over nearly the 
entire economy, including business and consumer transactions on the 
Internet.2
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    \2\ The FTC has limited or no jurisdiction over specified types of 
entities and activities. These include banks, savings associations, and 
federal credit unions; regulated common carriers; air carriers; non-
retail sales of livestock and meat products under the Packers and 
Stockyards Act; certain activities of nonprofit corporations; and the 
business of insurance. See, e.g., 15 U.S.C. Sec. Sec. 44, 45, 46 (FTC 
Act); 15 U.S.C. Sec. 21 (Clayton Act); 7 U.S.C. Sec. 227 (Packers and 
Stockyards Act); 15 U.S.C. Sec. 1011 et seq. (McCarran-Ferguson Act).
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    Under the Federal Trade Commission Act,3 the agency's 
mandate is to take action against ``unfair or deceptive acts or 
practices'' and to promote vigorous competition in the marketplace. The 
FTC Act authorizes the Commission to halt deception through civil 
actions filed by its own attorneys in federal district court, as well 
as through administrative cease and desist actions.4 
Typically these civil actions seek preliminary and permanent 
injunctions to halt the targeted illegal activity, as well as redress 
for injured consumers. Where redress is impracticable, Commission 
actions generally seek disgorgement to the U.S. Treasury of defendants' 
ill-gotten gains. As discussed below, these tools have proven to be 
effective in fighting a broad array of fraudulent schemes on the 
Internet, in spite of the sheer size and reach of the Internet.
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    \3\ 15 U.S.C. Sec. 45(a). The Commission also has responsibilities 
under more than 45 additional statutes, e.g., the Fair Credit Reporting 
Act, 15 U.S.C. Sec. 1681 et seq., which establishes important privacy 
protections for consumers' sensitive financial information; 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 35 rules 
governing specific industries and practices, e.g., the Used Car Rule, 
16 C.F.R. Part 455, which requires used car dealers to disclose 
warranty terms via a window sticker; the Franchise Rule, 16 C.F.R. Part 
436, which requires the provision of information to prospective 
franchisees; and the Telemarketing Sales Rule, 16 C.F.R. Part 310, 
which defines and prohibits deceptive telemarketing practices and other 
abusive telemarketing practices.
    \4\ 15 U.S.C. Sec. Sec. 45(a) and 53(b).
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    In addition, the FTC has specific statutory authority with respect 
to identity theft and pretexting. Under the Identity Theft Assumption 
and Deterrence Act of 1998 the agency is charged, among other things, 
with responsibility to create and maintain a central clearinghouse for 
identity theft complaints. The Gramm-Leach-Bliley Act charges the FTC 
and other agencies with responsibility to ensure that financial 
institutions protect the privacy of consumers' personal financial 
information.5
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    \5\ 15 U.S.C. Sec. Sec. 6801-6809. In addition to the FTC, the 
Federal banking agencies, the National Credit Union Administration, the 
Treasury Department, and the Securities and Exchange Commission have 
responsibilities under the Gramm-Leach-Bliley Act.
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B. The Growth of Ecommerce and Internet Fraud.
    The growth of the Internet and ecommerce has been explosive. The 
number of American adults with Internet access grew from about 88 
million in mid-2000 to more than 104 million at the end of the 
year.6 The Census Bureau of the Department of Commerce 
estimated that in the fourth quarter of 2000, not adjusted for 
seasonal, holiday, and trading-day differences, online retail sales 
were $8.686 billion, an increase of 67.1 percent from the 4th quarter 
of 1999.7 Total ecommerce sales for 2000 were an estimated 
$25.8 billion, .8 percent of all sales.8
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    \6\ Pew Internet and American Life Project, More Online, Doing More 
(reported at http://www.pewinternet.org/reports/toc.asp?Report=30) 
(comparison of tracking survey data in May and June with data from 
Thanksgiving and Christmas indicates that the number of American adults 
with Internet access grew fr
    \7\ Reported at www.census.gov/mrts/www/current.html).
    \8\ Id.
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    Unfortunately, but not surprisingly, the boom in ecommerce has 
created fertile ground for fraud. The Commission's experience is that 
fraud operators are always among the first to appreciate the potential 
of a new technology to exploit and deceive consumers. Long-distance 
telemarketing attracted con artists when it was introduced in the 
1970's. They swarmed to pay-per-call technology when it became 
available in the late 1980's. Internet technology is the latest draw 
for opportunistic predators who specialize in fraud. The rapid rise in 
the number of consumer complaints related to online fraud and deception 
bears this out: in 1997, the Commission received fewer than 1,000 
Internet fraud complaints; a year later, the number had increased 
eight-fold. In 2000, over 25,000 complaints--roughly 26 percent of all 
fraud complaints logged into the FTC's complaint database, ``Consumer 
Sentinel,'' by various organizations that year--related to online fraud 
and deception. The need--and challenge--is to act quickly to stem this 
trend while the online marketplace is still young.

C. The FTC's Response to Protecting Consumers in the Online Marketplace
    Stretching its available resources to combat the growing problem of 
Internet fraud and deception, the Commission has targeted a wide array 
of online consumer protection problems. This effort has produced 
significant results. Since 1994 , the Commission has brought 182 
Internet-related cases against over 593 defendants. It obtained 
injunctions stopping the illegal schemes, and ordering more than $180 
million in redress or disgorgement,9 and obtained orders 
freezing millions more in cases that are still in litigation. Its 
federal district court actions alone have stopped consumer injury from 
Internet schemes with estimated annual sales of over $250 
million.10
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    \9\ To date the Commission has collected more than $55 million in 
redress for victims of Internet fraud and deception.
    \10\ These figures are based on estimated annual fraudulent sales 
by defendants in the twelve months prior to filing the complaint. 
Fraudulent sales figures are based on, among other things, financial 
statements, company records, receiver reports, and deposition testimony 
of company officials.
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                 II. CHALLENGES POSED BY INTERNET FRAUD

    The Commission faces a host of novel challenges in its efforts to 
combat fraud and deception online. Traditional scams--such as pyramid 
schemes and false product claims `` thrive on the Internet. Moreover, 
the architecture of the Internet itself has given rise to new high-tech 
scams that were not possible before development of the Internet. Both 
traditional scams and and the innovative ones exploit the global reach 
and instantaneous speed of the Internet. In addition, the Internet 
enables con artists to cloak themselves in anonymity, which makes it 
necessary for law enforcement authorities to act much more quickly to 
stop newly-emerging deceptive schemes before the perpetrators 
disappear. And because the Internet transcends national boundaries, law 
enforcement authorities must be more creative and cooperative to 
successfully combat online fraud. These novel challenges are discussed 
in greater detail below.

A. Combating Internet Fraud Requires New Methods of Collecting and 
        Analyzing Information.
    The Commission is developing new methods of collecting and 
analyzing information about both the offline and online marketplace, 
drawing upon the power of new technology itself. A central part of this 
effort is Consumer Sentinel, a web-based consumer complaint database 
and law enforcement investigative tool.11 Consumer Sentinel 
receives complaints about all sorts of transactions, whether on the 
Internet or in the ``brick and mortar'' world. The complaints come into 
Consumer Sentinel from the FTC's Consumer Response Center (``CRC''), 
which processes both telephone and mail inquiries and 
complaints.12 For those consumers who prefer the online 
environment, an electronic complaint form at www.ftc.gov, first 
available in May of 1998, permits consumers to channel information 
about potential scams directly to the CRC and the fraud database.
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    \11\ See www.consumer.gov/sentinel.
    \12\ The CRC now receives over 12,000 inquiries and complaints per 
week. They cover a broad spectrum--everything from complaints about 
get-rich-quick telemarketing scams and online auction fraud, to 
questions about consumer rights under various credit statutes and 
requests for educational materials. Counselors record complaint data, 
provide information to assist consumers in resolving their complaints, 
and answer their inquiries.
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    Consumer Sentinel also benefits from the contributions of many 
public and private partners. It receives data from other public and 
private consumer organizations, including 64 local offices of the 
Better Business Bureaus across the nation, the National Consumers 
League's National Fraud Information Center, and Project Phonebusters in 
Canada. Additionally, a U.S. Postal Inspector has served for the past 
year as the program manager, and the U.S. Postal Inspection Service 
just signed an agreement to begin sharing consumer complaint data from 
its central fraud database with Consumer Sentinel.
    The Commission provides secure access to this data over the 
Internet, free of charge, to over 300 U.S., Canadian, and Australian 
law enforcement organizations--including the Department of Justice, 
U.S. Attorneys' offices, the Federal Bureau of Investigation, the 
Securities and Exchange Commission, the Secret Service, the U.S. Postal 
Inspection Service, the Internal Revenue Service, the offices of all 50 
state Attorneys General, local sheriffs and prosecutors, the Royal 
Canadian Mounted Police, and the Australian Competition and Consumer 
Commission. Consumer Sentinel is a dynamic online law enforcement tool 
to use against all types of fraud, especially online 
fraud.13
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    \13\ In 1998, the Interagency Resources Management Conference Award 
recognized Consumer Sentinel as an exceptional initiative to improve 
government service.
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    The central role that Consumer Sentinel plays in the Commission's 
law enforcement is exemplified by ``Operation Top Ten Dot Cons,'' the 
Commission's latest broad ``sweep'' of fraudulent and deceptive 
Internet scams. In a year-long law enforcement effort, the FTC and four 
other U.S. federal agencies,14 consumer protection 
organizations from 9 countries,15 and 23 states 
16 announced 251 law enforcement actions against online 
scammers. The FTC brought 54 of the cases.17 The top 10 
Internet or online scams, identified through analysis of complaint data 
in the Consumer Sentinel database, were:

    \14\ U.S. agencies participating included the Commodity Futures 
Trading Commission, the Department of Justice, the Securities and 
Exchange Commission and the United States Postal Inspection Service.
    \15\ Participants in ``Operation Top Ten Dot Cons'' included 
consumer protection agencies from Australia, Canada, Finland, Germany, 
Ireland, New Zealand, Norway, the United Kingdom and the United States.
    \16\ Cases were brought by the Attorneys General of Arizona, 
Colorado, Florida, Illinois, Iowa, Indiana, Louisiana, Maryland, 
Massachusetts, Michigan, Missouri, Nevada, New Jersey, North Carolina, 
Ohio, Oregon, Pennsylvania, Tennessee, Texas, and Washington. Consumer 
protection offices in West Virginia, and Wisconsin also took action, as 
did the Louisiana Department of Justice, the Oklahoma Department of 
Securities, and the Washington State Securities Division.
    \17\ The SEC's contribution to this project consisted of 77 cases.
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 Internet Auction Fraud
 Internet Service Provider Scams
 Internet Web Site Design/Promotions (``Web Cramming'') 
        18
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    \18\ ``Web cramming'' is a type of unauthorized billing scam. Web 
crammers call their victims--often small businesses--and offer a 
``free'' Web page; then they start billing the victims, typically on 
their monthly telephone statements, without authorization. In many 
cases the small business victims are not even aware that they have a 
web site or are paying for one.
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 Internet Information and Adult Services (unauthorized credit 
        card charges)
 Pyramid Scams
 Business Opportunities and Work-At-Home Scams
 Investment Schemes and Get-Rich-Quick Scams
 Travel/Vacation Fraud
 Telephone/Pay-Per-Call Solicitation Frauds (including modem 
        dialers and videotext) 19
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    \19\ Telephone/Pay-Per-Call Solicitation Frauds are schemes that 
exploit the telephone billing and collection system to charge consumers 
for telephone-based entertainment programs (``audiotext'' in industry 
parlance) or other so-called ``enhanced services'' that are not 
telecommunications transmission but are often billed on consumers' 
telephone bills. Modem dialers and videotext schemes, like the 
operation attacked in FTC v. Verity International, No.00 Civ. 7422(LAK) 
(S.D.N.Y. 2000), described infra, are ones that, unbeknownst to a 
consumer, cause his or her computer modem to disconnect from his or her 
usual Internet service provider, dial an expensive international 
telephone number, and reconnect to the Internet at a remote location 
overseas, charging the consumer as much as $5.00 or more per minute for 
as long as the consumer remains online.
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 Health Care Frauds
    The Consumer Sentinel data enabled the FTC and the other 
enforcement agencies that joined us in this project both in the U.S. 
and abroad to identify not only the top ten types of scams, but also 
the specific companies generating the highest levels of complaints 
about each of those types of scams. These companies became the targets 
for the law enforcement actions that comprised Operation Top Ten Dot 
Con. Finally, Consumer Sentinel data enabled the Commission and its 
partners to obtain and develop evidence against these targets from 
individual consumers whose complaints had been included in the 
database.
    Consumer Sentinel first went online in late 1997. Since then, the 
Commission has upgraded the capacity of the Consumer Sentinel database 
and enhanced the agency's complaint-handling systems by creating and 
staffing a new toll-free consumer helpline at 1-877-FTC-HELP, and 
adding several new functions to Consumer Sentinel. The first of these 
new functions, the ``Top Violators'' report function, allows a law 
enforcement officer to pull up the most common suspects and schemes by 
state, region or subject area. The second new function, ``Auto Query,'' 
enables an investigator to create an automatic search request. This 
automatic search can be set to run daily, weekly, or monthly, and if 
new complaints come into Consumer Sentinel that match the search 
criteria, Consumer Sentinel will automatically alert the investigator 
via email. Third, the ``Alert'' function enables law enforcers to 
communicate with each other and minimize duplication of their efforts, 
and a fourth new function performs a search of Commission court orders 
online. In 2000, Consumer Sentinel received over 100,000 consumer 
complaints. Currently the database holds over 300,000 consumer 
complaints.20
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    \20\ The FTC recently signed an agreement with the Department of 
Defense to collect consumer complaints from men and women serving in 
the military through a project called ``Soldier Sentinel.''
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    Consumer Sentinel has particular relevance to identity theft, 
because the Commission has expanded Consumer Sentinel to encompass the 
Identity Theft Data Clearinghouse. Victims of identity theft can call 
the FTC's toll-free telephone number, 1-877-ID THEFT (438-4338), to 
report the crime and receive advice on what to do. CRC counselors enter 
the victims' information about their experience into the Identity Theft 
Data Clearinghouse, which immediately makes the information available, 
through the Consumer Sentinel web site, to174 participating domestic 
law enforcement agencies. The Clearinghouse data is used to spot 
patterns of illegal activity. For example, the Clearinghouse database 
may facilitate identification of organized or large-scale identity 
theft rings. The Clearinghouse is a tool that has begun to enable the 
many agencies involved in combating identity theft to share data, and 
to work more effectively to track down identity thieves and assist 
consumers.21 In this regard, starting this month, the U.S. 
Secret Service has detailed an agent to the Commission's Identity Theft 
Clearinghouse program to help develop and refer case leads from the 
Clearinghouse to law enforcers throughout the nation to facilitate 
investigation and prosecution of identity theft.
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    \21\ The Commission has been working closely with other agencies to 
establish a coordinated effort to identify the factors that lead to 
identity theft, to minimize those opportunities, to enhance law 
enforcement efforts and help consumers resolve identity theft problems. 
The first such event was the Commission's April 1999 meeting with 
representatives of approximately a dozen federal agencies as well as 
the National Association of Attorneys General to discuss the 
implementation of the consumer assistance provisions of the Identity 
Theft Act. FTC staff works with the Identity Theft Subcommittee of the 
Attorney General's Council on White Collar Crime to coordinate law 
enforcement strategies and initiatives. FTC staff also coordinates with 
staff from the Social Security Administration's Inspector General's 
Office on the handling of social security number misuse complaints, a 
leading source of identity theft problems.
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    The Commission's efforts to improve consumer complaint collection 
and analysis through the Consumer Response Center and Consumer Sentinel 
are complemented by a proactive program to uncover fraud and deception 
in broad sectors of the online marketplace through ``Surf Days.'' Surf 
Days use new technology to detect and analyze emerging Internet 
problems. While Consumer Sentinel provides data on broad trends and the 
volume of complaints prompted by particular Internet schemes, Surf Days 
allow the Commission to take a ``snap shot'' of a market segment at any 
given time. The Commission also uses Surf Days to reach new 
entrepreneurs and alert those who unwittingly may be violating the law.
    On a typical Surf Day, Commission staff and personnel from our law 
enforcement partners--often state attorneys general, sister federal 
agencies or private organizations like the Better Business Bureau--
widely ``surf'' the Internet for a specific type of claim or 
solicitation that is likely to violate the law. When a suspect site is 
identified, the page is downloaded and saved as potential evidence, and 
the operator of the site is sent an email warning that explains the law 
and provides a link to educational information available at 
www.ftc.gov. Shortly thereafter, a law enforcement team revisits the 
previously warned sites to determine whether they have remedied their 
questionable claims or solicitations. The results vary, depending on 
the targeted practice of the particular Surf Day. Between 20 and 70 
percent of the Web site operators who received a warning come into 
compliance with the law, either by taking down their sites or modifying 
their claims or solicitations. Sites that continue to make unlawful 
claims are targeted for possible law enforcement action.
    To date, the Commission has conducted 27 different Surf Days 
targeting problems ranging from ``cure-all'' health claims to 
fraudulent business opportunities and credit repair scams.22 
More than 250 law enforcement agencies or consumer organizations around 
the world have joined the Commission in these activities; collectively, 
they have identified over 6,000 Internet sites making dubious claims. 
The law enforcement Surf Day has proven so effective that it is now 
widely used by other government agencies, consumer groups and other 
private organizations.
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    \22\ The FTC has coordinated or co-sponsored the following Surf 
Days, listed by date of their announcements: Pyramid Surf Day (Dec. 
1996), Credit Repair Surf (April 1997), Business Opportunity Surf Day 
(April 1997), Coupon Fraud Surf Day (Aug. 1997), North American Health 
Claims Surf (Oct. 1997), HUD Tracer Surf Day (Nov. 1997), International 
Surf Day (Oct. 1997), Kids Privacy Surf Day (Dec. 1997), Junk E-mail 
Harvest (Dec. 1997), Privacy Surf (March 1998), Textile and Wool 
Labeling Surf (Aug. 1998), Y2K Surf (Sept. 1998), International Health 
Claims Surf (Nov. 1998), Investment Surf Day (Dec. 1998), Jewelry 
Guides Surf (Jan. 1999), Pyramid Surf Day II (March 1999), Green Guide 
Surf (April 1999), Coupon Fraud II Surf Day (June 1999), Jewelry Guides 
Surf II (January 2000), Scholarship Services Surf (January 2000), 
GetRichQuick.con Surf (March 2000), False or Unsubstantiated Lice 
Treatment Claims Surf (April 2000), Credit Repair Surf II (Aug. 2000), 
Childrens' Online Privacy Protection Act Compliance Surf (Aug. 2000), 
False Claims of Authenticity for American Indian Arts and Crafts Surf 
Day (Oct. 2000), TooLate.Com [Surf of Online Retailers' Compliance with 
the Mail or Telephone Order Merchandise Rule] (Nov. 2000), and 
Operation Detect Pretext [Surf of more than 1,000 web sites (coupled 
with a review of more than 500 advertisements in the print media) for 
firms offering to conduct financial searches, in order to identify 
potential violators of the Gramm-Leach-Bliley Act, which specifically 
prohibits obtaining, or attempting to obtain, another person's 
financial information by making false, fictitious or fraudulent 
statements to financial institutions].
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B. Traditional Scams Use the Internet to Expand in Size and Scope.
    Out of the 170 cases brought by the Commission against Internet 
fraud and deception, over half have targeted old-fashioned scams that 
have been retooled for the new medium. For example, the Commission has 
brought 28 actions against online credit repair schemes, 25 cases 
against deceptive business opportunities and work-at-home schemes, and 
11 cases against pyramid schemes.
    It is no surprise that the Internet versions of traditional frauds 
can be much larger in size and scope than their offline predecessors. A 
colorful, well-designed Web site imparts a sleek new veneer to an 
otherwise stale fraud; and the reach of the Internet allows an old-time 
con artist to think--and act--globally, as well.
    Pyramid schemes are the most notable example of a fraud whose size 
and scope are magnified by the Internet.23 By definition, 
these schemes require a steady supply of new recruits. The Internet 
provides an efficient way to reach countless new prospects around the 
world, and to funnel funds more efficiently and quickly from the 
victims to the scammers at the top of the pyramid. As a result, the 
victims are more numerous, the fraud operator's financial ``take'' is 
much greater, and the defense is typically well-funded and fierce when 
the FTC brings suit to stop a pyramid scheme operating online.
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    \23\ Pyramid operators typically promise enormous earnings or 
investment returns, not based on commissions for retail sales to 
consumers, but based on commissions for recruiting new pyramid members. 
Recruitment commissions, of course, are premised on an endless supply 
of new members. Inevitably, when no more new recruits can be found, 
these schemes collapse and a vast majority of participants lose the 
money they invested.
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    Despite the extensive resources required to pursue an online 
pyramid case, the Commission has asserted a strong enforcement 
presence, obtaining orders for more than $70 million in redress for 
victims,24 and pursuing millions more in ongoing litigation. 
In one case, FTC v. Fortuna Alliance, the Commission spent two years in 
litigation and negotiations and finally obtained a court order finding 
the defendants in contempt, and a stipulated final order enjoining the 
defendants from further pyramid activities and requiring them to pay 
$5.5 million in refunds to over 15,000 victims in the U.S. and 70 
foreign countries.25 More recently, in FTC v. Five Star Auto 
Club, Inc.,26 the Commission prevailed at trial against 
another pyramid scheme that lured online consumers to buy in by 
claiming that an annual fee and $100 monthly payments would give 
investors the opportunity to lease their ``dream vehicle'' for ``free'' 
while earning up to $80,000 a month by recruiting others to join the 
scheme. The court issued a permanent injunction shutting down the 
scheme, barring for life the scheme's principals from any multi-level 
marketing business, and ordering them to pay $2.9 million in consumer 
redress.
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    \24\ To date, the Commission has collected about $42.6 million in 
these cases.
    \25\ FTC v. Fortuna Alliance, L.L.C.,, No. C96-799M (W.D. Wash. 
1996). See also, FTC v. JewelWay International, Inc., No. CV97-383 TUC 
JMR (D. Ariz. 1997) ($5 million in redress for approximately 150,000 
investors); FTC v. Nia Cano, No. 97-7947-CAS-(AJWx) (C.D. Cal. 1997) 
(approximately $2 million in redress); FTC v. FutureNet, No. 98-1113GHK 
(AIJx) (C.D. Cal. 1998) ($1 million in consumer redress). FTC v. Five 
Star Auto Club, Inc., 97 F. Supp. 2d 502 (S.D.N.Y. 2000). ($2.9 million 
in consumer redress); FTC v. Equinox International Corp., No CV-S-
990969-JBR-RLH (D.Nev. 1999) (pyramid promoted through many devices, 
including some use of the Internet; $50 million in consumer redress).
    \26\ FTC v. Five Star Auto Club, Inc., 97 F. Supp. 2d 502 (S.D.N.Y. 
2000).
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C. Scams Are Increasingly High-Tech.
    Although most Internet fraud stems from traditional scams, the 
number of schemes uniquely and ingeniously exploiting new technology is 
multiplying. These are the most insidious schemes because they feed on 
the public's fascination with--and suspicion of--new technology. Their 
ultimate effect can only be to undermine consumer confidence in the 
online marketplace. To combat this type of high-tech fraud, the 
Commission has supported staff training and given its staff the tools 
to be effective cyber-sleuths.
    Recognizing that most of its attorneys and investigators need to be 
Internet savvy, the Commission has hosted beginner and advanced 
Internet training seminars and held sessions on new technology, 
investigative techniques, and Internet case law. The Commission also 
makes this training available to personnel of other law enforcement 
agencies. In the past year, the Commission has presented Internet 
training seminars in seven U.S. cities and in Toronto, Canada, and 
Paris, France. In addition to FTC staff, these sessions trained 
approximately 800 individual participants from other law enforcement 
agencies. These participants represented twenty different countries 
including the U.S., twenty-six states, twenty-two federal agencies, and 
fourteen Canadian law enforcement agencies. Among those who have 
participated are representatives from the offices of state Attorneys 
General, the Department of Justice and U.S. Attorneys, the Securities 
and Exchange Commission, the FBI, and the Postal Inspection Service.
    In addition to providing regular Internet training, the Commission 
also provides its staff with the tools they need to investigate high-
tech fraud. The FTC's Internet Lab is an important example. With high 
speed computers that are separate from the agency's network and 
equipped with current hardware and software, the Lab allows staff to 
investigate fraud and deception in a secure environment and to preserve 
evidence for litigation.
    1. Modem Hijacking--The Commission has used its training and tools 
to stop some of the most egregious and technically sophisticated 
schemes seen on the Internet. For example, the FTC's lawsuit against 
Verity International, Ltd.,27 was prompted by the influx of 
hundreds of complaints in the last week of September 2000 through the 
CRC and logged in Consumer Sentinel. Investigation showed that high 
charges on consumers' phone lines were being initiated by ``dialer'' 
software downloaded from teaser adult web sites. Many line subscribers 
had no idea why they received bills for these charges. Others 
discovered that a minor in their household--or another person who did 
not have the line subscriber's authorization--accessed the Web sites 
and downloaded the dialer software. The dialer program allowed users to 
access the ``videotext'' adult content without any means of verifying 
that the user was the line subscriber, or was authorized by the line 
subscriber to incur charges on the line for such service. Once 
downloaded and executed, however, the program actually hijacked the 
consumer's computer modem by surreptitiously disconnecting the modem 
from the consumer's local Internet Service Provider, dialing a high-
priced international long distance call to Madagascar, and reconnecting 
the consumer's modem to the Internet from some overseas location, 
opening at an adult web site. The line subscriber--the consumer 
responsible for paying phone charges on the line--then began incurring 
charges on his or her phone lines for the remote connection to the 
Internet at the rate of $3.99 per minute. The court has ordered a 
preliminary injunction in this matter, and litigation 
continues.28
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    \27\ FTC v. Verity International, Ltd., No. 00 Civ. 7422 
(LAK)(S.D.N.Y. 2000).
    \28\ Other modem hijacking cases include FTC v. Audiotex 
Connection, Inc., No. CV-97-0726 (DRH) (E.D.N.Y. 1997) (final 
stipulated injunction halting the unlawful practice and ordering that 
27,000 victims receive full redress totaling $2.14 million); FTC v. RJB 
Telcom, Inc., No.CV 00-2017 PHX SRB (D. Az. 2000); FTC v. Ty Anderson, 
No. C 00-1843P (W.D. Wa. 2000).
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    2. ``Pagejacking'' and ``Mousetrapping''--Earlier, in FTC v. Carlos 
Pereira d/b/a atariz.com,29 the Commission attacked a world- 
wide, high-tech scheme that allegedly ``pagejacked'' consumers and then 
``mousetrapped'' them at adult pornography sites. ``Pagejacking'' is 
making exact copies of someone else's Web page, including the imbedded 
text that informs search engines about the subject matter of the site. 
The defendants allegedly made unauthorized copies of 25 million pages 
from other Web sites, including those of Paine Webber and the Harvard 
Law Review. The defendants made one change on each copied page that was 
hidden from view: they inserted a command to ``redirect'' any surfer 
coming to the site to another Web site that contained sexually-
explicit, adult-oriented material. Internet surfers searching for 
subjects as innocuous as ``Oklahoma tornadoes'' or ``child car seats'' 
would type those terms into a search engine and the search results 
would list a variety of related sites, including the bogus, copycat 
site of the defendants. Surfers assumed from the listings that the 
defendants' sites contained the information they were seeking and 
clicked on the listing. The ``redirect'' command imbedded in the 
copycat site immediately rerouted the consumer to an adult site hosted 
by the defendants. Once there, defendants ``mousetrapped'' consumers by 
incapacitating their Internet browser's ``back'' and ``close'' buttons, 
so that while they were trying to exit the defendants' site, they were 
sent to additional adult sites in an unavoidable, seemingly endless 
loop.
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    \29\ FTC v. Carlos Pereira d/b/a atariz.com, No. 99-1367-A (E.D. 
Va. 1999).
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    Using the new tools available in the Internet Lab, the Commission 
was able to capture and evaluate evidence of this ``pagejacking'' and 
``mousetrapping.'' In September 1999, the Commission filed suit in 
federal court and obtained a preliminary order stopping these 
activities and suspending the Internet domain names of the defendants. 
Since then, the Court has entered default judgments against two 
defendants and a stipulated permanent injunction against a third, 
baring them from future law violations. A fourth defendant, Carlos 
Pereira, has evaded law enforcement authorities in Portugal.
    3. Internet-based Facilitation of ID Theft--The Commission has 
brought one law enforcement action that directly confronted identity 
theft, FTC v. Jeremy Martinez d/b/a Info World.30 Jeremy 
Martinez allegedly facilitated identity theft by offering over the 
Internet fake ID templates for which there was absolutely no legitimate 
use. The FTC complaint alleged that Jeremy Martinez, doing business as 
Info World, maintained Web sites, including one located at a site 
called ``newid'' that sold 45 days of access to fake ID templates for 
$29.99. The site contained ``high quality'' templates to use in 
creating fake drivers licenses from ten states.31 It also 
offered a birth certificate template, programs to generate bar codes--
required in some states to authenticate drivers licenses--and a program 
to falsify Social Security numbers.
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    \30\ FTC v. Jeremy Martinez d/b/a Info World, No. 00 Civ 12701 
(C.D. Cal. Dec. 5, 2000). See, also, FTC v. J.K. Publications, Inc., et 
al, 99 F. Supp.2d. 1176 (C.D. Cal. Apr. 10, 2000)(granting summary 
judgment for the FTC in case alleging that defendants obtained 
consumers' credit card numbers without their knowledge and billed 
consumers' accounts for unordered or fictitious Internet services), 
later proceedings at FTC v. J.K. Publications, Inc., et al, 99 Civ 
00044 (C.D. Cal. Aug. 30, 2000)(final order awarding $37.5 million in 
redress); FTC v. Rapp, No. 99-WM-783 (D. Colo. filed Apr. 21, 1999) 
(alleging that defendants obtained private financial information under 
false pretenses)(Stipulated Consent Agreement and Final Order entered 
June 23, 2000).
    \31\ Info World offered templates for California, Georgia, Florida, 
Maine, Nevada, New Hampshire, New Jersey, Utah, Wisconsin and New York 
drivers licenses.
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    The complaint alleged that Martinez was deliberately marketing his 
site to consumers who were surfing the net to find fake ID documents. 
Web sites use Meta-tags--hidden words that help search engines identify 
and index Web site content. Martinez's Meta-tags included ``illegal 
id,'' ``fake id fraud,'' and ``forging documents'' according to the FTC 
complaint.
    The Commission charged that selling the fake ID templates violated 
Section 5 of the FTC Act and that by providing false identification 
templates to others, Martinez provided the ``means and 
instrumentalities'' for others to break the law--a separate violation 
of Section 5. Immediately upon the Commission's filing of the 
complaint, the Court issued a Temporary Restraining Order (TRO) halting 
the alleged illegal activity, and soon thereafter a stipulated 
preliminary injunction continuing the relief granted in the TRO. On May 
17, 2001 the Court approved Martinez' stipulated settlement with the 
FTC that permanently bans him from selling false identification 
documents or identification templates, or assisting others in doing so. 
The settlement also permanently bars Martinez from providing others 
with the means and instrumentalities with which to make any false or 
misleading representations that conceal or alter a person's identity, 
or that falsely signify that a fake document is real. The stipulation 
also requires Martinez to disgorge illegal earnings from the scheme in 
the amount of $20,000. The settlement provides an ``avalanche'' clause 
making Martinez liable for more than $105,000 in the event that he 
misrepresented his financial condition to the Commission.
    4. Pretexting by Internet-based Information Brokers.--Last month, 
the Commission filed lawsuits against three Internet-based information 
brokers who used false pretenses, fraudulent statements or 
impersonation to obtain consumers' confidential financial 
information.32 The practice `` known as `pretexting' '' is 
illegal under the Gramm-Leach-Bliley Act.33 The three 
complaints, filed in federal courts in Maryland, New York and Texas, 
alleged that defendants represented on their Web sites that they could 
obtain customer financial information and used pretexting to obtain 
bank account balances.
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    \32\ FTC v. Information Search, Inc. and David Kacala, Civil Action 
No. AMD-01-1121 (D. Md. April 17, 2001); FTC. v. Victor L. Guzzetta d/
b/a Smart Data Systems, Civil Action No. CV 01 2335 (E.D.N.Y. April 17, 
2001); FTC v. Paula L. Garrett d/b/a Discreet Data Systems, Civil 
Action No. H 01- 1225 (S.D. Tex. April 17, 2001). The Commission 
determined to file the complaints by a vote of 3-2, with Chairman 
Pitofsky, Commissioner Anthony, and Commissioner Thompson voting in the 
affirmative and Commissioner Swindle and Commissioner Leary voting in 
the negative.
    \33\ Subtitle B of the Gramm-Leach-Bliley Act provides for both 
civil and criminal penalties for pretexting or for soliciting others to 
pretext. 15 U.S.C. Sec. Sec. 6821. et seq. The Commission only has 
civil enforcement authority. Subtitle B also directs the Commission to 
report annually to Congress on the disposition of all enforcement 
actions. The Commission issued its first annual report on January 12, 
2001, before the three complaints were filed.
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    The Commission staff first identified the defendants as possible 
pretexters when it conducted a ``surf'' of information broker Web 
sites. As part of ``Operation Detect Pretext,'' the staff screened more 
than 1,000 Web sites and reviewed more than 500 print media 
advertisements to identify approximately 200 firms that offered to 
obtain and sell asset or bank account information to third parties. The 
Commission staff sent notices to most of these firms advising them that 
their practices must comply with the anti-pretexting provisions of the 
Gramm-Leach-Bliley Act. At the same time, the staff set up a sting 
operation to confirm that the three defendants were actually providing 
the illegal pretexting services they advertised on their Web sites. 
Based primarily upon evidence uncovered by the sting, the FTC filed 
complaints alleging that the defendants--for fees ranging from $100 to 
$600--would obtain bank account balances by calling a bank and 
pretending to be the customer.
    The courts in all three cases immediately entered TROs to halt the 
illegal activity, freeze certain of the defendants' assets, and require 
the defendants to produce their financial and business records to the 
Commission. Shortly thereafter, all three defendants stipulated to 
preliminary injunctions continuing the relief granted in the TROs. The 
Commission's goal is an order permanently barring defendants' illegal 
pretexting practices and disgorging the money defendants earned from 
them.

E. Online Scams Spread Quickly and Disappear Quickly.
    One hallmark of Internet fraud is the ability of perpetrators to 
cover their tracks and mask their locations and identities. Using 
anonymous emails, short-lived Web sites, and falsified domain name 
registrations, many fraud operators are able to strike quickly, 
victimize thousands of consumers in a short period of time, and 
disappear nearly without a trace.
    To stop these swift and elusive con artists, law enforcement must 
move just as fast. The FTC's Internet Rapid Response Team was created 
for this very purpose. It draws heavily upon complaints collected by 
the FTC's Consumer Response Center and the Consumer Sentinel system. 
The team constantly reviews complaint data to spot emerging problems, 
conduct quick but thorough investigations, and prepare cases for filing 
in federal courts. Based on such data review, FTC staff had completed 
its investigation and was in court successfully arguing for an ex parte 
temporary restraining order and asset freeze in FTC v. Verity 
International, Ltd. within a little more than a week after the first 
complaints began coming in to the Consumer Response Center.
    In another exemplary effort, FTC v. Benoit,34 the Rapid 
Response Team quickly moved against defendants who allegedly used 
deceptive emails or ``spam'' to dupe consumers into placing expensive 
international audiotext calls.35 The defendants allegedly 
sent thousands of consumers an email stating that each recipient's 
``order'' had been received and that his or her credit card would be 
billed $250 to $899. The email instructed consumers to call a telephone 
number in the 767 area code if they had any questions. Most consumers 
did not realize that 767 was the area code for Dominica, West Indies. 
When consumers called the number expecting to reach a customer 
representative, they were connected to an audiotext entertainment 
service with sexual content and charged expensive international rates.
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    \34\ FTC v. Benoit (previously FTC v. One or More Unknown Parties), 
No. 3:99 CV 181 (W.D.N.C. 1999). In the course of the litigation, 
Commission attorneys were able to identify the operators of the scheme.
    \35\ ``Audiotext'' services are telephone-based entertainment or 
information services.
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    Even though a string of telephone carriers could not identify who 
operated the audiotext number in question, the Internet Rapid Response 
Team constructed a compelling case in about three weeks. The Commission 
quickly obtained a federal court order to stop the scheme and freeze 
any proceeds of the fraud still in the telephone billing system.

F. Effective Remedies Are More Difficult to Achieve in the Global 
        Online Market.
    The globalization of the marketplace poses new and difficult 
challenges for consumer protection law enforcement. Anticipating this 
development, the Commission held public hearings in the fall of 1995 to 
explore business and consumer issues arising from technological 
innovation and increasing globalization. Over 200 company executives, 
business representatives, legal scholars, consumer advocates, and state 
and federal officials presented testimony, and the Commission published 
a two-volume report summarizing the testimony and the role of antitrust 
and consumer protection law in the changing marketplace. As reported 
in, ``Anticipating the 21st Century: Consumer Protection in the New 
High-Tech, Global Marketplace,'' there was a broad consensus that 
meaningful consumer protection takes: (1) coordinated law enforcement 
against fraud and deception; (2) private initiatives and public/private 
partnerships; and (3) consumer education through the combined efforts 
of government, business, and consumer groups.36 These 
principles have guided FTC policy regarding the Internet ever since.
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    \36\ See Bureau of Consumer Protection, Federal Trade Commission, 
Anticipating the 21st Century: Consumer Protection in the New High-
Tech, Global Marketplace, iii (May 1996); See also, Looking Ahead: 
Consumer Protection in the Global Electronic Marketplace (September 
2000).
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    In addition to gathering information through hearings and 
workshops, the FTC has gained practical knowledge about the effects of 
globalization and ecommerce through its litigation. In this respect, 
the Commission has found that pursuing Internet fraud often involves a 
difficult and costly search for money that has been moved off-shore. 
For example, in FTC v. J.K. Publications,37 the defendants, 
who had made unauthorized charges of $19.95 per month on consumers' 
credit or debit cards for purported Internet services, moved much of 
their ill-gotten gains off-shore. The Commission ultimately won a $37.5 
million verdict in this matter, but in the course of litigation, the 
receiver appointed in this case reported that the defendants had moved 
millions of dollars to the Cayman Islands, Liechtenstein, and Vanuatu 
in the South Pacific. However, to date, despite substantial litigation 
costs, the monies have not been fully repatriated.38
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    \37\ FTC v. J.K. Publications, No. 99-000-44ABC (AJWx)(C.D. Cal. 
1999).
    \38\ Similarly, in FTC v. Fortuna Alliance, the Commission found 
that the defendants had transferred $2.8 million to Antigua, West 
Indies. With the assistance of the U.S. Department of Justice's Office 
of Foreign Litigation, the Commission obtained an order from an 
Antiguan court freezing those funds and a stipulated final judgment in 
U.S. court that required the defendants to repatriate that money for 
consumer redress. In the process, however, it cost $280,000 in fees 
alone to litigate the case in foreign court. In this case, the 
Department of Justice's Office of Foreign Litigation paid $50,000 up 
front, and the U.S. court ordered the defendants to pay the remaining 
$230,000 in fees. In other cases, the Commission may have to bear all 
or most of the cost of litigating in foreign court.
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    In addition to fraud proceeds moving off-shore quickly, fraudulent 
online operators may be beyond the reach of the Commission and U.S. 
courts, practically if not legally. There is now limited recognition of 
civil judgments from country to country. Even if the Commission were to 
bring an action and obtain a judgment against a foreign firm that has 
defrauded U.S. consumers, the judgment might be challenged in the 
firm's home country, and the ability to collect any consumer redress 
might be frustrated. In light of this possibility, U.S. law enforcement 
must look for more effective cross-border legal remedies, and must work 
more cooperatively with law enforcement and consumer protection 
officials in other countries.
    To meet this challenge, the Commission is increasingly cooperating 
with international counterparts in a number of venues. One is the 
International Marketing Supervision Network (IMSN), a group of consumer 
protection agencies from the 30 countries that are members of the 
Organization for Economic Cooperation and Development (OECD). The FTC 
has also executed cooperation memoranda with agencies in Canada, the 
United Kingdom, and Australia.
    The FTC has also taken a stride forward in cross-border cooperation 
with a project called econsumer.gov. The FTC, agencies from twelve 
other countries, and the OECD unveiled this new international joint 
effort to gather and share cross-border e-commerce complaints at last 
month's IMSN meeting in New York. The project has two parts: a public 
Web site at www.econsumer.gov, and a restricted access law enforcement 
site. The public site provides--in English, French, German, and 
Spanish--an online consumer complaint form and various other consumer 
protection information. The law enforcement site, using the FTC's 
existing Consumer Sentinel network, will provide the econsumer.gov 
complaints and other investigative information to participating 
enforcers.
    The Commission's actions in FTC v. Pereira represent significant 
strides in the right direction. In that case, the Commission realized 
that the defendants' ``pagejacking'' and ``mousetrapping'' scheme had 
operated through Web sites registered with a U.S.-based company. Thus, 
in its request for a temporary restraining order and preliminary 
injunction, the Commission asked that the registrations for these Web 
sites be suspended, thereby effectively removing the defendants and 
their deceptive Web sites from the Internet, pending a full trial. At 
the same time, the Commission reached out to its international 
colleagues in Portugal and Australia. The Australian Competition and 
Consumer Commission (ACCC) proved especially helpful in providing 
information about the defendants and their business operations in 
Australia. The ACCC also began its own investigation, executed a number 
of search warrants, and began pursuing potential legal action against 
the defendants in that country.

                  III. CONSUMER AND BUSINESS EDUCATION

    Law enforcement alone cannot stop the tide of fraudulent activity 
on the Internet. Meaningful consumer protection depends on education as 
well. Consumers must be given the tools they need to spot potentially 
fraudulent promotions, and businesses must be advised about how to 
comply with the law. The FTC's consumer and business education program 
uses the Internet to communicate anti-fraud and educational messages to 
reach vast numbers of people in creative and novel ways quickly, simply 
and at low cost. As more consumers and businesses come online, use of 
the Internet to disseminate information will grow.
A. Fraud Prevention Information for Consumers
    More than 200 of the consumer and business publications produced by 
the FTC's Bureau of Consumer Protection are available on the agency's 
Website in both text and .pdf format. Indeed, the growth in the number 
of our publications viewed online between 1996 and 1999 (140,000 vs. 
2.5 million) tells the story of the Internet's coming of age as a 
mainstream medium and highlights its importance to any large-scale 
dissemination effort. Those 2.5 million page views are in addition to 
the 6 million print publications the FTC distributes each year to 
organizations that disseminate them on the FTC's behalf.39
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    \39\ With respect to identify theft, the Commission also conducts 
an extensive multi-media education campaign including print materials, 
media mailings and interviews and a website, located at 
www.consumer.gov/idtheft. The FTC's consumer education booklet, 
Identity Theft: When Bad Things Happen to Your Good Name, covers a wide 
range of topics, including how identity theft occurs, how one can 
protect one's personal information and minimize their risk, what steps 
to take immediately upon finding out one is a victim, and how to 
correct credit-related and other problems that may result from identity 
theft. It also describes federal and state resources that are available 
to consumers who have particular problems as a result of identity 
theft. The FTC has distributed directly more than 230,000 copies of the 
booklet through April 2001. Another 425,000 copies have been printed 
and are being distributed by the Social Security Administration. The 
identity theft website includes the booklet, descriptions of common 
identity theft scams, and links to testimony, reports, press releases, 
identity theft-related state laws, and other resources. The site also 
has a link to a web-based complaint form, allowing consumers to send 
complaints directly to the Identity Theft Data Clearinghouse. The 
website had received almost 350,000 hits by the end of April 2001 and 
more than 7,300 complaints had been submitted electronically.
    As part of ``Operation Detect Pretext,'' in January the Commission 
published a Consumer Alert entitled ``Pretexting: Your Personal 
Information Revealed'' that offers practical tips on how consumers can 
protect their pers
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B. Link Program
    In addition to placing publications on its own Web site, the FTC 
actively encourages partners `` government agencies, associations, 
organizations, and corporations with an interest in a particular 
subject `` to link to its information from their sites and to place 
banner public service announcements provided by the FTC on their sites. 
Links from the banners allow visitors to click through to the FTC site 
quickly to get the information they're looking for exactly when they 
want it. Examples of the varied organizations that have helped drive 
traffic to the valuable consumer information on www.ftc.gov are Yahoo!, 
American Express, Circuit City, AARP, North American Securities 
Administrators Association, the Alliance for Investor Education, the 
Better Business Bureau, CBS, motleyfool.com, the U.S. Patent and 
Trademark Office, Shape Up America!, the National Institutes of Health, 
and the Arthritis Foundation.

C. ``Teaser'' Pages
    Too often, warning information about frauds reaches consumers after 
they've been scammed. For the FTC, the challenge is reaching consumers 
before they fall victim to a fraudulent scheme. Knowing that many 
consumers use the Internet to shop for information, agency staff have 
developed teaser sites that mimic the characteristics that make a site 
fraudulent and then warn the reader about the fraud. Metatags embedded 
in the FTC teaser sites make them instantly accessible to consumers who 
are using major search engines and indexing services as they look for 
products, services and business opportunities online. The teaser pages 
link back to the FTC's page, where consumers can find practical, plain 
English information. The agency has developed more than a dozen such 
teaser sites on topics ranging from fraudulent business opportunities 
and wealth-building scams to weight loss products, vacation deals and 
investments.40 Feedback from the public has been 
overwhelmingly positive: visitors express appreciation--not only for 
the information, but for the novel, hassle-free and anonymous way it is 
offered.
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    \40\ The titles of the teaser sites are: Looking for Financial 
Freedom?; The Ultimate Prosperity Page; Nordicalite Weight Loss 
Product; A+ Fast Ca$h for College; EZTravel: Be an Independent agent; 
EZTravel: Certificate of Notification; EZToyz Investment Opportunity; 
HUD Tracer Association; CreditMenders Credit Repair; NetOpportunities: 
Internet is a Gold Mine; National Business Trainers Seminars; 
VirilityPlus: Natural Alternative to Viagra; ArthritiCure: Be Pain-Free 
Forever.
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D. Consumer.gov.
    Following its vision of the Internet as a powerful tool for 
consumer education and empowerment, the FTC organized a group of five 
small federal agencies in 1997 to develop and launch a Web site that 
would offer one-stop access to the incredible array of federal consumer 
information. On the theory that consumers may not know one federal 
agency from another, the information is arranged by topic area. Federal 
agencies have responded well to consumer.gov. The site now includes 
contributions from 170 federal agencies. Consumers also find it useful, 
with over 182,500 visits to the site recorded in the first half of FY 
2001.
    Visitors to consumer.gov find special initiatives, too: The 
President's Council on Y2K Conversion asked the FTC to establish a Y2K 
consumer information site; the Quality Interagency Coordination Task 
Force requested a special site on health care quality; and the U.S. 
Postal Inspection Service asked that consumer.gov house the site to 
support the kNOw Fraud initiative, an ongoing public-private campaign 
initiated with the sending of postcards about telemarketing fraud to 
115 million American households in the fall of 1999.41 The 
FTC continues to maintain the site.
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    \41\ The original consumer.gov team received the Hammer Award, 
presented by the Vice President to teams of federal employees who have 
made significant contributions to reinventing government. than 1,000 
Internet fraud complaints; a year later, the number had increased 
eight-fold. In 2000, over 25,000 complaints--roughly 26 percent of all 
fraud complaints logged into the FTC's complaint database, ``Consumer 
Sentinel,'' by various organizations that year--related to online fraud 
and deception. The need--and challenge--is to act quickly to stem this 
trend while the online marketplace is still young.
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E. Business Education for Online Marketers
    As part of its mission, the FTC provides guidance to online 
marketers on how to assure that basic consumer protection principles 
apply online. Many of these entrepreneurs are small, start-up companies 
that are new to the Internet and to marketing in general and are 
unfamiliar with consumer protection laws. The Commission's publication, 
Advertising and Marketing on the Internet: Rules of the Road, is 
designed to give practical, plain-English guidance to 
them.42 FTC also has used a variety of other approaches to 
get its messages out to the business community, from posting compliance 
guides, staff advisory letters and banner public service announcements 
on the Web to speaking at industry and academic meetings and 
conferences, using the trade press to promote the availability of 
information on the agency site, and holding workshops on online issues 
and posting the transcripts. Most recently, on January 30 of this year, 
the Commission, in cooperation with the Electronic Retailing 
Association, presented ``Etail Details,'' a case-driven Internet 
marketing seminar for Internet retailers, marketers, and suppliers on 
applying offline rules and regulations online. The seminar was designed 
to ensure etailers understand and comply with FTC rules regarding 
etailing.
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    \42\ There has been an astonishing growth in page views of this 
publication in the past year: from 33,448 views in FY 1999 to 110,473 
in FY 2000 .
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                             IV. CONCLUSION

    The Commission has been involved in policing the electronic 
marketplace for more than six years `` before the World Wide Web was 
widely used by consumers and businesses. The Commission has strived to 
keep pace with the unprecedented growth of the electronic marketplace 
by targeting our efforts, making innovative use of the technology, and 
leveraging our resources to combat fraud on the Internet. In addition, 
the Commission has taken the necessary steps to fulfill its 
responsibilities under both the Identity Theft Assumption and 
Deterrence Act of 1998 and, with respect to pretexting, the Gramm-
Leach-Bliley Act to promote protection of consumers' personal financial 
information by financial institutions. We have done this within the 
framework of limited resources, and without retreating from our 
important consumer protection work in traditional markets.
    The Commission greatly appreciates the opportunity to describe its 
efforts to combat fraud on the Internet, and its activities against 
identity theft and pretexting.

    Mr. Stearns. I thank the gentlelady.
    Mr. Stearns. Mr. Swartz.

                   STATEMENT OF BRUCE SWARTZ

    Mr. Swartz. Thank you, Mr. Chairman. Mr. Chairman, members 
of the subcommittee, the Department of Justice thanks you for 
inviting the Department of Justice to testify this morning 
about the important issue of Internet fraud and the closely 
related issue of identity theft. With the subcommittee's 
permission I will submit my full statement for the record and 
simply summarize it this morning.
    Mr. Stearns. By unanimous consent, so ordered.
    Mr. Swartz. As the subcommittee members have noted, and as 
the prior witnesses have stated, Internet fraud is one of the 
most pervasive and one of the fastest growing types of fraud we 
face.
    I'd like to turn first this morning to the Department's 
strategy for dealing with Internet fraud. That strategy has 
three significant components. The first of those components is 
interagency and international coordination. Mr. Kubic this 
morning has already mentioned one of the fruits of that 
cooperation and coordination, ``Operation Cyber Loss'', a 
significant take down of Internet fraudsters.
    My written statement also details a number of other recent 
significant prosecutions that have been undertaken by Federal 
law enforcement with regard to Internet fraud.
    Beyond Cyber Loss, the Department of Justice also fosters 
coordination through its chairing of the interagency 
Telemarketing and Internet Fraud Working Group. All of the law 
enforcement agencies at the table this morning, as well as the 
Postal Inspection Service, the FTC, the SEC and other law 
enforcement agencies, are represented on this working group. 
The working group meets quarterly and is able to examine and 
work toward responding to developing trends in Internet fraud.
    Internationally as well, the Department of Justice is in 
the lead in attempting to coordinate responses to Internet 
fraud, particularly through the Lyon Group of the G-8, a senior 
experts group on transnational organized crime. The Department 
has worked to ensure that we have a global response to what is 
clearly a global problem.
    The second component of the Department's response to 
Internet fraud is intelligence and analysis. We've heard this 
morning already from other witnesses about the importance of 
the Internet Fraud Complaint Center, which the Department of 
Justice has strongly supported. That Center has allowed for 
centralization of complaints and for packaging of investigative 
materials to be sent out to prosecutors. The FTC's Consumer 
Sentinel program has also been an important development in the 
intelligence and analysis field.
    Legal analysis is also an important part of this, and in 
that regard, the Department of Justice has developed a brief 
bank of legal materials and pleadings which it has been able to 
provide to Federal prosecutors throughout the United States. 
Similarly, we've worked on developing an Intranet on the 
Internet, a means of speeding communication among and between 
Federal prosecutors engaged in Internet fraud prosecutions.
    The third component of our strategy is training and 
outreach. The Department of Justice, through the Fraud Section 
and through its Computer Crime Section, has taken the lead in 
providing specialized training on Internet fraud at the 
National Advocacy Center. That training has been provided to 
Federal, State and local prosecutors and law enforcement 
agencies. Significantly, it also has been provided to 
international prosecutors and law enforcement agency members--
again, recognizing the global dimensions of this project.
    Our outreach programs also extend beyond law enforcement 
agencies. We're looking to develop ways to increase public 
education and knowledge about Internet fraud, with appropriate 
collaboration between the public and private sector. These 
measures include public websites produced by the Department and 
other law enforcement agencies and regulatory agencies. These 
act as electronic fora for discussing detailed ways to prevent 
becoming a victim and also how to respond if one does become a 
victim.
    With the subcommittee's permission, I would like now to 
turn briefly to the related issue of identity theft. Identity 
theft of course can be perpetrated on the Internet, and is 
frequently perpetrated on the Internet, but can be perpetrated 
in other ways as well. Here, also the Department of Justice has 
followed a policy and a strategy of coordination, intelligence 
analysis and training and outreach.
    A major vehicle for implementation of this strategy has 
been the Attorney General's White Collar Crime Council and in 
particular, its Identity Theft Subcommittee. That subcommittee 
includes all of the major Federal law enforcement agencies. It 
has provided guidance memoranda and other materials about 
identity theft and distributed them not only to Federal, but 
also to State and local, prosecutors and investigative 
agencies. It has also worked with the FTC and other agencies to 
provide educational materials.
    In addition, in the field, the Department has supported the 
creation and establishment of identity theft task forces. I'm 
pleased to report that this coordination has resulted in an 
increasing number of prosecutions under the new identity theft 
statute, with over 92 prosecutions reported by the United 
States Attorneys' offices over the past 2 years.
    Thank you, Mr. Chairman. I would welcome any questions the 
subcommittee might have.
    [The prepared statement of Bruce Swartz follows:]

Prepared Statement of Bruce Swartz, Deputy Assistant Attorney General, 
         Criminal Division, United States Department of Justice

    Good morning, Mr. Chairman and Members of the Subcommittee. I am 
pleased to appear before you this morning to testify about the problem 
of Internet fraud and the closely related problem of identity theft, 
and what the Department of Justice is doing to combat them. I will 
first discuss Internet fraud and then identity theft.
    As a preliminary matter, Mr. Chairman, today the Department of 
Justice and the FBI are announcing a major enforcement operation 
targeting Internet fraud, one of the fastest-growing and most pervasive 
forms of white-collar crime. The threat of Internet fraud calls for 
forceful action, and today, the Department and the FBI, in partnership 
with the U.S. Postal Inspection Service, the Internal Revenue Service-
Criminal Investigative Division, the U.S. Customs Service, and numerous 
state and local law enforcement agencies, are responding with a 
national ``sweep'' of coordinated enforcement actions against 
approximately 90 subjects. In a few moments, Mr. Thomas Kubic, Deputy 
Assistant Director in the FBI's Criminal Investigative Division, will 
provide details of the sweep, ``Operation Cyber Loss.''

                           I. INTERNET FRAUD

    Internet fraud, in all of its forms, is one of the fastest-growing 
and most pervasive forms of white-collar crime. Criminals, both here 
and abroad, have recognized that the very features of the Internet that 
many people find appealing--its global reach, its ability to 
communicate instantaneously with millions of people at virtually zero 
cost, and the relative anonymity that its users have while online--can 
be turned to their advantage for fraudulent purposes. Regrettably, 
criminal exploitation of the Internet now encompasses a wide variety of 
securities and other investment schemes, online auction schemes, 
credit-card fraud, financial institution fraud, and identity theft. If 
law enforcement does not move aggressively to respond to this threat, 
there are significant indications that the threat will become more 
severe and more pervasive over time.
    A January 2001 study by Meridien Research, for example, reports 
that with the continuing growth of e-commerce, payment-card fraud on 
the Internet will increase worldwide from $1.6 billion in 2000 to $15.5 
billion by 2005. The Securities and Exchange Commission staff reports 
that it receives 200 to 300 online complaints a day about Internet-
related securities fraud. Foreign law enforcement authorities also 
regard Internet fraud as a growing problem. Earlier this year, the 
European Commission reported that in 2000, payment-card fraud in the 
European Union rose by 50 percent to $553 million in fraudulent 
transactions, and noted that fraud was increasing most in relation to 
remote payment transactions, especially on the Internet. Similarly, the 
International Chamber of Commerce's Commercial Crime Service reported 
that nearly two-thirds of all cases it handled in 2000 involved online 
fraud.
    To ensure an effective and coordinated response to the problem of 
Internet fraud, the Department has been pursuing a comprehensive six-
part strategy. The elements of that strategy are as follows.

A. Interagency Coordination
    First, the Department has taken a number of steps to provide 
enhanced coordination on Internet fraud prosecutions between law 
enforcement and regulatory agencies at regional, national, and even 
international levels. On the national level, for example, the 
Department has been proactive in maintaining contact with United States 
Attorneys' offices throughout the country about their Internet fraud 
cases, and working to develop coordinated actions wherever possible.
    United States Attorneys have been compiling a record of significant 
accomplishments in prosecuting major Internet fraud schemes. The 
following are but a few of the more recent successful Internet fraud 
prosecutions by United States Attorneys:

 On May 10, 2001, a federal jury in the District of Colorado 
        found Daniel Ketelsen guilty of charges relating to Internet 
        fraud. Ketelsen received money for computer components he 
        auctioned under false identities but never delivered via eBay. 
        After receiving numerous complaints from victims, Ketelsen 
        filed a fraudulent claim with his insurance company, alleging 
        that the computer components had been stolen from his garage. 
        An investigation by U.S. Postal Inspectors revealed that 
        Ketelsen never had the computer components auctioned on eBay, 
        and was attempting to obtain money illegally from an insurance 
        company.
 On March 8, 2001, a federal jury in the Southern District of 
        New York convicted Fred Moldofsky, on securities fraud charges 
        for distributing over the Internet a series of fake press 
        releases regarding Lucent Technologies. The evidence at trial 
        showed that on March 22-23, 2000, Moldofsky, a self-described 
        securities day trader living in Houston, used the Internet to 
        distribute a series of 19 fake press releases purporting to 
        announce that Lucent expected its earnings for the second 
        quarter of its fiscal year 2000 to fall short of analysts' 
        expectations. After Moldofsky's posting of these messages on a 
        Yahoo! message board, on the morning of March 23, 2000, the 
        price of Lucent's common stock declined by as much as 3.6 
        percent, resulting in losses of millions of dollars by 
        investors who sold Lucent stock at artificially depressed 
        prices. Later that morning, when Bloomberg News announced that 
        Lucent had confirmed the release to be fake, Lucent's common 
        stock price rose by approximately $5 per share in less than 
        eight minutes.
 On December 27, 2000, a federal judge in the Central District 
        of California sentenced two defendants in a business 
        opportunity fraud scheme to 27 months' imprisonment and more 
        than $100,000 in restitution to fraud victims. The defendants 
        in this case had pleaded guilty to fraud-related charges 
        stemming from their sending out more than 50 million ``spam'' 
        e-mails, fraudulently soliciting money. The e-mails, which 
        targeted students, the elderly, and others, promised enormous 
        returns from a ``work-at-home'' scheme in exchange for the 
        payment of a so-called ``processing fee'' of $35. The scheme 
        resulted in approximately 12,405 victims sending money to the 
        defendants. (It should be noted that the cost of sending these 
        50 million spam e-mails was less than $100. By contrast, 
        sending the same number of messages by first-class mail, at 34 
        cents per envelope, would have cost the defendants 
        approximately $17 million in postage alone.)
      To misdirect people who wanted to complain about the 
        solicitations or the lack of action after the ``fees'' were 
        paid, the defendants' ``spam'' included a forged return 
        address, making it appear that the point of origin was an 
        Internet service provider, BigBear.Net. Irate Internet users 
        sent approximately 100,000 e-mails in response, mistakenly 
        believing that BigBear.Net had sent the spam. This flood of 
        messages led to the ``crash'' of BigBear.Net's Internet 
        computer file servers. The company that operated BigBear.Net 
        also had to hire three temporary workers for nearly six months 
        to respond to these complaints. Ultimately, the court's 
        restitution order included not only individual victims but the 
        victimized company.
    The Department also fosters national-level coordination through its 
chairing of the interagency Telemarketing and Internet Fraud Working 
Group. This Working Group, which meets quarterly, brings together 
representatives of numerous United States Attorneys' offices, the FBI, 
the Secret Service, the Postal Inspection Service, the Federal Trade 
Commission, the Securities and Exchange Commission, and other law 
enforcement and regulatory agencies. The Working Group meetings enable 
agencies to share information about trends and patterns in Internet 
fraud schemes, to brief members on noteworthy legal and policy 
developments, and otherwise to encourage closer and more active 
communication on Internet and telemarketing fraud matters.
    At the international level, the Department of Justice has played a 
leading role in initiating discussions about Internet fraud at subgroup 
meetings of the G8's Senior Experts Group on Transnational Organized 
Crime (also known as the ``Lyon Group"). These discussions have led to 
the G8 Ministers of Justice identifying Internet fraud as a significant 
threat to the growth and development of e-commerce, and committing to 
adopt a comprehensive response to the problem that includes 
investigation, prosecution, and prevention. Discussions on followup 
measures on Internet fraud are being pursued in the Projects and High-
tech Subgroups of the Lyon Group.

B. Support and Advice on Prosecutions
    Second, the Department provides continuing support and advice on 
Internet fraud prosecutions to federal prosecutors. As a result of its 
continuing contact with Assistant United States Attorneys who handle 
Internet fraud cases, the Department has compiled a substantial ``brief 
bank'' of pleadings and other legal materials that prosecutors may find 
useful. The Department makes these materials readily available to 
United States Attorneys' offices throughout the country. The Department 
is now working to establish an Intranet on Internet fraud to improve 
communication and information-sharing among its prosecutors. The 
Department, through the Fraud Section and the Computer Crime and 
Intellectual Property Section of the Criminal Division, also routinely 
provides legal and practical advice to federal prosecutors working on 
Internet fraud cases.

C. Training for Prosecutors and Agents
    Third, the Department has demonstrated its commitment to ensuring 
that prosecutors and agents receive appropriate training to conduct 
Internet fraud investigations and prosecutions effectively. At its 
National Advocacy Center, the Department has established basic and 
advanced training courses on Internet fraud. The Center has a basic 
Cybercrimes course, presented several times a year, that now includes a 
track on Internet fraud. The Center has also conducted two advanced 
Internet fraud courses for more than 180 federal, state, and local 
prosecutors, FBI agents, and even foreign prosecutors from Canada, 
Germany, Hong Kong, and the United Kingdom. The Department has taken 
affirmative steps to invite foreign prosecutors to these courses, 
because it regards Internet fraud as a global problem that will require 
increased understanding of how U.S. and foreign prosecutors can work 
together more effectively. The Department has also provided expert 
speakers on Internet fraud issues for training sessions at the FBI 
Academy and other law enforcement and regulatory training programs.

D. Investigative and Analytical Resources
    Fourth, the Department has recognized the need to develop 
investigative and analytical resources, so that agents and prosecutors 
can more quickly identify Internet fraud schemes while they are still 
underway and develop effective enforcement responses. To that end, it 
has supported the establishment of the Internet Fraud Complaint Center 
(IFCC), a joint project of the FBI and the National White Collar Crime 
Center. The IFCC receives complaints from members of the public in 
nearly 90 countries about various types of Internet frauds and other 
Internet-related crimes. It then analyzes the fraud-related complaints 
for patterns, develops additional information on particular cases, and 
sends investigative packages to law enforcement authorities in the 
jurisdiction that appears likely to have the greatest investigative 
interest in the matter.

E. Education and Prevention
    Fifth, the Department has been actively pursuing new measures for 
public education about, and prevention of, Internet fraud, with 
appropriate collaboration between government and the private sector.

F. Nature and Scope of the Problem
    Finally, the Department continues to work closely with other 
agencies to develop better information about the nature and scope of 
Internet fraud. The IFCC's data compilations are expected to be 
increasingly useful in identifying longer-range trends and patterns of 
Internet fraud schemes, including statistical data that law enforcement 
and regulatory agencies may find useful in allocating resources and 
devising enforcement strategies. The Department has also worked closely 
with the Federal Trade Commission (FTC) to enhance the quality and 
availability of data from complaints about Internet-related consumer 
fraud that the FTC receives for inclusion in its Consumer Sentinel 
database.
    This summary of the Department's efforts against Internet fraud 
should help to demonstrate that the Department is wholeheartedly 
committed to an aggressive strategy for combating Internet fraud, and 
that this strategy is based on fostering improved cooperation and 
coordination at all levels of government.

                           II. IDENTITY THEFT

    With your permission, Mr. Chairman, I would like to turn to the 
issue of identity theft. Identity theft, and the crimes that it 
furthers, can take advantage of the Internet, but can be committed 
online or offline.
    Law enforcement has made remarkable strides in dealing with 
identity theft as a crime problem over the last two years. One of the 
first steps that needed to be taken was to ensure that identity theft 
is clearly identified as a serious crime. Before October 30, 1998, when 
the Identity Theft and Assumption Act of 1998 (18 U.S.C. 
Sec. 1028(a)(7)) became law, there was no federal statute that made 
identity theft a crime, and state statutes on identity theft were few 
and far between. Only two years later, federal prosecutors are making 
substantial use of the statute. To date, we have identified at least 92 
cases in which U.S. Attorneys' offices throughout the country have made 
use of that section in prosecuting cases that involved identity theft. 
Here are some examples of federal identity theft prosecutions that the 
Department has been pursuing this year:

 In California, a defendant was sentenced to 27 months' 
        imprisonment and five years' supervised release after pleading 
        guilty to identity theft and related charges. The defendant 
        stole private bank account information about an insurance 
        company's policyholders and used that information to deposit 
        approximately 4,300 counterfeit bank drafts, totaling more than 
        $764,000, and withdraw funds from the accounts of the 
        policyholders. United States v. Johnson (C.D. Cal.).
 In Delaware, two defendants were sentenced to terms of 
        imprisonment after pleading guilty to identity theft. The 
        defendants obtained names and Social Security numbers of high-
        ranking military officers on the Internet and used them to 
        apply for credit cards and bank and corporate credit in the 
        officers' names. One defendant was sentenced to 33 months' 
        imprisonment, three years' supervised release, $160,910.87 in 
        restitution, and a $100 special assessment; the other was 
        sentenced to 41 months' imprisonment, three years' supervised 
        release, $126,298.79 in restitution, and a $100 special 
        assessment. United States v. Christian (D. Del.).
 In Texas, a man was indicted on identity theft and related 
        charges, after allegedly creating false identification 
        documents in the name of his deceased brother-in-law and twice 
        applying for a U.S. passport in the brother-in-law's name. 
        United States v. Ipi (S.D. Tex.).
 In the State of Washington, a defendant pleaded guilty to 
        identity theft, after using the date of birth and Social 
        Security number of another individual (with the same first and 
        last names and middle initial) to obtain credit cards and an 
        automobile loan. United States v. Wahl (W.D. Wash.). Another 
        defendant pleaded guilty to identity theft and related charges, 
        after participating in a conspiracy to use the identities and 
        names of others to obtain credit cards, open banking and 
        investment accounts at numerous locations, and negotiate 
        fraudulent and counterfeit checks. United States v. Tomaszewski 
        (W.D. Wash.).
    Approximately 40 states have now enacted statutes to prohibit 
identity theft, and other states are considering such legislation. 
Moreover, to ensure that persons convicted under the federal identity 
theft provisions receive appropriate sanctions, the United States 
Sentencing Commission has issued Sentencing Guidelines for identity 
theft. The new Guidelines establish a two-level enhancement, in 
addition to the offense level dictated by the amount of loss, where the 
identity thief has used ``breeder documents,'' such as Social Security 
cards. Even if there is no loss, the Guidelines will set a ``floor''--
that is, a minimum offense level--of 12, which would ensure a jail 
sentence that could be as high as 10-16 months, even for someone with 
no prior criminal convictions. The Guidelines also invite upward 
departures for more severe sentences in cases where egregious conduct 
seriously affects individuals (for example, where the criminal ``takes 
over'' a victim's identity).
    Until recently, victims of identity theft had no single national 
point of contact to report instances of identity theft or get advice on 
how to deal with identity theft, and law enforcement had no single 
place to which they could go to find and review complaints from 
identity theft victims in their jurisdictions. Under the 1998 Act, the 
Federal Trade Commission established a national toll-free number [1-
877-ID-THEFT] for victims to call, and has made the identity theft 
complaints available to law enforcement through its Consumer Sentinel 
data base.
    Similarly, until recently federal, state, and local law enforcement 
had no means by which they could coordinate their efforts and resources 
to deal more effectively with identity theft. We now understand that 
identity theft--while it may appear in any one case to be a 
comparatively minor violation--is a crime problem of significant 
proportions, and one that calls out for genuine and sustained 
cooperation among federal, state, and local law enforcement.
    Today, law enforcement is vigorously pursuing two distinct 
approaches to improved coordination. First, soon after the enactment of 
the Identity Theft and Assumption Deterrence Act in 1998, the Attorney 
General's Council on White Collar Crime established a Subcommittee on 
Identity Theft. This Subcommittee is intended to provide appropriate 
coordination and coherence in the fight against identity theft.
    The Subcommittee, which includes all of the major federal law 
enforcement agencies, operates to foster closer coordination among all 
levels of government. Its growing list of accomplishments includes 
preparation and distribution of guidance memoranda about the identity 
theft offense to United States Attorneys' offices, federal, state, and 
local law enforcement agencies, and numerous government agencies, such 
as the Social Security Administration's Office of Inspector General, 
the FTC, the SEC, the Federal Deposit Insurance Corporation, the Office 
of the Comptroller of the Currency, the Federal Reserve Board, and the 
Department of the Treasury. The Subcommittee also has assisted the FTC 
and other agencies in preparing and distributing educational and other 
materials directly to consumers and victims of identity theft, in an 
effort to prevent or ameliorate the effects of this crime. Much of this 
progress is due to the leadership of the Criminal Division's Fraud 
Section, which continues to devote significant resources to the work of 
the Subcommittee.
    Second, in the field, law enforcement agencies are establishing 
closer working arrangements, such as identity theft task forces, to 
investigate and prosecute appropriate cases more efficiently:

 In the Western District of Washington, a Special Assistant 
        U.S. Attorney, employed by the Social Security Administration, 
        has been instrumental in the development of an Identity Theft 
        Working Group. The group includes representatives from the U.S. 
        Attorney's Office, the U.S. Department of Agriculture, the 
        Veterans Administration, the FBI, the Immigration and 
        Naturalization Service, the IRS Criminal Investigation 
        Division, the Postal Inspection Service, local law enforcement, 
        county prosecutors, the Washington State Department of Health 
        and Social Services, and the Washington State Attorney General. 
        The Working Group is addressing training on fraud and identity 
        theft, coordination of statistics on identity theft, and 
        outreach.
 In the District of Maryland, investigators have set up a 
        multiagency task force on identity theft that includes 
        representatives of the U.S. Secret Service and local police.
 Other informal arrangements or task forces are now established 
        or being established in Cleveland, Detroit, St. Louis, and Los 
        Angeles.
    Only two years ago, there was no nationwide program to educate and 
warn the public and law enforcement about identity theft. To date, we 
have taken a number of significant steps to inform the public about the 
seriousness of the problem. The FTC has an extensive collection of 
online resources and materials about identity theft, available through 
the Web site at www.consumer.gov/idtheft. In addition, the Fraud 
Section of the Department's Criminal Division has a series of Web pages 
on identity theft that are posted on the Department's Web site, 
www.usdoj.gov. These Web pages include information about the nature of 
identity theft, what the Department is doing about it, and how 
consumers can better protect themselves from identity theft. These Web 
pages are linked to the FTC Identity Theft Web site, and other law 
enforcement Web sites, to help consumers immediately contact other 
agencies that can assist them in addressing their personal problems 
resulting from identity theft.
    Furthermore, last year the Treasury Department, the FTC, the Social 
Security Administration, the Secret Service, and the Department of 
Justice sponsored a series of events to highlight the problem of 
identity theft. The Treasury-sponsored Identity Theft Summit, which was 
open to the public, included panel discussions on victims' experiences; 
federal and state prevention programs; private sector prevention 
programs; federal, state, and local investigative and prosecutive 
actions in response to identity theft; public and private sector 
remediation programs; possible future trends to be anticipated in 
identity theft; and identifying areas for enhanced cooperation between 
governmental and private sector. As a followup to the Summit, three 
workshops on identity theft were held focusing separately on 
remediation (FTC), prevention (Social Security Administration) and law 
enforcement (Department of Justice) strategies.
    We have made a good beginning to combat identity theft in a more 
coordinated and effective fashion. We must, however, continue the 
efforts we have begun in order to have a lasting impact on the identity 
theft threat.
    Mr. Chairman, that concludes my prepared statement. I would be 
pleased to respond to any questions that you or other Members of the 
Subcommittee may have at this time.

    Mr. Stearns. I thank you. I say to my colleagues we have 
here in front of us the Justice Department, the FBI, the FTC 
and the Secret Service and we have within each of these 
agencies they have talked about this new sense of cyber crime. 
And as this committee goes forward, I think what we're hearing 
from you is that it's often rolling, this cyber crime, even as 
we speak, the FBI is talking about 56,000 victims that these 
crimes have been perpetrated on at a cost of $117 million. 
That's roughly, if you take the 90 people that are going to be 
arrested, I guess as we speak, you're talking a little over 
$1,300,000 per person who perpetrated those crimes. So it's 
quite, as you said, Ms. Harrington, target rich. These people 
are out there. And the thing we have to realize is that this is 
perhaps just the tip of the iceberg. What each agency is 
talking about, the FBI talks about their complaints that they 
set. They've got 36,410, of which 30,000 were validated. The 
FTC--each of you folks have talked about the complaints and how 
you're trying to go through it. So we might be talking about 
something much larger than even you have identified and the 
thing that worries Members of Congress, I think, is do you have 
the resources to deal with this? If you take a GS-5 and GS-9 
and bring he or she over, can that individual have the 
capability to handle this?
    So I would like to--let's start out with Mr. Kubic, do you 
have the resources in place to handle this, the technology or 
when the consumer goes out there and dealing with the industry, 
is the person who has the technology at an advantage or do you 
have resources to even identify and be comprehensive with the 
problem?
    Mr. Kubic. Mr. Chairman, I'd like to answer that question 
in the context of the overall law enforcement effort rather 
than just the FBI's commitment because we recognize that it 
would be extremely difficult to address the problem of 56,000 
victims nationally just based on FBI Agents knocking on doors, 
doing interviews. So we have to be aware of what tools are 
available.
    For instance, at the Internet Fraud Complaint Center, that 
whole process results in the first steps at obtaining the 
required evidence that we need to take to the U.S. Attorney's 
Office to present a case. So if we take advantage of the 
technology that's available and use the on-line reporting, for 
example, we get a step up, an advantage in making those cases.
    Second, I think what's going on through the National White 
Collar Crime Center is a major effort at education and training 
for State and local law enforcement officers with these new 
tools, techniques, they become much more efficient and 
effective at conducting those investigations. So I'd say that 
while it's extremely difficult to commit the 2400 Agents who 
work white collar crime nationally to this one particular area 
of fraud, by partnering up with the Secret Service, the FTC, 
also the Postal Inspectors and IRS, we have somewhat of a 
multiplier effect as the Agents and Police Officers and 
Detectives who are well-trained, move forward to address these 
complaints.
    Mr. Stearns. So Mr. Kubic, you're saying this morning that 
you have the resource to combat future Internet cyber crime?
    Mr. Kubic. It would depend on the growth of the problem as 
well, Mr. Chairman. I mean if we see the effect of the law 
enforcement effort is to reduce the instance of some of these 
crimes, I think that we may be able to dampen the overall 
amount of crime that occurs.
    I'd also point out that the private sector is very 
aggressive in protecting their intellectual property rights, as 
well as their assets in their commercial activity. As it was 
previously mentioned, there is a strong bottom line profit 
motive, don't want to lose customers.
    Mr. Stearns. Mr. Townsend, what are the most common ways in 
which ID information is stolen? Can you just give us an 
example?
    Mr. Townsend. Certainly, I believe Mr. Swartz referred to 
the fact that frequently the crime of identity theft is one 
that is perpetrated via the Internet, but we also see low tech 
means of identity theft. In the Secret Service, we view 
identity theft really as a disturbing combination of old 
schemes and new technology. Frequently, we see criminals that 
will hack into Internet merchant sites and steal credit card 
numbers and accompanying personal data about those customers 
and begin to use that, not only across this country, but in a 
trans-national fashion. We have seen cases where a hacker in 
Moscow broke into a system located in the United States, sent 
that personal information and credit card numbers to a co-
conspirator in Buenos Aires where merchandise is purchased and 
transshipped to Miami for sale on the street. It raises a lot 
of interesting questions. Where's the venue for that 
prosecution? Who's going to step up and investigate a case like 
that?
    So as I mentioned in my opening statement, the effects of 
the IT revolution, combined with globalization have really 
changed the whole landscape of law enforcement.
    The Internet provides the criminal with access to victims, 
literally an unlimited pool of victims. In low tech schemes one 
had to have some physical access to his or her victims. Well, 
the Internet has changed all that.
    Mr. Stearns. My time has expired, but Ms. Harrington, what 
is your toll free number?
    Ms. Harrington. 1-877-FTC-HELP.
    Mr. Stearns. Okay, the ranking member?
    Mr. Towns. Thank you very much, Mr. Chairman. Let me begin 
with you, Mr. Swartz. You said today the Department of Justice 
and the FBI are announcing a major enforcement operation 
targeting Internet fraud, one of the fastest growing and 
pervasive forms of white collar crime.
    The threat of Internet fraud calls for forceful action and 
today the Department and the FBI in partnership with the United 
States Postal Inspection Service, the Internal Revenue Service, 
the Criminal Investigative Division and Customs Service and you 
go on and on, you said States and local enforcement and all of 
that.
    Let me ask the question, is coordination and cooperation 
enough? Should there be some new statutes? Or can you do it 
just with coordination and cooperation?
    Mr. Swartz. Mr. Towns, thank you for that question. I think 
that the question as to whether or not legislation is 
sufficient is always a critical one and one that we're 
constantly reevaluating at the Department of Justice. Certainly 
the identity theft statute of 1998, was an important 
development.
    At the current time we believe that we have the legislative 
tools for dealing with matters such as ``Operation Cyber 
Loss''. Of course, it is a matter that we will continue to 
consider and analyze, particularly as Mr. Kubic suggests, as we 
analyze how Internet fraud is developing and increasing. But 
for now and pending, of course, any decisions made by the new 
administration, I believe that we do have the legislative tools 
in hand to deal with this problem.
    Mr. Towns. Let me switch over. I don't want to start a 
fight, but I just want to go to you, Mr. Kubic in something 
that you said that in some way or another ties into this. You 
indicated let me begin by emphasizing that the FBI places a 
high priority on investigating Internet fraud matters and is 
committed to working with this subcommittee and all of Congress 
to ensure that law enforcement and the private sector, have the 
necessary tools and protections to combat these crimes.
    Now are you saying more needs to be done? I just want to 
make certain this is clear. I'm not trying to start a fight.
    Mr. Kubic. No, no, that's a good question. I think we're 
saying the same thing. Basically, what I was suggesting was 
that as we delve into the problem, as we understand the 
operations of some of these criminal organizations, there may 
come a time when we need to come back and identify some flaws 
in the current legislation that they are exploiting. That being 
the case, that was the genesis of my initial comment, that we 
would like to have the opportunity, that as these 
investigations progress, should there be a need for additional 
legislation, we'd work with the Department of Justice certainly 
and the committee to make some recommendations.
    At this time, the laws are quite adequate to address this 
particular problem.
    Mr. Towns. You mentioned the working group. Thank you, Mr. 
Kubic. You mentioned the working group. Would the working group 
consider these kind of matters as well?
    Mr. Kubic. Yes, that would be the kind of matter that would 
be before the working group, not only the trends in Internet 
crime, but what steps, if necessary, to take with regard to 
seeking additional legislation. But that's exactly the kind of 
forward looking problem that they try to deal with.
    Mr. Towns. Thank you. Ms. Harrington, you mentioned the 
Commission has conducted 25 different surf days targeting 
problems ranging from cure-all health claims to fraudulent 
business opportunities and credit repair scams.
    More than 250 law enforcement agencies or consumer 
organizations are around the world have joined the Commission 
in these activities. Collectively, they have identified over 
6,000 Internet sites making dubious claims.
    First of all, my question would be what happened, No. 1, 
and how many sites were corrected, and of course, I guess the 
other part of the question would be were they corrected 
voluntarily or in other context?
    Ms. Harrington. Thank you for that question. Internet surf 
days are a way for law enforcement to let operators of sites 
that make these dubious claims know that law enforcement is on 
the beat. We focus on a specific problem. We organize our law 
enforcement partners to visit specific parts of the web during 
a time period, download for evidentiary purposes, what they 
find that is suspect and then several things happen. No. 1, a 
message goes out to those site operators from law enforcement. 
It might say we're the FTC and we visited your web site today 
and we want you to know what the law requires. And we tell them 
what the law is. Or our partner tells them what the relevant 
law is in the United States, in Norway, in Finland, wherever it 
is that our surf partners are located.
    So first we send basically a warning message with 
information about what the law requires.
    Second, some time later we go back and do a follow-up surf 
on those sites that we found in the first instance that raise 
problems to see whether they're still engaged in the behavior 
that caused us to be concerned. And what we find there really 
has varied from problem area to problem area. We find in a 
significant percentage of instances that either the site has 
been taken down or the claims that we were concerned about in 
the first place have been corrected, where we find evidence 
that they're still doing the same thing, then that site 
operator becomes a prime target for follow-up investigation and 
enforcement. And we at the FTC and our enforcement partners 
have brought many enforcement actions to stop those bad 
practices.
    Can we get them all? No. But by being on the beat, by 
giving the information needed to know how to comply with the 
law and interestingly, we find whenever we do a surf that there 
are some site operators who are engaged in illegal behavior and 
they don't know that it's illegal. They're copying what they 
see others do and because they've seen someone else do it, they 
think well, this must be all right. And when we tell them that 
it's not all right, they not only stop it, but we get thank you 
notes from people who almost ran afoul of the law.
    Mr. Stearns. The gentleman from Illinois, Mr. Shimkus, 
you're recognized.
    Mr. Shimkus. Thank you, Mr. Chairman. Under the Gramm-
Leach-Bliley Act, pretexting was allowed to be enforceable 
under the law and I know the FTC has about three cases 
seeking--my first question is to Mr. Swartz. Your testimony 
does not address pretexting and the question is has the DOJ 
taken any pretexting cases up yet?
    Mr. Swartz. If you allow me to consult with my colleague 
for a moment?
    Mr. Shimkus. I can give you the answer.
    Mr. Swartz. At the present time I am informed while there 
are investigations that are on-going, there are no pending 
prosecutions.
    Mr. Shimkus. And the law on pretexting has been in effect 
for about 18 months, is that correct? Do you expect to address 
the pretexting issue in the future or why have you not been 
more vigilant in this one area?
    Mr. Swartz. We certainly hope that the investigations will 
bear fruit and they will lead to criminal prosecutions, but it 
is a matter that is being pursued through investigations.
    Mr. Shimkus. Let me and it will be an area that will be 
vigilant and watching the Department of Justice in their good 
offices, address this issue.
    The concern that I have and there's very good diligence 
being done by the different agencies, with all the different 
agencies' finger in the pie, is that helpful or is that 
harmful? In other words, where do we get a better bang for our 
buck and more streamlining of the process if we had one agency 
take the lead on all these issues and without the--because 
there is some collaboration and I listened to the opening 
testimonies and some of the questions and answers. There's 
collaboration being done. But all the things falling through 
the cracks because we have sliced up aspects of who's doing 
what and I'd like for each agency,if you would just go down the 
table, starting with Mr. Kubic and address that concern that we 
would have as policymakers about the efficiency of the multi-
taskings with the different agencies?
    Mr. Kubic. It's my opinion that each one of the agencies 
represented at the table here brings a particular unique 
expertise to the problem. For example, with regard to the 
Bureau's investigations of these matters, our primary focus is 
the determination as to whether or not there's a criminal 
enterprise that's engaged in this particular type of fraudulent 
activity so that the result of our investigation is not one 
particular individual, but it's thorough enough to get to the 
full understanding of that organization and how they're using 
the Internet to defraud people.
    I think that as you hear from my associates to the left of 
me, each has a particular thing that they can bring to a task 
force investigation or a civil enforcement action that is 
somewhat unique. Absent that, I think what we'd see is the 
development of an organization which would be pretty large and 
cumbersome and not particularly nimble and able to respond to 
the emerging crime problem that we see.
    Mr. Townsend. If I could address my comments to the issue 
of identity theft. In the Secret Service, although I don't want 
to speak for Mr. Kubic, I think he would agree, enforcement 
agencies are about criminal case,s about getting people 
indicted and getting them locked up.
    Identity theft is a crime that is a particularly invasive 
crime. I have had the opportunity to interview victims of 
identity theft who after being victimized repeatedly over time 
showed the symptoms of almost someone who was physically 
assaulted, so this is a crime that is about more than the theft 
of money or property, although that's important. It's about the 
theft of one's good name, reputation in the community, years of 
hard work and commitment to goals. In the enforcement world we 
have a limited ability, once we get the criminal locked up to 
help that victim. We want to help them, but we have limited 
ability and mandate with regard to victim witness. Now we do 
have some mandate in that area which we carry out with regard 
to helping victims and witnesses, but we're not equipped, 
frankly, to go on once that guilty verdict hopefully comes in. 
The Federal Trade Commission is and they are about making those 
victims whole which is, I think, a critical aspect of this and 
as Ms. Harrington stated in her opening testimony, we have 
detailed a full-time Secret Service Special Agent to the FTC to 
make sure that there is not a dropping of the ball, if you 
will, between that criminal prosecution and getting these 
victims made whole again.
    So your point is well taken. We, in the Federal Government, 
we in law enforcement because of our law enforcement system 
have to be very vigilant about coordination because we're a 
country with so many different law enforcement agencies.
    Do some things fall through the crack, probably so, but I 
think we're getting better. The Attorney General's White Collar 
Crime Council, the Identity Theft Subcommittee of all the ones 
that we participate in, and you know about them, in my view is 
among the most effective. Out of that group, that subcommittee 
has come at least two and maybe three identity theft white 
collar crime summits where real people and real law enforcement 
officers came in for an exchange of ideas.
    Ms. Harrington. Mr. Shimkus, I think that one of the most 
important ways to keep things from falling between the cracks 
is to share two kinds of information. One, who's doing what and 
two, what are the complaints? The good news is that computers 
in the Internet enable law enforcement at all levels to do that 
better than ever before. We no longer have to rely on somebody 
picking up the telephone to call an agency to say hey, we're 
looking at so and so, do you have anything? And that's one of 
the reasons that we developed Consumer Sentinel and make it 
available for free to every law enforcement agency in the 
United States and Canada. Agencies can put alerts on Sentinel 
to let one another know who's looking at what, who needs more 
information and it's critical that all of the complaint data be 
central sourced and immediately available to all law 
enforcement and so that's why we have Consumer Sentinel and I 
think it goes a long way toward preventing that kind of problem 
that we have when things fall between the cracks.
    Mr. Swartz. Certainly the question is an important one, but 
given the nature of Internet crime, generally, and Internet 
fraud, in particular, both its scope and diversity as a type of 
crime and its global reach, we believe it's inevitable that 
numerous Federal law enforcement agencies will be involved--and 
we believe because of the expertise they bring, as Mr. Kubic 
has suggested, they should be involved. But the Department of 
Justice considers its primary charge in this regard to be 
attempting to coordinate the response and ensuring, as you say, 
that cases do not fall through the cracks. We think we've 
gained from the cooperation of the different law enforcement 
agencies, but we recognize this is an on-going task that we 
have to continue.
    Mr. Stearns. Thank you. Ms. DeGette?
    Ms. DeGette. Thank you, Mr. Chairman. One of the intriguing 
aspects, I think, about cyber crime is just that, that it's 
cyber crime and by nature much more ephemeral than something 
like a guy running into the local 7-11 and holding it up. It's 
a lot harder, sometimes, to find the perpetrators and I know 
several of the witnesses alluded both in their oral and written 
testimony to some of the international efforts that we're 
making to address cyber crime which I think is essential, a 
really essential component to beginning to address this, much 
more essential than traditional law enforcement challenges that 
we face. I know you're all nodding in agreement.
    I'd like to talk a little bit more about that. In 
particular, about G-8 efforts and other efforts. Now Mr. 
Swartz, I know you talked in your written testimony about the 
G-8 efforts and nations agreeing to take action to criminalize 
certain computer abuse, designating a high tech point of 
contact to respond quickly to computer-related crimes and so 
on. Apparently, there's some follow-up discussions going on.
    I wonder if you could tell me what the status of the 
efforts are, either at the G-8 or in EU context, other kinds of 
international cooperation?
    Mr. Swartz. The G-8 senior experts group, commonly known as 
the Lyon Group has been for the United States one of the 
leading means of dealing with cyber crime issues. Its on-going 
standing sub-group in the high tech crime area, continues to 
meet to try and develop, as you suggest, the 24-7 network, that 
is the 24 hours, 7 days a week network to deal with computer 
crime and to address the future trends in this criminal area.
    In addition, the United States works closely with the EU 
through the new trans-Atlantic agenda. We have met frequently 
with our EU partners to discuss cyber crime issues. The EU 
itself has issued recently a cyber crime communique or 
declaration on which the United States has commented. And then 
finally, there are negotiations on-going now with regard to a 
cyber crime convention with the Council of Europe, in which the 
United States is an observer but has played a role in 
attempting to ensure that United States interests are advanced 
by that convention.
    Ms. DeGette. I think it's great that we're having meetings 
and discussions and so on. What kind of timeframe are we 
looking at for developing guidelines and what kinds of 
enforcement efforts are being taken in the EU countries or in 
the G-8 countries, I mean having talks is great and developing 
protocols is super, but until countries have laws that mirror 
ours, I'm not sure how effective it's going to be and once you 
finish, I see Ms. Harrington has a response.
    Mr. Swartz. Certainly a number of our G-8 partners and EU 
partners have taken steps to ensure that they can prosecute 
these cases. The cyber crime convention being developed by the 
Council of Europe would require that legislation be enacted in 
signatory countries to deal with the issue. We agree that the 
purpose of the Lyon Group is not only to ensure that there are, 
as you say, protocols and guidelines, but to encourage actual 
prosecution of Internet fraud cases.
    Ms. DeGette. Ms. Harrington?
    Ms. Harrington. Ms. DeGette, in addition to the work that 
was just described, as you know, treaties and changing laws 
takes a long time. We've been working on some practical and 
immediate approaches. One is through the International 
Marketing Supervision Network which is an organization of 
consumer protection law enforcement authorities from OECD and 
other countries and through that group we have been able, for 
example, to organize these international surf days to work 
together with those enforcement authorities to take action 
against perpetrators in their own countries who are on the web 
and scamming consumers all over the world.
    We just launched with the IMSN a project called e-
consumer.gov which is the first worldwide website where 
consumers can go and make fraud complaints. There are 13 
countries participating in this and these are very practical--
--
    Ms. DeGette. I understand. How many of the countries we're 
talking about, how many of the EU countries or the G-8 
countries or others actually have laws that are parallel to our 
law that are directed at stopping this kind of cyber crime? Do 
you know or somebody else?
    Ms. Harrington. There are 29 or 30 countries that are part 
of the International Marketing Supervision Network. And I 
believe that all or almost all of those have laws like the FTC 
Act that prohibit deception in commerce and give those 
authorities some remedies that are immediately available to 
stop that kind of scheme.
    Now we're a civil law enforcement agency at the FTC and 
many of our counterparts are as well. On the criminal side, I'd 
have to defer to Mr. Swartz.
    Mr. Swartz. We'd be glad to respond for the record on that, 
if we could, and give you a listing of the various statutes.
    Ms. DeGette. I think that would be very useful for the 
committee.
    Mr. Stearns. If you would be so kind as to send it to the 
chair and then we'll give it to Ms. DeGette.
    And I thank the gentle lady. Mr. Upton?
    Mr. Upton. Thank you, Mr. Chairman. As I sit back and 
listen to the testimony and I've talked to my folks at home, 
there's not a nightmare that anyone--this is a nightmare that 
no one wants to experience and particularly for my field office 
folks, the FBI, look at the Western Michigan Marshal Service 
and others, I guess wire fraud is the main hook that you go 
after these folks.
    Let's say as you look at today's world, it's real easy to 
log on to your own bank account and get it on the Internet, 
find out exactly where you are. It's real easy to order a 
Chicago Cubs or a St. Louis Cardinals jersey and get it 
delivered or University of Michigan ball cap, something like 
that, but all of a sudden that information is out there and as 
they steal one's identity, we learned of a case where literally 
the employees of one business were shipped monthly their 
vacation days and what they had left for the balance of the 
year and next to their name was their Social Security Number 
and someone picked that information up and set up a false 
account on the other side of the State with a telephone 
company. Thousands of dollars of bills added up. Of course, 
they went to the collection agency, the individuals didn't know 
anything about it. Only until they moved away and they tried to 
get a mortgage and they found out that there was a lien on 
their account.
    Now if they go to the--I come from a small town, 12,000 
people. The Police Department there probably can't, doesn't 
have the expertise to handle a situation like that, unless it's 
compounded with all these--literally, I think there are more 
than 150 individuals in this one case. But what is the 
threshold that Secret Service or the FBI will begin to look at 
a case versus someone that's all on their own and maybe it's a 
few thousand dollars, maybe it's a little bit more. I know tom 
Siegel had a pretty big case, $10 million they took out of his 
account. Not a lot of people have $10 million, but they got 
him. There are a lot more that are considerably smaller and I'm 
wondering what level do you all begin to examine.
    The other thing I'd like you to comment on as part of that 
is my friend, Mr. Shimkus, mentioned the hearings that he 
participated in last year. I was not on the Subcommittee on 
Encryption. Of course, the administration's view is really a 
paradox. They were opposed to stronger encryption technology 
being used, but as an individual that wants to purchase 
something, you'd think that if you allowed those, whether it 
would be a lending institution or a mail order hours, to in 
fact have the tools on encryption to better protect and build 
some firewalls so that that information, that type of personal 
information cannot be divulged, you wouldn't have the caseload 
that you have today. The administration, particularly, Mr. 
Freeh weighed in very heavily against allowing that technology 
to get out the door.
    So I'd be interested in your thoughts on both and start 
with you, Mr. Kubic.
    Mr. Kubic. Let me start by answering your first question 
which is is there a dollar amount that triggers an 
investigation?
    By way of example, in the last year we actually referred 
out a case that was at the $180 level and within a week of 
receiving the complaint, the Police Officer knocked on the door 
of this lady who was defrauded out of some tickets that she 
never got and gave her back the $180. Frankly, she was very 
surprised at the speed with which this particularly fraudster 
decided that he didn't want to have anything to do with 
violating a Federal law, nor did he want anything to do with 
having the cops knock on his door very often.
    So we don't want to do a lot of $180 cases, but the fact is 
that for purposes of collection of information and linkages, we 
really need to do some of that and we need to do it at some 
fairly low dollar levels, things that we're not normally known 
to be engaged in in terms of investigative priorities.
    So we'll look at those. The Miami case that's mentioned in 
my earlier testimony is basically a $300 loss. However, there 
are 46,000 victims, so quickly you're into the multi-millions 
of dollars of an investigative effort. So having said that, I 
think that the Department and all 96 U.S. Attorneys regularly 
take the lead from the White Collar Crime Subcommittee in terms 
of establishing investigative and prosecutorial guidelines. So 
some of those are unique, but some apply somewhat nationally.
    With regard to the Director's opposition to encryption, I 
think the key factor in the Bureau's position on that was not 
so much a concern about protecting legitimate transactions, but 
having the ability to decrypt, if you would, those 
conversations where we have a court order and the authority to 
intercept. Some of this encryption technology is very robust 
and frankly is beyond the ability of many, certainly many law 
enforcement agencies to decrypt. So I would say or suggest that 
in a very short time the criminals who are actively exploiting 
the Internet would, in fact, use that to hide their 
conversations from each other, to hide the distribution of the 
monies that were stolen and that really was the basis for the 
concern of the Bureau as expressed in prior testimony.
    Mr. Upton. Mr. Townsend?
    Mr. Townsend. In the Secret Service, in an effort to best 
utilize the finite resources that we have, we have developed 
case classifications that our offices are required to select 
from when opening their cases. Among those case classifications 
is something we call community impact case. And in the Secret 
Service, we believe that we are a grass roots law enforcement 
organization.
    While we have a mission and the ability to deal with 
transnational threats and the fact that we also have 19 Secret 
Service attaches fully assigned to embassies around the world 
full-time, the case that you describe someone in a small town 
in Michigan is one that we very well might find ourselves 
involved in. Unlike some other agencies, we do not have a 
policy prohibition against taking a case, a criminal case to a 
State prosecutor and do that regularly on a regular basis.
    In a community impact case, if it's a problem to our local 
law enforcement partners in that jurisdiction, the city police, 
the Michigan State Police, we view it as part of our mission to 
work with them to provide them whatever resources we can in a 
case which might under existing U.S. Attorney guidelines for 
that district might not be prosecuted.
    Another case I would like to just very briefly tell you 
about is one that occurred in Grand Rapids, Michigan during 
March of this year. There was a homicide case in which a person 
was murdered. Three suspects came under suspicion. One of our 
electronic crimes special agents, a fully qualified Secret 
Service Special Agent who has special expertise in electronic 
and high tech crimes was requested by the State Prosecutor in 
that county to examine computers that had been taken from the 
suspect's residence. In that case, our Secret Service EXAP 
Agent, Electronic Crimes Agent, recovered 162 e-mails which the 
conspirators had discussed the case and he testified at jury 
trial. The suspects were convicted.
    A little bit outside what one might think of as a Secret 
Service's traditional mandate, but an important case to the 
citizens of Michigan in that case and one that we undertook.
    Mr. Upton. Thank you. I know my time has expired. I yield 
back.
    Mr. Stearns. I thank the gentleman. The gentleman from 
Georgia--I would point out to my colleagues, I think we're 
going to another quick second round, if you had a follow-up 
question that you want to do before we start the second panel. 
So Mr. Deal?
    Mr. Deal. Thank you, Mr. Chairman. I realize that this is a 
multi-faceted problem and all of your testimony, of course has 
alluded to that. I would have an initial question. Is there 
anything else that statutorily you see needs to be addressed 
and is it something that needs to be addressed at the Federal 
level, local level, etcetera or do you have the statutory tools 
in place to define the offenses and to provide the mechanisms 
for the prosecution?
    Mr. Swartz. Mr. Deal, that's an issue that we are 
constantly reassessing. We believe at the current time that we 
do have the statutory tools at the Federal level, particularly 
with the Identity Theft Act of 1998. But again, it's the kind 
of issue that our working groups and committees consider to see 
whether there are any gaps in the statutory protections that 
are now available.
    We should say that we also, of course, work with States and 
encourage States to make sure that they also have legislative 
authorities available to help supplement and deal with the 
cases as well, and we are pleased that 43 States now have 
identity theft legislation in place. The Federal Government, 
the Department of Justice and my colleagues here at the table 
work closely with State and local prosecutors and law 
enforcement agencies in that regard.
    Ms. Harrington. Mr. Deal, the one area that we might 
commend for study is in the area of international information 
sharing and cross-border fraud complaint sharing. There might 
be some improvement or room for improvement with the law there 
to make it easier for law enforcement to share fraud complaint 
information across borders.
    Mr. Townsend. Sir, in the view of the Secret Service, the 
Identity Theft and Assumption Act of 1998 gave us the 
additional tools that we needed at that time. It defined 
identity theft in and of itself as a crime and frequently we're 
able now to make a plea outside the traditional prosecutive 
guidelines that talk about dollar thresholds, about the fact 
that the identity theft had occurred in and of itself and it's 
defined in the statutes.
    And as you know, the Internet False Identification Act of 
2000 closed a loophole in that law, so in our view we do have 
the tools to go forward.
    Mr. Kubic. I agree basically with the position of the 
Department that the tools are currently adequate. We can 
certainly use a few more prosecutors in some of the districts, 
however.
    Mr. Deal. Well, that was going to be my next question is 
that obviously you can have the legislative tools in place as 
far as defining the offenses, but then the next step is what do 
you do in terms of manpower and the ability to prosecute and I 
notice in looking through the material that if you're talking 
about jurisdictional amounts, Beanie Babies seems to be one of 
the larger categories, but in total dollars is not large 
compared with many other categories. What has been the attitude 
of most of the prosecutorial offices in terms of willingness to 
accept these cases, and I realize, being a former prosecutor 
myself, that the nature of these crimes often makes it very 
difficult because witnesses are far removed, perhaps, from the 
location where the prosecution may occur.
    What has been the general attitude of the prosecutors to 
accept these cases and to proceed to prosecute them and what 
other than additional resources might be necessary in that 
regard?
    Mr. Kubic. I'd say that the Bureau's experience has been 
very good with regard to the willingness to take on some of the 
cases. In our partnerships with some of the county DAs and so 
on, I mean those cases that are referred out to State and local 
authorities, it's generally positive. There's an interest. 
Certainly, there's the Beanie Baby example is one of those 
things that I think is a little bit of a strange situation, if 
you would, and there may be things that are less dramatic than 
criminal prosecutions in some of those matters.
    So I think a balanced approach is necessary, but our 
experience overall has been very good.
    Mr. Townsend. I would agree with Mr. Kubic in that in 
approaching high tech crime prosecutions with the various U.S. 
Attorneys the response has been receptive. Like all of us they 
are faced with keeping up with the technology challenge to 
having qualified Assistant U.S. Attorneys to prosecute these 
very complex cases. In the Secret Service, we frequently send 
some of our experts to the DOJ Advocacy Center in Columbia, 
South Carolina so we can share some of our expertise and learn 
from the DOJ what is going to be required, what the elements of 
proof are going to be in these evolving cases so we can put 
those out to our field agents.
    Ms. Harrington. One thing I would ad don the Beanie Baby 
problem, the FTC for the last couple of years has run a program 
called Project Safe Bid. And that project has our investigators 
looking at the Internet auction fraud complaints constantly and 
really packaging up prosecution worthy matters, doing some 
additional investigation on them and getting them out to local 
prosecutors. That's been a successful program. We've referred 
out over 50 auction fraud matters that we've worked up for them 
and many of those have resulted in local prosecutors bringing 
action, so where the dollar threshold might not meet the 
interest or for some other reason there might not be an 
interest at the Federal level, we have a network of mostly 
county DAs and sheriffs who we've worked with who are willing 
to take these cases on.
    Mr. Swartz. Certainly from the Department of Justice's 
point of view coordination and encouragement of these cases is 
one of our main goals. We've done that, as I mentioned in my 
opening statement, both by trying to work together on major 
operations like ``Operation Cyber Loss'' but also through 
training of State and local prosecutors and provision of not 
only packaged cases as Ms. Harrington correctly points out, but 
also packaged materials, brief banks and other materials, that 
make prosecution more straightforward.
    Mr. Deal. Thank you.
    Mr. Stearns. I thank the gentleman. The gentleman from New 
Hampshire, Mr. Bass?
    Mr. Bass. Thank you very much, Mr. Chairman. This is a 
wonderful hearing. I'm sorry I've been in and out during the 
course of it because the subject matter is so current and I 
want to start by asking a question that was suggested to me by 
my distinguished colleague from Michigan who obviously knows a 
lot--who has forgotten more about this issue than I know.
    Mr. Upton. It's the great State of Michigan, not just 
Michigan.
    Mr. Bass. I didn't yield to the gentleman, Mr. Chairman. I 
just wanted to give him some credit.
    The issue of identity theft and Social Security Numbers, 
it's my understanding that certain members of the Ways and 
Means Committee would be introducing legislation having to do 
with the controlling the proliferation of the use of Social 
Security Numbers in almost every facet of our lives, from 
driver's licenses to personal checks and so forth. Is it not 
true--isn't there a case to be made that the use of Social 
Security Numbers on Internet transactions are, on the Internet, 
might be narrowed or controlled in order to deal with the issue 
of identity theft?
    Mr. Townsend. I know that Mr. Hughes, the Inspector General 
of the Social Security Administration testified I believe 
yesterday on that matter and certainly I don't speak for the 
Treasury Department or the administration on the pending 
legislation, but clearly looking at some way to--let me back 
up. The Social Security Number is a gateway to identity theft, 
so looking at ways in which the private industry uses--can 
continue or can be amended in some way, but looking at a way 
that we can try to amend what we're doing now is a useful 
undertaking in our view.
    Mr. Bass. What kind of amendments are you talking about?
    Mr. Townsend. Well, clearly, as Mr. Hughes stated, the 
Social Security Number is out of the box. It's used not as the 
government intended it to be. So while there would be a number 
of ways to limit that use, we would, of course, have to look at 
particular proposals and develop a position. But just the 
undertaking, the beginning of looking at ways to limit the use 
of the Social Security Number now, in our view, is a good 
undertaking.
    Mr. Townsend. I yield to the gentleman from Michigan.
    Mr. Upton. I just have a--Mr. Bass and I have been talking 
about this a little bit up here. I know, I think it was part of 
the Welfare Reform Act that passed several years ago as an 
effort to go after deadbeat parents, often Dads. The Social 
Security Number, States are now required to log in the Social 
Security Number as part of the driver's license. I know in the 
State of Michigan, we've never had the Social Security Number 
literally on the face of the driver's license before. We are 
now, I believe, required to make that change. And I have been 
one, among those, that have thought that that was a bad idea. I 
know that they've been using Social Security Numbers in almost 
any transaction, a bank loan, buying and purchasing a car, all 
of that thing. You've got to rattle off that digit. It's got to 
be part of the application and I would think that it's fairly 
easily stolen. And as you suggested, it's a pretty easy gateway 
then to get into the personal information that might be 
accumulated with that particular individual, and so although I 
haven't seen this legislation either that's referred to in the 
National Journal today, I'm inclined to think that it's a good 
idea and would lend my support to it.
    Mr. Kubic. Mr. Upton, if I could just volunteer somewhat of 
different view. It seems to me that the problem that relates to 
the identity theft is that the individual whose identity has 
been stolen by a Social Security Number, for example, it takes 
so long for that--the fact that it had been stolen to work its 
way through the commercial system as well as through law 
enforcement.
    I would think that a quick validation that somebody stole 
Tom Kubic's Social Security Number and his name would result in 
a reissue o fa new Social Security Number and basically a 
closing of those old accounts. So the suspect or the subject is 
immediately stopped or prohibiting from engaging in any 
transaction with that number because it's not valid. That would 
require some work with the Credit Bureaus, those people who are 
doing a lot of commercial transactions or logging by commercial 
activity as well as the banks. But it just seems to me that to 
try to prohibit the States who are using it as a form of 
identification, it might be the wrong way of trying to do it.
    Mr. Upton. We had a situation in Michigan a couple of years 
ago where some clandestine group went out and they literally 
went after virtually every public official within the county, 
township officials, postmaster, postmistress, I mean a whole 
number of folks and through their own kangaroo court exercised 
some judgment against them and because they had the Social 
Security Numbers they were able to affect all of their credit 
ratings, so when they went to refinance their mortgage because 
the rates came down, there was a block on it that literally 
took months and months and they had no idea that this had 
happened and it was because probably, I didn't see y our 
personnel sheet coming in that you were testifying today, but 
it may, in fact, have been your Social Security Number on that 
cover sheet, I don't know.
    Mr. Stearns, is it on there?
    Mr. Stearns. I don't think so.
    Mr. Kubic. I'm pretty familiar with the process that you're 
talking about. Some of the right wing types were engaged in 
that where public officials were liened up based on some 
judgments that they held against them. Once again, I think the 
fix may be to kill my old Social Security Number and give me a 
new number, if in fact that can be validated through the Social 
Security Administration.
    The account and the information would stay the same, how 
many quarters and so on.
    Mr. Bass. Reclaiming my time. What's left of it. Even worse 
is the reason for this whole legislative effort to begin with 
which was the murder of one of my constituents due to a 
purchase of a Social Security Number for a nominal fee by an 
individual who wound up stalking her. These are very, very 
serious issues that need direction and control by policymakers 
in this country.
    With that, I'll yield back to the chairman.
    Mr. Stearns. We have a second panel and I thought if the 
members would agree that we would just quickly take about a 
minute, maybe, and we could wrap around and follow up with 
anything that is curious to you.
    I'll start with the first question to the FBI. Is 
information from the Internet Fraud Complaint Center shared 
with the FTC Consumer Sentinel program? If not, why not?
    Mr. Kubic. Yes, it is. It is shared. Currently it's not 
shared on-line, but we'd like to move to that. Currently it's a 
disk and transferred in that fashion.
    Mr. Stearns. Mr. Swartz, would you comment on the 
convention and cyber crime and how that's coming along and what 
impact will it have on cyber fraud and crime enforcement?
    Mr. Swartz. Mr. Chairman, the administration has not yet 
taken a position on the Council of Europe's Cyber Crime 
Convention, although, of course, we are deeply engaged in the 
negotiation process as an observer to the Council of Europe. 
The timeframe is that we expect by the end of this year the 
convention will be in its final form.
    Mr. Stearns. To the FTC and Ms. Harrington, do key 
interested private sector parties such as credit agencies have 
access to the FTC's Consumer Sentinel?
    Ms. Harrington. They don't now, but we would certainly be 
willing to work with them. There are legal issues, particularly 
in the agreements that we have with the Department of Justice 
which is a participant in Consumer Sentinel. So we would need 
to make some modifications to those agreements in order to 
permit private security agents like those of the credit card 
companies to have access to Sentinel, but we would be willing 
to work with them on that.
    Mr. Stearns. Mr. Towns?
    Mr. Towns. Thank you very much, Mr. Chairman. Ms. 
Harrington, you mentioned that the FTC had limited resources to 
deal with the on-line problem.
    How much are you actually spending now on this kind of 
problem?
    Ms. Harrington. I can get back to you with that precise 
information, Mr. Towns, I don't have it. But as I said, we're a 
small agency, about 1100 staff members. And certainly a much 
smaller percentage of those would be focused on consumer 
protection of all sorts. One of the pieces of good news that we 
have for you is that by using the technology itself, we get a 
lot more bang for our buck than we used to get, but we'll get 
back to you with an answer to your question, specifically, for 
the record.
    Mr. Towns. A follow-up, quite often now people are talking 
about setting up an office within the Agency just to deal with 
these kind of matters. Do you have any thoughts on that?
    Ms. Harrington. Well, we don't think that's the right 
approach, at least for us. Instead, we've trained our entire 
Consumer Protection staff, investigators, attorneys and others. 
The Internet is a medium. It's not an industry. So while there 
are new and technology-enabled frauds that we see because of 
this technology, we also see a lot of frauds as all of the 
witnesses have acknowledged, that are migrating from the off-
line world.
    The point for us is to No. 1, make sure that everyone who 
is doing this work understands the technology, how to conduct 
investigations of those who use the technology, what the legal 
issues are that the technology poses, how to present evidence 
in court that is taken from the Internet, those kinds of 
things. And so by broadly training everyone, we think that 
we've had a greater impact on the problem than we would have if 
we sort of cordoned off a group of our people and said you do 
Internet only.
    Mr. Towns. Thank you. Thank you, Mr. Chairman.
    Mr. Stearns. Mr. Bass?
    Mr. Bass. Thank you, Mr. Chairman. I'll just ask one quick 
question. It has to do with the issue of investigations. It's 
my understanding that the law enforcement community's ability 
to investigate suspects is somewhat dependent on the suspect's 
method of on-line access. For example, because of the different 
notification laws within the Cable Act and the Telecom Act, our 
ability to track suspects may be limited. I was wondering if 
any of the four of you have a comment on this as an example, at 
least, in any other similar cases that you might be aware of?
    Ms. Harrington. Mr. Bass, I know that we've been working 
closely with our colleagues at the Department of Justice to 
take a look at some of the statutory provisions concerning 
electronic privacy and the way in which those might frustrate 
investigation and I believe that down the line there will be 
some thoughts shared, recommendations forthcoming from that 
inter-agency effort.
    Mr. Swartz. I would add simply that it still is at the 
consideration stage and if I may take a moment to clarify the 
record on the Council of Europe Cyber Crime Convention: the 
administration has not taken a final position because of 
course, the convention itself is not final at this time and is 
still under development.
    Mr. Bass. If no one else has any other observation, I'll 
yield back.
    Mr. Stearns. Ms. DeGette?
    Ms. DeGette. Thank you, Mr. Chairman. Following up on my 
earlier line of questioning, I'm wondering perhaps, Mr. Kubic 
or Mr. Swartz, if you could tell me if there's any statistical 
analysis of how many cases there are that are unsolvable 
because of international implications on cyber crime or how 
much more difficult it is, given the electronic nature of the 
crime?
    Mr. Kubic. I'm not sure they are necessarily unsolvable. I 
can use the telemarketing example. Over the years, there's been 
a series of investigations that have been very successful at 
addressing that problem. In the last few years we've seen a 
migration of some of the con men from the U.S. to Canada and 
they now use Canada as a base of operations. The investigative 
response from the Bureau's perspective was then to join with 
the RCMP to see what we could do to assist them. That led to a 
particular development of some task forces where we have agents 
working with the RCMP today. So----
    Ms. DeGette. Let me stop you. I agree with you they're not 
unsolvable and that's not the question I'm intending to ask. 
What I'm asking is do we have some sense of how many we are not 
able to solve versus traditional types of crime and do we have 
any sense of the ones that are more difficult to solve, how 
much more difficult? Obviously, if you have folks going to 
Canada, you've got international implications which from a law 
enforcement perspective does make it more easier. I'm just 
wondering if we have some sense of the extent of the 
international implications?
    Mr. Kubic. Within the last year there are approximately 
1500 complaints that we received from the Internet, at the 
Internet Fraud Complaint Center from foreign individuals 
complaining about being defrauded by U.S. fraudsters. I'd have 
to get back to you with some specific numbers though in terms 
of cases not solved.
    Ms. DeGette. You can help Mr. Swartz with his.
    Mr. Swartz. We'll try to respond together. Thank you.
    Ms. DeGette. Did you have a response to the question?
    Mr. Swartz. I can certainly expand further on the problems 
of international cooperation. It's something that our Office of 
International Affairs in the Department of Justice, Criminal 
Division, works constantly to improve. One of the things we've 
tried to encourage our law enforcement partners and other 
countries to do is to ensure that they have the tools in place 
to allow for real time investigations in cyber crime matters, 
for instance, which is also an important predicate for them to 
be able to share that information with us after they obtain it.
    I'm not aware of any statistics that would let us establish 
with any definitive knowledge how many cases are not being 
solved because of international lack of cooperation, but it is 
certainly one of the areas we consider most important at the 
Department of Justice to try and push in the future.
    Mr. Stearns. Mr. Deal?
    Mr. Deal. Just very quickly. I think as all of you 
recognize that sometimes we are confronted with conflicting 
issues here in the Congress as we deal with legislative 
matters. Obviously, the whole discussion today deals with 
issues relating to privacy in one form or another, but as 
you're also aware this committee is constantly being asked to 
ratchet down in the name of protecting individual privacy, the 
ability to share information whether it be in the commercial 
sector or in other sectors.
    Does the current restriction on to the name of privacy or 
perceived future restrictions in the name of privacy have any 
detrimental effect in your investigations or does the general 
exclusion of a criminal investigation remove that obstacle?
    Are you understanding what I'm saying? I have an idea that 
the next panel is probably going to be more appropriately one 
that I ask that question to, but in the public sector now, does 
the right of privacy of someone who has requested information 
and they say I cannot reveal this because it would violate the 
right of privacy of the person you're inquiring about, are 
those impediments that you run into now?
    Mr. Kubic. Well, obviously, we're one of the law 
enforcement exemptions so we regularly exchange information 
among ourselves without much of a concern about the privacy 
issue. It's criminal information that we're exchanging. It is a 
constant complaint that we hear from the private sector about 
our inability to share specific information that is not in the 
public record, so to speak as a result of a criminal complaint 
being filed. And it's an issue that we'll probably need some 
additional thought.
    Mr. Deal. For example, I could imagine a situation where 
you have the dollar amount of the fraud is smaller per 
individual case, and many of the victims may not have actually 
filed a complaint, but they are victims. And you, in the 
process of investigating the pattern, would need to inquire 
about people who may not have filed a complaint, but who 
nevertheless may be victims. Are the privacy rules that we 
currently have impediments to that investigation or does the 
general criminal exclusion give you enough leverage to be able 
to get that information?
    Mr. Kubic. I think we have enough tools to get the 
information that we need at this point.
    Mr. Deal. Thank you, Mr. Chairman.
    Mr. Stearns. I want to thank the participants of the first 
panel. We're very appreciative of your time and efforts and now 
we'll bring up the second panel which is Mr. Scott Charney, 
Principal, Digital Risk Management and Forensics, 
PricewaterhouseCoopers; Ms. Susan Grant, Director of the 
Internet Fraud Watch, National Consumers League; and Mr. Mark 
MacCarthy, Senior Vice President, Public Policy, Visa U.S.A. 
Incorporated.
    I want to thank the three of you for waiting patiently and 
we look forward to your opening statements and we'll start from 
left to right with Mr. MacCarthy.

  STATEMENTS OF MARK MacCARTHY, SENIOR VICE PRESIDENT, PUBLIC 
  POLICY, VISA U.S.A. INCORPORATED; SCOTT CHARNEY, PRINCIPAL, 
DIGITAL RISK MANAGEMENT AND FORENSICS, PRICEWATERHOUSECOOPERS; 
AND SUSAN GRANT, DIRECTOR OF THE INTERNET FRAUD WATCH, NATIONAL 
                        CONSUMERS LEAGUE

    Mr. MacCarthy. Chairman Stearns, Ranking Minority Member 
Towns, who is no longer here, and members of the subcommittee, 
my name is Mark MacCarthy. I am Senior vice President for 
Public Policy for Visa U.S.A. and I'm pleased to be here to 
testify before you on this very important topic.
    I should say I'm especially pleased to be here today 
because in the 1980's I was a staff member of the Energy and 
Commerce Committee working with the then chairman of the 
Commerce Committee, so this is a little like coming home for 
me.
    Mr. Stearns. Welcome.
    Mr. MacCarthy. Thank you. The Visa Payment System is the 
largest consumer payment system in the world. Over 1 billion 
Visa-branded cards are accepted at over 20 million locations to 
buy $1.8 trillion in goods and services worldwide. In the U.S. 
alone, cardholders use Visa-branded cards for over $800 billion 
worth of purchases every year.
    Visa is also the leading consumer e-commerce payment system 
in the world. Payment cards now account for 95 percent of on-
line consumer transactions and Visa accounts for 53 percent of 
these transactions. We expect 10 percent of Visa's overall 
transaction volume to come from Internet purchases by the 2003, 
up from 2 percent today.
    Some suggest that on-line commerce is lagging because 
people are afraid to shop on-line. But more people are shopping 
on-line, and we expect comfort levels to grow, as more people 
use this new channel of commerce. This is what happened with 
mail order and telephone order transactions in the past.
    Consumers should be comfortable using Visa cards to shop 
on-line. Fraud using Visa payment cards is at an all-time low. 
As a percentage of our total volume, fraud has declined from 
\2/10\ths of 1 percent in the late 1980's to a mere \7/100\ths 
of a percent today.
    And Visa has taken many steps to promote consumer 
confidence in this new channel of commerce, including:
    A zero liability policy for unauthorized use of Visa cards.
    Guidance for consumers shopping on-line.
    Programs designed to help Internet merchants reduce the 
risk of unauthorized card use.
    A tough new security program to protect cardholder data 
that's held in web merchant data bases.
    An effective system for resolving disputes with on-line 
merchants through our chargeback procedures.
    And steps to ensure on-line privacy protections for 
electronic shoppers.
    Let me spend a few minutes describing some of these steps. 
First, Visa goes well beyond the current legal requirements to 
ensure that cardholders are fully protected against monetary 
losses due to the fraudulent use of Visa payment cards. This 
zero liability policy covers all Visa consumer card products, 
including debit and credit cards and it applies to on-line 
transactions, as well as off-line transactions.
    Second, the fact that unauthorized transactions take place 
on the Internet does not mean that the Internet itself is a 
risky place for consumers to shop. Account information can be 
stolen off-line and then used for unauthorized transactions on-
line.
    This is why Visa and its members have developed an arsenal 
of fraud control programs that help merchants reduce the 
incidence of unauthorized use of Visa payment cards in card-
not-present environment like the Internet.
    Third, some consumers express concern that information they 
provide to on-line merchants could later be improperly 
accessed. To address this concern, Visa has developed new 
security requirements for companies holding card data--
including web merchants, gateways and Internet service 
providers. These security requirements prescribe how companies 
should store, encrypt and access cardholder data and these 
provisions include the installation of firewalls and the 
encryption of stored data.
    Fourth, Visa can help resolve consumer disputes with on-
line merchants through our chargeback system. The three most 
common categories of consumer complaints handled in our 
chargeback system can be described as ``I didn't do it,'' ``I 
didn't get it'' and ``I don't want it.'' Visa rules for such 
complaints are designed to protect consumers. Consumers do not 
have to pay if they didn't purchase an item, if they didn't get 
the item or if it wasn't what they ordered.
    Fifth, Visa has taken steps to ensure that privacy notices 
are posted by on-line merchants who accept Visa payment cards. 
Violation of consumer privacy expectations on the Internet is 
simply bad business, and consumers object to the unwanted 
dissemination of information about their on-line activities. To 
respond to such privacy concerns, Visa adopted new policies 
that require web merchants that accept Visa cards to display 
prominently on their websites the merchant's privacy policies 
and a description of their on-line security capabilities. These 
requirements become effective next month.
    I appreciate the opportunity to appear before you today and 
I'd be happy to answer any questions.
    [The prepared statement of Mark MacCarthy follows:]

  Prepared Statement of Mark MacCarthy, Senior Vice President, Public 
                        Policy, Visa U.S.A. Inc.

    Chairman Stearns, Ranking Minority Member Towns, and Members of the 
Subcommittee, my name is Mark MacCarthy, and I am Senior Vice President 
for Public Policy for Visa U.S.A. Inc. Thank you for the invitation to 
participate in this hearing on Online Fraud.
    The Visa Payment System is a membership organization comprised of 
21,000 financial institutions licensed to use the Visa service marks. 
It is the largest consumer payment system in the world. Over 1 billion 
Visa-branded cards are accepted at over 20 million locations worldwide. 
Consumers use their Visa cards to buy over $1.8 trillion in goods and 
services worldwide. Visa U.S.A., which is part of the Visa Payment 
System, is comprised of 14,000 U.S. financial institutions. U.S. 
customers carry about 350 million Visa-branded cards and use them to 
buy over $800 billion worth of goods and services annually.
    Electronic commerce is vital to the U.S. economy and to the 
prospects for our continued economic growth. The size of electronic 
commerce is difficult to measure and there are gaps of tens of billions 
of dollars in estimates between different consulting groups. There is 
no doubt that electronic commerce is a large, growing and permanent new 
channel for the sale of goods and services to consumers. The Department 
of Commerce estimates, for example, that online retail sales grew from 
less than $5.2 billion in the fourth quarter of 1999 to almost $8.7 
billion in the same quarter one year later. Sales projections for the 
electronic commerce market range from $35 billion to $76 billion by the 
year 2002. By any measure, this counts as explosive growth.
    Visa is the leading consumer electronic commerce payment system in 
the world. Payment cards now account for some 95 percent of online 
consumer transactions and Visa accounts for 53 percent of the payment 
card portion. We expect 10 percent of Visa's overall transaction volume 
to come from Internet purchases by 2003, up from 2 percent today.
    There are some who suggest that online commerce is lagging because 
people are afraid to shop online. But increasing numbers of people are 
shopping online, and we expect that comfort levels will grow, as more 
people become familiar with this new channel of commerce. This is 
certainly what happened with mail order and catalog and telephone order 
transactions in the past.
    In our view, consumers should continue to feel comfortable using 
their Visa payment cards to shop online. Fraudulent use of Visa payment 
cards is at an all-time low. Fraud as a percentage of our total volume 
has declined over time. In the late 1980s, fraud accounted for about 
0.20 percent of total Visa card volume; in the early 1990s, it was 
about 0.15 percent; today it's a mere 0.07 percent.
    Visa has taken steps to promote consumer confidence in this new 
channel of commerce. These steps include:

 A zero liability policy for unauthorized use of our payment 
        cards.
 Guidance for consumers shopping online.
 A range of programs designed to help Internet merchants reduce 
        the risk of unauthorized card use.
 A tough new security program that went into effect on May 1, 
        2001 to protect cardholder data housed in web merchant 
        databases.
 An effective system for resolving consumer disputes with 
        online merchants through our chargeback procedures.
 Steps to insure online privacy protections for electronic 
        shoppers.

                             ZERO LIABILITY

    Under Federal regulations, credit card issuers are required to 
limit liability for unauthorized use of credit cards to $50. Visa has 
chosen to go beyond this requirement to ensure that cardholders are 
fully protected against any monetary losses due to fraudulent use of 
their payment cards.
    In April 2000, a new Visa operating regulation went into effect 
that eliminates consumer liability in cases of unauthorized use of Visa 
payment cards. This zero liability policy covers the use of all Visa 
consumer card products--including debit and credit cards. As a result 
of this new policy, a consumer will not be held liable for unauthorized 
use of any Visa consumer payment card.
    This zero liability policy applies to online transactions as well 
as offline transactions. Customers are protected online in exactly the 
same way as when they are using their cards at a store, ordering from a 
catalog by mail, or placing an order over the phone. In case of a 
problem, Visa provides 100 percent protection against unauthorized card 
use, theft, or loss. If someone steals a payment card number from one 
of our cardholders while the cardholder is shopping, online or offline, 
our customers are fully protected--they pay nothing for the thief's 
fraudulent activity.
    We took this step in part to make sure that our cardholders know 
that it is safe to shop online, despite all of the recent attention to 
Internet security. Although card fraud numbers are very small, Visa's 
zero liability policy takes away risk of unauthorized use that 
cardholders face shopping online.

                         FRAUD CONTROL PROGRAMS

    One type of fraud occurs when someone uses a cardholder's account 
number to engage in an unauthorized transaction online. For example, a 
person may steal a consumer's credit card number and use it to order 
merchandise online. The theft might occur in a variety of ways --for 
example, by breaking into a merchant's database that contains consumer 
account numbers, or by intercepting a consumer's credit card billing 
statement sent to the consumer's home.
    It is important to keep in mind that account information can be 
stolen offline, and then used to engage in an unauthorized transaction 
online. The fact that unauthorized transactions take place on the 
Internet does not mean that the Internet itself is a risky place for 
consumers to shop. If the thief has obtained a card account number, but 
does not actually have the card, it is only natural for him to use this 
account information in a channel of commerce, such as the Internet or 
mail order and telephone order, in which the card does not have to be 
present in order for the transaction to take place. For this reason, 
mail order and telephone order and Internet transactions show a higher 
incidence of unauthorized use. The fraud rate for all Visa transactions 
is about 0.07 percent. For card-not-present transactions it is 0.15 
percent. This, of course, does not mean that it is more risky for 
consumers to use these channels of commerce. It simply means that those 
who gain unauthorized access to card information are more likely to try 
to use that information to engage in fraud in a card-not-present 
environment.
    It is in the interests of Visa, consumers, merchants, and Visa's 
members to prevent fraud. Fraud prevention protects merchants from 
absorbing the costs of fraud and protects consumers from the higher 
prices that they would have to pay in order to cover fraud losses. 
Fraud prevention further protects consumers from the trouble of having 
to exercise their rights in connection with unauthorized transactions. 
For these and other reasons, preventing fraud involving Visa credit and 
debit cards is a top priority for Visa and its members. Fraud 
prevention also is essential to protecting the integrity of the Visa 
brand and maintaining the confidence of consumers and merchants that 
use the Visa system. Through significant investments in technology, 
cooperative efforts between Visa, its members, and law enforcement 
agencies, and a wide variety of educational initiatives, the incidence 
of Visa-system fraud in recent years is at an all-time low, even as the 
volume of Visa card transactions has grown dramatically.
    Visa and its member financial institutions have developed a varied 
arsenal of fraud control programs that help merchants reduce the 
incidence of unauthorized use of Visa payment cards. These programs are 
especially important in addressing fraud in a card-not-present 
environment like the Internet. These include the Address Verification 
Service, Cardholder Risk Identification Service, an Exception File, 
Card Verification Value, and a new pilot program for Payer 
Authentication.

 The Address Verification Service is a fraud prevention system 
        that allows merchants to verify automatically that a shipping 
        address provided by a cardholder at the time of purchase 
        matches the cardholder's billing address and other information. 
        This service helps merchants minimize the risk that they will 
        accept fraudulent orders from persons using stolen cardholder 
        information.
 Visa's Cardholder Risk Identification Service (``CRIS'') is a 
        transaction scoring and reporting service that employs advanced 
        neural network technologies to develop artificial intelligence 
        risk-scoring models that help identify fraudulent transaction 
        patterns. Issuers can use CRIS as a stand-alone fraud detection 
        system or together with their own internal fraud detection 
        methods.
 Visa's Exception File is a worldwide database of account 
        numbers of lost/stolen cards or other cards that issuers have 
        designated for confiscation, referral to issuers, or other 
        special handling. All transactions routed to Visa's processing 
        system have their account numbers checked against the Exception 
        File.
 The Card Verification Value (CVV) is not printed on the card 
        itself, but can be found on the card's signature strip on the 
        back of the card. These codes help merchants confirm that 
        cardholders are in possession of the actual card. Online 
        merchants and other merchants in situations where the card is 
        not present at the merchant's premises during the transaction 
        can verify that their customers have the actual card in their 
        possession by requesting the customer to provide the CVV from 
        the signature strip.
 Visa's Payer Authentication service is currently a pilot 
        program. This service will enable issuers to confirm a 
        cardholder's identity to the merchant during the virtual (on-
        line) checkout process. This process will be accomplished using 
        a password that the cardholder registers with his or her 
        issuer. The process will help reduce fraud by enabling 
        merchants to confirm the cardholder's identity at the time of 
        purchase.

                 GUIDANCE FOR CONSUMERS SHOPPING ONLINE

    Visa provides consumers with information on how to protect their 
cardholder information online. Visa's website, for example, provides an 
Internet Shopping Guide for consumers, with suggestions for how 
consumers can shop safely on the Internet. Some of these suggestions 
are:

 Shop with merchants you know and trust and visit Better 
        Business Bureau Online if you have questions about a particular 
        merchant.
 Look for signs of security. Symbols like an unbroken lock or 
        key, a URL that begins https://, or the words Secure Sockets 
        Layer (SSL) mean that no one but you and the merchant can view 
        your payment information.
 Never send payment information via e-mail. Information that 
        travels over the Internet (like e-mail) is not fully protected 
        from being read by outside parties.
 Shop with reputable merchant sites that use encryption 
        technologies that will protect your private data from being 
        read by others as you conduct an online transaction. When you 
        pay online, make sure that you are using a secure browser.
 Make a point of reading a merchant's privacy policy to find 
        out what type of information is captured and how it is used.

               SECURITY REQUIREMENTS FOR CARDHOLDER DATA

    Some consumers express concern that the account information they 
provide to merchants during online transactions might be subject to 
unauthorized access after the transaction is complete. The account 
information might be transmitted to web merchants in a secure fashion, 
but not maintained securely in the web merchant's database. Reports of 
intrusion by hackers into web merchant databases have increased this 
concern. It should be noted, however, that the security of merchant 
databases of account numbers is not related to whether a transaction is 
conducted over the Internet, rather it is related to the accessibility 
of the database from the Internet.
    To address this concern about unauthorized access to merchant 
databases, Visa has developed new security requirements for cardholder 
data. These requirements apply to any entity holding card data--
including web merchants, gateways and Internet service providers. These 
requirements prescribe how these companies should store, encrypt and 
grant access to cardholder data. For example, they require Internet 
merchants to install firewalls, to keep security systems up-to-date, to 
encrypt stored data, and to use anti-virus software, among other 
things. These requirements became effective May 1, 2001.
    Visa offers assistance to Internet merchants that accept Visa cards 
in meeting these requirements for safeguarding their customers' payment 
card data. We provide merchants with training sessions, interactive 
reviews, compliance and monitoring consultation and information on 
third-party firms specializing in testing and compliance.
    The new program requires the top 100 e-commerce merchants--who 
account for 70 percent of Internet commerce in the Visa system--to have 
their online security procedures validated by an outside accounting or 
Internet security firm. Other online retailers will be subject to 
random security reviews by Visa.
    The twelve requirements of the new security program are: Install 
and maintain a working network firewall to protect data accessible via 
the Internet. Keep security patches up-to-date. Encrypt stored data. 
Encrypt data sent across open networks. Use and regularly update anti-
virus software. Restrict access to data by business ``need-to-know.'' 
Assign a unique ID to each person with computer access to data. Do not 
use vendor-supplied defaults for system passwords and other security 
parameters. Track access to data by a unique ID. Regularly test 
security systems and processes. Maintain a policy that addresses 
information security for employees and contractors. Restrict physical 
access to cardholder information.

                           DISPUTE RESOLUTION

    Visa has an effective way of resolving consumer disputes with 
online merchants through our chargeback system. Chargebacks are 
contractual ways of resolving transaction disputes involving payment 
cards between the Visa banks that serve cardholders (the issuers) and 
the Visa banks that serve merchants (the acquirers). A chargeback is 
the return of a transaction from the issuer to the acquirer. Our 
chargeback system can resolve transaction disputes, even if the 
merchant and the consumer are geographically dispersed. As a result, 
Visa's chargeback process provides practical and effective consumer 
protections for electronic commerce transactions.
    Most chargebacks in the Visa system are for housekeeping reasons. 
In a system that handles 25.5 billion transactions a year, mistakes are 
bound to occur. These can include double billing, no billing, 
incorrectly entered amounts, failure to provide requested copies of 
transactions, mismatches among accounts and so forth. These errors 
constitute the vast majority of chargebacks.
    In addition to these housekeeping chargebacks, there are 
chargebacks involving consumer complaints. The three most common 
categories of Internet consumer complaints handled in our chargeback 
system can be described by the phrases: ``I didn't do it,'' ``I didn't 
get it'' and ``I don't want it.'' Visa rules with respect to these 
complaints are designed to protect cardholders. Cardholders do not have 
to pay if they did not make the purchase, if they did not get what they 
ordered or if it was not what they ordered.
    The ``I didn't do it'' dispute relates to situations where the 
cardholder claims that the transaction was processed without the 
cardholder's permission. This is the most common category of Internet 
disputes. It covers fraud, but it also covers situations where the 
cardholder does not recognize the charge as it appears on the monthly 
bill. Confusion often can arise when the merchant uses a different 
billing name or address than the expected trade name. About 50-60 
percent of these disputes are resolved by giving the cardholder 
additional information about the charge.
    The ``I didn't get it'' category of consumer complaint covers 
untimely receipt or non-receipt for goods. This dispute involves 
situations where a cardholder claims that he or she did not receive 
ordered merchandise at the agreed-upon location or by the agreed 
delivery date. An issuer can charge back a transaction on the 
cardholder's behalf if the cardholder sends a letter to the issuer 
supporting his or her claim. Proof of shipment by the merchant is 
irrelevant; the Visa member acquiring the transaction can only counter 
the chargeback on the merchant's behalf by providing proof of delivery, 
signed by the cardholder or another authorized person.
    The ``I don[t want it'' category of Internet disputes includes 
``quality'' disputes, such as when merchandise is received broken, not 
as ordered (e.g., wrong color or size) or not as described. It is the 
most difficult type of dispute to deal with because value judgments are 
involved.
    Only a tiny percentage of all Visa transactions are charged back, 
about 0.07 percent or 7 for every 10,000 transactions. Chargebacks for 
Internet transactions also are a small portion of all Internet 
transactions. Even though chargebacks are rare occurrences, they are 
more common for Internet transactions than for other types of 
transactions. However, it is difficult for us to say how much more 
common. Merchants are supposed to report their Internet transactions to 
the Visa system using an E-commerce code. Not every merchant that 
operates both in the Internet and the ``real'' world--the so-called 
``bricks and clicks'' merchants--report and break down their sales by 
channel. So the statistics available are not as comprehensive as we 
would like. That being said, the Visa chargeback rate for Internet 
transactions is estimated to be about 0.5 percent. Put another way, 
only about 50 out of every 10,000 electronic commerce transactions are 
charged back.
    There are a number of reasons for this. The Internet is a new 
channel, much the way mail order and telephone order transactions were 
new a decade ago. Not all merchants have developed the back office and 
customer service facilities that consumers have come to expect, and 
those consumers use the Visa chargeback system to help them resolve 
their problems with merchants.
    In addition, the Internet is a channel of commerce, in which, like 
mail order and telephone order, the card is not presented to the 
merchant when the transaction takes place. This naturally creates 
greater opportunity for unauthorized use of card account information. 
In this regard it is useful to note that chargebacks for mail order and 
telephone order transactions are 0.39 percent, or 39 per 10,000 
transactions. The fact that there is greater use of chargebacks for 
payment cards used on the Internet or through mail order or telephone 
order does not mean that these channels of commerce are inherently more 
risky for consumers.
    Other factors contribute to the higher chargeback rate for Internet 
transactions. Cardholders are doing business with unfamiliar merchants, 
or with individuals at auction sites. In some cases, these merchants or 
individuals are unscrupulous. In other cases, cardholders deny valid 
charges. In addition, digital goods present some special difficulties. 
Some digital good subscriptions require the use of a payment card 
account number for access and this sometimes results in customer 
confusion on the nature of the subscription terms and payments. Buying 
and delivering digital goods like software and music can be difficult 
on the Internet. For example, the Internet connection may be lost 
during long downloads. Or a cardholder might repeatedly hit the buy 
button on a site when the link does not respond quickly.
    The Visa chargeback system operates in compliance with federal laws 
that provide a number of important consumer protections. The Truth in 
Lending Act, implemented through Regulation Z, gives cardholders 
various rights regarding billing error resolutions. And it allows the 
cardholder to assert claims and defenses against the card issuer. The 
Electronic Funds Transfer Act, implemented under Regulation E, applies 
to debit cards and also contains error resolution procedures. These 
legal protections apply to online transactions as well as to face-to-
face transactions.
    These legal protections are just the start of the consumer's 
protection. There are more protections that are provided voluntarily by 
competing payment systems. And there can be even more protections 
provided within systems, bank-by-bank, to meet the needs of 
cardholders. The payment card business is intensely competitive, with 
all competitors seeking to gain the business and loyalty of 
cardholders. Banks are extremely interested in having satisfied 
customers, as are merchants. Each will do what they can to continue 
customer relationships. In fact, a joint venture system, like Visa, 
enhances competition generally because it provides for bank-to-bank 
competition as well as system competition.
    Visa also works with cardholders, merchants, consumer groups and 
seal programs to avoid consumer disputes in the first place. One 
important relationship we have established is with the online 
subsidiary of the Better Business Bureau, BBB Online. BBB Online has 
developed a comprehensive Code of Online Business Practices and a 
first-rate Reliability Trustmark Program. The code outlines the 
responsibilities of online merchants in five key areas: truthful and 
accurate communications, disclosure of policies, information practices 
and security, customer satisfaction and protecting children. Their 
Reliability Trustmark Program is one of the most significant trustmark 
programs on the web, providing more than 8,800 websites with a seal to 
signify to potential customers the merchant's commitment to good 
customer practices. The seal provides consumers navigating the 
electronic marketplace with a reassuring sign from a well-regarded and 
well-known organization, the Better Business Bureau.
    On November 14, 2000, Visa joined forces with BBB and agreed to 
promote its Code of Online Business Practices and its Reliability 
Trustmark Program. This includes a consumer advertising and a consumer 
education campaign. Many websites that provide excellent customer 
service and protections are not part of the BBB Online program. But 
online consumers can be confident that online sites displaying the BBB 
Online reliability seal have the highest level of consumer protection.
    Visa also maintains a chargeback-monitoring program. This program 
monitors a merchant's chargeback rate. If this rate exceeds certain 
levels, Visa asks the merchant's bank to ensure that the merchant takes 
steps to correct the problem. Usually, the problem is technical and is 
fixed immediately. In cases where the chargeback rate does not decline, 
Visa has a process of assessing fines. A merchant that does not correct 
a persistent chargeback problem can ultimately be denied the right to 
accept Visa payment cards for goods and services.

                          PRIVACY PROTECTIONS

    Visa has taken steps to ensure that privacy notices are provided by 
merchants who accept Visa payment cards to consumers who shop online. 
Violation of consumer privacy expectations on the Internet is simply 
bad business, and consumers are right to be upset about the unwanted 
dissemination of information about their online activities. To respond 
to privacy concerns, in October 2000, the Visa International Board 
adopted new consumer protection policies that set global disclosure 
standards for web merchants. The new policies require web merchants 
that accept Visa cards to display prominently on their websites the 
merchant's privacy policy and online security capabilities. These 
requirements become effective on June 1, 2001.
    Merchant banks must update their merchant agreements to include 
these requirements no later than January 1, 2002. Banks may satisfy 
this requirement by mailing a disclosure addendum to each of their 
electronic commerce merchants. Many electronic commerce merchants 
already disclose this information. However, Visa and its member banks 
provide guidance to electronic commerce merchants that need assistance 
in meeting the privacy policy requirement. For instance, we encourage 
merchants to use the Privacy Policy Statement Generator developed by 
the Organization for Economic Co-operation and Development.
    Visa also has taken other steps to help consumers protect their 
privacy online. Our website contains an extensive consumer guide to 
online privacy protection. In addition, we participate in pro-privacy 
industry organizations such as the Privacy Leadership Initiative, a 
group of major corporations and associations, dedicated to promoting 
privacy on the part of U.S. business and educating consumers about ways 
in which they can protect their privacy.
    Finally, Visa has provided extensive legal and regulatory guidance 
to our member banks to ensure that the mandated online and offline 
privacy protections of the Financial Modernization Act of 1999 are 
fully implemented. Financial institutions must be in compliance with 
the privacy provisions of this law by July 1, 2001. These rules 
generally require financial institutions to disclose their privacy 
policies at least annually and to provide their customers with the 
opportunity to opt-out of certain information sharing practices with 
third parties. These Federal privacy rules apply to information 
collected on websites in connection with providing a financial product 
or service. Financial services websites now must comply with notice and 
opt-out requirements.
    Visa appreciates the opportunity to appear before you today. We 
believe that our payment system represents a reliable and secure means 
of conducting online transactions in which the rights of consumers are 
well protected. Visa will continue to adapt to new technologies and 
practices. Combating fraud and maintaining information security are top 
priorities of Visa and its member financial institutions.
    I will be happy to answer any questions that you may have.

    Mr. Stearns. Mr. Charney?

                   STATEMENT OF SCOTT CHARNEY

    Mr. Charney. Thank you, Mr. Chairman. It's a pleasure to be 
here. The subcommittee asks, ``Are consumers safe,'' and I 
think the answer is not safe enough and not yet. And the reason 
for that are several factors. First is the origins of the 
Internet, built as a military communication system, it had a 
trusted group of users and crime wasn't a problem. Then in the 
early 1890's, IBM introduced the PC, the government decides the 
Internet should be a public resource and suddenly everyone is 
on the Internet and it has no embedded security. And as a 
result of that we've seen a rise in both cyber fraud and cyber 
crime and conceptually, these are really different, but 
overlapping terms. Cyber crime generally refers to attacks 
against the confidentiality, integrity and availability of 
computer networks and systems. Cyber fraud cases are usually 
cases where the Internet is used as a tool to facilitate some 
sort of fraudulent activity. And in those cases, very often the 
Internet is being used as a communications device to reach out 
to consumers with fraudulent, deceptive information to 
encourage consumers to part with personal information, credit 
card information and the like.
    So cyber fraud and cyber crime are problems and they're 
real challenges and here's why. First, of all there's a lack of 
authentication on the Internet. It's hard to know who you're 
dealing with. That is one of the reasons I think, Mr. Bass, 
there was a discussion about using Social Security Numbers 
because it is a unique identifier. The difficulty is, as they 
become broadly used, they're no longer secret, shared secret 
identifiers, but they're in the public domain and they're value 
for authentication drops.
    Second, the Internet has a lack of traceability. There are 
no real tracing tools built into the Internet and there are 
values in that in that it protects privacy and confidentiality 
and anonymity. At the same point, it allows criminals to act in 
the belief sometimes real, sometimes false, but their 
activities cannot be traced back to their source. Therefore, 
because of the perceived lack of traceability very often 
criminals feel more emboldened to engage in criminal activity.
    The third problem, of course, is globalization, because the 
Internet is global there is far more criminal activity that is 
committed across national borders, and while criminals do not 
worry about passing borders, law enforcements and governments 
certainly do have to worry about investigations that havve an 
impact upon the sovereignty of other countries. In my 9 years 
as chief of the Computer Crime and Intellectual Property 
Section, I also chaired the G-8 subgroup on high tech crime 
that was a discussion of the former panel and clearly, 
countries are worried about how to protect their sovereignty at 
the same time that they assist in international investigations.
    The next problem with the Internet is that its mixed use. 
It's part commerce, part speech, part political speech and 
because the Internet is used in many different ways, it is very 
hard to build regimes that can protect people on the Internet 
without possibly infringing on constitutionally protected 
rights. You see that, for example, in the Supreme Court 
decisions on the Communication Decency Act and the Third 
Circuit Decision on COPA, Children's On-Line Protection Act.
    The other real challenge is how to get security into the 
network. The truth of the matter is that if you look at the 
General Accounting Reports on government security and all the 
cyber crime reports from the private sector, security is not 
where it should be. Part of the problem is how to fund that 
security. Many of my clients which are large companies, they 
want to use technology to increase efficiency, increase the 
bottom line, but security is a cost and because it's a cost 
it's hard to allocate resources to employing security. In fact, 
a Joint Security Commission Report of the Defense Department 
and CIA in 1996 said 10 to 15 percent of every information 
technology dollar should be spent on security, more probably 5 
percent today.
    So what are the solutions? Well, the first is the market. 
As consumers have gotten more concerned about cyber crime and 
more concerned about their privacy, the markets are responding 
with better security, in particular, things like firewalls, 
virtual private networks and the use of encryption and Visa's 
response is a classic example to responding to those markets.
    Second, regulation, at times will affect security in 
dramatic ways. The HICFA regulations on privacy and security 
will force health care providers to deploy far more security 
than they are today. And then finally, of course, is education, 
that is the public has to appreciate that on the Internet, like 
in the real world, if you see a deal that's too good to be 
true, it probably is. We often tell consumers that they should 
do business with companies they know and trust and that's one 
way to ensure that the relationship will be reliable. The 
difficulty with that is the Internet web business model is a 
low barrier to entry, anyone can open up a business on the 
Internet. So we're giving a little bit of a mixed message if we 
say only deal with businesses you know, but the beauty of this 
technology is anyone can start a business, even if it doesn't 
have a track record.
    So there are some real challenges, but there are some 
solutions.
    Thank you.
    [The prepared statement of Scott Charney follows:]

 Prepared Statement of Scott Charney, Partner, PricewaterhouseCoopers 
                                  LLP

    I would like to thank the Committee for inviting me to speak on the 
topic: ``On-line Fraud and Crime: Are Consumers Safe?''
    That question is admittedly difficult to answer. To begin with, 
safety--whether on the Internet or in the physical world--is never 
absolute. Clearly the Internet does affect the types of threats 
consumers face, and with mixed results. For example, there is no 
question that on-line banking substantially reduces the risk that one 
will be robbed at gunpoint after cashing a check at a bank branch but, 
at the same time, it increases the risk of white-collar hackers 
emptying customer accounts from remote locations. Rationally one might 
assume that consumers would approve of the trade-off. Yet the fear of a 
hacking incident (or put another way, lack of customer trust in 
technology) remains somewhat of an impediment to the growth of on-line 
banking.1 Similarly, I have met many individuals who refuse 
to use their credit card over the Internet, expressing the fear that 
their credit card number will be intercepted. In reality, however, it 
is extremely difficult to intercept such data in transmission. 
Moreover, those same individuals will often admit to handing their 
credit card to a waiter they do not know, and blissfully drink their 
coffee while the waiter takes the credit card out of view. To some 
extent, therefore, it is perceived safety, more than actual safety, 
that may govern consumer habits on the Internet.
---------------------------------------------------------------------------
    \1\ Research conducted by the Banking Industry Technology 
Secretariat (BITS) Research and Communications Steering Committee found 
that consumers' anxieties about security are more acute in the ``new 
and intangible cyberworld'' than in the physical world and that these 
anxieties have caused consumers to proceed with caution. See 
``Consumers' Attitudes about Security, Privacy and Trust,'' BITS 
Research and Communications Steering Committee, April 4, 1998.
---------------------------------------------------------------------------
    Second, it must be remembered that Internet safety, like 
technology, is not a constant. At the same time regulatory and market 
forces are doing much to improve consumer safety, technological changes 
pose new risks. For example, while better computer security, including 
the increased use of encryption, plays an important role in protecting 
consumers, new technologies such as broadband are putting home 
computers at greater risk. This is significant for several reasons, not 
the least of which is that consumers store sensitive personal data on 
their home machines, and they may also use those computers to access 
corporate networks, thus creating a vulnerable ``weak link'' between a 
hacker and corporate America.
    So if I were to answer the question ``Are Consumers Safe?'', my 
answer would be ``yes, but we clearly can do more.'' We can start by 
better authenticating both businesses and consumers in commercial 
transactions, and better protecting the confidentiality of data.
    There is a now-famous cartoon of a dog, sitting before a computer 
terminal, who turns to another dog and says, ``On the Internet, nobody 
knows you're a dog.'' One of the key changes that the Internet has 
brought about is the creation of customer accounts and other business 
transactions without the personal interaction that was traditionally an 
essential part of such relationships. Although telephone calls have 
long been the basis for the establishment of certain business 
relationships without any face-to-face contact, the Internet allows for 
transactions with even less personal interaction between businesses and 
consumers.
    Merchants, whether in the real world or cyber world, have always 
faced the challenge of authenticating their customers. In many cases--
at least outside of small towns where everyone knows each other through 
face recognition--a merchant's success depends on his ability to sell 
to--and collect money from--people he or she does not know. In cash and 
carry transactions, the anonymity of the buyer is no problem, as the 
merchant is paid before the product leaves the store. In other types of 
transactions, such as check payments and credit cards, there needs to 
be trust since receiving actual payment is deferred in 
time.2 In these situations, allowing a buyer to remain 
anonymous increases the risk of fraud (anonymous buyers do not fear 
being held accountable for payment), and may leave the merchant holding 
the bag (unless, of course, contract rules shift the loss to another 
party, such as a card issuing bank or an insurance company).
---------------------------------------------------------------------------
    \2\ Who accepts the risk of loss is a separate question. For 
example, in a face-to-face transaction, a merchant may collect on a 
credit card payment even though the charge is later deemed fraudulent, 
so long as the merchant took certain steps to validate the card. In 
such cases, the bank issuing the card suffers the loss. By contrast, in 
MOTO transactions (Mail Order/Telephone Order), the merchant will 
suffer the loss, as the card is not present at the time of sale. 
Internet transactions are, not surprisingly, considered card-not-
present transactions.
---------------------------------------------------------------------------
    For these reasons, merchants have always looked for ways to prove a 
buyer's identity.3 In short, there are three formulas for 
authenticating an unknown buyer's identity: something the buyer is, 
something the buyer has, or something the buyer knows. These different 
metrics are often combined in some way.
---------------------------------------------------------------------------
    \3\ It is important to note that authenticating users is important 
for reasons other than commercial transactions. In today's electronic 
environment, there is a strong need to be able to authenticate the 
sender and/or recipient of a message, in large part to protect the 
confidentiality of that message from improper prying eyes. If 
communications, particularly e-mails containing sensitive personal or 
corporate information, can be opened by someone other than the intended 
recipient, the end result may be a significant invasion of privacy or 
loss of proprietary information.
---------------------------------------------------------------------------
    ``Something the buyer is'' refers to biometrics. In face-to-face 
transactions, many biometrics are available. The most common biometric 
is the signature, and merchants will often have a buyer sign some 
document (e.g., a check or charge slip). The advantage of a signature 
is its uniqueness, permanence, and evidentiary value (compare this to 
eye witness testimony of face recognition which is neither unique nor 
permanent, and of weak evidentiary value due to claims of mistaken 
identification).
    ``Something the buyer has'' refers to something in the possession 
of the buyer. For identification purposes, it is common to require a 
driver's license or other government identification (e.g., passport), 
documents that have a high degree of reliability because an independent 
authority (the government) has assumed responsibility for verifying the 
identity of the person to whom it has issued the document. In business 
transactions, the ``something the buyer has'' is today most often a 
credit card. Although it is of course possible to manufacture such 
cards without authority, most common fraudsters have neither the means 
nor inclination to mass produce plastic cards, although there are 
certainly organized groups that do so. In any event, in face-to-face 
transactions, it is possible to use both ``something the buyer is'' and 
``something the buyer has,'' and that is frequently done. For example, 
a merchant will ensure that the customer both has the credit card 
(``something the buyer has'') and that his signature matches the 
signature on the back of the card (``something the buyer is''). Another 
example: some credit cards come with photos, thus combining something 
the buyer has (the credit card) with something the buyer is (the facial 
appearance).
    The problem is that these techniques do not work well in telephonic 
and electronic environments where neither physical characteristics nor 
personal possessions can be checked. Although both biometrics 
(``something the buyer is'') and possessions (``something the buyer 
has'') can be implemented electronically, the cost is substantial. 
Whether using biometrics or credit card readers, these techniques 
generally require the distribution of specialized hardware/software 
(e.g., fingerprint readers, credit card readers) and are often 
unworkable due to the difficulty of and cost of distributing such 
equipment in the business-to-consumer model.
    Recognizing the impracticability of authenticating electronic and 
telephonic transactions using biometrics and possessions, merchants 
have relied upon the third type of authentication: ``something the 
buyer knows,'' often referred to as a ``shared secret.'' In some cases, 
this secret can be created by the consumer and merchant together. For 
example, the first time a customer does business with a website, the 
merchant may ask the consumer to create a password for future access. 
This ``shared secret'' is thereafter known only to the merchant and 
that consumer, at least if neither party discloses it to, nor has it 
stolen by, a third party. Even the proper use of this shared secret in 
future transactions only proves, of course, that the person signing on 
the second time is the same one who signed on the first time, but it 
does not prove that the customer, who has now signed on twice, is who 
he claims to be. Put another way, a fraudster who signs on to a site 
and creates a password will have a shared secret for his second visit, 
but he is still a fraudster.
    More commonly, both merchants and consumers rely upon a third party 
to verify the secret. For example, if a consumer is purchasing goods 
with a credit card, he may also be asked to provide his home address as 
a shared secret; this is information that the merchant can have 
verified by a third party (e.g., a credit reporting agency). The 
problem with such shared secrets, however, is that they are often too 
broadly shared to be called a ``secret'' at all. Even worse, the secret 
may in fact be stored with the very information that the secret is 
designed to protect. Since a credit report may contain a credit card 
number and the buyer's home address, anyone who accesses the credit 
report also gains possession of the shared secret (the home address), 
thus defeating the entire scheme. Suffice to say, from an e-commerce 
perspective, authentication will remain a critical issue, at least in 
business to consumer (B2C) transactions.
    The Internet certainly exacerbates such authentication issues for a 
host of reasons. On the civil side, differences in legal rules across 
international jurisdictions also may pose a significant impediment to 
both authenticating and protecting consumers. How can a retailer 
physically located in Australia authenticate a buyer claiming to be a 
European citizen browsing its website in the middle of the night from a 
location somewhere in Asia? And which set of regulatory rules should be 
applied to such transactions? Finally, if the transaction at issue 
turns out to be unsatisfactory, to which legal systems should the 
business or consumer turn for assistance, and is there any practical 
cost-effective way to vindicate one's rights? 4 One current 
consumer-oriented proposal--the Hague Convention--would allow consumers 
to sue in their home nation, thus requiring even the smallest website 
owner to defend suit in every jurisdiction from which an Internet user 
makes a purchase.
---------------------------------------------------------------------------
    \4\ See, e.g., the Hague's Preliminary Draft Convention On 
Jurisdiction And Foreign Judgments In Civil And Commercial Matters, 
Article VII (allowing consumers to bring causes of action against 
merchants in the forum in which the consumer is habitually resident).
---------------------------------------------------------------------------
    On the criminal side, fraudsters have continued to use the 
Internet's lack of authentication to facilitate illegal schemes. One 
bank, for example, reported a fraud scheme that illustrates the 
authentication issue from both the consumer and financial institution 
perspectives. After several of the bank's customers contacted the bank 
concerning the status of the credit card they had ordered online, the 
bank reported a false advertising Internet scam. The perpetrator 
utilized the bank's name to lure victims to a fraudulent web site and 
charged victims $99.00 for a guaranteed Visa or Master Card. To 
facilitate payment of the $99.00 fee, the fraudulent web site allowed 
the customers to provide their checking account information directly 
online, thus allowing the perpetrator to direct the withdrawal of funds 
from the victim customers' accounts. The customers also had the option 
to send checks to a mailbox address for deposit. An investigation by 
the United States Secret Service and the bank's corporate security 
department revealed nearly $300,000.00 was deposited into the 
perpetrator's account in a 30-day period.
    That fraud may be facilitated by the Internet is of course no 
surprise, but in considering consumer safety we must remember to add 
two other Internet attributes: scalability and globalization. It is not 
just the risk of an event that matters, but the size of the event, and 
the Internet presents a platform for large-scale abuses that are 
generally not practical in the physical world. In short, large scale 
abuses can occur at anytime and anywhere, and can be committed by 
anyone in the world with Internet connectivity. For example, a hacker 
can breach network security and simultaneously breach the 
confidentiality and privacy of thousands of customer records in real 
time. This radical change occurs because of the way data is 
consolidated and thereby made accessible, distributable, and usable. By 
way of contrast, ten years ago a fraudster working at a busy restaurant 
or bar might have been able to steal at most dozens or even hundreds of 
credit card numbers on a good night and would have been hard pressed to 
make use of all those numbers quickly. Today, with Internet merchants 
allowing credit card purchases twenty-four hours a day for everything 
from major home appliances to groceries, thousands of credit card 
numbers may be quickly consolidated on a single computer. Those numbers 
can then be stolen en masse, and quickly used. Moreover, such credit 
data may be combined with other personal information, thus making 
identify theft a real risk.
    Equally problematic is that global connectivity allows hackers to 
access those numbers and distribute them, again globally, within 
minutes. Hackers are not hampered by the existence of international 
boundaries because property need not be physically carried, but can be 
shipped covertly via telephone and data networks. A hacker needs no 
passport and passes no checkpoints, thus eliminating any hope of 
interdiction by customs authorities. And while hackers ``roam'' freely, 
law enforcement should and must respect national boundaries.
    There are things being done, however, by both industry and the 
government, to help reduce these risks. VISA, for example, has 
promulgated requirements that merchants encrypt credit card data not 
just in transmission, but in storage. AMEX is relying upon smart card 
technology to better authenticate users, and has introduced another 
technology which permits a member to use his or her credit card without 
the actual card number being passed to the end merchant. This technique 
limits the distribution of the actual card number, thus reducing the 
risk of fraud. As for the government, in addition to fulfilling its 
traditional responsibility to react to crime when it occurs, it has 
been working proactively in several international fora to ensure that 
computer crime issues are addressed. For example, at the G8, nations 
have agreed that certain computer abuse must be criminalized, and that 
each country must designate a high-tech point of contact, available 24 
hours-a-day and 7 days-a-week, to respond quickly to computer related 
crimes. A draft cybercrime treaty at the Council of Europe would expand 
the scope of these agreements to a larger group of nations. Although 
there is still a long way to go, such efforts--by both markets and 
governments--have served to make the Internet safer.

    Mr. Stearns. Ms. Grant.

                    STATEMENT OF SUSAN GRANT

    Ms. Grant. Thank you for asking the National Consumers 
League to participate today. Though we were founded in 1899, 
long before the Internet was born, we've kept up with cutting 
edge issues such as electronic commerce. Internet fraud is 
really the dark side of electronic commerce and anybody who 
goes on-line is a potential victim.
    We have submitted written testimony which we would 
appreciate being entered into the record.
    Mr. Stearns. By unanimous consent, so ordered.
    Ms. Grant. And that describes in detail the consumer and 
law enforcement services that we provide really as a public 
service from a nonprofit organization. But I just want to 
highlight the importance of the two roles that we play. One is 
fraud prevention. Our trained counselors help consumers 
identify the red flags of fraud and prevent victimization and 
that's really crucial because as any law enforcement agency 
will tell you, although they may be able to take action against 
the bad guys, getting people's money back is often difficult or 
impossible.
    And then the second really important thing that we do is 
notify law enforcement agencies quickly about crooks and their 
victims. We do that through an ingenious computer system which 
was actually the inspiration for the FBI's Internet Fraud 
Complaint Center.
    It may sound as though we're competing with each other, 
private organizations and government agencies, but we're not. 
There's plenty of fraud to go around. We all play an important 
role. I think that in many instances consumers come to us 
because we're a trusted source of information and also because 
they're confused about what government agencies to go to. We 
can help them by getting our information to all the right 
agencies.
    We've learned a lot about Internet fraud over the years and 
in our written testimony we've described to you the consumers 
who are victimized and how they're victimized. Younger people 
tend to be more often on-line fraud victims than older, but 
nobody is immune. People are losing more and more money every 
year.
    The victims tend to come from the States where most people 
live, California, Florida, Texas and New York top the list and 
that's also where many of the cyber crooks are, but we're 
seeing growing numbers of cyber crooks from other countries and 
this is a big challenge for law enforcement agencies as we've 
already heard.
    We're also seeing more use of credit cards as a payment in 
what turned out to be fraudulent Internet transactions. From 
our standpoint, that's a good thing. We actually urge consumers 
to pay with credit cards because of the strong legal dispute 
rights if somebody uses their card number without 
authorization, if they don't get anything or if what they get 
was misrepresented.
    We are concerned, however, about some new forms of payment 
from debit cards to demand drafts from people's bank accounts 
to things like cyber wallets and other means of payment that 
are not--that don't afford consumers the same protection as the 
laws that we have concerning credit cards.
    I would like to really focus my remaining time on the 
solutions which I know you're most interested in. And as we 
said in our written testimony, we think the first thing we need 
to do is set some basic rules for e-commerce, similar to the 
way that we did in enacting the law and the telemarketing sales 
rule promulgated under it which sets a code of conduct for 
telemarketers. We need a code of conduct for e-tailers that 
requires certain disclosures and prohibits certain practices. 
We have a model to look at in the Consumer Protection, in the 
context of electronic commerce guidelines which were issued in 
December 1999 by the Organization for Economic Cooperation and 
Development. We should take steps to implement those 
guidelines.
    We should also enact uniform protection for different forms 
of electronic payment so that consumers have the same dispute 
rights and also to hold the e-tailers feet to the fire. After 
all, if there are complaints against vendors for what appears 
to be fraud and misrepresentation, they can lose their ability 
to continue to participate in the electronic payment system and 
that's a very important tool.
    We need, as we heard earlier today, to provide more 
resources to law enforcement agencies to fight Internet fraud. 
We'd also like more resources from the government. We, for 
instance, a couple of years ago received a grant from the 
Department of Justice which helped us improve the law 
enforcement services that we provide and we would appreciate 
more funding to continue those services and we also need 
funding for consumer education. This is an on-going need. We 
all share the responsibility in it. We've done a lot of work 
with private sector partners and we would welcome government 
grants to do that work as well.
    [The prepared statement of Susan Grant follows:]

  Prepared Statement of Susan Grant, Director, Internet Fraud Watch, 
                       National Consumers League

    Thank you very much for inviting me to speak to you today. Though 
the National Consumers League was founded more than one hundred years 
ago to advance the economic and social interests of consumers, long 
before the Internet was born, we have kept on the cutting edge of 
issues such as electronic commerce. Internet fraud is the dark side of 
electronic commerce, and anyone who goes online is a potential victim.
    Our involvement in fighting Internet fraud has its roots in the 
National Fraud Information Center, a program that NCL set up in 1992 as 
the first nationwide toll-free hotline to assist consumers with 
questions or problems concerning telemarketing fraud. In 1996, as many 
of the same scams that we saw in telemarketing began to appear in 
cyberspace, we created a companion program, the Internet Fraud Watch, 
and a Web site, www.fraud.org. These programs perform two very 
important functions.
Fraud Prevention
    The first is fraud prevention. More than half of the 1,000-1,200 
consumers who contact us by phone or via the Web site each week have 
not yet been victimized. They are doing exactly what we want all 
consumers to do--checking out offers that sound enticing but may not be 
legitimate. Our trained counselors help consumers identify the ``red 
flags of fraud,'' such as sweepstakes winnings that require payment to 
claim, unrealistic promises of big returns on investments with little 
or no risk, easy ways to earn money with little or no work, and 
guaranteed credit even for those with bad credit histories. It is 
crucial to prevent victimization whenever possible because, as those in 
law enforcement will tell you, chances of actually recovering money 
from crooks are usually fairly low. We reinforce the advice that our 
counselors provide by sending everyone who contacts us educational 
materials, by mail or email, on the specific types of scams about which 
they inquired.
Alerting Law Enforcement Agencies Quickly
    The second vital function of our fraud programs is to alert law 
enforcement agencies quickly about con artists and their victims. We 
transmit the information that consumers have provided to us by phone or 
via the online form on the Web site to the appropriate federal, state 
and local law enforcement agencies, alerting them to scams about which 
they may not already know and to people who need their help.
    Agencies tell us in advance what they wish to receive by certain 
criteria, such as geographic location, type of scam, or other factors. 
For example, the Florida Attorney General's Office wants complaints 
where either the consumer or the perpetrator is in that state. The 
Securities and Exchange Commission receives information about 
investment-related scams. The Postal Inspection Service is interested 
in cases where the payment was sent by mail. Our FAST Alert System 
matches the information that our counselors take from consumers with 
the agencies' criteria and automatically relays those complaints by fax 
or email. We also send agencies a daily log showing them what other 
agencies have received the same fraud reports and the contact 
information so that investigators and prosecutors can coordinate their 
activities. To date there are more than 230 agencies on our system.
    Since it is not uncommon for one complaint to be of interest to 
several agencies, we save consumers the trouble of having to contact 
each directly. We also upload new complaints on a weekly basis to the 
Consumer Sentinel database, which is maintained by the Federal Trade 
Commission and the National Association of Attorneys General. Law 
enforcement agencies can query Consumer Sentinel to find information 
that aids in their investigations and prosecutions.
The Worst Internet Scams
    What is the worst scam on the Internet? That depends on how you 
look at it. In terms of volume, it's online auction fraud. As a survey 
that we recently conducted shows, most sellers are honest, and most 
buyers are happy with their experiences. But there are some individuals 
and companies who offer items on online auctions that they don't really 
have or that don't remotely resemble the descriptions they provide. 
Last year, 78% of the Internet fraud complaints we received were about 
online auction transactions. The good news is that this is down from 
87% the year before, but it is still a significant concern. Whenever 
consumers pay in advance for items they haven't seen, there is an 
element of risk. We launched a public education campaign earlier this 
year to tell consumers how they can protect themselves in online 
auctions.
    We have attached to our testimony the list of the top ten Internet 
frauds of 2000, and that information is on the Web site at 
www.fraud.org/internet.It00totstats.htm. The Web site also provides 
basic Internet tips and specific tips on common Internet scams. More 
than 300,000 people visit our Web site every week. Some Internet scams 
are the same as we see in telemarketing fraud; for example, work-at-
home schemes, advance fee loans, bogus offers of credit cards, and 
empty promises of free or cheap trips. Others are specifically 
Internet-related. Online auctions are a phenomenon made possible by 
this new interactive medium. Other frequent complaints are about offers 
for Internet services and sales of computer equipment and software.
    Based on the amount of money that victims lose, Nigerian money 
offers are the worst Internet scam. These offers, which used to come by 
airmail but now are increasingly arriving by email, promise millions of 
dollars in exchange for allowing your bank account to be used to 
safeguard someone else's riches. But the real intent is to take money 
out of your account, not put money in it. These scams rose to the top 
ten Internet frauds last year, and victims are losing an average of 
$3,000 in money they've paid or that was taken from their bank 
accounts. Another category with high dollar losses is travel scams, an 
average of $1,464 per victim last year. Overall, the average loss to 
Internet fraud was $427 in 2000, up from $310 in 1999.
Victims of Internet Fraud
    The biggest losers to Internet fraud are people in their 20s, 30s 
and 40s, who represented 77% of the victims we heard from last year. 
Among the top ten frauds, the most young victims are found in the 
advance fee loan category, the most older victims in bogus credit card 
offers. But no one is exempt; there is a scam for everyone. The states 
with the most people are where the most victims are located: 
California, Florida, New York, and Texas.
    Those states are also the top locations for cybercrooks. But since 
the Internet has no geographic boundaries, neither do the con artists. 
Nearly 4% of the Internet scams reported to us last year originated 
from Canada, a little more than 2 % from other countries, and offshore 
fraud is growing.
    Because we hear from so many online auction victims, the most 
common method of solicitation is through Web sites. But 12% of the 
victims were solicited through emails last year, up from 9% in 1999, 
and 4% were solicited through newsgroups, a sharp increase from 1% last 
year. Consumers have to be wary no matter where they go on the 
Internet. A friendly tip from someone in a newsgroup can actually be a 
trap set by a fraudster.
    Since many online auction transactions are completed with the high 
bidder sending payment offline to the seller, the most frequent methods 
of payment are money order and check. But more consumers are paying for 
fraudulent online transactions by credit card, 11% last year compared 
to 5% in 1999. We advise consumers to pay by credit card because of the 
strong legal dispute rights they have for unauthorized charges, 
nondelivery or misrepresentation. However, we are beginning to see 
payments made with debit cards or by demand drafts from consumers' bank 
accounts, and the legal dispute rights in those cases are not as 
strong. This is a concern, especially as new forms of electronic 
payment such as cyberwallets are developed.
Making the Internet Safer for Consumers
    There are several things that should be done to make the Internet a 
safer place for consumers and enable e-commerce to achieve its full 
potential:

 Set some basic rules for e-commerce. Five years ago, the 
        federal Telemarketing Sales Rule was promulgated by the FTC to 
        require certain disclosures and prohibit specific practices. 
        States are empowered to help enforce the rules in federal 
        court. In December of 1999, the Organization for Economic 
        Cooperation and Development issued Guidelines for Consumer 
        Protection in the Context of Electronic Commerce, which provide 
        suggestions to the member countries for how e-commerce should 
        be conducted. The United States played a major role in drafting 
        the guidelines. Now we should implement them by setting some 
        basic rules for e-tailors, such as requiring that they provide 
        their physical addresses, and prohibiting practices that should 
        be illegal on their face, such as advance fee loan offers from 
        entities that are not regulated financial institutions.
 Enact online privacy protection. Consumers should have legal 
        protections against commercial email that they never agreed to 
        get and having their personal information shared by companies 
        to whom they provide it without their permission.
 Enact uniform protection for different forms of electronic 
        payment. To encourage e-commerce, debit card issuers currently 
        provide more generous dispute rights to consumers than those 
        required by law, but those policies are not written in stone, 
        and other forms of electronic payment aren't treated the same. 
        Dispute rights for fraud and misrepresentation don't just help 
        consumers--they make the sellers more responsive to problems 
        and more likely to conduct themselves properly in the first 
        place, because if they don't they may not be paid and could 
        even lose their ability to participate in the electronic 
        payment system.
 Provide more resources for fighting Internet fraud. Law 
        enforcement agencies need more resources to train investigators 
        and prosecutors and to bring actions that may entail appearing 
        in court in another country. We need more resources to sustain 
        the League's fraud programs, too. In the past few years, we 
        have received grants from the Bureau of Justice Assistance in 
        the Department of Justice that have enabled us to upgrade our 
        data system and improve services to law enforcement agencies 
        and consumers. We need more federal funding to supplement the 
        support that we receive for the programs from our members and 
        businesses that care about fighting fraud.
 Provide more resource for consumer education. Education is 
        needed on an ongoing basis to make consumers aware of the 
        danger signs of fraud and give them confidence in the new 
        electronic marketplace. We have done many educational projects 
        about e-commerce in the last few years with support from the 
        private sector. For example, our Be e-Wise: How to Shop Safely 
        Online brochure, which is on the League's main Web site, 
        www.nclnet.org, was produced with a grant from MasterCard. More 
        recently, we developed a Consumer Guide for Internet Safety and 
        Security, also on the League's Web site, with support from Dell 
        Corporation. The government should join the private sector in 
        providing resources for nonprofit groups such as ours to reach 
        out to consumers with the information they need to protect 
        themselves in cyberspace.
    Thank you very much for asking the National Consumers League to 
share its knowledge and suggestions on this important issue.

    Mr. Stearns. Thank you, Ms. Grant.
    Let me start out my questions by asking you in your 
testimony you explained the highest volume of Internet related 
fraud is for on-line auction fraud. What are the specific types 
of auction fraud that you have reported?
    Ms. Grant. Two very simple types. I'm the high bidder. I 
sent my money to the seller. I either never got anything or 
what I got didn't remotely resemble what I was promised. And my 
favorite story in that regard is somebody who thought she was 
getting a portable wheelchair and instead received an aluminum 
lawn chair on casters. People are not seeing what they get 
before they get it and before they pay. So there's always an 
element of risk there. And we've been doing a lot of consumer 
education to tell people how they can reduce the possibility of 
loss by doing things such as using escrow services which act as 
go betweens, taking their payment and only forwarding it to the 
seller when they confirm that they got what they were promised.
    Mr. Stearns. What Internet frauds were most reported last 
year?
    Ms. Grant. Well, on-line auction scams topped the list. I'm 
happy to report that that's going down. It was 78 percent of 
the Internet fraud that we heard about last year as opposed to 
87 percent the year before. It's gone down because of efforts 
by some of the large on-line auction houses to better police 
themselves and consumer education as well.
    Mr. Stearns. What steps can consumers take to protect 
themselves from on-line fraud?
    Ms. Grant. Well, we've heard that people are well advised 
to shop with companies that they know and trust, but we've also 
heard that there are a lot new players on the Internet. One of 
the things that we can do is help consumers recognize the 
hallmarks of fraud. It doesn't matter what the company name is. 
There are certain kinds of things that are offered and certain 
ways that they're offered that we know are fraudulent and we 
need to convey that information to consumers. For instance, 
somebody on-line, not a banker, another financial institution, 
who promises to give you a credit card or a loan as long as you 
pay a fee up front. We know that those offers are fraudulent. 
Actually, if we had a good on-line commerce rule we could 
prohibit those kinds of offers as we do in the telemarketing 
sales rule.
    Mr. Stearns. Do you think there's legislation that's needed 
in this area?
    Ms. Grant. We think legislation that would charge the FTC 
with developing an e-commerce rule would be very helpful. It's 
not necessarily going to prevent fraud, but it would do a 
couple of real useful things. One is it would create some 
bright lines which would help people understand what's 
fraudulent and what's not, what's appropriate behavior and 
what's not and the other is that when you have laws like this 
and I should point out that the telemarketing sales rule is 
helpful not only to the Federal agencies, but to the State 
Attorneys General who are able to go into Federal court to 
enforce it.
    You can take easy action against a company if they're doing 
something which on its face because there's a rule that 
prohibits it is illegal.
    Mr. Stearns. Mr. MacCarthy, if I ask you to compare on-line 
commerce with off-line commerce, which would you say is safer?
    Mr. MacCarthy. I think with respect to the important for 
Visa cardholders, they're both equally safe.
    Our zero liability policy which prevents cardholders from 
being held responsible for unauthorized use of their cards 
applies both on-line and off-line. So in the relevant 
respective applies to the Visa payment system, zero liability 
protects cardholders from unauthorized use 100 percent, on-line 
or off-line.
    Mr. Stearns. Aren't chargebacks more frequent on Internet 
transaction than other type of transactions?
    Mr. MacCarthy. They are and the fraud rates differ. The 
general fraud rate for all transactions is \7/100\ths of 1 
percent for all the areas in which cards are not present. It's 
\15/100\ths of 1 percent. So there is a difference between the 
two and I think there's some things that explain that 
historically. When you go into a card not present environment, 
if you've stolen some cardholder information, you don't have to 
look the merchant in the eye. And also if you've gotten 
cardholder information, but you don't really have the card, you 
don't really have an alternative but to go to the card not 
present environment.
    So those things explain the difference, but the thing I 
want to point out is that what those numbers measure is not the 
danger to consumers. It's the likelihood that someone will use 
that channel to commit fraud. And again, the consumers are 
protected 100 percent in either channel by the zero liability 
policy.
    Mr. Stearns. Mr. Charney, is the authentication technology 
progressing at appropriate pace to keep up with fraudulent 
actors? I think you've mentioned that American Express is using 
a smart card technology to protect its consumers?
    Mr. Charney. Right.
    Mr. Stearns. You might want to just explain some of that.
    Mr. Charney. Yes, I mean one of the things that some of the 
credit card companies are trying to do is turn these Internet 
transactions into card present transactions. So if your 
computer has a card reader and you have to insert your credit 
card into a slot, then the vendor at the other side doesn't 
just get your number from you typing it in, but knows you 
actually have the card. So that becomes almost closer to a card 
present transaction. You still can't look at the signature on 
the back of the card, but you know the person has a credit card 
in hand.
    The difficulty is those credit card readers are hardware, 
not software, therefore, they tend to be more expensive to 
deploy.
    Mr. Stearns. I've seen in the European Union I think 
they've started that. I think I saw that maybe up in Canada or 
somewhere that the smartcard, you put it in your computer now 
and it's using it rather than giving your number over the 
Internet.
    Mr. Charney. Smartcards have gotten far more acceptance in 
Europe than in the United States.
    Mr. Stearns. Do you think that's the way to the future that 
instead of giving your credit card over the Internet, you'll 
have it swiped in with maybe a little bit more identification?
    Mr. Charney. Absolutely. I think you'll see that and you'll 
see more biometric authentication over time. You can now buy 
laptops, for example, that will look at fingerprints to ensure 
that you're the person you claim to be. It raises interesting 
privacy issues, but many of them can be addressed in other 
ways.
    Mr. MacCarthy. Mr. Chairman, I think the possibility of 
using smart cards in a swiping context is a real possibility 
that will help to control fraud in the on-line environment, but 
let me direct your attention to another program that Visa is 
embarking on. It's our pay authentication program. It's 
currently a pilot program, but it will enable to issuers to 
confirm a cardholder identity during the on-line transaction 
itself and it involves the cardholder inserting a PIN number in 
the process of the transaction and that along with these other 
technologies that are coming on-line, the smart cards and so 
on, we think will help to control the fraud rate in the on-line 
environment.
    Mr. Stearns. My time has expired. Mr. Towns?
    Mr. Towns. Thank you, Mr. Chairman. Let me begin with you, 
Ms. Grant. You mentioned the basic rules of e-commerce need to 
be set and I agree with that. These advanced fee loans from 
entities that are not regulated financial institutions, what 
are these unregulated financial institutions you refer to and 
how much of the on-line fraud problems do they account for, do 
you know?
    Ms. Grant. The kind of folks who offer loans and credit 
cards for a fee up front are not financial institutions at all. 
They're con artists working out the Internet version of boiler 
rooms, just making those offers and targeting people who are 
having financial difficulties. In fact, part of their pitch is 
that you're guaranteed a loan or a credit card, even if you 
have poor credit and sometimes they combine those offers with 
by the way, we'll clean up your credit history which we all 
know cannot happen.
    They rank in the top 10 Internet frauds consistently, so it 
is a serious concern.
    Mr. Towns. You talk about the need to enact consumer 
protections against the unauthorized sharing of personal 
information. What specific protections do you believe are 
needed?
    Ms. Grant. One concern is unsolicited commercial e-mail. We 
see a growing number of fraudulent solicitations being made to 
consumers by what's commonly referred to as spam and we'd like 
to see a law that would prohibit people from receiving 
unsolicited e-mails unless they've specifically agreed to do so 
with the sender.
    But we also need, just in general, on-line privacy 
protection to keep consumers information from being shared when 
they give it to one entity with others without their knowledge 
and consent. We feel that that is the root of a lot of 
situations where people find themselves being charged for 
products and services that they've never agreed to and I should 
note that in the OECD's guidelines for consumer protection and 
e-commerce, one of the things that they call for is for 
countries to implement privacy protections along the line of 
the OECD guidelines for personal privacy protection. We think 
that that is important, not only on-line, but off-line.
    Mr. Towns. My final question, Mr. Chairman. Ms. Grant, you 
mentioned the important role, the FTC's Telemarket and Fraud 
Rule has played in addressing crime. Is it your view that the 
FTC should issue on-line fraud rules in the same way that it 
addressed telemarketing fraud by regulation in the past?
    Ms. Grant. Yes, I think it would be very helpful for a e-
commerce, but prohibiting acts that should on their be illegal 
and requiring disclosures that would help consumers know who 
they're dealing with, where the entity that they're dealing 
with is located and other key information that they need to 
make a wise on-line buying decision.
    Mr. Towns. Let me thank you very much. Let me thank all of 
you for your testimony. You've been extremely helpful.
    Mr. Chairman, I yield back.
    Mr. Stearns. Thank you to my colleague. Mr. Bass?
    Mr. Bass. Thank you, Mr. Chairman. This has been very 
interesting testimony.
    Mr. MacCarthy, this is probably going to be the nurdiest 
question I've ever asked in a subcommittee hearing. You say in 
your testimony that total fraud, total fraud is 7 per 10,000. 
Card not present fraud is 15 per 10,000, but that includes, 
that 15 per 10,000 includes the 7 per 10,000. Is that correct 
or not?
    Mr. MacCarthy. That's correct.
    Mr. Bass. 7 per 10,000 is total for everything.
    Mr. MacCarthy. That's right. If you just look at total off-
line as opposed to total in its entirety, you'd have a smaller 
number than 7. And if it's important for you, I could provide 
that information.
    Mr. Bass. I'd be interested to know because this is going 
to be almost waste of time. I'd like to know what the fraud 
rate is for within the card not present category for Internet 
transactions versus telephone, anything else. You don't have to 
answer now. But that would be an interesting number.
    Mr. MacCarthy. I can give you that one. The first one you 
were asking for, I'd have to get back to you on. In the 
Internet context if you just look at Internet transactions, the 
fraud rate is \24/100\ths of 1 percent.
    Mr. Bass. 24 per 10,000.
    Mr. MacCarthy. Which is higher than the 15 and higher than 
the 7. We think, obviously, there are reasons why in the card 
not present environment, generally, you'd have a different----
    Mr. Bass. Do you think that's a big problem or not? I'm 
just trying to get a feel for----
    Mr. MacCarthy. We think it's a problem that relates mostly 
to two factors. One is we've got a new channel of new commerce 
here. Many of the merchants are not as well established as 
merchants that have been involved in mail order and telephone 
order. Their back offices may not be as well developed as some 
of the more established companies. And they may not take as 
full advantage of the fraud protection services that we provide 
as some of the more established merchants do.
    The second is that we think that fraudsters like the 
anonymity of the Internet. In face to face fraud you've got to 
look the merchant in the eye. In the telephone context you've 
at least got to talk to him . In the Internet, you don't to do 
either.
    Mr. Bass. Are there Internet payment companies that have 
developed user fees? First of all, why is Visa 95 percent of 
all? Why isn't it Diners and Master--I know you guys are 
obviously the best in the world, but did you say that 95 
percent of all credit card transactions are Visa?
    Mr. MacCarthy. That would be nice, but it would be 
misleading to say it that way. Ninety-five percent of all the 
Internet transactions are paid for using a payment card, a 
debit card or a credit card. We have 53 percent of that part of 
the market.
    Mr. Bass. Okay, that clarifies that. Internet payment 
companies, they exist, don't they? Do you know what I mean by 
that, like PayPal and Honesty?
    Mr. MacCarthy. Right.
    Mr. Bass. Are they subject to the same--what is your 
relationship with them? They don't actually sell anything.
    Mr. MacCarthy. It depends on how they're set out. I don't 
want to speak in particular about any one of those, the 
operations. But I think Susan Grant mentioned the concern that 
consumers should be aware of that when they do use these 
alternative payment mechanisms they may not have the same legal 
protections that they have when they use their traditional 
credit card and debit cards and they certainly don't have the 
zero liability and other protections that we've done to provide 
beyond the current legal protections that they have using their 
credit cards.
    Mr. Bass. In other words, on an on-line auction, the seller 
has to have his or her own direct contract with Visa in order 
for the buyer to get the same protections versus an 
intermediary?
    Mr. MacCarthy. Many of the on-line participants, the 
sellers, are not individuals, they're businesses. They're small 
businesses, but they're businesses and many of them do have 
access to the payment mechanism. They can use Visa cards or 
master cards or any of the other traditional cards.
    Mr. Bass. One other question mainly for you, Mr. MacCarthy, 
following up on a question that Mr. Deal asked of the earlier 
panel, do any of you hold the opinion that existing laws and 
regulations actually act as a barrier to investigating reported 
or suspected misuse and do any of these barriers preclude you 
from notifying consumers that they may have been victimized?
    Mr. MacCarthy. Not at the present. As you probably know, 
financial institutions live under the Gramm-Leach-Bliley Act 
and there are privacy protections and security protections 
built into that act for financial institutions. But there's a 
clear exception for the choice requirement for consumers to 
take into account the fraud situation. WE think that's 
essential. We have to be able to pass on information to law 
enforcement people with whom we work very closely without 
having the possibility that a consumer would interpose privacy 
rights.
    Privacy rights are crucial. We don't think there's a 
problem with having a generalized privacy rights, but in that 
kind of context it's very, very important. It's essential for 
us to be able to pass information on to law enforcement 
agencies for fraud prevention.
    Mr. Bass. Thank you, Mr. Chairman.
    Mr. Stearns. time has expired. We are finishing up. The 
gentleman from Illinois, does he wish to ask any questions?
    All right, I want to thank the second panel for their 
patience in waiting through the first panel and the 
subcommittee is adjourned.
    [Whereupon, at 12:25 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                                                     PayPal
                                                      June 29, 2001
The Hon. Charlie Bass
United States House of Representatives
Washington, D.C. 20515
    Dear Representative Bass: We were pleased that you inquired about 
online payment services like PayPal at the May 23rd hearing in the 
Subcommittee on Commerce, Trade, and Consumer Protection entitled ``On-
line Fraud and Crime: Are Consumers Safe?'' PayPal is the world's first 
and largest online payment service. With PayPal, individuals and 
businesses can transfer money instantly and securely using the 
Internet. This revolutionary service provides a faster, easier, less 
expensive, and safer way to move money in today's digital economy.
    In response to your questions, Mark MacCarthy from Visa USA 
identified two important factors in Internet fraud. First, the Internet 
is a new channel of commerce. Many merchants are inexperienced with 
remote commerce and their back offices may not be as well developed as 
more established companies. Such merchants may not take as full 
advantage of the fraud protection measures that are available. Second, 
Internet commerce is more anonymous than traditional commerce. It is 
easier for criminals to commit fraud in an environment that does not 
require face-to-face contact or even a telephone conversation.
    We concur with these intelligent observations and, like Visa, are 
working to lower fraud rates so that e-commerce can continue its 
dramatic growth--especially for small business-people and entrepreneurs 
who have not traditionally had access to a national market and cost-
effective payment systems.
    Though Mr. MacCarthy was thoughtfully cautious not to speak of any 
particular online payment service, a portion of your colloquy with him 
(excerpted below) may have left a mistaken impression about the 
protections enjoyed by consumers using PayPal. You summarized your 
understanding by noting that, ``in an online auction, the seller has to 
have his or her own direct contract with Visa in order for the buyer to 
get the same protections versus an intermediary.''
    This is not the case with PayPal. A consumer using his or her 
credit card with PayPal retains all the rights and privileges accorded 
by the card-issuing bank, including the right to dispute payments. In 
the uncommon event of a dispute, PayPal works with the consumer and 
seller to resolve the issue. As the merchant of record for the card 
transaction, PayPal takes a chargeback if the issue cannot be resolved 
and if the seller will not honor his or her commitment. Consumers who 
use a credit card on PayPal retain all the protections offered by 
credit cards.
    When consumers do not use a credit card with PayPal, sending money 
from their bank accounts or PayPal accounts, these transactions are the 
equivalent of sending money through Western Union, by check, or in 
cash. Once the recipient has retrieved the money from PayPal, there is 
no effective way to reverse the transaction, just as there is no way to 
stop payment on a check that has cleared.
    Too often, consumers find bargains in online auctions that seem 
``too good to be true''--only to discover later that they are, indeed, 
not true. That is why PayPal takes the steps it does to protect its 
users against fraud. Our 75-person Fraud and Investigations team, which 
was recently recognized in the Wall Street Journal's online edition, 
has seen substantial success in preventing online auction and e-
commerce fraud against consumers, and in providing assistance in the 
apprehension and successful prosecution of those who temporarily 
succeed. PayPal's proprietary anti-fraud software, which analyzes the 
patterns of transactions searching for suspicious activity, helps the 
team identify potentially fraudulent sales and recover consumer funds 
before they leave the system, and has enabled PayPal to return payments 
to thousands of consumers. These efforts have also allowed PayPal to 
alert law enforcement of numerous fraud attempts against consumers 
before their conclusion, and to reduce the fraudulent transaction rate, 
in our network to well below the e-commerce industry average, as 
calculated by the Gartner Group.
    For example, the day of the hearing, the FBI acknowledged our work 
to fight fraud by inviting us to participate in the press conference 
announcing that it had brought charges against approximately 90 
criminals in ``Operation Cyber Loss.'' The Bureau's press release cited 
PayPal's ``great assistance in identifying individuals engaged in wrong 
doing . . .''
    PayPal takes seriously its commitments to consumer protection and 
fraud prevention. We hope that this letter clarifies your impressions 
of our particular online payment service. By copy of this letter, we 
are requesting that Chairman Steams also include it in the hearing 
record. We are very pleased by your awareness of PayPal, our services, 
and the positive effect e-commerce is having on small and remote 
business-people who have historically not had access to a national 
marketplace. If we can answer any further questions, please contact me 
at the letterhead address or our Washington representative, Jim Harper 
of PolicyCounsel.Com at (202) 546-3701.
            Sincerely,
                                           Vincent Sollitto
                           Vice President, Corporate Communications