THE ECONOMIC COST OF BAD
ACTORS ON THE INTERNETAFFILIATE MARKETING | 2020

THE ECONOMIC COST
OF BAD ACTORS SERIES

2 AFFILIATE MARKETING | 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 marginalizedgroups 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 commissioned economist,
Professor Roberto Cavazos at the University of Baltimore, toundertake the first ever in-depth economic analysis of thefull scale of internet harm. For the first time, using economic
analysis, statistical & data analysis, we measure the global
economic price paid by businesses and society due toproblems including ad fraud, online bullying, and fake news.

AFFILIATE
MARKETINGAD FRAUDUNCOVERING A $1.4 BILLION PROBLEM
In this report, we focus on the problem of
online affiliate marketing, or "performancemarketing". This performance-based
approach to online marketing sees
advertisers only pay when a sale occurs,
involving online tracking that attributes
sales to affiliates. Affiliates are third-party,
independent websites, such as travel blogs,
information pages and interest groups, who
are willing to display advertisement links fora monetary gain.1

The problem occurs with bad actors
exploiting shortcomings in tracking andattribution to claim commissions unfairly,
damaging marketers and the bottom lineof many businesses. In the following pages,
we show that affiliate marketing fraud will
cost advertisers $1.4 billion in 2020. Leftunchecked, the problem will continue to growwith global expansion of affiliate marketing
into new markets and countries, particularly as
the appeal of affiliate marketing continues togrow in a downturn.

Marketers are expected to lose $1.4 billion
to affiliate marketing fraud in 2020, basedon the current size of the sector and rate offraud. Our analysis is based on the level offraud at a conservative level of 9% within

the $15 billion affiliate sector. This analysis
and uptick in fraud in affiliates comes at atime when reliable digital marketing spend
is more crucial than ever to the success ofenterprises in all sectors facing a significant
downturn.

THE CHALLENGE OF AFFILIATE FRAUD
Affiliate marketing promised to remove manyof the risks associated with traditional digitalmarketing channels. So-called Pay Per salemarketing was proclaimed by The Economist
as the "holy grail of advertising" "liberating
advertisers from the old cost-per-thousandmodel, in which they targeted audiences andthen blindly threw money in their general
direction." In contrast "Pay Per Sale "willliberate advertisers from all wasted spendingby tying their costs to real sales".2

However, affiliate marketing has faced its shareof fraud, and a renewal of fraudulent tactics asaffiliate marketing continues to grow. In thiscontext, affiliate fraud refers to any false or
unscrupulous activity conducted to generatecommissions from an affiliate marketing
program. Affiliate fraud also encompasses any
activities that are explicitly forbidden under theterms and conditions of an affiliate marketing
program. This has been described as "the darkside" of affiliate marketing.

Exploring Risk and Fraud Scenarios in Affiliate Marketing Technology
from Advertiser's Perspective, Amareskara & Mathrani (2015)

1

2

The Economist, Pay Per Sale (2005)

3 AFFILIATE MARKETING | 202002

ECONOMIC COST OF AFFILIATE FRAUDSIZE OF AFFILIATE
MARKETING INDUSTRYGLOBALLY IN 2020:$15 BILLION
The size of the affiliate marketing industry continues to grow, and in 2020,
we estimate the sector to be worth $15 billion.3

Country
United States$6.8BILLION

Japan
Australia
UK
France$1.34 BILLION$930 MILLION$634 MILLION (£510 MILLION)$522 MILLION

Canada$118 MILLION

India$96 MILLION

Brazil$33 MILLION

The largest market in the United States stands at $6.8 billion. Japan sees $3.3 billion
in affiliate marketing with the domestic market growing 15% each year. In the UK $634
million (£510 million) has been poured into affiliate marketing programs. Germany's
retail trade association Handelsverband Deutschland (HDE) estimates that mobilecommerce sales alone in the country sees $1.34 billion from affiliate marketing. China's
growing affiliate marketing industry demonstrate the size of the market. Rising affiliates
such as Chanet work with more than 300,000 websites connecting affiliates focusedon recruitment, education, travel, networking, entertainment, and e-commerce. Also, in
China, YiquiFa, generates an average of 20 million clicks and 2.5 million sales per day;while LinkHaiTao works with foreign businesses including Nike and Rakuten. In Australia,
almost a third of brands and agencies currently spend over 10% of their Marketingbudgets on affiliate marketing.
Based on independent analysis but consistent with Forrester Research ( 2017) showing a market value of$12 billion and calculating annual growth of 10%.

3

4 AFFILIATE MARKETING | 2020

Germany$3.3 BILLION (354 BILLION YEN)

THE ECONOMICS OF
AFFILIATE MARKETINGThe majority of affiliate programs involve cost per action (CPA). This is a performancepricing model in which marketers pay media sources a fixed amount based on a prespecified action. For instance in a study by the IAB of 70 marketers engaged in large
scale affiliate marketing in Australia, found that it while almost all brands engaged withaffiliate marketing use Cost Per Action (99%), a minority use Cost per click (19%), cost
per lead (16%), and cost per thousand, known as CPM (used by 14% of programs).
Beyond affiliates and the payouts from the brands themselves, affiliate networks playa vital role in the ecosystem. Networks bring in new advertisers, track leads and sendout payments. For performing this overhead, affiliate networks receive a commission,usually receiving 14-30% range for their work. Some of the biggest affiliate networks are
Amazon Associates, eBay, Commission Junction, Rakuten Marketing Affiliate and Awin.

It has been estimated that up to 15% of all digital media industry’s revenue comes fromaffiliate marketing. For many companies, pay per sale, particularly in the travel andretail space affiliate marketing has become their lifeblood. Several brands are seeing
20% of their e-commerce revenues stemming from affiliate marketing, sometimes only
mere months after launching their programs. It has extended to finance, loans andinvestments. For instance, eToro a social investment network has reportedly paid out$87 million in commissions to its affiliates since its inception. For Amazon 6% of its hefty
2.5 billion online visits a month arrive from affiliate sites.4
Indeed, in a typical cyber Monday, about 16% of sales comes from affiliate traffic.
This is drawn from 81% of advertisers that adopt affiliate marketing as part of their coremarketing strategy, while, 84% of publishers adopt affiliate marketing.
4

SimilarWeb data accessed June 2020

5 AFFILIATE MARKETING | 2020

PAY PER SALELARGE PRIZE FOR TOP AFFILIATES
For those being paid by affiliate programs
there is substantial money to be made.
High-profile affiliate leaders include Pat
Flynn, Smart Passive Income, who madeover $100,000 in a single month, or Zach
Johnson, earning $100,000 every year. In
the world of sports gambling, Shahbazyan
generates 25-40%

lifetime commissions on net gaming revenues
from referrals creating $2 million per year.5
The affiliate website—The Wirecutter—madean estimated $10 million in revenue, and wassold to the New York Times for $30 million. In
policies on affiliate links, Wired, calls editoriallyindependent affiliate links "another meansof paying for the high-quality journalism you
expect".

GROWTH OF THE AFFILIATE MARKET INDUSTRY
POST COVID-19
During COVID more brands are turning
to performance channels because
advertisers only pay when they see
success, in theory diminishing risks. In
a period of "lockdown" from April 2020
affiliate volumes rose in many sectors:
gifts and flowers rising 80%, computerand electronics up 66%, health and beauty
rising rose 41% [the so-called "lipstickeffect" of recessions]6 home and gardenrose 28%, and sports and fitness, 6%.7

In addition, as brands cancel influencermarketing campaigns or put projects on
hold, affiliate revenue has become a growing
source of income for some digital creatorsand those who are unemployed. At thesame time publishers – countering a loss inadvertising revenue, seeking alternative cash
sources, are turning to affiliate marketing.
Indeed leading affiliate network, Rakuten
found that nearly half (42%) of affiliate
publishers reported an increase in sitetraffic during the pandemic.

The rates of fraud in affiliate marketingare highly debated. Indeed, it depends
on the type of transaction – for instance
up to 25% of app installs are considered
to be fraudulent most often as a result of
attribution fraud. Based on proprietary
CHEQ data based on more than a trillion
impressions, representing more than
39 sectors, and detailed interviews andinsights from affiliate and marketing
experts we consider the rate of fraud at
9% across affiliate marketing.

This is highly conservative estimate of fraud
and many marketers report finding muchlarger percentages of fraud in their affiliate
programs. Indeed, it was only four years agothat the University of Illinois estimated that
38.1% of partners in the Amazon affiliate
program engaged in fraud.8

5

Inc: How Sports Betting Affiliate Marketer Makes $2 Million Per Year

6

Washington Post: The creative ways beauty pros are facing the pandemic, June 18 2020

7Media Post: Performance Marketing Gets A Lift As Advertisers Look For Guarantees May 12, 2020

8

Journal of Cybersecurity: Characterizing fraud and its ramifications in affiliate marketing networks,
Peter Snyder and Chris Kanich, University of Illinois at Chicago (July 2016)

6 AFFILIATE MARKETING | 2020

RATES OF FRAUD IN AFFILIATE MARKETINGRISE OF AFFILIATE MARKETING FRAUDThere have been major cases (see table)
which show the significant costs of affiliate
fraud on the bottom line of enterprisebusinesses. In one high-profile ongoingcase ride-hailing company Uber says that
it was duped out of more than $70 million
through attribution fraud. Like most casesof affiliate marketing fraud this involved
allegations of a scheme that credit affiliates
for purchases from users already on theverge of making purchases. However, alldigital sectors are affected from finance, totravel and tech. In one case in which CHEQ
is investigating, a personal loans company
is seeing a 9.6% fraud rate coming fromtheir affiliate channels. Such affiliate fraud
is triggering a large volume of "loanreverses". This sees the loan company
approve loans based on a specified
criterion, only then to cancel it as details
turned out to be fake or fraudulent. Thishas seen affiliates place a massive exposureon the loan business which was forced to
rip up loans of those likely default on their
payments.

In another case, a major travel-tech platform,
spends millions of dollars across multiple
search and paid social channels. In this case,
22% of the client’s incoming ad clicks were
either completely fraudulent or invalid, withthe vast majority of these clicks driven by theclient’s affiliates. This included fraudulent,
non-human traffic from affiliate sites, email
campaigns and referrers including travel agentsand hotels, amounting to millions of dollars in
wasted ad spend.
In the words of Ben Edelman, a researcher
and professor at Harvard Business School,and now an economist at Microsoft, the profile
of an affiliate fraudster "remains a white guy
in the United States. I’ve got lots of stories
about foreign affiliates, you know someone
in Lebanon who cheated you. I’m sure that
happens sometimes, but the most common
perpetrator remains American, typically male,typically age 20-40, often living below his
wealth, so living at a standard of living that
doesn’t reflect the large amount of money
he’s taking from his victimizing."9The merchants – those paying thecommissions – are assumed to be clean,
and fair payment of affiliates is required
for the entire system to work. However, it
has been pointed out affiliates are wary ofadvertisers who might willfully omit someof the of the sales transactions that shouldhave earned a commission for the affiliate,by deliberately not recording sometracking information or adjusting sales
volumes.10

Zac Johnson an entrepreneur who has
helped affiliates generate millions of dollars,says that an absence of fraud is vital foraffiliate marketing to function for those
whose career depends on it. “We assume
that when we place an affiliate link on ourblogs that we will be suitably and accurately
credited for any qualified referrals that we
generate."

Tune blog, Preventing Affiliate Fraud – Interview with Ben Edelman

910

Exploring Risk and Fraud Scenarios in Affiliate Marketing Technology from Advertiser's Perspective,
Amareskara & Mathrani (2015)

7 AFFILIATE MARKETING | 2020

MERCHANT FRAUDMETHODS OF
AFFILIATE FRAUDThere are several methods of affiliate fraud that contribute to the $1.4 billion
economic losses we expect by the end of 2020

1.COOKIE STUFFING
Browser cookies are the fundamental
feature that enables tracking. Cookie
stuffing is a process in which an affiliate willplace many different cookies belonging todifferent advertisers (third-party cookies),in the visitor's computer. If the visitor
subsequently visits any of those advertisers'
sites and makes purchases, the affiliate will
earn a commission

without actually having taken part in leading
the visitor to that site. In 2014, Shawn
Hogan, the CEO of a successful online
marketing company, Digital Point Solutions,
was sentenced to five months in federal
prison for his role in defrauding eBay of analleged $28 million in online marketing fees, inan elaborate cookie-stuffing scheme.

In the same vein, but for mobile apps,
attribution fraud is a case where fraudsters
attempt to steal credit for app installs, notgenerated by them. This is an attempt toregister the last engagement before theapp is first launched by the user. Attribution
fraud tricks attribution platforms to
associate an organic install or one createdby another source to the fraudster, thus
manipulating the “last-click-attribution”
model commonly applied by attribution
providers. For instance, in 2018 Google
took again against Cheetah Mobile’s FileManager and the Kika Keyboard on thePlay Store. It was alleged they were among
a rise in install attribution abuse falsely
crediting app installs by creating false
clicks. The ongoing Uber case is anotherexample of such attribution fraud. Former
Uber head of performance marketing, Kevin
Frisch says following an investigation, heturned off $100 million out of $150 annual
spend on mobile app installations to get
new riders.

He says: “We basically saw no change in ournumber of rider app installs. What we found
was that a number of installs we thought hadcome in through paid channels, suddenly camein through organic. I started gaining reports
and I started seeing things that just did not
make any sense. There is an app that has 1000
monthly active users and in theory we got
350,000 installs from them. We kept peelingthis back, and we found that someone saw
an ad and downloaded and opened the app
within two seconds, which is just not possible.
We discovered what we had was attribution
fraud.” Some cases of attribution fraud may
involve malware, in which a program “listens”
to the user’s activity and is notified once a
new app install starts. The malware will thensearch for campaigns relating to the relevant
app, populating the relevant information into
a fake click report, registering the last click
engagement to win the attribution for anotherwise organic install or one generated byanother media partner.

8 AFFILIATE MARKETING | 2020

2. ATTRIBUTION FRAUD (APP INSTALLS)3. TYPO SQUATTING
In this tactic, affiliates register domainnames that are misspellings of merchants’domain names. (Moore and Edelman,2010).
When a user misspells a merchant’s
domain name in the way that the affliate
anticipated, the user will be sent to theaffliate’s site, which immediately redirects

If the user makes a purchase, the affliate will becredited.In one such case, retailer, Land's End
proved in court (2006) that its affiliates failed todisclose that they registered as domain names
dozens of misspellings of "Land's End". The
defendants sent users to the real Land's End site,
but only after funneling them through "affiliate"sites so that the defendants could collectcommission.

4. LOYALTY SOFTWARE
Here, affliates place “loyalty” software on a user’s computer to remind the user about
possible rebates, points, or other beneﬁts from purchasing through certain merchants.
The loyalty software automatically sends a user through an affliate’s link when the user
requests a merchant’s site directly. Often, loyalty software claims affliate commission even
if the user had never registered with the loyalty service and is incapable of claiming or
receiving beneﬁts.

5. DECEPTIVE AFFILIATE MARKETING

11

Consumers paid as much as $60,000 for
MOBE "mentoring" . "These so-called'affiliates' helped MOBE swindle consumers
out of millions of dollars by making
outlandish and false earnings claims," said
Andrew Smith, Director of the FTC’s Bureauof Consumer Protection.
In addition, fraudsters use variations on fakeclicks and spamming to obtain credit forsales. A particularly nasty development isthat of diverting. Diverting is the practiceof diverting traffic from an affiliate's site,
When buyers are redirected to a fraudsters
site, they canstill make a purchase, but the
fraudster rather than the original affiliates
receives the commission.11

See: Affise, Fraud in Performance Marketing, Trends, Statistics, Solutions. For discussion on diverting.

9 AFFILIATE MARKETING | 2020

Sometimes affiliates ads could be bait fora scam, according to investigations by theFederal Trade Commission (FTC). The FTC
for instance cracked down on a low-cost
trial scam placed by affiliate marketers.
Here, a “free” trial offered up by affiliates
ended up on a website that offered the
product trial for $1.03. "That amount is not
much, but it’s not free", the FTC stated.
They added: "In fact, people who bought
the trial for $1.03 ended up being charged
almost $200 monthly for a second productthey didn’t even want". The FTC also
continues to crackdown on expensive
schemes promising the "secrets" behindaffiliate marketing. In March 2020, affiliate
marketers behind My Online Business
Education (MOBE) settled FTC charges
by paying more than $4 million due to analleged fraudulent business coaching andinvestment scheme.

TIMELINE
OF AFFILIATE
ALLEGATIONSOF FOUL PLAY

Two of eBay’s super-afﬁliates
were caught and convicted offraud in 2013, after the use of
cookie stufﬁng as they were
paid $28 million in afﬁliate
commissions

Federal Trade Commission
charges online marketing
operation for deceptive adpractices, driving users to theirwebsite via afﬁliate networks.

Google warns app developersof three malicious SDKs being
used for attribution fraud

2013

2016

2017

2018

DECEMBER
2018

2019

Afﬁliate marketers behind My
Online Business Education(MOBE) settled FTC charges bypaying more than $4 million for
deploying a fraudulent
business coaching andinvestment scheme.

2020

Brothers, Andrew Chiu andAllen J. Chiu, found guilty in
the US of a scheme todefraud Nordstrom of morethan $1.4 million incommissions and rebates

Criteo dropped a fraud casein which it alleged thatcompetitor Steelhousecounterfeited clicks to trickcompanies into attributing
sales to its rival

Police arrest Alexander
Zhukov, an afﬁliate fraud“mastermind” alleged tohave taken more than
$7million from merchants

Uber Fraud Case against AdTech
companies claiming $70 million
was subject to attribution fraud

10 AFFILIATE MARKETING | 2020

2012

INDIRECT COSTS
OF AFFILIATE
MARKETING FRAUD

12

The risk of affiliate fraud scares manybusinesses away from the practice altogether
and threatens to damage trust in the growing
market that can benefit both brands andaffiliates. This could jeopardize the revenue
model itself. Sufficiently successful attackers
could reduce the revenue for legitimate
affiliate advertisers so much that the entire
business model no longer works, putting boththose free sites out of business and further
limiting the ways in which free content can be
subsidized online.12

Journal of Cybersecurity: June 2016: Characterizing Fraud and its ramificationsin affiliate marketing networks: Peter Snyder and Chris Kanich

11 AFFILIATE MARKETING | 2020

Direct costs refer to the direct losses
and damage as a result of the situation,
while indirect costs are the losses andopportunity costs imposed on society by
the fact that the fraud is carried out. The
US government has suggested that to best
understand the cost of crime, estimatesshould consider both the financial andnon-monetary effects of harm—such as theimpact on quality of life, increasing fear, or
indirect effects, such as change in behavior.
Some researchers have concluded thatcrime’s most costly factors stem from theseless tangible effects.