Fraud Examination, 3E

Chapter 15: Consumer Fraud

COPYRIGHT 2009 South-Western, a part of Cengage Learning

Learning Objectives
Define what consumer fraud is and
understand its seriousness.
Understand identity theft.
Classify the various types of
investment and consumer fraud.

Consumer Fraud
Definition:
Any fraud that targets individuals as
victims.

Consumer Fraud
Two Primary Types of Consumer
Fraud
1.Identity Theft
2.Consumer Scams

Consumer Fraud
Seriousness of the Problem
The US Federal Trade Commission
released a statistical survey in
2004 with the following findings:
Nearly 25 million adults11.2% of the
adult populationwere victims of fraud
during the year studied.
34% of American Indians and Alaska
Natives were victims
17% of African American were victims
14% of Hispanics were victims
6% of non-Hispanic, whites were victims
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Consumer Fraud
Numbers of Victims in the Top
10 Frauds
1.Advance-fee loan scams4.55
million victims
2.Buyers clubs4.05 million victims
3.Credit card insurance3.35
million victims
4.Credit repair2 million victims
5.Prize promotions1.8 million
victims
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Consumer Fraud
Numbers of Victims in the Top 10
Frauds
6.Internet services1.75 million victims
7.Pyramid schemes1.55 million
victims
8.Information services0.8 million
victims
9.Government job offers0.65 million
victims
10.Business opportunities0.45 million
victims
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Consumer Fraud
US FTCs Response to Consumer
Fraud

Consumer Sentinel a complaint

database developed by the US
Federal Trade Commission that tracks
information about consumer fraud
and identity theft and makes it
available to law enforcement
partners across the US and
throughout the world.
http://www.consumer.gov

Identity Theft
The most common type of
consumer fraud.
40% of the frauds reported to the FTC
over the last few years have involved
some type of identity theft.

Identity Theft
Definition
Circumstances when someone uses
another persons name, address,
Social Security number, bank or
credit card account number, or
other identifying information to
commit fraud or other crimes

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Identity Theft
The Identity Theft Cycle

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Identity Theft
Stage 1: Discovery
Gain Information Phase:
Searching trash
Stealing mail
Phishing
Scanning credit card information

Information Verification Phase:

Telephone scams (Pretexting)
Trash searches
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Identity Theft
Stage 2: Action
Accumulating Documentation Phase:
Perpetrator gets the tools to commit the
fraud (applying for credit cards, a drivers
license, or fake check in the victims name)

Cover-up or Concealment Actions Phase:

Perpetrator takes steps to cover or hide
the financial footprints left throughout the
identity theft process.
Example: Changing the billing address on a
credit card so that the statements go to
the fraudsters address.
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Identity Theft
Stage 3: Trial
1st Dimensional Actions Phase:
First attempts to test the stolen information.
If the test works, the fraudster attempts
more

2nd Dimensional Actions Phase:

Actions taken after the tests are successful
The fraudster usually attempts face-to-face
transactions

3rd Dimensional Actions Phase:

Fraudster opens bank accounts, establishes
phone accounts, secures auto loans, etc.
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Identity Theft
Personal Information Financial
Gain
The perpetrator may

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Buy large-ticket items

Take out car, home, or other loans
Establish phone or wireless services
Use counterfeit checks or debit cards
Open new bank accounts
File for bankruptcy
Report victims name to police
Open new credit card accounts
Change victims mailing address

Identity Theft

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Stealing a Victims Identity

Dumpster diving
Skimming
Social engineering
Stealing wallets/purses
Sneak into a victims home and
steal information
Shoulder surfing
Phishing
Steal mail

Identity Theft

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Minimizing the Risk

Guard your mail from theft
Opt out of preapproved credit cards
Check you personal credit information
at least annually
Guard Social Security card and number
Safeguard all personal information
Guard trash from theft
Protect wallet and other valuables
Protect the home, computer,
passwords

Identity Theft

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Prosecution of Identity Theft

When identity theft is committed,
the perpetrator can be prosecuted
criminally and/or civilly.
For prosecution, it is necessary to
show the perpetrator acted with
intent to defraudusually easy to
prove if evidence of the fake
identity used to purchase an item,
open an account, or obtain a credit
card is collected.

Identity Theft
Once Identity Theft Occurs
Victims should
Contact the Federal Trade Commission
Contact local FBI and/or US Secret Service
agencies
Contact the credit reporting agencies
Contact the local Postal Inspection Service
Contact the Social Security Administration
Contact personal financial institutions
Change personal identification information

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Investment/Consumer Scams
Foreign Advance-Fee Scams
Nigerian Money Offers
Clearinghouse Scam
Purchase of Real Estate Scam
Sale of Crude Oil at below market
price
Disbursement of money from wills

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Investment/Consumer Scams
Work-at-Home Schemes
Multilevel Marketing
Pyramid Scheme

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Chain Letter, Mail Stuffing, Product

Testing, and Craft Assembly

Investment/Consumer Scams

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Bogus Mystery Shopping Scams

Perpetrators promise victims a job to
stroll through stores, enjoy the
displays, shop for merchandise, and
file reports about their experiences.
Fraudsters promise victims
compensation ranging from $10$40
an hour, plus the opportunity to keep
all products evaluated.
Although some mystery shoppers
advertisements are legitimate, the
majority are not.

Investment/Consumer Scams

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Telemarketing Frauds
Fraudsters set up giant rooms
(referred to as boiler rooms) in
rented offices where they train
salespeople to find and defraud
victims
Unwary investors lose about $1
million every hour to investment
fraud promoted over the
telephone
Telemarketing scams on the elderly

Investment/Consumer Scams
Safeguards Against
Telemarketing Frauds
Never give a Social Security, credit
card, or other information over the
phone unless you initiate the call.
Put your information on the do no
call registry

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Investment/Consumer Scams

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Investment Scams
Unreasonable promised rates of
return
Investments that do not make
sound business sense
Pressure to get in early on the
investment
Use of a special tax loophole or a
tax avoidance scheme
A business with a history of
bankruptcy or scandals