THE ECONOMIC COST
OF BAD ACTORSON THE INTERNETAD FRAUD 2020

The internet has heralded an economic revolution. The internet
economy of the G20 countries alone is worth more than $4.2 trillion
representing 5.3% of their total GDP. However, as Tim Berners Lee,the father of the internet has put it: "While the web has created
opportunity, given marginalized groups a voice, and made our daily
lives easier, it has also created opportunity for scammers, given a
voice to those who spread hatred, and made all kinds of crime easier
to commit."
In a series of reports, we reveal the monetary cost caused by bad
actors on the internet. CHEQ has worked with the economist,
Professor Roberto Cavazos at the University of Baltimore, toundertake the first ever in-depth economic analysis of the full scaleof internet harm. For the first time, using economic analysis, statistical& data analysis, we measure the global economic price paid bybusinesses and society due to problems including ad fraud, online
bullying, and fake news.

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BAD ACTORSON THE
INTERNETIn this report, we focus on ad fraud—thepractice of fraudulently representing online
advertising impressions, clicks, conversion
or data events in order to generate
revenue. Digital ad revenue provides
much of the financial underpinning of
e-commerce and online-based businesses.
Marketers suffer when their analytics tools
report a substantial amount of web traffic,
but the amount of revenue does notsupport the number of visitors tracked bytheir systems.
This problem has grown as digital ad
spending has vastly surpassed traditionalad spending. In the following pages,
we reveal that online ad fraud will costadvertisers $35 billion in 2020. This is a risefrom the previous year, reflecting a surgeof more sophisticated attacks, heightened
further during the climate of COVID-19. The
rise in ad fraud comes despite a contractionof digital ad spending. Further, indirect
economic and social costs may increase thetotal cost, closer to $40 billion.
In addition to the direct costs, online fraud
imposes indirect costs in the form of lesstrust, lost ROI from advertising spend anddisinclination by some business to advertise
online, and associated court costs whichhave risen to prosecute ad fraudsters.

1

In addition, the complexity at play,size and growth of digital advertisingand asymmetric information within theadvertising ecosystem has contributed to
the rapid rise of the problem. There has
been ongoing industry efforts and court
enforcement, but as a study published in
March 2020 showed, 15% of advertiser
spend – around one third of supply chain
costs – is completely unattributable.1 This
opacity remains a breeding ground forfraud, and while many industry actions areunderway, the situation is certainly no betterand only likely to face more challenges in
the near and long term.

Professor Roberto
Cavazos
University of Baltimore

Professor Roberto Cavazos, Executive
in Residence at the Merrick School ofBusiness at the University of Baltimore,
has over 25 years' experience in economic
analysis, statistical & data analysis, projectand program management and policy,
and technology with extensive experiencein financial, data and health care fraud
analytics and analysis for government
and private sector organizations. He is
also director of the risk and cybersecurity
management program at the University ofBaltimore.

ISBA/PWC Programmatic Supply Chain Transparency Study (2020)

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AD FRAUD IN 2020:
UNCOVERING
A $35 BILLION PROBLEM

Online advertising is a complex ecosystem and as such has become
the target of abuse for botnets and other techniques used to defraud
advertisers.
With increased complexity in any activity comes an increased probabilityof fraud. Likelihood of fraud increases with the number of participants in
a complex system, and few sectors attract as many players engaged in acomplex transaction as online advertising. Even in a simplified narrative of
the process of placing an online advert, we see at least 23 categories ofdifferent player in this transaction (image via Luma Partners, 2019).

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AD FRAUDENABLED BYCOMPLEXITY

SectorSize of Sector

Fraud in Billons
of Dollars

Percent ofFraudulent Activity

Digital Advertising$333 billion$35 billion

10.5%

Credit Card

$3.32 trillion$27 billion.008%

Insurance$5 trillion$80 billion.016%

Health Care

$7.6 trillion$456 billion

6%

AD FRAUD OVERTAKES
CREDIT CARD FRAUDThis year, the losses from digital advertisingfraud ($35 billion) have swiftly overtaken
global annual credit card fraud ($27 billion).
Despite the relatively insignificant digitaladvertising sector annual spend ($333billion) compared to the $3.32 trillion
credit card sector. The fraud rate in digitaladvertising is more than six-times higher
than the insurance sector, 1.8 times higher
than in health care and 13 times higher thanthe credit card industry.
This again is a factor of complexity andopacity which acts as a breeding ground forfraud, and digital advertising in particiular.

The Association of Certified Fraud
Examiners cites increasingly complex
transactions as a prime source of fraud infinancial and investment markets.2 In the
U.S., complexity is one of the principal
reasons why in 2014 it is estimated that
Medicaid made $17 billion in improper andor fraudulent payments.3 In the words of PJ
O'Rourke, H. L. Mencken Research Fellow
at the libertarian Cato Institute: “There is a
simple rule here, a rule of legislation, a ruleof business, a rule of life: beyond a certain
point, complexity is fraud.”2

https://www.acfe.com/financial-transactions-and-fraud-schemes.aspx

32MEDICAID: Key Issues Facing the Program GAO-15-677: Published: Jul 30, 2015. Publicly Released: Jul 30, 2015

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COMPARISONSWITH OTHERFRAUD-FUELLEDSECTORS4

Compare this lack of transparency to thefinancial and medical insurance sectors.
These sectors are heavily regulated (bymultiple government agencies) andUS health insurers at most deal with 5
or 6 heavily regulated entities. In theseindustries there is tight interconnection
and accountability—the payer has muchcontrol and the interests of all involved
are fairly aligned. Improper payments or
missing funds are eventually detected.
The requirements for fraud prevention in
online advertising add to this complexity.
With credit card fraud, banks have limited
amounts of requests say 1 million a day toinvestigate, however in advertising fraud
prevention solutions need to analyze
20,000 requests per second. The spend on
fraud prevention and resources in online
advertising is insignificant, with some largerbanks using more than 1000 cybersecurity
professionals to monitor dangers.
Calls for greater transparency within thedigital ecosystem, in order to lessen ad
fraud, will be shown to be moot as has
been the case for other complex markets.
Complex market structures do not tend
to rapidly transform and at present
instances of the several types of ad fraud
are technologically enabled. Ultimately,
the frauds are due to information
asymmetry (when parties do not haveaccess to the same information) generated
and reinforced by complexity, lack oftransparency and regulatory oversight.

ISBA/PWC Programmatic Supply Chain Transparency Study (2020)

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However, fraud in the advertising sector
stands out as more complex than other“fraud-fueled” industries. Compared toother sectors, online advertising is lessregulated and less interconnected. Online
advertising has created a situation in which
the situation and interests of more than 20
parties are not aligned. In addition, there
is little to disincentivize fraudsters. Indeed,a 2020 ISBA/PwC study, involving brands
including HSBC, Walt Disney, and Unilever(each brand advertiser with 300 distinct
supply chains), found that 15% of advertiser
spend is completely unattributable. It notesthat the data captured from a demandside platform (DSP) for an impression
is not equally captured on the sell side.
Impression matching cannot easily be
performed at campaign level due to mission
information in datasets. Independent ad
fraud investigator, Augustine Fou, notesthat complexity and lack of transparency isevident in reporting fraud levels. Fou notesthat one party claims that invalid traffic(bots) is 10% on a campaign…while anothervendor claims IVT is 1% on the same
campaign. Sometimes the same vendors
measuring the same campaigns (on behalfof the marketer versus on behalf of the
publisher) shows different invalid traffic
numbers."

In a tumultuous year for advertising, nevertheless the total market
expenditure on online digital ads is set to reach $332.84 billion in 2020.5
To get a true sense of this magnitude this is larger than the GDP of
Malaysia and almost half the GDP of Saudi Arabia. Despite some pauses
in advertising spend because of COVID-19, there is little change in the
direction towards digital advertising representing the vast bulk of global
advertising spend. It is huge, and as previously outlined, a complex market,
that is very tempting to bad actors.

DIGITAL AD SPENDING WORLDWIDE$332.842020

5$389.292021$441.122022$485.262023$526.172024

https://www.emarketer.com/content/global-digital-ad-spending-update-q2-2020

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CALCULATINGTHE COSTS: ONLINEAD SPEND REACHES$333 BILLION
IN 2020

In 2020, we have seen a perfect storm for ad fraud, as bad actors have exploited
disruption caused by the global pandemic; large political spend tends to belargely unaccountable; and sophistication by ad fraudsters has increased.

1. COVID-19
The scale and sophistication of ad fraudattacks have only increased during theperiod of COVID-19. Previous recessions
show a direct correlation between a fallin economic output and a rise in fraud.6
In particular publishers felt the brunt ofmalvertising attacks between April andJune 2020– estimated to have lost about
9% of their pageviews as user sessions
were hijacked. Click fraud (paid search)
represents 14% of search and paid social
clicks, while click fraud affecting small
businesses, the engine of the global
economy, rose by 21% across paid search
campaigns during the period of lockdown.7
OTT programmatic ad spend, susceptible
to ad fraud attacks, increased as streaming
services saw a resurgence during lockdown,with OTT fraud rates representing 17% of
marketer spend.

Meanwhile affiliate marketing fraud,
reached 9% of spend in the $15 billion
global sector. Brands turned to affiliate/performance-based marketing as providing
greater "certainty" during a recession, while
consumers have been drawn to promised
rewards offered, increasing affiliate activity.
The bright spot is that the pandemic
represents a chance to start again with
first principles in digital advertising.
COVID-19 has focused minds on achieving
long-sought after efficiencies, seeking
to eliminate wasted ad spend. Harmony
Murphy, Head of Advertising UK at eBaysays: "In the world of online advertising,it's now more important than ever for every
single impression to be a valuable one –and as they get back on track, brands can't
afford to waste spend by serving ads toaudiences that won't be interested in them."

6

See for instance, Mark Button, director of the Centre for Counter Fraud Studies at the University of Portsmouth
findings that during the 1990-91 slowdown, with a 1.7 per cent fall in GDP, involved a 9.9 per cent increase in fraud.
The global financial crisis that began in 2008 featured a 2.1 per cent fall in GDP and 7.3 per cent rise in fraud.

7

Merkle Digital Marketing Report, Q2 2020 found that despite COVID-19, search spend rose 9% Y/Y in Q22 2020,

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PERFECT STORM
FOR AD FRAUD

Though high profile big-spending digital
events, notably the Olympics, werecancelled in 2020, digital political campaign
spending in the US is set to reach $1.3
billion. This is particularly vulnerable toad fraud. Zach Edwards, who worked on
the online digital campaigns for President
Obama and Mayor Bloomberg, says that up
to 10-30% of a political campaign budget iswasted on ad fraud. He says: "There is no ad
fraud department in most of these buying
teams that can be spending "$30,000 to
50,000 a day" on political ads.

He adds: "There is a huge difference
between political ad buys and businessad buys. In a business ad buy you havean ROI, you have people checking it formonths afterwards, and if it didn't pan
out you may ask for a refund, whereas inpolitical buying the only day that matters iselection day. So, you are spending money
as fast as you possibly can. Because thepolitical campaigns are so short, there is noaccountability for ad fraud. But because thecampaigns dissolve, no one ever checks
that, and no-one ever asks for refunds."

3. INCREASED SOPHISTICATIONThe sophistication of hackers attacking
marketing spend has vastly increased. For
the majority of fraudsters, the automation
tools used to commit fraud are evolving
without them having to do very much work
– fraudsters just have to hide and rewrite
certain elements in order to evade more
and more tests. Bot-makers create millionsof headless browsers, that can simulate
all human-like actions such as mouse
movement, page scrolling, and clicks, toload webpages and cause ad impressions
which appear human. Malicious SDKs foradvanced and AI-powered click injection
are sold in the Dark Web to the public fora fairly low price to perpetrate ad fraud,offering the opportunity in the words of the
suppliers to "emulate ad clicks and hijack
clicks including Google, Facebook andorganic clicks."
Meanwhile data center-dwelling bots havebeen replaced by fraudsters using harderto-detect residential Windows systems

running a Remote Desktop Protocol (RDP)8connection exposed to the Internet. Thistypically involves brute forcing million RDP
servers all over the world.9 The activity
is from a real Window with an updated,
valid Google Chrome browser. Unlike
normal fraud schemes which are using bot/
automation tools (Selenium, Puppeteer) inthis this case, the attack uses a legitimate
environment (for instance an updated
Chrome, Windows, and residential IP).
Leading criminal lawyer Arkady Bukh, a
New York-based attorney with a history ofrepresenting suspected hackers and ad
fraud perpetrators from Eastern Europe,
including those involved in the "Methbot"
case,10 says the growth in sophistication by
bad actors is marked. "There is widespreadfraud from huge amounts of traffic getting
directed through botnets. Before, it wasboys and girls in Russia sitting in boiler
rooms clicking manual clicks in order to getapparent traffic to defraud affiliates. Now it’sdone by bots.”

8

RDP is a remote desktop protocol, providing a user with a graphical interface to connect to a different
computer over a network connection. Although without controls it can be a significant security risk.

9

See for example GoldBrute, the botnet searching for RDP connections
https://www.pandasecurity.com/mediacenter/malware/goldbrute-botnet-rdp/

10

The Methbot case is estimated to have cost marketers at least $3 million dollars each day the botnet operated

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2. DIGITAL POLITICAL SPEND

The World Federation of Advertisers which
represents 100 of the world’s biggest
brand owners and 60 national advertiser
association is well placed to draw industry
insights. They estimate, in line with many
independent fraud experts, that 10 to 30%
of advertising is not seen by consumers
and thus spend for unseen ads is a direct
cost due to ad fraud.11 Even best casescenarios accepted by the industry, showsthat 8 % of display advertising impressions
are fraudulent, 14 percent of video ads
are fraudulent12. Though some collatedindustry figures put ad fraud at around 2%,
many ad verification companies do notdetect sophisticated frauds (SIVT) which isboth harder to detect and brings greater
damage to the bottom line of businesses.
Often surveys donwplay ad fraud levels in
fast-growing digital advertising markets:for instance, ad fraud in India reaches ashigh as 39% in India, and 29% in Russia and
20% in Mexico. It should also be noted thatsome studies used to calculate the cost of
global fraud are based on a limited sample
of impressions. This sample in some cases
amounts to analyzing a relatively tiny (27billion impressions) of the 70 trillion ad
impressions each year.

Moreover, it is a basic principle of fraud that
instances will always be under-recorded.
Even in the case of financial fraud (costing
US corporations up to $364 billion annually)and subject to watchful regulators, it has
been shown that for every fraud caught atleast 1-2 additional frauds go undetected.13
This of course, concerns instances offinancial fraud detection probed by wellfunded bodies such as the SEC. By contrast,
the online ad industry faces nothing close
to this level of scrutiny, such that probes
have been launched in the past year by
the UK and Australian governments tobetter understand the online advertising
ecosystem among governments andregulators.
Undoubtedly the incentives for fraud remainmuch larger than almost any other industry.
There are minimal court cages against
offenders who remain incentivized by highpayoffs.
Of course, many fraud attempts areinvalidated by demand-side platforms(DSPs) or supply-side platforms (SSPs),
before being paid for, but the sophisticationof attacks means that the rate of attacks
are constantly keeping pace with fraud
detection efforts.

11

See: https://www.wfanet.org/

12

Business Wire, May 1, 2019, Report from ANA and White Ops Shows War on Ad Fraud is Succeeding13

See 2017: How Pervasive is Corporate Fraud? Alexander Dyck (University of Toronto);
Adair Morse (University of California at Berkeley); and Luigi Zingales (University of Chicago)

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RATES OF FRAUD

If we assume the different rates of fraud
noted by industry experts as a percentage
of digital advertising spend, we see themagnitude of the problem. Using the World
Federation of Advertisers’ assessment ofads not seen by intended audiences wenote that between 10% and 30% of ads are
not seen. Rates of ad fraud vary by channel.
This is around 9% in affiliate marketing
spend, 14% in paid search and paidsocial; 14% in mobile apps; 17% in OTT
spend; and up to 30% in display. However,tempting to assume that 9% to 30% of ads
not seen translates to 9% to 30% of ad fraud
it should be noted that not all unseen ads
cost the same.

Our experience suggests that higher end
campaigns through well-known reputable
advertisers are subject to a 5%-10% fraudrate, whereas lower-end campaigns
experience a much higher rate of ad
fraud potentially up to 50% (though they
are a much smaller portion of total admarket). Thus, businesses using lower costadvertising services or gaining cheap traffic
are more likely to suffer from advertisingfraud.
Industry insiders' insights suggest that a
10.5% composite rate of total ad spend lostto ad fraud reflects the mix of lower end andhigher end ad campaigns for a total annual
loss of $35 billion estimated for 2020.
Left unchecked the direct level of fraud isexpected to reach $41 billion in 2021 and$46 billion by 2021.
Though all types of digital advertising facefraud, now we analyze fraud trends in themain digital channels.

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THE DIRECT COST
OF AD FRAUD

Programmatic advertising is the economic fuel of the “free” internet and in the US
alone marketers will spend $68 billion a year on programmatic display. Its rise has
made it dramatically easier for anyone to create their own site and immediately makemoney from traffic. Unfortunately, the same convenience that allows a food blogger
to turn their following into an income also allows anyone to set up a site pushinghate speech or propaganda and get it monetized without any advertiser explicitly
choosing to pay them.14 Duane Brown, Founder and Head of Strategy at Take Some
Risks, says: "We don't tend to do much on display as it is pretty trash traffic. I am sure
we have ads and videos that appear on sites we don’t want them to appear on, but
we take what precautions we can."

MOBILE APPSAt least $4.8 billion is lost by marketers
to mobile app ad fraud. Fraudsters arenaturally attracted to a combination of highvolume and high payout, putting the financeand shopping verticals at the greatest
immediate risk. To highlight the problem
for instance, Union Bank, the Philippines
tenth-largest bank, in a race to fast-trackuser acquisition for its UnionBank Online
app, found levels of fraudulent installs
approaching 88% among their media
partners. Install hijacking, click flooding anddevice emulators (a tool used by fraudsters
for various bot-related fraud schemes orlarge-scale device farm operations) arefrequently detected.
Fraud in this sphere may see fraudsters
plant malware-laced ads on users' phones
or embedding malware in apps and online
services to generate clicks fraudulently toreceive payouts by advertising networks.
The Google Play Store has had regularattacks from fraudsters. In February
2020, apps, (mostly camera utilities andchildren’s games)were laced with a malware
strain dubbed Haken, stealing data andsigning victims up for expensive premium
services.
14

In February, announcing the banning of
100 apps from the Google Play Store, Per
Bjorke, Senior Product Manager, Ad Traffic
Quality at Google confirmed the scaleof the problem: "Mobile ad fraud is anindustry-wide challenge that can appear
in many different forms with a variety ofmethods, and it has the potential to harmusers, advertisers and publishers." In
March, the Google Play store also removed
50 Android apps compromised by the
Tekya auto-clicker-malware. In June 2020,
popular barcode apps producing ads that
instantly vanish were removed after being
downloaded 1 million times. In April, 29
apps were identified and removed, but hadcollected 3.5 million total downloads. Suchapp frauds include the sneaky serving ofads, calling up fake browser pages outside
the user's control, and ads displayed while
phones are unlocked or charging.
User reviews of such apps begin with botdriven five-star reviews. This is followed bygenuine human reviews confirming thatsuch apps are barely functional.

Gilad Edelman, Wired, 28 July 2020: Follow the Money: How Digital Ads Subsidize the Worst of the Web

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DISPLAY

Paid search spending, according to industry estimates, will grow overthe next couple of years. This channel will see 5% growth in paid searchadvertising this year, followed by 13% in 2021. Based on empiricalbased research, we found that 14% of PPC spending is invalid acrosspaid search and paid social based on platforms attracting PPC dollars,
including Google, Facebook, Bing, Yahoo, Baidu, Snap, Twitter, LinkedIn,
and Amazon. Click fraud is driven by many different sources, fromstandard web crawlers, to malicious bots, click farms, ad-fraud schemes
and even competitor clicks, fake accounts, data centers, and thechallenges of Facebook's Audience Network. The highest sector for loss
in paid search and paid social includes, eCommerce sites (set to lose
$3.8 billion to click fraud in 2020); followed by travel ($2.6 billion) andeducation spending ($830 million).

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PAID SEARCH
AND PAID SOCIAL

Publishers have faced severe economic
challenges from ad fraud. This is on topof brand safety economic pressures,emphasized in a separate report in thisseries. For instance, Newsweek launched
an investigation and was forced to issue anews release, after it was "alerted to a pieceof potential code that disrupted ad tracking
and ad viewability". The Indian editionof the International Business Times has
been caught three times using deceptive
ad practices to inflate views, blamed on a
"rogue employee". Showing the economic
incentives of such fraud, the publication
said the employee sought to " boost his
performance metrics…[employing] shortcut
methods to reach monthly targets".15
In one investigation, Megan Graham, a
CNBC reporter showed the ease of setting
up an illegitimate news website andmonetizing it with online ads. The fake site
attracted ads from top brands including
Kohl’s, Wayfair, Overstock and Chewy".
[In a statement, Overstock said that as anadvertiser it is negatively impacted by thisfraud and does “everything in [its] power toprevent it.”] It has been estimated that suchfake news site can make $100,000 a monthfrom inflating traffic with bots, and attracting
online ads. UK brand, Virgin Media, oneof dozens of brands advertising on suchsites, said: "We hope more can be done
across the industry to clamp down on these
instances of pay-per-con advertising fraud."

Even when affirmative action has beentaken where brands sought to prevent theirads appearing on Breitbart, so called "darkpooling" (sharing of ads.txt identification)effectively mislabeled inventory andfunneled ad dollars back to such sites.
The Financial Times was hit by domain
spoofing of its trusted brand, withthe publisher estimating the value ofa fraudulent inventory, across 10 ad
exchanges to be $1.3 million a month.
Decrying the incident, Anthony Hitchings,
the FT’s digital advertising operations
director said: "The scale of the fraud
we found is jaw-dropping. The industry
continues to waste marketing budgets onwhat is essentially organized crime.”
In setting out its views on the market
problems of online advertising, the UK's
competition watchdog, the Competition
Markets Authority wrote in July 2020: "If
problems in the digital advertising market
mean that [publishers] receive a lower shareof advertising revenues than they should,
this is likely to reduce their incentives andability to invest in news and other online
content, to the detriment of those who use
and value such content and to broader
society."1615

IBT India’s site used a combination of methods, including bot-like behavior on its pages,
to artificially increase the number of pages and ads being loaded.

16

https://www.gov.uk/cma-cases/online-platforms-and-digital-advertising-market-study#interim-report

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PUBLISHERSMarketers are expected to lose $4 billion
in 2020 due to OTT ad fraud, according toour estimates. Over-the-top (OTT) media
services are streaming media services
offered directly to viewers via the Internet.
Brands are projected to spend $23.8 billion
in 2020 to show ads on connected devices,like Roku, and over-the-top media services,which are streaming platforms like Hulu.
Advertisers increasingly invest in fastgrowing ad-supported streaming platforms
globally. However, at least a quarter ofthat money will be stolen by fraudsters,
according to almost all ad fraud services
and experts.
The industry has seen a 232% rise in
the number of OTT apps supporting
programmatic, while during lockdown, total
hours spent with CTV devices were up 81%,equating to nearly 4 billion hours of CTV
use per week. With smart TVs and otherconnected TV devices enjoying higher
CPMs, the fraud focused on on spoofing
these two types of devices. OTT ad fraudcases brought to light in the past year
include the so-called IceBucket botnet inwhich fraudsters discovered weaknesses in
the SSAI server communications mechanism

In another case involving Grindr (January2020) "ad spoofing" saw cheap banner ads
used to resell more expensive video ads.
In another case (March 2020) an alleged
ad fraud scheme ran on Roku, was said
to cost "seven figures". Marketers frombrands including Jaguar, Geico, and Lexus,
had purchased what they believed tobe ad space alongside popular content;
however, it emerged that these brands’ ads
were being displayed in spots alongsidescreensaver and pet entertainment apps,
and not to the viewers they had hoped toreach.
Joe Barone, managing partner for brandsafety in the Americas at GroupM, theworld's largest media investment company
responsible for more than $50B in annual
media investment, said of the rise of OTT
ad fraud: "Right now, we’re looking at a big
bucket of invalid traffic. It’s not just fraud.
There’s content that’s emanating fromoutside of U.S., redirects to user-generated
content, and straight fraud like spoofing.
… There are a number of different things
adding up to [problems] we don’t want to
pay for.”

15

IBT India’s site used a combination of methods, including bot-like behavior on its pages,
to artificially increase the number of pages and ads being loaded.

16

https://www.gov.uk/cma-cases/online-platforms-and-digital-advertising-market-study#interim-report

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OTT FRAUDFake ads on social media platforms also hit brands including Patagonia,
Microsoft, and Ralph Lauren. This involves leveraging Facebook's powerful
advertising tools to target people with fake promotions for products, andthen directing them to other websites siphoning credit card details or
selling counterfeit versions of premium brand products. Between February
and July, Patagonia says it received more than 1,500 reports of fake
Facebook ads for its products. In another variation of fraud techniques, inFebruary, 2020, more than 500 browser extensions, downloaded more than
1.7 million times from Google’s Chrome Web Store, were found complicit
in ad fraud. In addition there have been cases of email-based extortion with
bot-runners threatening to flood websites with fake traffic unless payment
was made, at a cost of a $5000 to avoid this eventuality.
Through the sophistication and spread of ad fraud hitting multiple
companies on a daily basis, we see the bottom-line impact on the wider
economy. Indeed, our figure of $35 billion lost to ad fraud in 2020 could
be even higher still if the indirect and opportunity costs of ad fraud arefactored in.

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OTHER AD FRAUDWe have found that the direct costs
associated with ad fraud will reach at least$35 billion in 2020. However, there areintangible costs associated with ad fraud
as well, which have not been factored into
this estimate. The US government hassuggested that to best understand the costof crime, estimates should consider boththe financial and non-monetary effects ofharm—such as the impact on quality of life,
increasing fear, or indirect effects, such aschange in behavior.This has concluded thatcrime’s most costly factors stem from theseless tangible effects.17

Direct costs refer to the direct losses anddamage as a result of the situation, while
indirect costs are the losses and opportunity
costs imposed on society by the fact thatthe fraud is carried out.
Some indirect costs of ad fraud may include
less trust among actors and thus lessinnovation. Advertiser clients may over time
become less inclined to spend. In the words
of Per Bjorke, a senior product manager
who leads Google’s ad traffic quality team:“It’s very simple. The future growth of
Google and other companies hinges on thefact that online advertising is trusted, andthat there will be a return on investment
on ad budgets … It’s very important for us
because people could stop investing inadvertisements.”

ENFORCEMENT ACTIONS

Indirect costs also include expensive enforcement (see table of 2020 ad fraud court
cases and enforcement actions, p.19). This encompasses significant time and executive
investment in tackling these problems. Rob Tadlock, Patagonia's associate general
counsel, said hunting down ad fraud, involving ads on networks disguised as their brand,
requires ongoing major investment from its legal and customer service teams.

United States Government Accountability Office: Experts Report Challenges Estimating Costs
and Suggest Improvements to Better Inform Policy Decisions https://www.gao.gov/assets/700/691895.
pdf

17

17 THE ECONOMIC COST OF BAD ACTORS ON THE INTERNET | AD FRAUD 2020

INDIRECT AND
OPPORTUNITY
COSTSThere is also the damage done to marketing strategies driven by bots polluting
data on ad campaigns. In many cases for instance retargeting spend is wasted
chasing after bots that visited promotions. In the ongoing case of Las-Vegas based
Online golf equipment retailer Motogolf.com (2020), the sports retailer sued
TopShelf Golf, alleging they violated federal and state law by repeatedly clicking
on Motogolf’s pay-per-click online Google ads. According to the court complaint,
beyond the immediate economic damage, the alleged victim is suffering fromlosing “valuable demographic data about prospective customers”.

OPPORTUNITY COSTS

Lost economic opportunities in this area
might be more difficult to measure because
the calculation involves focusing on whatmight have been if fraud was not in play.
Companies, however, should consider
and even quantify the lost economic
opportunities so a true picture of losses
suffered can be determined.18
Lost budgets could have produced value foradvertisers had they been wisely invested inother profitable channels. This is consideredas the alternative cost. In an alternative
scenario such digital campaigns could have
converted more prospects and produced
greater revenue for the business.

18

Indirect fraud damages are felt across allentities and players within the marketing
ecosystem. For instance, a lack of fraud
treatment could mean losing an ad
network’s reputation and risking its
future business with leading advertisers,
limiting their media portfolio in exchange
for cleaner traffic. Moreover, legitimate
networks often lose credit for quality users
they provided due to attribution hijacking
tactics, stealing their credit using fakeclicks. The costs of such challenges, though
representing a significant business burden,cannot be directly calculated.

Association of Certified Fraud Examiners (2015) Measuring the economic impacts of fraud

18 THE ECONOMIC COST OF BAD ACTORS ON THE INTERNET | AD FRAUD 2020DAMAGE TO FUNNELS

Facebook acts against iLike Ad Media
which deceived people into installingmalware compromising people’s
Facebook accounts. This involved
running deceptive ads through"cloaking", disguising the destination of
the link in ads by displaying one versionof an ad’s landing page to Facebook’s
systems and a different version to
Facebook users.

AUGUST 7
2019

DECEMBER2019

FEBRUARY
2020

Afﬁliate marketers behind My Online
Business Education (MOBE) settled
FTC charges by paying more than $4
million behind a fraudulent businesscoaching and investment scheme.
Consumers paid as much as $60,000

MARCH
2020

Las-Vegas based Online golf
equipment retailer Motogolf.com
sued a competitor, TopShelf Golf
alleging they violated federal andstate law by repeatedly clicking on
Motogolf’s pay-per-click online
Google ads

APRIL
2020

Chinese app developer Cheetah
Mobile prevailed in a court battle withinvestors who sued the company after
allegations surfaced that seven of its
apps were involved in an ad fraud(click injection) scheme.

JULY
2020

In the Superior Court of California
urged a California state judge toissue a $17 million award andterminating sanctions against
Phunware Inc, claiming the online
advertiser intentionally destroyed
evidence showing it violated theircontract by posting Uber ads on
pornographic websites.

APRIL
2020

JUNE
2020

JULY
2020

JULY
2020

Facebook ﬁles lawsuits against two
app developers accused ofgenerating fraudulent revenue,
LionMobi — based in Hong Kong,and JediMobi — based in Singapore— generated “unearned payouts”
from Facebook advertising.

Google removes 600 apps
from its Play store andbanned them from admonetization platforms,
Google AdMob and Google
Ad Manager for ad fraud.

Facebook court action against
Leadcloak, Basant Gajjar, forsoftware and services running
deceptive ads, including scams
related to COVID 19 andcryptocurrency. The company
reimbursed $4 million to victimsof the scam.
United States Magistrate Judge
Christopher J. Burke of the Districtof Delaware held that “click fraud”
violates the federal Computer
Fraud and Abuse Act (CFAA). Under
this law, you can go to prison for up
to 10 years.
The Federal Trade Commission
conﬁrms that if platforms areproviding information that is false
or unsubstantiated – for example
that ad’s impressions are actually
generated by bots – that practicelikely violates the FTC Act’s
prohibition on deceptive acts orpractices.

19 THE ECONOMIC COST OF BAD ACTORS ON THE INTERNET | AD FRAUD 2020

RECENT AD FRAUDCOURT CASES AND
ENFORCEMENTBy 2020, the industry has recognized the challenges of ad fraud andongoing efforts are being made to tackle the challenges. For instance,
Google has deployed Play Protect as a means to screen potentially harmful
applications and also forged an "App Defense Alliance" in partnershipwith cybersecurity firms to reduce the risk of app-based malware. The
IAB Tech Lab partnered with the Advanced TV committee to craft theguidelines for improving measurement in SSAI and, more broadly,across OTT/CTV advertising. In February 2020, the industry watchdog,
the Media Rating Council (MRC) also updated its guidance, in relation toa more sophisticated fraud ecosystem, covering new threats involving
sophisticated invalid traffic, in-app, OTT and other rapidly emerging digitalad environments. In August 2020, the Trustworthy Accountability Group(TAG) issued best practice guidelines to combat the rise in malware.

20 THE ECONOMIC COST OF BAD ACTORS ON THE INTERNET | AD FRAUD 2020

INDUSTRYACTIONFraud has a way of hiding in plain sight. In an entirely different sector, the$3.9 billion Wirecard scandal surfaced in 2020 (described as "the Enron ofGermany"). This shows us that even in 2020 fraud not only exists but thrives
at the highest level. In the world of digital advertising, marketers concur thatonline fraud remains a challenge. According to an ANA survey, more than 70
percent of advertisers consider invalid traffic and fraud in digital advertising”
to be a top concern.19
The reasons fraud continues boil down to the systemic opacity and complexityof online advertising and the increase in motivation and resources toperpetrate fraud. It has also been pointed out that the ongoing prevalenceof ad fraud is a byproduct of the fact that the average CMO tenure is getting
shorter, and that marketing leaders may be focused on bigger, more visible
wins. This would be a mistake in the current climate for any executive
leadership team seeking to restore revenues through reaching real customers.
Though COVID-19 brings an extra uncertainty to digital marketing, it should
not be viewed as a reason to pause the fight against bad actors online. The
need to account for every dollar and the motivation to restore revenues
attracting more visitors and buyers through digital advertising means that therequirement to challenge of ad fraud is more pressing than ever.

19

ANA/Reed Smith: September 2019: Trust Consortium, Issues that Contribute to the breakdownof Trust in the Advertising System

21 THE ECONOMIC COST OF BAD ACTORS ON THE INTERNET | AD FRAUD 2020

CONCLUSION:
THE RIGHT TIMETO TACKLEAD FRAUD

POSTSCRIPT

fact that it funds the internet, the good stuff and the bad stuff. There isn’t a big
investigation into ad fraud because I don’t think enough people understand it,
and certainly not in government. Regulation and legislation are miles behind
the technology. It’s a murky world.”
Jake Dubbins
Managing Director of Media Bounty andco-chair of the Conscious Advertising Network“When the numbers look good, no one is questioning them– and marketing fraud makes the numbers look good."

Angus McLean
Director, global marketing, Ebiquity“If platforms are providing information that is false or unsubstantiated– for example, if many of an ad’s impressions are actually generated by bots
– that practice likely violates the FTC Act’s prohibition on deceptive actsor practices. By challenging false claims, the FTC can better protect
businesses that may be overpaying for ads."
Commissioner Rohit Chopra
Commissioner, Federal Trade Commission“The concept of “FOFO” – fear of finding out – is one of the ironic truths in thisspace, describing the incentive misalignment on solving the issue.
Fraudsters try to access marketing budgets by generating and selling
invalid traffic, but all other parties may have conflicting interests."

Danilo Tauro
Global Director of media, tech and data,
Procter & Gamble“This is an industry that is constantly talking about wanting to transform itself,
but that is also constantly sticking to very traditional approaches. Old habits
die hard, but people are being forced out of necessity to adapt faster.”Marcelo Pasco
VP Marketing, Coors

22 THE ECONOMIC COST OF BAD ACTORS ON THE INTERNET | AD FRAUD 2020

“Advertising needs to step up to its responsibility for its supply chain and the