Con Schemes Abound, Part Two

Both the savvy and naïve are eligible prey to new business con schemes. Consumer education is the greatest weapon in the war against the pervasive scammers.

In the January/February 2003 issue, we reviewed general red flags of con schemes, how fraudsters execute them, effects on consumers, and some investment schemes. In this second and final adapted excerpt from the ACFE's "Investment Swindles and Con Schemes," we examine new business frauds.
Businesses, religious groups, and non-profit groups of all sizes and types are the targets of a number of special schemes.

Domain Name Registration

Scammers target potential Web site owners by offering, for an advance fee, to pre-register their businesses to one of the new top-level domain names, which include extensions ending in .aero, .biz, .coop, .info, .museum, .name, and .pro instead of .com or .org. Of course, they take the money and run.

In another scam, fraudsters - posing as "domain name monitoring" firms - send warning faxes or e-mails labeled "URGENT NOTICE OF IDENTICAL DOMAIN NAME APPLICATION BY A THIRD PARTY." The warnings claim that third parties, acting in bad faith, have applied for domain names almost identical to theirs and have already submitted the names to the National Domain Name Registry (NDNR). The scammers tell the businesses that they can stop the registry applications by immediately purchasing all the variations of their domain names from the monitoring firms.

In a recent case, the Federal Trade Commission (FTC) asked a U.S. district court judge to halt a domain-name poaching scam that duped, at a minimum, 27,000 consumers into needlessly registering variations of their existing domain names. At the FTC's request, the court issued a Temporary Restraining Order, froze the defendants' assets, and shut down their Web sites. The FTC asked the court to bar the scheme permanently and order consumer redress.

According to the FTC, consumers - many of them operating small businesses on the Internet - had received unsolicited fax solicitations stating the typical urgent notice warning. The solicitation listed four reasons someone might want to register a copycat domain name with the NDNR, including "disrupting the business of a competitor," or intentionally attempting to lure someone's customers by creating a confusingly similar Web address. The fax solicitation offered to block the application by obtaining the copycat domain name for $70. It warned that, if the consumer fails to act, "NDNR WILL NOT BE LIABLE FOR THE LOSS OF DOMAIN NAME LICENSE, IDENTICAL OR CONFUSINGLY SIMILAR USE OF YOUR COMPANY'S NAME; OR INTERRUPTION OF BUSINESS ACTIVITY OR BUSINESS LOSSES."

According to the FTC, no third parties had applied for the domain names, and the information in the fax solicitations was false, in violation of the FTC Act. An FTC memorandum to the court stated, "Defendant's representation that a third party has applied for a domain name by submitting a registration request to NDNR or any other entity is not only false, but also nonsensical. As explained in the declaration submitted by Internet Corporation for Assigned Names and Numbers, "the purchase of domain names is practically instantaneous, meaning there is no period during which an application (for a domain name) is pending and could be challenged."

The FTC asked the court to issue preliminary and permanent injunctions to bar the deceptive marketing practices, freeze the defendants' assets to preserve them for consumer redress, and shut down Web sites used to promote the domain name scheme.

The defendants settled with the FTC in April 2002. The settlement barred the defendants from:

• making false or misleading statements during the sale of goods or services related to domain names, e-mail, or Web-hosting; and
• using unsolicited faxes to market any goods or services and barred them from violating the Telemarketing Sales Rule.

It required the defendants to:

• provide domain-name registrations for the full terms originally purchased by customers, and
• tape record all outbound telemarketing sales calls made in the United States.

Under the terms of the settlement, the defendants will pay $250,000 in consumer redress to U.S. and Canadian consumers and $25,000 toward costs to administer the redress fund.1

Office Supplies and Equipment

Businesses, particularly small businesses, have increasingly become the targets of "paper-pirate" or "toner-phoner" fraudsters who use their knowledge of small business practices to fraudulently induce these businesses to pay for over-priced products and/or products that were never ordered. Because some small businesses do not use numbered purchase orders, it may be difficult to determine if they actually ordered the supplies or if they did order them whether they received the correct ones. These scams usually begin with a telephone or "boiler-room" call or the fraudster may appear in person at the business site.

Scam artists also pitch substandard office equipment and supplies, such as toner cartridges, posing as the companies' regular suppliers. They will obtain or "pirate" information about the office equipment prior to the solicitation by calling and requesting that employees verify the brands and model numbers of the office equipment. These scam artists tout claims of tremendous discounts on these products. They may pressure the businesses and force them to make swift purchasing decisions by claiming that the supply stock will be liquidated and become unavailable shortly. The items, once received, are usually substandard in quality, may cause damage to equipment, or lack proper warranties.

Phony Invoices Schemes

Businesses are vulnerable to phony invoice schemes if they lack effective internal control procedures in the purchasing department. These schemes prey on a business' inefficiencies. They usually begin with telephone calls from "boiler room" operations to obtain key contact information and other specific details about equipment and supplies. Once they obtain this information, the fraudsters send phony invoices. The invoices may be solicitations in disguise and include the following disclaimer in microscopic print: "This is a solicitation. You are under no obligation to pay unless you accept this offer." If businesses pay the phony invoices, the fraudsters place them on a "reload list" and they will repeatedly send the unsuspecting businesses phony invoices. The scammers also send phony past due or renewal invoices.

Publication

Fraudsters prey on company executives by offering to include their names and accomplishments in a "Who's Who" type publication with other successful executives. The executives later discover that substantial subscription fees are required or they have to purchase the directory at an exorbitant price.

Fraudulent Web Services

Fraudulent companies promote Web services, which include Web design and hosting services to businesses. These scam artists tout these supposedly free services but then charge businesses' credit card accounts.
The scam usually begins with telephone calls offering free, 30-day trial Web sites and a continuance of service for $25 or $30 per month with the ability to cancel at any time. The fraudsters may say that the services will continue automatically unless cancelled and the businesses will be automatically billed for the service after the trial period expires.

The fraudsters will design and host the sites but they provide little or no value to the businesses because they often have incorrect information and omit important features such as linked pages. The fraudsters promise to send a "welcome package," which includes a printable copy of the Web site, instructions for accessing the site, and a contact number for changes or cancellation purposes. However, the package may never arrive but the charges for the service will.

Yellow Pages Invoice

Scammers know that the term "Yellow Pages" is not protected by trademark or copyright and can be used by anyone. Fraudsters will send apparent invoices to businesses for what appears to be inclusion of ads in yellow pages directories. The invoices, which are actually disguised solicitations, are misleading because:

• they include the words "Yellow Pages" and a "walking fingers" logo;
• they use language such as "present listing information," implying that the businesses had previously given the information to them and "directory listing renewal invoice" or "renewal payment stub," implying that the businesses once purchased ads for the publication; and
• they do not say that the directory in which the ads will appear may not be distributed to the public and/or provide the intended benefits.

Solicitations such as these require a disclaimer such as this: "This is not a bill. This is a solicitation. You are under no obligation to pay the amount stated above unless you accept this offer." However, con artists attempt to skirt the requirement by printing the disclaimer in small text.
Companies should remember to:

• contact the Yellow Pages company before paying any questionable invoices;
• review the previous directory information;
• inquire for distribution information, including method, geographic area, and statistics; and
• ask about cost and availability of services.

Consumer Education is a Powerful Weapon

Remedies for victims of fraudulent investment swindles and con schemes require a team effort on the part of the consumer, law enforcement officials, and agencies by:

• increased and continued consumer awareness and education on the red flags of fraudulent schemes;
• consumers reporting fraudulent schemes to appropriate authorities and organizations;
• increased communication among government authorities, organizations, and consumers;
• fraud detection by federal authorities, other agencies, organizations, and individuals;
• fraud deterrence through the prosecution of the perpetrators; and
• the establishment of federal laws, statutes, acts and rules for restitution and prevention measures.

Everyone pays the cost of these investment swindles and con schemes through higher prices for goods, bank and credit card fees, and taxes. In this war, consumer education is the most powerful weapon.

Karen J. Tierney, CFE, CPA, CVA, CIA, is president of Karen J. Tierney, CPA, P.C., in Glastonbury, Conn.  

1. "FTC Halts Domain Name Scam; Thousands of Consumers Pay Up To Fend Off Fictional Poachers." The Federal Trade Commission, Feb. 15, 2001; "Domain Name Registrars Settle FTC Charges: Alleged Bogus Claims Duped Consumers Into Buying Variations on Their Own Domain Names." The Federal Trade Commission, April 25, 2002.