Internet Fraud Could Chill Consumer Confidence: Pitofsky

Robert Pitofsky, Chairman of the Federal Trade Commission, today told a Senate Committee that business on the Internet could explode -- from $2.6 billion in 1996 to $220 billion in 2001 -- but that if the trend and benefits it implies are to continue, "... consumers must feel confident that the Internet is safe from fraud." In FTC testimony to the Subcommittee on Investigations of the Senate Governmental Affairs Committee, Pitofsky likened the advent of the Internet to the introduction of the television or the telephone. "Like these earlier technologies, the Internet is an exciting new means for consumers to purchase both innovative and traditional goods and services faster and at lower prices, to communicate more effectively, and to tap into rich sources of information that were previously difficult to access and that now can be used to make better-informed purchasing decisions." But Pitofsky said, "Nothing is more likely to undermine their confidence than exploitation by scam artists using this new technology as yet another means to defraud consumers."

Pitofsky noted that the FTC began to examine the potential for consumer protection problems on the Internet before online consumer transactions became common. Public hearings held by the Commission in 1995 concluded that "Consumer protection is most effective when businesses, government, and consumer groups all play a role. Meaningful consumer protection takes: (1) coordinated law enforcement against fraud and deception; (2) private initiatives and public/private partnerships; and (3) consumer education through the combined efforts of government, business and consumer groups."

Pitofsky said the FTC has taken the offensive against fraud on the Internet using a combination of law enforcement actions and education efforts targeted at consumers and Internet entrepreneurs. "The Commission has brought over 25 law enforcement actions against defendants whose alleged illegal practices used or involved the Internet. Most of the Commission’s law enforcement actions, however, have involved old-fashioned scams dressed up in high-tech garb," he said, including pyramid schemes, business opportunity schemes and credit repair scams. But he noted that several FTC law enforcement initiatives involved cases that used technology unique to the Internet to gull victims. One case, FTC v. Audiotex Connection, Inc., "... presented a scheme that allegedly 'hijacked' consumers’ computer modems by surreptitiously disconnecting them from their local Internet Service Provider (such as AOL) and reconnecting them to the Internet through a high-priced international modem connection, purportedly going to Moldova but actually terminating in Canada." Settlement of the case will return an estimated $2.74 million to 38,000 consumers Pitofsky said. Two other cases involved the use of "spam" -- unsolicited commercial e-mail (UCE) -- to recruit victims. Noting that AOL has estimated that unsolicited commercial e-mail comprises as much as one third of all e-mail traffic, Pitofsky said, "Beyond the sheer volume and potential annoyance of UCE, many UCE messages may be misleading or deceptive."

The FTC has made use of the Internet to educate consumers, according to Pitofsky. It maintains an agency web site (http://www.ftc.gov) where consumer and business education material is available. It also has initiated and developed another web site (http://www.consumer.gov) in cooperation with four other agencies to provide " ... one-stop shopping for federal information on a broad spectrum of consumer issues, ranging from auto recalls to drug safety to investor alerts." To educate consumers surfing the Net rather than looking for consumer information, the agency has posted several "teaser" web sites, which mimic sites where consumers might get scammed by deceptive business opportunity schemes, pyramid schemes, deceptive travel programs, false weight- loss claims or fraudulent display rack opportunities. The sites take consumers through glowing testimonials and claims of great success to warnings such as "If you responded to an ad like this one, you could get scammed." Finally, the FTC has conducted "surf days" to provide information to Internet entrepreneurs who unwittingly may be violating the law.

"The Commission recognizes that we stand at a critical juncture in the development of electronic commerce. Although we have seen an explosion in online shopping and advertising, fraud and deception may deter consumers from acquiring a greater confidence in the Internet as a place to transact business. The Commission will continue its efforts to fight fraud and deception online by implementing a comprehensive strategy that combines traditional law enforcement with aggressive consumer and business education," Pitofsky said.

The Commission vote to approve the testimony was 4-0, with Commissioner Mary L. Azcuenaga not participating.

Copies of the testimony are available from the FTC’s web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-3128; TDD 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.