Internet Fraud Hearings Underway

Internet service providers may have to monitor online fraud voluntarily if they wish to avoid federal laws requiring them to do so.

The U.S. Senate Governmental Affairs Permanent Subcommittee on Investigations held its first in a series of hearings about Internet fraud Tuesday.

“If the companies don’t police themselves, they’re going to get policed,” warned Sen. John Glenn, D-Ohio, ranking minority member on the subcommittee.

Glenn said the hearing was intended to build public awareness of online schemes and help determine what degree of responsibility for fraud should fall to ISPs, such as whether ISPs should be legally required to screen commercial sites or levy extra fees on those who want to send unsolicited commercial e-mail.

Glenn said he lacked optimism for self-regulation since it didn’t work with banks, securities, auto dealers, and doctors. When even the leaders of the Internet industry are hauled up by legal authorities, as AOL has been scrutinized regarding pricing issues, “we’ve got a major problem,” Glenn said.

Tatiana Gau, vice president of integrity assurance for AOL, told the subcommittee that AOL has corrected its behavior and has also encouraged its members to notify AOL of scams and provided guidelines for reporting fraud.

Federal Trade Commission Chairman Robert Pitofsky said the FTC will need more people and money to address cyberspace protection, an agency effort that has already quadrupled its resources since 1996. There are 53 people working on Net fraud at the FTC, Pitofsky said.

“I think in the long run, it may well be that Congress is going to have to act in this area as it did in the area of telemarketing” Pitofsky said.

The Web industry has made promises of self-regulation but so far there hasn’t been a great deal of constructive evidence of forward movement, Pitofsky said. If industry promises go unmet, there’s all the more reason to legislate and regulate, Pitofsky said.

The FTC has already brought 25 federal actions against deceptive or fraudulent activity on the Net and conducted eight Internet “surf” days to target specific schemes. Last week, the FTC warned 1,000 commercial e-mailers that they may be involved in deceptive practices.

In the largest Net pyramid scheme prosecuted yet, Fortuna Alliance allegedly promised consumers that they would profit over $5,000 per month for a payment of $250. A court ordered reimbursement for more than 8,600 Fortuna members.

Barry Wise, a certified public accountant from Matthews, N.C., described his investment with Fortuna Alliance in which he lost $4,950 in a pyramid scheme that has not yet been refunded to him. Wise learned he was a victim after seeing an FTC alert on the Web when he trolled a search engine on the keyword, “fraud.”

“I was mainly taken in with the 90-day moneyback guarantee which I now know as meaningless,” Wise said in testimony.

Another enforcement action against Credit Development International allegedly bilked over 30,000 consumers out of $3 million to $4 million in a scam promising an unsecured credit card and opportunity to earn $18,000 a month.

The FTC’s teaser Web sites are aimed at educating consumers about fraudulent sites by luring them with promises of easy money, then warning them, “If you responded to an ad like this, you could get scammed.” Between 100 and 200 Internet-related complaints reach the FTC every month.

“Consumers must also be confident in the knowledge that there is a sheriff in cyberspace to whom they can report online fraud when they encounter it and who will investigate their complaints,” said Sen. Susan Collins, R-Maine, chairwoman of the subcommittee. The subcommittee’s next hearing on the Internet will focus on frauds such as Trojan horses and sniffers.

Susan Grant, director of the National Consumers League’s Internet Fraud Watch, told the subcommittee that the top Net scams in 1997 involved Web auctions, payment for products or Net services never provided, fraudulent sweepstakes, and false promises of credit cards. Cash was the fourth most common method of payment reported by scam victims. Grant advocated the creation of a fund to help state and federal agencies take legal action across borders.

As an example of the proliferation of online commerce, Sen. Glenn held up a copy of Internet Shopper magazine and pointed within its pages to a chance to win 1,000 roses which he said might please his wife Annie in time for Valentine’s Day.

“I’m going back to the office and click on one of these,” Glenn said. “I hadn’t seen this magazine before and I’m not recommending everybody go get a subscription. We knew this was big stuff and it’s even bigger than we thought it was when we planned these hearings.”

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