Skip to main content

Many consumers may not realize that someone can withdraw money from their checking accounts without showing the bank a check that has their signature on it. In fact, there are many legitimate uses for "demand drafts" -- which look just like checks and are created using the consumer's checking account number. The signature block usually contains a statement that the consumer's authorization is on file. But the Federal Trade Commission warned today that fraudulent telemarketers and their cohorts are using a combination of lies and intimidation to obtain consumers' checking account numbers and then using demand drafts to debit their accounts without the consumers' express authorization. Consumer losses -- including both the unauthorized debits and the fees consumers have to pay for bounced checks and other costs -- could exceed tens of millions of dollars a year, the FTC said.

The FTC's new Telemarketing Sales Rule strictly prohibits companies from debiting a consumer's checking account without the consumer's express authorization. The FTC today announced that it has filed charges against two telemarketing rings that allegedly debited thousands of consumers's checking accounts for packages of magazine subscriptions without the consumers' authorization, or even their knowledge in some instances. The FTC also cautioned consumers to guard their bank account numbers with the same diligence they use in guarding their credit card numbers.

"Consumers should suspect fraud and hang up immediately if a telemarketer asks for the numbers on the bottom of their checks for "identification" purposes or so that the telemarketer can deposit "prize" winnings into their accounts," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection.

Bernstein also announced today that, as the first campaign to be launched under the FTC's Partnership for Consumer Education, five companies that are among the largest in the automated payment systems industry over the next several months will send millions of consumers tips from an FTC "tip sheet" on how to avoid becoming a victim of demand draft fraud. The automated payment systems industry consists of companies that take computerized information from marketers and actually create the demand drafts that the marketers can then present to the consumers" banks for payment. These companies, in most instances, also mail each account holder a confirmation notice stating the amount of the draft and the merchant's identity. The consumer tips will be included on these confirmation notices, Bernstein said, adding that the five companies together mail out approximately 1.5 million letters every month.

"These companies are to be commended for being the first to jump on the bandwagon of our Consumer Education Partnership," Bernstein said. "With their help, we can get truly useful information in the hands of millions more consumers in an effort to arm them against this burgeoning form of fraud."

Partners in the project are Accelerated Payment Systems, Autoscribe, Intell-A-Check, Check/Debit, and QuickCard Systems, Inc.

At a press conference in Washington, D.C., Bernstein unveiled the tips sheet these companies will be sending as well as the Commission's allegations against:

  • Diversified Marketing Service Corp., of Oklahoma City, Oklahoma, and its president, H.G. Kuykendall, Jr.; and
  • several companies that do business under the names Wholesale Magazine, Premium Magazine, Magazine Express, Magazines Unlimited, Magazines of America, Magazines Limited, and Magazine Distributors of America (the Atlanta, Georgia, and Somerville, New Jersey-based defendants in this case are Windward Marketing, Ltd., Genisis Sales and Administration, Inc., Mega Magazines, Inc., Crestwood Enterprises, Inc., Wholesale Capital Corporation, and company officers Ronald Jay Pepper, Philip Edward Dill, Matthew Corbitt Mizell, Jr., Sarfraz A. Tariq, and Sabir Saleem; and all are referred to collectively below as the Windward defendants).

In both cases, the FTC alleged that the defendants sold their magazine subscriptions packages by placing "cold" sales calls to consumers and making a variety of misrepresentations. Diversified charged consumers from $500 to $800 for a package of subscriptions, while the Windward defendants debited consumers' accounts for a lump sum of around $300, according to the complaints detailing the charges in the cases. The alleged misrepresentations include false claims about the cost of the subscriptions -- for instance, claiming that some subscriptions were free or for longer terms than actually was the case -- or that consumers' accounts would be debited for only a nominal, monthly fee -- when, in fact, their accounts were debited for a lump sum. In addition, the FTC charged, the defendants's sales personnel lied to consumers about the reason for needing their checking account numbers or told consumers that their accounts would not be debited without authorization. In fact, the complaint states, the sole reason the defendants obtained the numbers was so that the consumers' accounts could be debited without their knowledge or for amounts much larger than they had authorized.

Diversified also refused to cancel consumers' subscriptions despite promises that consumers could change their minds, falsely claiming that consumers were bound by contract for multi-year subscriptions, the FTC charged. The Windward defendants also allegedly promised consumers cash certificates for groceries as a prize, but instead sent a survey consumers had to fill out and in return for which they received only coupons for groceries.

In addition to illustrating the need for consumers to guard their bank account numbers, these cases also exemplify the cooperation between the FTC and state law enforcement officials, in their effort to leverage scarce resources for maximum effect. The FTC obtained the assistance of a host of state and local law enforcement officials in bringing today's actions. In particular, the Georgia Governor's Office of Consumer Affairs devoted significant resources to the Windward matter. "Without their help, the FTC's case against Windward would not have been possible," Bernstein said. Other law enforcement authorities who assisted in these cases include the South Carolina Office of Consumers Affairs and the U.S. Postal Inspection Service.

The FTC's Telemarketing Sales Rule became effective Dec. 31, 1995. In addition to prohibiting unauthorized debiting of consumers' checking accounts, the rule requires telemarketers to tell consumers before they begin their sales pitch that they're calling to sell something, the nature of the products or services they're selling, and the identity of the seller. The rule also prohibits a variety of misrepresentations and abusive practices. Violators are subject to civil penalties of up to $10,000 per violation, and the rule is enforceable by the FTC as well as each of the 50 state Attorneys General. The FTC adopted the rule pursuant to a statute passed by Congress in 1994.

The Commission votes to file the complaints in the two magazine subscription cases were 5-0.

NOTE: The Commission files a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. These complaints are not findings or rulings that the defendants actually have violated the law. The cases will be decided by the courts.

Copies of the complaints, the FTC's Telemarketing Sales Rule and a consumer education brochure titled "Automatic Debit Scams" are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 202-326-2502. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases, consumer education brochures and other materials also are available on the Internet at the FTC's World Wide Web site at: http://www.ftc.gov

Return to top