Telecommunications: Overview of the Cramming Problem (Testimony,
10/25/1999, GAO/T-RCED-00-28).

Pursuant to a congressional request, GAO discussed Internet-related
cramming, which is the inclusion of unauthorized, misleading, or
deceptive charges on a consumer's telephone bill, focusing on: (1) the
extent of cramming complaints; (2) state and federal regulatory
initiatives to protect consumers from cramming; and (3) state and
federal enforcement actions against companies engaged in cramming.

GAO noted that: (1) although there is no central source for the number
of confirmed cramming cases nationwide, GAO was able to gather
information on consumers' complaints about cramming from state and
federal regulators and major regional telephone companies; (2) overall,
GAO found that consumers' complaints to state authorities about cramming
rose dramatically from about 850 in 1996 to nearly 20,000 in 1998; (3)
while only 3 states reported receiving cramming complaints in 1996, the
total increased to 36 states by 1998; (4) at the federal level, cramming
complaints became the fourth most common type of written complaint
received by the Federal Communications Commission (FCC) and the second
most common type of complaint received by the Federal Trade Commission
(FTC) during 1998; (5) both state and federal agencies are taking steps
to protect consumers from cramming; (6) most state public utilities
commissions told GAO that they provide consumers with information on
ways to prevent cramming and have administrative procedures for
resolving complaints about telephone billing; (7) at the federal level,
FCC has developed consumer information about cramming and streamlined
the process by which consumers can file complaints; (8) FCC adopted a
new order in April 1999 requiring telephone companies to format their
bills so that consumers can more easily identify any unauthorized
charges; (9) key parts of this order are scheduled to become effective
April 1, 2000, though some outstanding issues raised by members of the
industry have not been resolved; (10) FTC also provides information to
consumers about cramming and takes their complaints; (11) in October
1998, FTC proposed new rules for combatting cramming that, among other
things, would require a consumer's express authorization before charges
other than for local or long-distance calling could be placed on the
consumer's telephone bill and would allow the consumer to dispute any
unauthorized charges; (12) public utilities commissions and attorneys
general in 16 states reported to GAO that from 1996 through 1998, they
completed 25 enforcement actions against companies or individuals for
cramming violations, resulting in over $3.5 million in penalties and
customer restitution; (13) FCC and FTC are also working with the states
and telecommunications industry to curb this abuse; and (14) FTC has
sponsored public workshops with telecommunications representatives,
consumer groups, FCC officials, the National Association of Attorneys
General, and others to address cramming and provide additional consumer
education.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-00-28
     TITLE:  Telecommunications: Overview of the Cramming Problem
      DATE:  10/25/1999
   SUBJECT:  Fraud
	     Fines (penalties)
	     Telecommunication industry
	     Consumer education
	     Consumer protection
	     Federal/state relations
	     Telephone
IDENTIFIER:  Internet

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Cover
================================================================ COVER

Before the Committee on Small Business,
U.S.  Senate

For Release
on Delivery
Expected at
1:00 p.m.  EDT
Monday
October 25, 1999

TELECOMMUNICATIONS - OVERVIEW OF
THE CRAMMING PROBLEM

Statement of Stanley J.  Czerwinski, Associate Director,
Housing and Community Development Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-00-28

GAO/RCED-00-28T

(385833)

Abbreviations
=============================================================== ABBREV

  FCC -
  FTC -
  LDDI -
  TDDRA -

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

We are pleased to be at this hearing on Internet-related cramming
directed at small businesses.  As you know, Mr.  Chairman, cramming
is the inclusion of unauthorized, misleading, or deceptive charges on
a consumer's telephone bill.  Telephone companies can cram consumers
by adding unauthorized charges for telephone-related services, such
as call messaging.  Cramming can also involve third-party vendors,
who offer products and services that are unrelated to telephone
services, such as live or recorded information about the stock
market, sports, or products; chat lines and dating services; club
memberships; and services such as Internet Web site designs. 

Our statement today is based on our July 1999 report for Senator
Susan M.  Collins, Chairman of the Senate Permanent Subcommittee on
Investigations, along with updated information that we obtained
earlier this month at your request.\1 Details of our scope and
methodology are found in appendix I.  We will discuss three topics: 
(1) the extent of cramming complaints, (2) state and federal
regulatory initiatives to protect consumers from cramming, and (3)
state and federal enforcement actions against companies engaged in
cramming.  We will also mention actions being taken by major regional
telephone companies to curb cramming. 

In summary: 

Although there is no central source for the number of confirmed
cramming cases nationwide, we were able to gather information on
consumers' complaints about cramming from state and federal
regulators and major regional telephone companies.  Overall, we found
that consumers' complaints to state authorities about cramming rose
dramatically from about 850 in 1996 to nearly 20,000 in 1998.  While
only 3 states reported receiving cramming complaints in 1996, the
total increased to 36 states by 1998.  At the federal level, cramming
complaints became the fourth most common type of written complaint
received by the Federal Communications Commission (FCC) and the
second most common type of complaint received by the Federal Trade
Commission (FTC) during 1998.  Four major regional telephone
companies reported to us that they received a combined total of about
160,000 unconfirmed cramming complaints during 1998, and a fifth
company reported substantially more than that number during 1998. 
The picture for 1999 is a mixture of declines and increases,
depending on the data source.  Both FCC and FTC are reporting
declines in their complaint rates, as are all of the major regional
telephone companies.  However, the situation at the state level
remains disturbing.  Of the 38 state public utilities commissions we
contacted this month to obtain updated information on their cramming
complaints, 18 reported declines in the number of complaints
received, but 20 reported either increases or no changes in the
number of complaints received.  In addition, 23 of the 38 commissions
noted that small businesses were being charged for Web page designs
and other Internet services that were never authorized. 

Both state and federal agencies are taking steps to protect consumers
from cramming.  Most state public utilities commissions told us that
they provide consumers with information on ways to prevent cramming
and have administrative procedures for resolving complaints about
telephone billing.  In addition, 18 of the 38 state public utilities
commissions we contacted this month reported enacting or proposing
new rules designed to combat cramming.  At the federal level, FCC has
developed consumer information about cramming and streamlined the
process by which consumers can file complaints.  In addition, FCC
adopted a new order in April 1999 requiring telephone companies to
format their bills so that consumers can more easily identify any
unauthorized charges.  Key parts of this order are scheduled to
become effective on April 1, 2000, though some outstanding issues
raised by members of the industry have not been resolved.  FTC also
provides information to consumers about cramming and takes their
complaints.  In October 1998, FTC proposed new rules for combating
cramming that, among other things, would require a consumer's express
authorization before charges other than for local or long-distance
calling could be placed on the consumer's telephone bill and would
allow the consumer to dispute any unauthorized charges.  FTC plans to
issue a final rule this winter. 

In the area of enforcement, public utilities commissions and
attorneys general in 16 states reported to us that from 1996 through
1998, they completed 25 enforcement actions against companies or
individuals for cramming violations, resulting in over $3.5 million
in penalties and customer restitution.  Eight states also reported
initiating 22 enforcement actions for cramming that had not been
finalized when we conducted our survey in early 1999.  This month we
learned that, since the beginning of 1999, 13 state attorneys general
have reported completing an additional 22 enforcement actions, none
of which were included in our July 1999 report.  These actions
resulted in at least $460,000 in penalties and customer restitution. 
As of mid-October 1999, FCC had taken one enforcement action against
cramming, and was working with FTC on another case.  FTC has taken
nine enforcement actions that have resulted in injunctions,
restraining orders, and at least $52 million in consumer credits and
restitution. 

FCC and FTC are also working with the states and telecommunications
industry to curb this abuse.  For example, in 1998, FCC sponsored a
workshop with industry representatives to develop a set of ï¿½best
practicesï¿½ for combating cramming that telephone companies could use
in developing their own anticramming procedures.  The major regional
telephone companies recently reported that they have a variety of
measures in place to combat cramming, including several of the ï¿½best
practicesï¿½ developed at the FCC-sponsored workshop.  FTC has also
sponsored public workshops with telecommunications representatives,
consumer groups, FCC officials, the National Association of Attorneys
General, and others to address cramming and provide additional
consumer education. 

--------------------
\1 Telecommunications:  State and Federal Actions to Curb Slamming
and Cramming (GAO/RCED-99-193, July 27, 1999). 

   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Cramming is the inclusion on consumers' telephone bills of charges
that they did not knowingly authorize.  Unauthorized charges can
originate in a variety of ways.  For example, a consumer may call a
vendor's advertised number to receive information or a service. 
Having obtained the consumer's name and telephone number, the vendor
may then levy a hidden or deceptive charge, even a recurring monthly
charge, that the consumer did not know about and did not authorize. 
A consumer's name and telephone number can also be obtained through
sweepstakes entry forms, which may include some obscurely worded fine
print authorizing charges to be placed on the consumer's telephone
bill.  Some vendors apparently have simply lifted names and numbers
from telephone directories to charge businesses for nonexistent
services. 

In order to have charges placed on a consumers' telephone bills,
vendors typically use the services of companies called ï¿½billing
aggregators,ï¿½ which bundle billing information from many vendors. 
Billing aggregators contract with telephone companies to have the
vendors' charges included as part of the consumers' telephone bills. 

The format of telephone bills can make it hard for consumers to
recognize that they have been crammed, especially when the charges
are identified only by nondescript phrases, such as ï¿½monthly fee,ï¿½
ï¿½membership fee,ï¿½ or ï¿½service charge.ï¿½ The bills may not even clearly
identify the names of the vendors charging for these services, making
it difficult for consumers to contact them directly to have the
charges explained or removed. 

Both state and federal agencies are responsible for protecting
consumers from cramming and for taking regulatory and legal
enforcement actions against entities engaged in this abuse.  At the
state level, public utilities commissions are responsible for
regulating intrastate telephone services and resolving consumers'
complaints, while attorneys general are responsible for resolving
consumers' complaints about unfair and deceptive marketing practices. 
At the federal level, FCC's authority is focused on preventing
cramming by common carriers (telephone companies) engaged in common
carrier activities, while FTC's authority is focused on preventing
cramming by companies that are not common carriers, such as
third-party vendors that charge for their services through telephone
bills.  The Congress has, in some limited circumstances, granted FTC
concurrent authority with FCC to establish rules concerning certain
areas of telephone billing and collection. 

Consumers who are the victims of cramming can attempt to resolve the
problem by directly contacting their telephone company or the vendor
involved.  They can also file a complaint with their state public
utilities commission or their state attorney general's office.  These
two state-level bodies may attempt to resolve the complaint
informally, or they may take formal regulatory or legal action, as
authorized by state statute, against the offending company.  In
addition, consumers can send complaints about cramming to both FCC
and FTC.  Each complaint that FCC receives is sent to the appropriate
company.  The company in turn sends its response to the complaint to
both FCC and the affected consumer.  On the basis of these
complaints, FCC investigates patterns of cramming and takes
enforcement actions when appropriate.  FTC uses the cramming
complaints it receives, along with complaint data provided by
state-level sources and other contributors to its complaint database,
to take law enforcement actions against individuals and companies
engaged in this abuse. 

   CRAMMING COMPLAINTS TO STATE
   AND FEDERAL AUTHORITIES
---------------------------------------------------------- Chapter 0:2

The number of cramming complaints received by state and federal
agencies increased dramatically from 1996 through 1998 (see table 1). 
In 1996, only three states reported receiving complaints about
cramming.  In 1997, 16 states received a total of 1,188 cramming
complaints.  By the end of 1998, 36 states had received 19,543
complaints about this abuse.  The situation is similar at the federal
level.  FCC and FTC have seen cramming emerge as a major problem as
the number of cramming complaints to both agencies sharply increased
from 1997 to 1998.  In 1998, cramming became the fourth most common
cause of written complaints received by FCC and the second most
common cause of complaints received by FTC.\2

                                Table 1
                
                 Number of Cramming Complaints Reported
                 to State Public Utilities Commissions,
                FCC, and FTC for Calendar Years 1996-98

                              Cramming
                            complaints        Cramming
                           received by      complaints        Cramming
                          state public     received in      complaints
                             utilities      writing by     received by
Calendar year              commissions           FCC\a           FTC\b
----------------------  --------------  --------------  --------------
1996                               852               0             221
1997                             1,188               0           3,173
1998                            19,543           4,558           9,827
----------------------------------------------------------------------
\a A consumer may call FCC's National Call Center with either an
inquiry or a complaint.  While FCC keeps track of inquiries and
complaints received by the Call Center for trend and analytical
purposes, it did not, until recently, take action until a consumer
had submitted a written complaint, accompanied by bills and any other
supporting documentation.  These FCC numbers reflect written
complaints only. 

\b The numbers for FTC include complaints received by mail,
telephone, and the Internet. 

Sources:  State public utilities commissions' responses to GAO's
survey and data from FCC and FTC. 

The numbers in table 1 do not capture complaints about cramming that
consumers tried to resolve by dealing directly with their telephone
company or third-party vendor without filing a complaint with state
or federal authorities.  At present, there is no central source of
data on verified cases of cramming.  During early 1999, we contacted
major regional telephone companies to obtain data directly from them
on the number of cramming complaints they received during 1998.\3 The
results we obtained were incomplete and highly qualified.  Several
companies told us that they did not begin tracking cramming
complaints until the middle of 1998 and that, in any event, their
numbers represented unverified complaints, which may prove to be
unwarranted upon investigation.  Four companies reported a combined
total of about 160,000 unverified cramming complaints for all or part
of 1998, and a fifth company reported substantially more than that
number. 

The situation for 1999 is a mixture of declines and increases,
depending on the data source.  At the federal level, FCC reported
2,929 cramming complaints from January 1999 through September 1999,
and FTC reported 5,153 cramming complaints.  For both agencies, these
numbers for the first 9 months of 1999 represent a downward trend
from 1998 levels.  Major regional telephone companies are also
reporting declines in cramming complaint levels, according to
information they provided to FCC this summer.  The companies
attributed their improved numbers to actions they have taken to crack
down on cramming. 

At the state level, the complaint numbers remain disturbing.  We
contacted 38 state public utilities commissions this month to obtain
updates on their cramming complaints.  While 18 states reported
declines in the number of complaints received, 20 states reported
either increases or no changes in the number of complaints
received.\4 In addition, 23 of the 38 states noted that small
businesses were being charged for Web site designs and other Internet
services that were never authorized.  The offices of attorney general
in North Carolina and North Dakota have begun to track this type of
cramming as a separate category. 

--------------------
\2 The data in table 1 have some important qualifications.  The
complaint numbers do not equate to verified cramming incidents, since
a complaint could prove to be unwarranted upon investigation.  For
example, a customer might misinterpret a legitimate service charge
and mistakenly complain about being crammed.  Also, adding state and
federal complaint numbers together could result in some
double-counting because consumers can complain to both state and
federal authorities about a single cramming incident. 

\3 The regional companies consider the cramming data provided to us
to be proprietary.  To protect the confidentiality of the data, we
agreed to report only cumulative totals for all companies.  The
companies included Ameritech, Bell Atlantic, BellSouth, SBC
Telecommunications, and US WEST.  We did not attempt to gather data
from hundreds of smaller local service providers. 

\4 The public utilities commissions reporting declines in cramming
complaint levels were Alabama, Arizona, Delaware, Florida, Idaho,
Illinois, Indiana, Maryland, Michigan, Montana, Nevada, Ohio, Oregon,
Pennsylvania, Texas, Vermont, Wisconsin, and Wyoming.  The public
utilities commissions reporting increases in cramming complaint
levels were Iowa, Missouri, North Carolina, Oklahoma, Rhode Island,
South Carolina, South Dakota, Tennessee, Utah, and Virginia.  The
public utilities commissions in Arkansas, Connecticut, Hawaii,
Louisiana, Maine, Massachusetts, Minnesota, Mississippi, New
Hampshire, and Washington reported that the number of cramming
complaints they received in 1999 was about the same as they had
received in 1998. 

   CONSUMER PROTECTIONS AGAINST
   CRAMMING
---------------------------------------------------------- Chapter 0:3

Both the states and the federal government have taken action to help
protect consumers against cramming.  Most states have some
protections against cramming, and many are making efforts to alert
consumers to cramming and provide guidance on dealing with this
abuse.  At the federal level, FCC adopted a new order in April 1999
(ï¿½Truth-in-Billingï¿½) to combat cramming.  This order requires
telephone bills to clearly identify all charges and highlight any
changes in service so that consumers can more easily spot
unauthorized charges.  FTC has also proposed regulatory changes that
would address cramming by, among other things, requiring a consumer's
express authorization to charge for services other than local or
long-distance calling, enhancing the consumer's right to dispute
unauthorized charges, and imposing liability on those engaged in
cramming. 

      STATE-LEVEL CONSUMER
      PROTECTIONS AGAINST CRAMMING
-------------------------------------------------------- Chapter 0:3.1

In early 1999, 41 state public utilities commissions reported to us
that they had initiated some actions to help prevent cramming.  These
actions included providing consumers with educational brochures and
information on Internet sites and establishing procedures for
handling cramming complaints.  Some state commissions reported that
they refer cramming complaints to FCC.  In addition, a few state
commissions reported taking additional actions to increase their
ability to protect consumers from cramming.  For example, during
1998, Illinois passed legislation that in part enhanced the
enforcement actions the Illinois Commerce Commission can take to
protect customers from telephone cramming.  Specifically, the
legislation gave the Commission the authority to fine an offending
company up to $1,000 for each repeated and intentional cramming
violation as well as revoke the company's certificate to provide
service in the state.  In addition, the Tennessee Regulatory
Authority implemented new regulations in 1998 against cramming that
require the prior consent of an authorized individual before charges
for additional services can be placed on the telephone bill.  The
Authority can assess a maximum fine of $100 per day, per offense,
against a company engaging in cramming.  The California Public
Utilities Commission and the Indiana Utility Regulatory Commission
also recently implemented rules detailing the types of information
required before charges for other services can be added to a
consumer's telephone bill.  In addition, 18 of the 38 public
utilities commissions we contacted this month stated that their
states had either enacted or proposed new rules to combat cramming.\5

--------------------
\5 These states include Alabama, Florida, Illinois, Indiana, Iowa,
Maine, Maryland, Massachusetts, Montana, New Hampshire, Oklahoma,
Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia, and
Washington. 

      FEDERAL CONSUMER PROTECTIONS
      AGAINST CRAMMING
-------------------------------------------------------- Chapter 0:3.2

Both FCC and FTC have undertaken rulemakings to provide consumers
with greater protections against cramming.  They have also increased
their consumer education efforts and are making it easier for
consumers to file complaints about this abuse. 

         FCC'S ï¿½TRUTH-IN-BILLINGï¿½
         ORDER TO HELP COMBAT
         CRAMMING
------------------------------------------------------ Chapter 0:3.2.1

According to FCC, over 60,000 consumers made inquiries to the agency
in 1998 about the confusing format of their telephone bills.  FCC
believes that this confusion is contributing to the rise in cramming
because consumers are having difficulty detecting unauthorized
charges.  On April 15, 1999, FCC adopted its ï¿½Truth-in-Billingï¿½
order, which establishes principles and guidelines to make telephone
bills easier for customers to understand.\6 The new rule, which FTC
commented on and supports, requires that telephone bills (1) clearly
identify who is responsible for each charge, (2) include full and
nonmisleading descriptions of the services being billed, and (3)
provide telephone numbers for consumers to call for more information
about specific charges on their bills. 

This new order was originally to go into effect earlier this year. 
However, in September 1999, FCC announced that the implementation
date for parts of the order was being postponed until April 1, 2000. 
This date applies to compliance with the requirement that common
carriers highlight new service providers and identify deniable and
nondeniable charges.  All other deadlines under the rule, including a
requirement that common carriers separate charges on bills by service
provider, take effect 30 days after the notice's publication in the
Federal Register on October 12, 1999.  FCC stated that the
postponement came about because the Office of Management and Budget
raised concerns that the original implementation date could impair
the ability of some telephone companies, especially small and
medium-sized ones, to ensure that their computer systems were Year
2000 compliant.\7 FCC has also received several petitions for
waivers, stays, and other forms of relief from the guidelines adopted
in the order and continues to work to resolve these issues. 

--------------------
\6 "Truth-in-Billing and Billing Format,ï¿½ CC Docket No.  98-170, FCC
99-72 (rel.  May 11, 1999). 

\7 The Year 2000 problem is rooted in how dates are recorded and
computed.  For the past several decades, systems have typically used
two digits to represent the year, such as ï¿½98ï¿½ for 1998, to save
electronic storage space and reduce operating costs.  In this
two-digit format, however, 2000 is indistinguishable from 1900. 
Because of this ambiguity, date-dependent software, firmware, and
hardware could generate incorrect results or fail to operate
altogether when processing years beyond 1999. 

         FTC'S PROPOSED REVISION
         TO THE ï¿½PAY-PER-CALLï¿½
         RULE
------------------------------------------------------ Chapter 0:3.2.2

FTC is also taking action to combat cramming.  Under a proposed
revision to its ï¿½Pay-per-Callï¿½ rule, FTC has laid out a fourfold
approach to cramming.\8 First, a consumer's express authorization
generally would be required for purchases unrelated to local or
long-distance telephone service that are billed to the consumer's
telephone account.  Second, a vendor would be prohibited from placing
monthly or other recurring charges for pay-per-call service on a
telephone bill without prior agreement with the customer billed for
the service.  Third, consumers would have the legal right to dispute
unauthorized charges ï¿½crammedï¿½ onto their telephone bills and to have
these charges removed.  Finally, dispute resolution protections would
be provided for all transactions that resulted in the placement of
nontoll charges on a customer's telephone bill.  Violators would be
liable for civil penalties, currently $11,000 per violation.  FTC
officials currently expect to issue a final rule sometime this
winter. 

--------------------
\8 Under the authority of the Telephone Disclosure and Dispute
Resolution Act of 1992, FTC adopted its Pay-per-Call rule to curtail
the unfair and deceptive practices engaged in by some pay-per-call
businesses.  16 C.F.R.  part 308.  At that time, pay-per-call
services were generally provided via ï¿½900ï¿½ numbers that were billed
directly to a consumer's local telephone company.  Since then,
ï¿½telephone-billed purchasesï¿½ have expanded beyond simply ï¿½900ï¿½
numbers.  The Telecommunications Act of 1996 authorized FTC, through
its rule, to extend the definition of the term ï¿½pay-per-call
service.ï¿½ On October 30, 1998, FTC published a notice of proposed
rulemaking to revise the rule.  63 Fed.  Reg.  58524.  Part of this
revision focuses on cramming. 

         FEDERAL
         COMPLAINT-REPORTING AND
         EDUCATION INITIATIVES
------------------------------------------------------ Chapter 0:3.2.3

FCC and FTC are augmenting their regulatory efforts with expanded
consumer outreach and education, which are key elements in combating
cramming.  FCC is making it easier for consumers to submit complaints
about cramming.  In the past, FCC required consumers to submit
complaints in writing before it took action on them.  Since January
1999, consumers have been able to file complaints electronically via
FCC's Internet Web site.  And in June 1999, operators at FCC's
National Call Center started taking consumers' complaints over the
telephone and electronically submitting them for action directly to
FCC's Common Carrier Bureau.  In response to each complaint, the
Bureau electronically issues an ï¿½Official Notice of Informal
Complaintï¿½ to all companies identified in the complaint.\9 A served
company has 30 days to respond to FCC.  FCC is also automating some
of its old manual processes for handling consumers' complaints in
order to shorten its response time.  In addition, FCC is bolstering
its customer education efforts by making information about cramming
available on its public Internet Web site.  FCC is in the process of
establishing a centralized Consumer Information Bureau to be more
responsive to consumers' concerns and requests for information.  It
is also in the process of establishing a centralized Enforcement
Bureau to better marshal its resources for taking actions against
entities that violate its rules. 

FTC has expanded its efforts to educate consumers about telephone
billing abuses by creating a Web page on cramming and has formed a
telecommunications working group to develop consumer education
publications.  These materials emphasize that a consumer does not owe
a payment for unauthorized (crammed) services just because the call
for the service may have been placed from his or her home.  In 1999,
FTC added a toll-free number for consumers to call with complaints
about cramming and other abuses and to obtain information on how to
avoid such problems.  FTC's database system, called the Consumer
Sentinel, also contains details on over 210,000 consumer complaints
on all topics, including complaint data provided by a variety of
organizations, such as Better Business bureaus, state attorneys
general, the National Fraud Information Center, Phone Busters, and
private companies.  FTC uses the database to develop enforcement
strategies against companies engaged in abusive trade practices,
including cramming.\10

--------------------
\9 The issuance of a notice of informal complaint does not
necessarily indicate wrongdoing by the served company. 

\10 Over 170 law enforcement agencies in the United States and Canada
also have access to this database to assist them in their own
consumer protection efforts. 

   STATE AND FEDERAL ENFORCEMENT
   ACTIONS AGAINST CRAMMING
---------------------------------------------------------- Chapter 0:4

Both state and federal enforcement actions against companies engaged
in cramming have resulted in financial penalties, restitution, and
discontinued operations. 

      COMPLETED STATE ENFORCEMENT
      ACTIONS, 1996-98
-------------------------------------------------------- Chapter 0:4.1

As of the end of 1998, 16 states had successfully completed 25
enforcement actions against companies and individuals engaged in
cramming that have resulted in over $3.5 million in fines and other
penalties.  In each of these cases, the public utilities commission
and/or the attorney general's office participated in a formal hearing
against the violator that resulted in a final disposition or
resolution of the case. 

Usually, the accused company or individual was ordered to resolve the
complaint by providing consumers with some restitution, paying a
penalty, or providing an assurance that the cramming would stop.  As
shown in table 2, the 16 states ordered companies to pay at least
$1.7 million in customer restitution\11 and $1.8 million in penalties
and fines.\12 These completed enforcement actions affected at least
42,000 consumers.  These totals, however, understate the actual
outcomes of these actions because the survey responses of state
public utilities commissions and attorneys general did not always
include the number of consumers affected or the amount of customer
restitution and penalties involved. 

                                Table 2
                
                 Completed Enforcement Actions Taken by
                 State Public Utilities Commissions and
                 State Attorneys General for Cramming,
                                1996-98

                                                     Total       Total
                         Number of               amount of   amount of
                         completed   Number of    customer   penalties
                        enforcemen   customers  restitutio   and fines
State                    t actions    affected  n reported    reported
----------------------  ----------  ----------  ----------  ----------
California                       2    30,000\a    $650,000     $25,000
Florida                          3           2         579      21,000
Georgia                          1          \a
Idaho                            1           5          \b       1,500
Illinois                         1          57     500,000      20,000
Kentucky                         1          \a                   2,000
Missouri                         2          \a          \b          \c
New York                         3         172    67,000\b     129,000
North Carolina                   1          \a          \b     273,000
Oregon                           3          \a                  14,350
Pennsylvania                     2          \a          \b   1,002,500
Rhode Island                     1          14         400      35,000
South Dakota                     1           1         229
Tennessee                        1      11,878          \b     280,000
Virginia                         1          \a     435,000      15,000
Wisconsin                        1          \a      40,000      25,000
======================================================================
Total                           25      42,129  $1,693,208  $1,843,350
----------------------------------------------------------------------
\a The number of customers affected was not provided in at least one
of the reported actions. 

\b Restitution was ordered to be paid in at least one of the reported
actions, but the specific amount was not provided. 

\c A penalty was ordered to be paid in at least one of the reported
actions, but the specific amount was not provided. 

Sources:  State public utilities commissions' responses to GAO's
survey and responses of state attorneys general to a survey from the
National Association of Attorneys General. 

In addition to these completed cases, three state public utilities
commissions and five state attorneys general reported initiating 22
other enforcement actions against entities engaged in cramming. 
These actions had not been finalized when we conducted our survey in
early 1999.\13 This month we learned that, since the beginning of
1999, 13 state attorneys general reported completing an additional 22
enforcement actions, none of which were included in our July 1999
report.\14 These actions resulted in at least $460,000 in penalties
and customer restitution.  Four of the 38 public utilities
commissions we contacted this month also reported five more pending
enforcement actions for telephone cramming.\15

--------------------
\11 Customer restitution can include a complete or partial refund of
the money consumers paid for unauthorized services. 

\12 Penalties and fines include charges to cover the costs of court
proceedings and investigations.  In some cases, the penalties and
fines were used to cover the costs of consumer education campaigns. 

\13 The state public utilities commissions in Florida, Maine, and
West Virginia, and the attorneys general in Illinois, Missouri, New
Jersey, Ohio, and Wisconsin reported the pending cramming enforcement
actions. 

\14 The attorneys general in Arkansas, Florida, Idaho, Illinois,
Kansas, Michigan, New Jersey, North Carolina, Ohio, Oregon,
Pennsylvania, Tennessee, and Texas reported these completed
enforcement actions. 

\15 The state public utilities commissions in Florida, Mississippi,
North Carolina, and Tennessee reported the most recently pending
cramming enforcement actions. 

      FEDERAL ENFORCEMENT ACTIONS
      AGAINST CRAMMING
-------------------------------------------------------- Chapter 0:4.2

At the federal level, both FCC and FTC have taken enforcement actions
against entities engaged in cramming.  FCC and FTC, however, operate
under different statutory schemes and generally have different
remedies available.\16 As a regulatory agency, FCC has several tools
for achieving its enforcement goals.  These include administrative
remedies, such as revoking a company's operating authority, issuing a
cease and desist order, and assessing civil monetary penalties
(forfeitures).  As a law enforcement agency, FTC pursues cramming in
federal district courts, seeking temporary and permanent injunctive
relief and, ultimately, restitution for affected customers.  FTC can
also take administrative enforcement action, such as convening a
trial before an administrative law judge. 

FCC has brought an enforcement action against one common carrier,
Long Distance Direct, Inc.  (LDDI) for violations related to both
cramming and slamming.  (Slamming involves switching a consumer's
telephone service provider without the consumer's authorization.)
LDDI allegedly changed consumers' long distance service providers to
LDDI and billed consumers for ï¿½membership feesï¿½ simply on the basis
of the consumers' calls to a ï¿½psychic hotlineï¿½ service.  In some
cases, there was no evidence of contact with the affected consumer. 

FTC has brought nine cramming cases to court since April 1998 that
have resulted in at least $52 million in consumer credits and
restitution.\17 These cases involve 22 companies, including billing
aggregators and vendors.  In eight cases, FTC has sought and
successfully obtained preliminary or permanent injunctions, or
temporary restraining orders, to stop these companies' cramming
activities.  In addition, FTC is seeking restitution for the
unauthorized charges that these companies collected from consumers. 
According to FTC officials, these unauthorized charges range from
$4.7 million in one case to almost $40 million in another case.  Of
the nine cases brought to district court, four cases have been
settled with substantial redress.  The case involving Interactive
Audiotext Services, Inc., resulted in approximately $11 million in
consumer restitution and compliance provisions, including a 3-year
record-keeping requirement for the company.  In the second case,
involving American Telnet, Inc., the parties have agreed to $39.7
million in consumer restitution and changes in their business
practices.  In the third case, Hold Billing Services, Ltd., agreed to
$1.6 million in consumer redress.  The fourth case, which involved
unauthorized charges to small businesses for Web site services that
were purportedly free for a trial period, was just settled earlier
this month with the company, U.S.  Republic Communications, Inc.  The
other five cases were still in various stages of discovery and
negotiation as of October 1999.  Additional details on these cases
are found in appendix II. 

Officials at both FCC and FTC told us that they have several
additional investigations in progress, including one joint
investigation.  They expect to take more enforcement actions against
cramming before the end of this year.  They also told us that they
are working with their state counterparts to efficiently combat
cramming.  For example, the two federal agencies share complaint data
with each other and the states.  FCC and the National Association of
Regulatory Utility Commissioners are also working to coordinate their
enforcement actions and jointly disseminate educational materials on
telecommunications issues affecting consumers.  Both FCC and FTC
officials told us that they regularly participate in conference calls
with representatives from the state public utilities commissions and
attorneys general, respectively, to discuss telecommunications
issues, including cramming. 

--------------------
\16 Under the Communications Act of 1934, as amended, FCC has general
authority to prohibit carriers that provide interstate services
(telephone companies) from engaging in unjust and unreasonable
practices, such as cramming.  47 U.S.C.  201(b).  FTC, under the
Federal Trade Commission Act, as amended, has the authority to pursue
law enforcement actions against unfair and deceptive acts or
practices.  15 U.S.C.  45(a).  Common carriers (i.e., telephone
companies) subject to the Communications Act of 1934, as amended, are
exempt from FTC's statutory mandate under the Federal Trade
Commission Act.  15 U.S.C.  45(a)(2).  FTC has taken the position
that the statutory common carrier exemption does not shield the
non-common-carrier activities of an entity that may otherwise engage
in some common-carrier activities under another statute. 

\17 FTC's Fighting Consumer Fraud:  The Case Against Cramming, June
1999, discusses its actions against cramming. 

   INDUSTRY ACTIONS TO CURB
   CRAMMING
---------------------------------------------------------- Chapter 0:5

FCC and FTC officials also noted that that they are working with
members of the telecommunications industry to curb cramming.  For
example, in May 1998, FCC sponsored a workshop, attended by
representatives of the telephone industry, to develop a set of
voluntary guidelines on ï¿½best practicesï¿½ in combating cramming that
individual companies could consider implementing.  These best
practices cover issues such as screening products and service
providers to identify programs that may be deceptive or misleading,
establishing procedures for verifying that charges have been
authorized by the consumer, and establishing a dispute resolution
process.  In addition, FTC has sponsored public workshops with
industry representatives, consumer groups, FCC officials, the
National Association of Attorneys General, and others to address
cramming and provide additional consumer education. 

Earlier this year, several major local and long-distance telephone
companies provided us with information on initiatives they have
undertaken to deal with cramming.  Among them are the following: 

  -- Using brochures, press releases, and Web sites to educate
     customers on what constitutes cramming, what their rights are,
     and what steps they can take if they have been victims of
     cramming. 

  -- Limiting billing to vendors engaged in
     telecommunications-related services. 

  -- Eliminating billing for certain products and services
     susceptible to abuse by third-party service providers, such as
     prepaid calling cards and debit cards. 

  -- Eliminating billing for recurring monthly service charges
     associated with pay-per-call 900 number services or charges for
     services accessed via 800 and 888 numbers, which are widely
     associated in the public's mind with toll-free calling. 

  -- Refusing to bill on behalf of programs that use sweepstakes or
     ï¿½check boxï¿½ methods to sign up customers. 

  -- Requiring information providers to provide clearer billing
     descriptions, toll-free numbers for complaints, and procedures
     for handling complaints. 

  -- Requiring information providers to provide a notarized affidavit
     attesting to the validity of their descriptions and billings;
     requiring billing aggregators to sign an affidavit certifying
     that the third-party charges they are submitting are authorized
     by the consumer. 

The companies maintain that measures such as these (which reflect
several of the FCC workshop's ï¿½best practicesï¿½) have been effective
in combating cramming, as evidenced by the generally declining volume
of cramming complaints that they reported receiving during 1999. 

-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, this concludes my prepared remarks.  We would be
pleased to respond to questions that you and Members of the Committee
may have at this time. 

   CONTACT AND ACKNOWLEDGEMENTS
---------------------------------------------------------- Chapter 0:6

For information about this testimony, please contact Stan Czerwinski
at (202) 512-7631.  Individuals making key contributions to this
testimony include John Finedore, Mindi Weisenbloom, Mike Volpe, Terri
Russell, Martha Chow, Faye Morrison, Ed Warner, and James Sweetman. 

=========================================================== Appendix I

   OBJECTIVE, SCOPE, AND
   METHODOLOGY
--------------------------------------------------------- Appendix I:1

Our objective for this testimony was to provide general background
information on cramming and efforts to combat it.  We based our
testimony largely on the work we did for our recent report,
Telecommunications:  State and Federal Actions to Curb Slamming and
Cramming (GAO/RCED-99-193, July 27, 1999).  The objectives of that
report were to describe the (1) number of complaints about slamming
and cramming received by state and federal authorities, (2) types of
protections implemented by state and federal authorities to increase
consumers' ability to protect themselves against slamming and
cramming, and (3) state and federal enforcement actions taken against
slamming and cramming violations from 1996 through 1998. 

To determine the states' actions to combat cramming, we administered
a survey to the public utilities commissions in the 50 states and the
District of Columbia early in 1999.  This survey collected
information on the types of consumer protections offered by the
states, the number of cramming complaints received, and details on
each of the formal enforcement actions taken by the commissions from
1996 through 1998.  The National Association of Attorneys General
collected similar information about formal enforcement actions taken
by each state's attorney general.  We assisted in collecting this
information.  In addition, we reviewed relevant FCC and FTC documents
and met with officials of these agencies to discuss their efforts in
developing regulations to combat cramming and their enforcement
actions against those engaging in this abuse.  We also contacted
regional Bell operating companies and major long-distance companies
for data on cramming complaints and descriptions of their initiatives
to curb cramming. 

During October 1999, we obtained updated information on cramming
complaints and enforcement actions from FCC, FTC, and 38 state public
utilities commissions.  We also obtained an update on cramming
enforcement actions reported by some state attorneys general to the
Illinois Office of Attorney General.  To update cramming complaint
data from major regional telephone companies, we relied on their
responses to a July 1999 request by FCC for information on their
anticramming initiatives and current complaint levels. 

Our initial review, performed from December 1998 through June 1999,
and our October 1999 update were conducted in accordance with
generally accepted government auditing standards. 

FTC'S ENFORCEMENT ACTIONS AGAINST
CRAMMING
========================================================== Appendix II

The Federal Trade Commission (FTC) protects consumers by taking law
enforcement actions against unfair or deceptive acts or practices.\1
According to FTC officials, the Telephone Disclosure and Dispute
Resolution Act (TDDRA) of 1992, as amended, gives FTC the authority
to regulate all ï¿½telephone-billed purchasesï¿½ that are distinct from
charges for the transmission of local or long-distance telephone
calls.\2

FTC seeks and obtains temporary restraining orders, preliminary
injunctions, permanent injunctions, and other equitable relief, such
as the appointment of receivers, to halt unfair or deceptive
practices and to reserve the offending companies' assets for consumer
restitution. 

Between April 1998 and October 1999, FTC filed nine cases against 22
companies for cramming violations.  In some instances, FTC entered
into court-approved settlements with the companies.  Table II.1
provides details on the publicly filed enforcement actions that FTC
took during this period. 

                                        Table II.1
                         
                         FTC's Publicly Filed Cramming Cases, as
                                     of October 1999

                                                                         Comments and
                                     Amount of                           additional
Company            Date of action    suspect billing   Status            information
-----------------  ----------------  ----------------  ----------------  ----------------
Interactive        4/22/98, in U.S.  $11 million       Permanent         Settlement
Audiotext          District Court                      injunction;       entered as final
Services, Inc.     for the Central                     about $11         order; redress
Includes American  District of                         million in        phase under way
Billing and        California;                         restitution to    and changes
Collection         amended filing                      consumers.        required in
Services, U.S.     on 5/28/98.                                           business
Interstate                                                               practices.
Distributing,
Inc.; and
Allstate
Communications
(parent company).

International      7/10/98, in U.S.  $17,100,000       Temporary         Bankruptcy court
Telemedia          District Court                      restraining       has appointed a
Associates, Inc.   for the Northern                    order with        trustee for ITA;
(ITA); and Online  District of                         freezing of       ITA is closed
Consulting Group   Georgia.                            Online's assets   down and trustee
(vendor for ITA).                                      and preliminary   is winding up
                                                       injunction;       its business
                                                       receiver          affairs.
                                                       appointed to      Receiver is
                                                       manage Online.    closing down
                                                                         Online after
                                                                         deciding that it
                                                                         could not be run
                                                                         as a lawful
                                                                         business.

Hold Billing       7/16/98, in U.S.  $4.7 million      Permanent         Settlement
Services, Ltd.;    District Court                      injunction on 9/  entered as final
HBS Inc.; Avery    for the Western                     22/99; $1.6       order.
Communications     District of                         million in
(all closely       Texas.                              consumer
related companies                                      redress.
that are
aggregators); and
Veterans of
America
Association, Ltd.
(VOAA) (vendor).

Communications     12/22/98, in      Not yet           Not yet           Formal discovery
Concepts and       U.S. District     determined;       determined.       and negotiations
Investments, Inc.  Court for the     formal discovery                    are under way.
d/b/a Crown        Southern          is under way.
Communications     District of
and Crown          Florida.
Communications
Two, Inc.; and
Global
Collections, Inc.
(Crown's in-
house collection
agency).

Shared Network     6/7/99, in U.S.   Not yet           Stipulated        Resolution not
Services, LLC, d/  District Court    determined.       preliminary       yet determined.
b/a Shared         for the Eastern                     injunction;
Network Services   District of                         discovery is
and 1\st Page      California.                         under way.

Wazzu Corporation  6/7/99, in U.S.   Not yet           Temporary         Resolution not
                   District Court    determined.       restraining       yet determined.
                   for the Central                     order; discovery
                   District of                         is under way.
                   California.

American Telnet,   6/8/99, in U.S.   $39.7 million     Permanent         The parties have
Inc.               District Court                      injunction;       agreed to $39.7
                   for the Southern                    complaint and     million in
                   District of                         consent filed     forgiven charges
                   Florida.                            together.         and redress to
                                                                         consumers, and
                                                                         changes required
                                                                         in business
                                                                         practices.

Web Valley, Inc.;  7/4/99, in U.S.   $9 million        Preliminary       Resolution not
Profile National   District Court                      injunction.       yet determined.
Business           for Minnesota.
Directory, Inc.;
National Business
Directory, Inc.;
Protel Advantage,
Inc.; U.S. Protel

U.S. Republic      10/14/99, in      To be             Complaint and     Up to 124,000
Communications,    U.S. District     determined.       final consent     consumers may
Inc.; T. Gary      Court for the                       filed together.   receive redress
Remy               Southern                                              as a result of
                   District of                                           this settlement;
                   Texas.                                                changes required
                                                                         in business
                                                                         practices.
-----------------------------------------------------------------------------------------
Source:  FTC

--------------------
\1 Common carriers (i.e., telephone companies) subject to the
Communications Act of 1934, as amended, are exempt from FTC's
statutory mandate under the Federal Trade Commission Act.  15 U.S.C. 
45(a)(2).  FTC has taken the position that the statutory common
carrier exemption does not shield the non-common-carrier activities
of an entity that may otherwise engage in some common-carrier
activities under another statute. 

\2 Under TDDRA, the term ï¿½telephone-billed purchaseï¿½ includes any
purchase that is completed solely as a consequence of the completion
of a telephone call, or the subsequent dialing or comparable action
of the caller.  The term specifically excludes all ï¿½local exchangeï¿½
or interexchange telephone service. 

*** End of document. ***