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Consumer Fraud

2. LEARNING OBJECTIVES
After studying this chapter, you should be able to:
Define what consumer fraud is and understand its seriousness.
Understand identity theft.
Classify the various types of investment and consumer frauds.
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3. Consumer Fraud Consumer fraud Examples
Any fraud that targets individuals as victims
Examples
Telephone fraud
Magazine fraud
Sweepstakes fraud
Foreign money offers
Counterfeit drugs
Internet auctions
Identity theft
Bogus multilevel marketing schemes
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4. Seriousness of Consumer Fraud
Federal Trade Commission survey results
Estimated that more than 25 million adults—10.8 percent of the adult population—were victims of fraud during 2011
Identified characteristics of victims of consumer fraud
Ranked top-five most frequently reported types of consumer fraud
1. Weight-loss products (estimated 5.1 million victims)
2. Prize promotions (estimated 2.4 million victims)
3. Unauthorized billing—buyers’ club memberships (estimated 1.9 million victims)
4. Unauthorized billing—Internet services (estimated 1.9 million victims)
5. Work-at-home programs (estimated 1.8 million victims)
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5. Identity Theft
Identity theft is used to describe those circumstances when someone uses another person’s name, address, Social Security number (SSN), bank or credit card account number, or other identifying information to commit fraud or other crimes.
The most detrimental consequence of identity theft isn’t the actual loss of money, but rather the loss of credit and reputation along with introduction of erroneous information that is extremely difficult to restore or fix.
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6. How Identity Theft Occurs
Perpetrators of identity theft follow a common pattern after they have stolen a victim’s identity.
Although some fraudsters perpetrate their frauds in slightly different ways, most generally follow the stages in the cycle shown in Figure 15.1.
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7. Figure 15.1 Identity Theft Cycle
Stage 1. Discovery 1. Perpetrators gain information. 2. Perpetrators verify information. Stage 2. Action 1. Perpetrators accumulate documentation. 2. Perpetrators conceive cover-up or concealment actions. Stage 3. Trial 1. First dimensional actions— Small thefts to test the stolen information. 2. Second dimensional actions— Larger thefts, often involving personal interaction, without much chance of getting caught. 3. Third dimensional actions— Largest thefts committed after perpetrators have confidence that their schemes are working.
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8. How Fraudsters Convert Personal Information to Financial Gain
Buying large-ticket items
Taking out car, home, or other loans
Establishing phone or wireless service in victim’s name
Using counterfeit checks or debit cards
Opening a new bank account
Filing for bankruptcy under the victim’s name
Reporting a victim’s name to police in lieu of their own
Opening new credit card accounts
Changing victim’s mailing address
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9. Stealing a Victim’s Identity
Common ways to steal someone’s identity
Posing as a legitimate employee, government official, or representative of an organization with which the victim conducts business
Shoulder surfing—watching or listening as a victim enters a credit card number
Dumpster diving—rummaging through consumers’ trash to gain access to preapproved credit card applications, tax information, receipts containing credit card numbers, social security receipts, or financial records
Skimming—using a storage device to gain access to valuable information when a credit card is processed
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10. Skimming
Skimming is predominantly used to commit credit card fraud but it is gaining in popularity among identity thieves.
Skimming devices are small and easy to hide
Skimming occurs during transactions at common locations including:
Restaurants
ATM machines
Gas pumps
Stores
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11. Stealing the Identity of Many Victims
Gathering information from businesses
Stealing wallets or purses
Breaking into victims’ homes
Stealing mail
Completing “change of address” forms
Shoulder surfing
Phishing
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12. Minimizing the Risk of Identity Theft
Guard your mail from theft
Opt out of preapproved credit cards
Check your personal credit information (credit report) at least annually
Protect SSNs
Safeguard personal information
Guard trash from theft
Protect wallet and other valuables
Use strong passwords
Protect your home
Protect your computer
Opt out of information sharing
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13. Prosecution of Identity Theft
When people commit identity theft, they can face criminal charges, civil actions, or both.
Every state, as well as the federal government, has statutes prohibiting identity theft in its various forms.
Table 15.1 lists some of the more common identity fraud federal statutes that every fraud examiner should know about.
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14. Table 15.1 Common Identity Fraud Statutes
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15. Once Identity Theft Has Occurred
Contact the Federal Trade Commission (FTC).
Contact financial institutions where your identity might have been used to establish a fraudulent account.
Consider changing personal identification numbers (PINs), bank account cards, checks, and other personal identifying data.
Organizations and agencies that provide assistance to victims of identity theft
Federal Trade Commission (FTC)
Federal Bureau of Investigation (FBI)
U.S. Secret Service
U.S. Postal Inspection Service 
Internal Revenue Service
Social Security Administration
Credit reporting agencies
Check verification companies
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16. Table 15.2 Check Verification Agencies
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17. Other Types of Consumer and Investment Scams
Identity theft is not the only type of consumer fraud.
Other types of scams target consumers.
These scams fall into five categories:
Foreign advance-fee scams
Work-at-home schemes
Bogus mystery shopping scams
Telemarketing fraud
Investment scams
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18. Foreign Advance-Fee Scams
Nigerian money offers
Other foreign-advance fee scams
Clearinghouse scam
Purchase of real estate scam
Sale of crude oil at below market price
Disbursement of money from wills
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19. Figure 15.2 E-mail of Nigerian Money Offer Fraud
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20. Work-at-Home Schemes Multilevel marketing
Fraudulent multilevel marketing organization (pyramid or Ponzi scheme)
Headhunter fees
Front loading
Opportunity meetings
Snake oil plans
Ground floor opportunity
International multilevel marketing schemes
Chain letters
Mail stuffing
Product testing
Craft assembly
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21. Figure 15.3 The Structure of a Pyramid Scheme
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22. Bogus Mystery Shopping Scams
Perpetrators promise victims a job that involves strolling through stores, shopping for merchandise, and then filing reports on their experiences.
Consumers are asked to pay an “application charge” and they are promised supplies with a list of places and companies that may hire mystery shoppers.
This list is a simple collection of department store addresses and contact information.
Other scams require that consumers buy merchandise from a particular Web site.
Although some mystery shoppers’ advertisements are legitimate, the majority are not.
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23. Figure 15.4 Mystery Shopping Letters2
Figure 15.4 provides an example of three mystery shopping letters. 1 3
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24. Telemarketing Fraud Basics Scams that prey on the elderly
Boiler rooms
Target lists
Scripts
Promises
Scams that prey on the elderly
Safeguards against telemarketing fraud
Avoid sales calls
Telemarketing fraud involves large and small transactions
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25. Investment Scams
Investment fraud is any fraud that is related to stocks, bonds, commodities, limited partnerships, real estate, or other types of investments.
In investment fraud, perpetrators usually make fraudulent promises or misstatements of fact to induce people to make investments.
Investment frauds are often set up as Ponzi schemes.
Investments frauds can occur within or outside business organizations.
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26. Mortgage Fraud
Mortgage fraud involves falsifying or omitting information when obtaining a mortgage loan.
The goal is to obtain a higher loan than would be provided if the truth was disclosed.
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27. The Subprime Mortgage Crisis
During the subprime mortgage crisis, banks and mortgage brokers were encouraging and even, in some cases, creating fictitious information.
This is an unusual form of consumer fraud in that consumers can play both roles as perpetrator and victim.
In many cases, consumers were encouraged to commit fraud for the purpose of getting a loan on a home that they could not afford.
In the end, they become victims of the lender who gained fees to originate their loan.
The ensuing subprime mortgage crisis, which was arguably the result of multiple frauds, led to massive worldwide economic consequences of epic proportions.
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