CHAPTER 15

Consumer Fraud
LEARNING OBJECTIVES

After studying this chapter, you should be able to:

q Define what consumer fraud is and

understand its seriousness.

q Understand identity theft.

q Classify the various types of investment and

consumer frauds.
CONSUMER FRAUD

q Consumer fraud
Ø Any fraud that targets individuals as victims.

q Examples:
Ø Telephone fraud
Ø Magazine fraud
Ø Sweepstakes fraud
Ø Foreign money offers
Ø Counterfeit drugs
Ø Internet auctions
Ø Identity theft
Ø Bogus multilevel marketing schemes
SERIOUSNESS OF CONSUMER FRAUD

q Federal Trade Commission survey results

Ø Estimated that more than 25 million adults—10.8 percent of the
adult population—were victims of fraud during 2011.
Ø Identified characteristics of victims of consumer fraud.
Ø 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)
IDENTITY THEFT

q 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.

q 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.
 HOW IDENTITY THEFT OCCURS

q Perpetrators of identity theft follow a common

pattern after they have stolen a victim’s identity.

q Although some fraudsters perpetrate their frauds

in slightly different ways, most generally follow the
stages in the cycle shown in Figure 15.1.
FIGURE 15.1 IDENTITY THEFT CYCLE

q Stage 1. Discovery
1. Perpetrators gain information.
2. Perpetrators verify information.
q Stage 2. Action
1. Perpetrators accumulate documentation.
2. Perpetrators conceive cover-up or concealment actions.
q 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.
HOW FRAUDSTERS CONVERT PERSONAL INFORMATION TO FINANCIAL GAIN

q Buying large-ticket items.

q Taking out car, home, or other loans.
q Establishing phone or wireless service in
victim’s name.
q Using counterfeit checks or debit cards.
q Opening a new bank account.
q Filing for bankruptcy under the victim’s
name.
q Reporting a victim’s name to police in lieu
of their own.
q Opening new credit card accounts.
q Changing victim’s mailing address.
STEALING A VICTIM’S IDENTITY

q Common ways to steal someone’s identity

Ø Posing as a legitimate employee, government official, or
representative of an organization with which the victim
conducts business.
Ø Shoulder surfing—watching or listening as a victim
enters a credit card number.
Ø 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.
Ø Skimming—using a storage device to gain access to
valuable information when a credit card is processed.
 SKIMMING

q Skimming is predominantly used to commit credit card

fraud but it is gaining in popularity among identity thieves.
q Skimming devices are small and easy to hide.
q Skimming occurs during transactions at common
locations including:
Ø Restaurants
Ø ATM machines
Ø Gas pumps
Ø Stores
STEALING THE IDENTITY OF MANY VICTIMS

q Gathering information from businesses

q Stealing wallets or purses
q Breaking into victims’ homes
q Stealing mail
q Completing “change of address” forms
q Shoulder surfing
q Phishing
MINIMIZING THE RISK OF IDENTITY THEFT

q Guard your mail from theft.

q Opt out of preapproved credit cards.
q Check your personal credit information
(credit report) at least annually.
q Protect SSNs.
q Safeguard personal information.
q Guard trash from theft.
q Protect wallet and other valuables.
q Use strong passwords.
q Protect your home.
q Protect your computer.
q Opt out of information sharing.
 PROSECUTION OF IDENTITY THEFT

q When people commit identity theft, they can

face criminal charges, civil actions, or both.

q Every state, as well as the federal government,

has statutes prohibiting identity theft in its
various forms.

q Table 15.1 lists some of the more common

identity fraud federal statutes that every fraud
examiner should know about.
 ONCE IDENTITY THEFT HAS OCCURRED
q Contact the Federal Trade Commission (FTC).
q Contact financial institutions where your
identity might have been used to establish a
fraudulent account.
q 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
Ø Federal Trade Commission (FTC)
Ø Federal Bureau of Investigation (FBI)
Ø U.S. Secret Service
Ø U.S. Postal Inspection Service
Ø Internal Revenue Service
Ø Social Security Administration
Ø Credit reporting agencies
Ø Check verification companies
TABLE 15.2 CHECK VERIFICATION AGENCIES
OTHER TYPES OF CONSUMER AND INVESTMENT SCAMS

q Identity theft is not the only type of

consumer fraud.
q Other types of scams target consumers.

q These scams fall into five categories:

Ø Foreign advance-fee scams
Ø Work-at-home schemes
Ø Bogus mystery shopping scams
Ø Telemarketing fraud
Ø Investment scams
 FOREIGN ADVANCE-FEE SCAMS

q Nigerian money offers

q Other foreign-advance fee scams

Ø Clearinghouse scam
Ø Purchase of real estate scam
Ø Sale of crude oil at below market price
Ø Disbursement of money from wills
FIGURE 15.2 E-MAIL OF NIGERIAN
MONEY OFFER FRAUD
WORK-AT-HOME SCHEMES

q Multilevel marketing
q Fraudulent multilevel marketing organization
(pyramid or Ponzi scheme)
Ø Headhunter fees
Ø Front loading
Ø Opportunity meetings
Ø Snake oil plans
Ø Ground floor opportunity
q International multilevel marketing schemes
q Chain letters
q Mail stuffing
q Product testing
q Craft assembly
FIGURE 15.3 THE STRUCTURE OF A PYRAMID SCHEME
 BOGUS MYSTERY SHOPPING SCAMS

q Perpetrators promise victims a job that involves strolling through stores,

shopping for merchandise, and then filing reports on their experiences.
Ø 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.
Ø This list is a simple collection of department store addresses and
contact information.
q Other scams require that consumers buy merchandise from a
particular Web site.
q Although some mystery shoppers’ advertisements are legitimate, the
majority are not.
 FIGURE 15.4 MYSTERY SHOPPING LETTERS

q Figure 15.4 provides an example

of three mystery shopping letters.
 FIGURE 15.4 MYSTERY SHOPPING LETTERS

q Figure 15.4 provides an example

of three mystery shopping letters.
 FIGURE 15.4 MYSTERY SHOPPING LETTERS

q Figure 15.4 provides an example

of three mystery shopping letters.
TELEMARKETING FRAUD

q Basics
Ø Boiler rooms
Ø Target lists
Ø Scripts
Ø Promises
q Scams that prey on the elderly
q Safeguards against telemarketing fraud
q Avoid sales calls
q Telemarketing fraud involves large and
small transactions
INVESTMENT SCAMS

q Investment fraud is any fraud that is related

to stocks, bonds, commodities, limited
partnerships, real estate, or other types of
investments.
q In investment fraud, perpetrators usually
make fraudulent promises or misstatements
of fact to induce people to make investments.
q Investment frauds are often set up as Ponzi
schemes.
q Investments frauds can occur within or
outside business organizations.
 MORTGAGE FRAUD

q Mortgage fraud involves falsifying or omitting

information when obtaining a mortgage loan.

q The goal is to obtain a higher loan than would

be provided if the truth was disclosed.
THE SUBPRIME MORTGAGE CRISIS

q During the subprime mortgage crisis, banks and mortgage

brokers were encouraging and even, in some cases, creating
fictitious information.
q This is an unusual form of consumer fraud in that consumers can
play both roles as perpetrator and victim.
Ø In many cases, consumers were encouraged to commit fraud for
the purpose of getting a loan on a home that they could not
afford.
Ø In the end, they become victims of the lender who gained fees to
originate their loan.
q The ensuing subprime mortgage crisis, which was arguably the
result of multiple frauds, led to massive worldwide economic
consequences of epic proportions.