[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
ON-LINE FRAUD AND CRIME: ARE CONSUMERS SAFE?
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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
72-823 WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
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Mail: Stop SSOP, Washington, DC 20402-0001
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?
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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
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\1\ New York Times, November 12, 1999
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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
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\2\ Source: Forrester Research, Inc.,
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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