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Deceptive practices that result in financial or other losses for consumers in the course of seemingly legitimate business transactions.
Many think that consumer fraud only affects unwitting people who are all too willing to be duped. In truth, even the most savvy customer can fall victim to fraud. It may be as simple and seemingly innocuous as getting stuck paying a higher rate for a magazine subscription, or it may be as devastating as having one's identity stolen.
According to the Federal Trade Commission (FTC), consumers reported $343 million in losses from fraud in 2002. In addition to those who are unwittingly defrauded, there are a number of consumers who share at least a degree of culpability in their losses. People who try to save money on their income taxes by purchasing a new Social Security number or wage statement may become victims of fraud, but chances are that they understood that their actions were illegal, which makes them guilty of fraud as well.
Consumer fraud can take place in person, by telephone or mail, or over the Internet. As
technology continues to improve, Internet Fraud has risen faster than other types. With or without technology, however, consumers can protect themselves against fraud by following a few simple, common-sense measures such as not revealing personal information to strangers.
Following are some of the most common types of consumer fraud.
Identity theft accounts for more than 40 percent of all fraud complaints reported to the FTC. All identity theft is serious, but even in its mildest form it can involve the theft of a consumer's long-distance access code. The thief sells the code to individuals who use the code to charge long-distance calls all over the world. In its most serious form, a thief gains access to the victim's Social Security number. With this number, and some other basic information, a thief can create a double of the victim. The victim's information can be used to make purchases, to rent an apartment, or to take out bank loans. Often, victims of identity theft first find out their misfortune when they receive credit card bills totaling thousands of dollars, even though they had neither opened the accounts nor made the purchases.
Identity thieves can gain access to their victim's information by copying it off of forms (for example, if they work in an office where such information is kept), by stealing a wallet or personal papers, or by otherwise exploiting a careless individual. (Fraud experts warn people never to give their Social Security or bank account numbers to someone who has phoned them, even from a seemingly legitimate business.) Often identity thieves work in large rings that span several states, which makes it difficult to track them down. Thus, even when a theft ring is cracked, others quickly crop up to take its place.
Telephone and Mail Solicitations
To most people, junk mail and telemarketer calls are merely a nuisance, but unscrupulous companies can use both the mail and the telephone to part innocent (and not merely gullible) people from their money. Applications for credit cards or personal loans promise easy credit, but the fine print promises exorbitant interest rates. Sweepstakes promising millions in winnings await the lucky recipient, who often feels compelled to send an order for several magazines along with the prize receipt. Charities use telemarketing and mass mailings to ask for donations; while some of those charities are established and legitimate, others are dubious. Many phony charities assume names that sound like better-known organizations in the hope of fooling consumers.
Every day, people are contacted by telephone and mail with phony offers. Despite warnings from consumer-advocacy groups, people continue to provide credit card numbers, bank information, and even Social Security numbers to those whom they do not know. The elderly are a common target, in part because once they find that they have been defrauded they refuse to report the crime because they are embarrassed. Groups such as the Federal Trade Commission, the National Consumers League (NCL), and Consumers Union provide information to the general public in an effort to curtail fraud.
In 2002, several states initiated "do-not-call" programs that allow people to store their telephone numbers in a centralized database that telemarketers are prohibited from calling. A telemarketer who calls a prohibited number faces stiff fines.
The growth of the Internet as a communication tool has also meant its growth as an instrument of fraud. Internet fraud has grown so rapidly in recent years that federal bureau of investigation (FBI) and the National White Collar Crime Center launched the Internet Fraud Complaint Center, which compiles data and offers tips on ways to avoid being defrauded. In 2001, Internet fraud accounted for $17.8 million in losses, with a median loss of $435 per victim.
The most common type of fraud, accounting for nearly two thirds of all reported fraud, is Internet-auction fraud. Although there are a number of legitimate online auction houses, there are many that are simply scams. Consumers who purchase items on these sites find that the goods they bid for never existed, or that the goods are stolen, or that the seller has added numerous hidden charges. The seller might even act as a shill by placing false bids. (Some consumers jump on the fraud bandwagon, as well, by using aliases to place multiple phony high bids in order to deter low or moderate bidders.)
The Internet is also home to credit card scams, investment scams, and home-improvement scams. These may appear on web sites or they may be sent in the form of unsolicited commercial e-mail (UCE), better known as "spam." One common spam message is the "Nigerian Letter," in which a person who claims to be a former high official, usually from the Nigerian government, seeks help in converting millions of dollars in funds. The consumer is asked to provide bank account information so that the funds can be transferred to that account.
Income Tax Fraud
The Internal Revenue Service warns taxpayers to be on guard against tax scams that can result in loss of funds and, in some cases, legal difficulties. Some con artists make money at their victims' expense by claiming that they can help to secure tax refunds for their clients. Invariably, the clients must pay a fee up-front. One example of this is a company that claims it can help taxpayers find legal loopholes that will allow them to stop paying taxes. Another is a company that offers to help people submit claims for nonexistent credits. (Some African-Americans have been targeted by a "reparations" scam in which they are told they can apply for a slavery-reparations credit simply by paying a fee. No such credit exists.)
If the taxpayer knowingly engages in a scheme that is illegal (for example, signing up for a new Social Security number), he or she may face fines or imprisonment.
Education is key to combating consumer fraud. The FTC, FBI, NCL, Consumers Union, and Direct Marketing Association all work to educate the public and to identify fraudulent businesses. The Better Business Bureau is also a useful tool for consumers who wish to find out information about specific companies.
Bertrand, Marsha, 2000. Fraud! How to Protect Yourself from Schemes, Scams, and Swindles. New York: AMACOM.
U.S. Federal Trade Commission, 1997. Fighting Consumer Fraud: The Challenge and the Campaign. Washington, DC: U.S. Federal Trade Commission.