S. Hrg. 107–85

CROSS-BORDER FRAUD

HEARINGS

BEFORE THE

PERMANENT SUBCOMMITTEE ON

INVESTIGATIONS

OF THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JUNE 14 AND 15, 2001

Printed for the use of the Committee on Governmental Affairs

(

CROSS-BORDER FRAUD

U.S. GOVERNMENT PRINTING OFFICE

74–107 ps WASHINGTON : 2001

S. Hrg. 107–85

CROSS-BORDER FRAUD

HEARINGS

BEFORE THE

PERMANENT SUBCOMMITTEE ON

INVESTIGATIONS

OF THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JUNE 14 AND 15, 2001

Printed for the use of the Committee on Governmental Affairs

(

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 FAX: (202) 512–2250

Mail: Stop SSOP, Washington, DC 20402–0001

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

JOSEPH I. LIEBERMAN, Connecticut, Chairman

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

MARK DAYTON, Minnesota

FRED THOMPSON, Tennessee

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ROBERT F. BENNETT, Utah

JIM BUNNING, Kentucky

JOYCE A. RECHTSCHAFFEN, Staff Director and Counsel

HANNAH S. SISTARE, Minority Staff Director and Counsel

DARLA D. CASSELL, Chief Clerk

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

CARL LEVIN, Michigan, Chairman

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

MARK DAYTON, Minnesota

SUSAN M. COLLINS, Maine

TED STEVENS, Alaska

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ROBERT F. BENNETT, Utah

JIM BUNNING, Kentucky

LINDA J. GUSTITUS, Chief Counsel and Staff Director

CHRISTOPHER A. FORD, Minority Chief Counsel and Staff Director

MARY D. ROBERTSON, Chief Clerk

(III)

C O N T E N T S

Opening statements: Page

Senator Collins ................................................................................................. 1, 43

Senator Levin .................................................................................................... 4, 44

WITNESSES

THURSDAY, JUNE 14, 2001

Julia Erb, Kimball, Michigan ................................................................................. 9

Bruce Hathaway, Columbus, Ohio ......................................................................... 12

Ann Hersom, Acton, Maine ..................................................................................... 14

Detective Staff Sergeant Barry F. Elliot, Ontario Provincial Police, AntiRackets Section, North Bay, Ontario, Canada .................................................. 21

Jackie DeGenova, Chief, Consumer Protection Section, Ohio Attorney General’s Office, Columbus, Ohio .............................................................................. 24

Lawrence E. Maxwell, Postal Inspector In Charge, Fraud, Child Exploitation,

and Asset Forfeiture Division, U.S. Postal Inspection Service, Washington,

DC .......................................................................................................................... 27

FRIDAY, JUNE 15, 2001

Hon. William H. Sorrell, Attorney General, State of Vermont, Montpelier,

Vermont ................................................................................................................ 46

Mary Ellen Warlow, Acting Deputy Assistant Attorney General, Criminal

Division, U.S. Department of Justice, Washington, DC ................................... 49

Hugh Stevenson, Associate Director, Planning and Information, Bureau of

Consumer Protection, Federal Trade Commission, Washington, DC .............. 52

ALPHABETICAL LIST OF WITNESSES

DeGenova, Jackie:

Testimony .......................................................................................................... 24

Prepared statement .......................................................................................... 123

Elliot, Barry F.:

Testimony .......................................................................................................... 21

Powerpoint presentation .................................................................................. 77

Erb, Julia:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 65

Hathaway, Bruce:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 68

Hersom, Ann:

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 74

Maxwell, Lawrence E.:

Testimony .......................................................................................................... 27

Prepared statement with attachments ........................................................... 129

Sorrell, Hon. William H.:

Testimony .......................................................................................................... 46

Prepared statement .......................................................................................... 152

Stevenson, Hugh:

Testimony .......................................................................................................... 52

Prepared statement with attachments ........................................................... 191

Warlow, Mary Ellen:

Testimony .......................................................................................................... 49

Prepared statement with attachments ........................................................... 158

Page

IV

EXHIBIT LIST

1. Map of United States highlighting ‘‘Locations of Telemarketing Fraud

Victims For Just One Scam’’ ............................................................................ 237

2. ‘‘Platinum Industries’’ scam letter ................................................................... 238

3. ‘‘Cash Disbursement Division’’ scam letter ..................................................... 239

4. ‘‘Trans-American Equities (TAE)’’ scam letter ............................................... 240

5. Description by convicted felon of a ‘‘Down The Road Pitch’’ ......................... 241

6. Excerpts of audio tapes in which cross-border criminals solicited Bruce

and Anne Hathaway ......................................................................................... 242

7. ‘‘Center for International Disbursements’’ mailing ........................................ 251

8. Report of the United States-Canada Working Group on Cross-Border

Telemarketing Fraud ........................................................................................ 253

9. Postmaster General mailing, ‘‘Know Fraud,’’ regarding telemarketing

fraud .................................................................................................................. 281

10. Brochure prepared by The Senior Action Coalition and distributed by

the U.S. Postal Inspection Service regarding fraudulent telemarketing

abuse against senior citizens ........................................................................... 283

11. Brochure prepared by the Federal Trade Commission on consumer protection efforts ......................................................................................................... 295

12. Statement for the Record of Michigan Attorney General Jennifer M.

Granholm ........................................................................................................... 297

13. Statement for the Record of Monty D. Mohr, Deputy Director of Investigations, Georgia Governor’s Office of Consumer Affairs ................................... 302

14. Statement for the Record of ‘‘Son of Victim’’ of cross-border fraud .............. 326

15. Statement for the Record of Stephen M. Hills, son of parents who were

victims of cross-border fraud ........................................................................... 329

16. Material regarding cross-border fraud submitted for the record of Canadian Ambassador Michael Kergin ................................................................... 332

17. Permanent Subcommittee on Investigations, Republican Staff Background

Memorandum on June 14–15, 2001, Cross-Border Fraud hearings ............. 361

(1)

CROSS–BORDER FRAUD: SCAMS KNOW NO

BOUNDARIES

THURSDAY, JUNE 14, 2001

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC.

The Subcommittee met, pursuant to notice, at 9:30 a.m., in room

SD–342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding.

Present: Senators Levin and Collins.

Staff Present: Linda Gustitus, Chief Counsel and Staff Director;

Mary D. Robertson, Chief Clerk; Laura Stuber, Counsel; Christopher A. Ford, Minority Chief Counsel and Staff Director; Frank

Fountain, Senior Counsel to the Minority; Marianne Kenny,

Detailee/Secret Service; Susan M. Leonard, Congressional Fellow;

Bos Smith, Intern; Alan Stubbs, Detailee/Social Security Administration; Bob Westbrooks (Senator Akaka); and Ian Morrill (Senator

Collins).

Senator LEVIN. The Subcommittee will come to order. Today and

tomorrow, this Subcommittee will be looking at cross-border fraud.

These hearings have been initiated and led by Senator Collins. I

thank her for her hard work in this area and so many other areas

involving the protection of America’s seniors and America’s consumers and I call upon her now to give her opening statement. I

will follow that up with my opening statement. Senator Collins.

OPENING STATEMENT OF SENATOR COLLINS

Senator COLLINS. Thank you very much, Mr. Chairman. I would

like to begin today by thanking the distinguished Subcommittee

Chairman for convening this hearing. As he indicated, these hearings are the result of a 5-month investigation by my staff and they

had been scheduled before the change in control of the Senate.

Nevertheless, Senator Levin was under absolutely no obligation to

proceed and I am very grateful for his willingness to convene these

hearings.

In this age of ubiquitous international communications, crossborder fraud has emerged as a serious problem. Foreign countries,

and particularly Canada, have unfortunately become a major point

of origin for lottery, sweepstakes, and advance-fee-for-loan scams

that prey upon Americans through direct mail and telemarketing.

Last year, the Canadian Phonebusters fraud hotline alone received

information about frauds involving $16 million in losses affecting

nearly 5,000 American citizens. The National Association of AttorVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 74107.TXT SAFFAIRS PsN: SAFFAIRS
2

neys General in the United States, moreover, estimates that crossborder fraud costs Americans tens or perhaps even hundreds of

millions of dollars each and every year.

Worse yet, such schemes often specifically target the elderly, who

are often especially vulnerable and least able to afford being defrauded. A 1997 U.S.-Canadian working group on cross-border telemarketing fraud concluded that senior citizens are over-represented among victims and defenders have admitted to targeting

them specifically. Similarly, a survey by AARP found that older

Americans are disproportionately victims of telemarketing scams.

Almost all of the elderly victims interviewed by the Subcommittee had suffered a traumatic experience prior to falling victim to a scam. For example, one of our witnesses was distressed

over his wife’s stroke and was worried about the high cost of her

nursing home care. The enticements of a con artist came at a time

when he was particularly vulnerable to such a pitch.

Our investigation indicates that the cross-border fraud industry

is a fairly sophisticated one. Cross-border fraud very often involves

‘‘boiler rooms,’’ in which hundreds of people may be involved, operating out of warehouses in Canada, with dozens of telephone lines,

making high-pressure calls perhaps 16 hours out of each day, 7

days a week. Nor do such boiler rooms necessarily operate in isolation. Rather, Canadian telemarketing fraud appears to involve a

closely-connected network in which criminals actually share information on successful pitches and purchase and trade victim lists

among themselves. Through the use of multiple company names,

con artists who pretend to represent different internal offices of the

same company, and systems for handing off defrauded victims to

other ‘‘boiler rooms,’’ fraud rings may be able to swindle the same

person time and again.

Cross-border fraud is a growing phenomenon. According to the

Federal Trade Commission, U.S. consumers’ complaints against Canadian companies rose from nearly 5,000 in 1999 to more than

8,000 last year and are projected to reach more than 10,000 this

year. Similarly, the dollar value of losses reported by consumer

complaints against Canadian companies rose from $5.3 million in

1999 to $19.5 million in 2000 and is projected to reach $36.5 million this year. As our witnesses today will illustrate, the impact of

such fraud upon the lives of ordinary Americans can be devastating, not only to their finances but also to their pride.

One of the most common forms of cross-border fraud is the lottery scam. The smooth-talking cross-border criminals involved in

lottery scams convince their victim that he or she has won millions

of dollars in a drawing and that the only thing that the victim has

to do in order to claim these winnings is, first, to pay legal fees or

back taxes or excise fees supposedly due to the Canadian Government. Since there is no lottery and there are no winnings, this ruse

far too often defrauds the victim of many thousands of dollars. Our

witness today from Acton, Maine, Mrs. Ann Hersom, saw her own

family defrauded of several thousand dollars in this fashion, and

her family is not alone. There are many more victims in communities all across America.

Another victim was an elderly woman in North Carolina who

was tragically defrauded of more than $100,000. A telemarketing

3

1 Exhibit No. 1 appears in the Appendix on page 237.

2 Exhibit No. 5 appears in the Appendix on page 241.

fraud operation based in Montreal convinced her that she had won

a lottery and could collect a huge prize if only she paid certain

taxes on her winnings. To convince her of their bona fides, they

sent her some relatively small items, such as a VCR, which helped

persuade her to send them more than $100,000.

The fraud ring that destroyed her financial security was a major

one which combined elements of the lottery scam with various

other promotional offers, all of which, of course, were no more than

cruel illusions. According to documents provided to us by the FBI,

this one fraud ring defrauded literally thousands of victims in 18

States and Canada of between $4 and $6 million in the last 4

years.

But this scam was not the only one out there. More seem to

spring up every day.1 Joyce Noble from my hometown of Caribou,

Maine, recently sent me a mailing from Toronto that illustrates

what may be yet another such fraud. This mailing announced that

Ms. Noble was eligible to receive a cash payment of $7,500 and entitled to further awards of up to $500,000. Before this prize could

be released, however, the mailing advised that she needed to send

an entitlement fee.

Now, this mailing fits a very familiar pattern. It promises considerable payoffs, but not unless the victim pays money up front,

which must be returned to an official-sounding location in Canada,

denoted by a suite address, which may only mean that it is a simple post office box. The entitlement fee that is listed is $26, in return for which this woman is supposedly eligible for $7,500. I have

little doubt that if Ms. Noble had sent in this $26, that she soon

would have been told that her chances had greatly improved for a

half-million-dollar grand prize, or that she had won it, but that she

could collect only in return for yet another even larger entitlement

fee. In other words, my constituent would have embarked on a long

road of repeated contacts in which she would have been promised

ever-greater rewards in return for ever-greater payments.

One convicted cross-border felon had a term for this kind of

scam. He called it the ‘‘down the road’’ pitch.2 It is a method for

stringing victims along for long periods of time, getting more and

more money out of them at every turn. A handwritten document

prepared by this criminal and given to the Subcommittee staff sets

out the ‘‘down the road’’ pitch used in his fraud ring. According to

this document, a salesman called a ‘‘loader’’ would contact persons

who had already sent in money, announcing that they had been selected to participate in an upcoming awards presentation. This

loader would send them small gifts of low value to help convince

them of his legitimacy and asking for more up-front payments.

Subsequently, the loader would call back, happily announcing that

the victim had moved up in the standings and now was set to receive an even bigger gift.

The gifts sent to the victim kept getting more valuable, but they

never, ever came close, anywhere near the value of the money that

the victim kept sending in the hopes of receiving the promised

ever-larger grand prize. As this criminal stated, this was totally a

4

scam because there was never an award presentation, never a million or more in cash and prizes, and we never sent a client any

kind of gift that he did not already pre-pay for. These are the kinds

of people who set out to victimize innocent Americans such as the

three witnesses on our first panel today.

Now, how do we fight such fraud? The first line of defense

against cross-border fraud is to promote public awareness of the

types of schemes in which criminals like this engage, and we

should also help educate consumers on what they can do to report

fraudulent overtures and to help law enforcement officials catch up

with these con artists.

The second line of defense is to ensure a prompt, aggressive, and

efficient response by law enforcement officials. Naturally, this is a

particular challenge in cross-border crime fighting for which law

enforcement coordination is required among Federal, State or provincial, and local and municipal authorities on both sides of the

border. I hope that these hearings will serve as a catalyst for better

public awareness, greater consumer wariness, and improved law

enforcement cooperation across the U.S.-Canadian border.

Finally, let me note that the relationship between the United

States and Canada is an extremely, perhaps even uniquely, good

one. As symbolized by the fact that we share the world’s largest

unguarded border, our two countries have long enjoyed a special relationship of close economic, cultural, and political ties. In fact, in

Northern Maine, where I am from, those ties frequently involve

family members, as well. My sister-in-law is a Canadian citizen, for

example. With the many benefits of these U.S.-Canadian economic

and social bonds, however, has come the problem that it is very

easy for criminals in one country to defraud victims in the other.

However strong our ties, the United States and Canada remain

two separate, sovereign nations, each with its own legal system

and each with a law enforcement jurisdiction in some respects offlimits for officials from the other side of the border. Consequently,

the challenge of fighting fraud across international boundaries is a

formidable one. The physical border is no barrier for scam artists,

however, and that is why I am very pleased that Senator Levin is

holding these hearings today. Thank you, Mr. Chairman.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Senator Collins, thank you. Senator Collins has

just outlined that cross-border fraud is a real problem. This is true

despite significant law enforcement efforts in the last few years

and it is also on the rise, as Senator Collins has indicated. We

know that there is more money that was lost to these scam artists

last year than the year before, and that was true relative to the

year before that. These scams frequently involve advance fees for

loans, they involve foreign sweepstakes, foreign lotteries that are

initiated by people in one country against residents of the United

States, usually through phone solicitations, but often in the mail.

The perpetrator of the frauds uses the border as an obstacle to

being caught and being prosecuted, and one major border for such

activity is the U.S.-Canadian border. This is not now a matter of

either us or the Canadians not caring enough. Both our governments care a great deal. But because of the complications of any

5

border, even between two friends like the United States and Canada, that border is being used by the scam artists as a way of complicating their arrests and their prosecutions. The reason that is

true is that law enforcement personnel are faced with multiple

extra steps and procedures to bring the perpetrators to justice.

A common practice in a Canadian-U.S. cross-border fraud scheme

is for a con artist to operate out of British Columbia or some other

province in Canada and make calls to persons in the United States,

frequently elderly persons and people who are vulnerable. Using a

warm and a friendly style, they offer the U.S. resident some exciting and large financial winnings or an opportunity which requires

an up-front payment, which the con artist then claims is necessary

for taxes or customs fees or some similar purpose.

We have had many examples of how these con artists work. Senator Collins has just reviewed a number of those examples. The one

that I am going to focus on here is a tape which was obtained by

Senator Collins’ staff, and this tape was made by the daughter of

one of our witnesses. The first excerpt which we are going to hear

is a tape that was made by Ann Hathaway, the daughter of witness

Bruce Hathaway. Now, Ms. Hathaway recorded this conversation

on October 15, 1998, with the help of the Ohio Attorney General’s

Office, and that office will be testifying here later on today.

In this phone conversation, someone who identifies herself as

Mary Thompson claims to be from the U.S. Customs Service and

she lays out an elaborate and chillingly believable scam to Ms.

Hathaway. The woman who calls herself Mary Thompson says that

because Ms. Hathaway’s father had entered scam sweepstakes and

lotteries, that these scam sweepstakes and lottery people had been

caught and had agreed to a court settlement of $110,000, to be paid

to 1,200 people who lost their money. Now, the catch was that the

people who she said were entitled to the settlement money must

first send money to Mary Thompson at the U.S. Customs Service

to cover the taxes on the settlement amount that they would be receiving, and, of course, nobody ever gets the settlement money. We

will play the first excerpt now.

[An audio tape was played.]

Mary Thompson: It’s very simple, Ann, I’m going to explain to

you from the beginning.

Ann Hathaway: Oh, well, thank you.

Mary Thompson: Your father, your father has got a bad habit to

enter sweepstakes and lottery companies. You know those sweepstakes that you get by the mail?

Ann Hathaway: Right.

Mary Thompson: You send $10 dollars, $20 dollars, they promise

you money now.

Ann Hathaway: Right.

Mary Thompson: He lost . . . he, he sent quite a bit of money

to those sweepstakes and lotteries within maybe 3 years, yes?

Ann Hathaway: Oh, ok.

Mary Thompson: What happened is that those companies are illegal. They promise him money, they never send him anything, so

those companies were seized. I’ve got some lists here that I, I did

send your father——

Ann Hathaway: Yes.

6

Ms. THOMPSON [continuing]. Of the companies that were seized,

and those companies were brought to court. It was a class-action

suit done against them, and finally they decided to, with the money

they made with that, to send it back to (uh) some people in a lot

of countries.

Ann Hathaway: Yes.

Mary Thompson: People from Australia, United States, and Canada who were playing those sweepstakes and lotteries. It is very

hard for them to send like $10, $20, or $40 back to 30 million people. I would have to call everybody and say, ‘‘OK, how much did

you lose? We’re gonna send it back to you.’’ So what they decided to do instead is offer a court settlement of $110,000, ah, to about,

let me see, it’s about 1,200 people that are going to be getting that

money, OK? What they did is they called your father up, there’s an

attorney by the name of Robert Duran, which I didn’t know. They

called him up, and they told him about that story. And he said,

‘‘Listen, you have to pay taxes on that.’’ Ann Hathaway: Yes.

Mary Thompson: Because it’s coming from another country. I’m

at the United States Customs Office. So what we did is we confirm

everything with Mr. Duran, and your father sends in $2,000 for his

taxes because he’s a senior citizen and he’s able to pay the balance

only after he receives the court settlement.

[End of recorded tape.]

Senator LEVIN. Now, in the second excerpt, which Ms. Hathaway

recorded on November 25, 1998, Ms. Hathaway is now speaking

with a person who identifies himself as Mark Davis. He says he is

the associate of Mary Thompson, who we just heard in this first excerpt. Mark Davis says that he is the owner of a law firm which

is handling the settlement. On the phone is also someone called

Mr. Taylor, who Mark Davis says is an attorney at the law firm.

Both Mary Thompson and Mark Davis have explained to Ms.

Hathaway that there are additional settlements for her father to

claim. Ms. Hathaway has been told that her father is now entitled

to $170,000 from a settlement, but Ms. Hathaway or her father

must pay first $78,000 before they receive any money. Neither Ms.

Hathaway or her father paid at the time of the following conversation, when Mark turns up the pressure and tells Ms. Hathaway

that he is losing money as a result and is upset that she has not

paid. So now we are going to hear that piece of the conversation,

first hearing from someone who is identifying himself as Mark

Davis.

[An audio tape was played.]

Mark Davis: Now, I know that (uh) you spoke with Mrs. (uh)

Thompson, and she was expecting those payments, and all the time

something happened. Now, you have to know that we’re running

late, and every day that passes by I’m paying interest for that

money that is (uh, uh) held at U.S. Customs.

Mr. Taylor, an associate fo Mark Davis, in the background:

That’s right.

Mark Davis: And here, at the law firm, we’re not too crazy about

this. So this is why I’m trying to find answers and I’m trying to

find some solutions to get through this so you can have the money

already.

7

[End of recorded tape.]

Senator LEVIN. Fortunately, Ms. Hathaway did not send the money, but her dad had already sent $47,000 to these people and

never received one cent in return. These crooks are still at large.

They are probably making calls similar to the ones that we have

just heard.

In addition to hearing from Mr. Hathaway, we are going to be

hearing from two other victims of similar scams, including a witness from Michigan, Mrs. Julia Erb, who I met yesterday with her

daughter. She is going to describe how she lost $2,971 from similar

calls informing her that she had won a lottery but needed to send

money to cover the taxes that she would first have to send in, because those taxes would have to be paid on the money.

[The prepared statement of Senator Levin follows:]

PREPARED OPENING STATEMENT OF SENATOR LEVIN

Today and tomorrow this Subcommittee will be looking at cross-border fraud.

These hearings have been initiated and led by Senator Collins, and I thank her for

her hard work in this area and so many other areas involving protection of America’s consumers and seniors.

Cross-border fraud is a serious problem that, despite significant law enforcement

efforts in the last few years, is still on the rise. When I say ‘‘cross-border fraud’’

I am describing scams involving advance fees-for-loans, foreign sweepstakes, and

foreign lotteries that are initiated by persons in another country against resident

sof the United States often through phone solicitations, sometimes through the mail.

The perpetrator of the fraud uses an international border as an obstacle to being

caught and prosecuted. One major border for such activity is the U.S.-Canadian border. Victims in our country often think it isn’t worth the trouble to seek a remedy,

and law enforcement personnel are faced with multiple extra steps and procedures

to bring the perpetrators to justice. Perpetrators rely on this reality to escape prosecution.

A common practice in a Canadian-U.S. cross-border fraud scheme is for a con artist to operate out of British Columbia or some other province in Canada and make

calls to persons in the United States who are most often elderly. Using a warm and

friendly style, they offer the U.S. resident some exciting and large financial

winnings or opportunity which requires an up-front payment of a significant amount

which the con artist claims is necessary for taxes or customs fees or similar purpose.

The FTC estimates that the dollar loss reported by U.S. consumers with respect

to Canadian companies for FY 2000 was $19.5 million, and for FY 2001, the FTC

estimates that number will rise to $36.5 million. And these are just the reported

losses. Many people don’t even report their losses, because of the embarrassment

of having been duped.

We have a first-hand example of how these con-artists work their persuasive talents over the phone. It comes from a tape made by the duaghter of one of our witnesses. The first excerpt we will hear was taped by Ann Hathaway, the daughter

of witness Bruce Hathaway. Until recently, Miss Hathaway was a Michigander. She

moved from Michigan to Ohio in 1998 to take care of her parents. Miss Hathaway

recorded this conversation on October 15, 1998, with the help of the Ohio Attorney

General’s Office.

In this conversation a ‘‘Mary Thompson,’’ who claims to be from the U.S. Customs

Service lays out an elaborate and chillingly believable scam to Ms. Hathaway. Mary

Thompson says that because Miss Hathaway’s father entered illegal sweepstakes

and lotteries (foreign sweepstakes and lotteries are illegal for U.S. citizens to play)

in the past, these lottery and sweepstakes companies have agreed to a court settlement which will pay $110,000 to 1,200 people who have all lost money in the past

due to participating in foreign lotteries and sweepstakes. The catch is that the people who are entitled to the settlement money must send money to Mary Thompson

at the U.S. Customs Service to cover the taxes on the settlement amount that they

will be receiving. Of course, no one ever gets the settlement money.

Conversation No. 1

Mary Thompson: It’s very simple, Ann, I’m going to explain to you from the beginning.

Ann Hathaway: Oh, well, thank you.

8

Mary Thompson: Your father, your father has got a bad habit to enter sweepstakes and lottery companies. You know those sweepstakes that you get by the

mail?

Ann Hathaway: Right.

Mary Thompson: You send $10 dollars, $20 dollars, they promise you money now.

Ann Hathaway: Right.

Mary Thompson: He lost . . . he, he sent quite a bit of money to those sweepstakes and lotteries within maybe 3 years, yes?

Ann Hathaway: Oh, ok.

Mary Thompson: What happened is that those companies are illegal. They promise him money, they never send him anything, so those companies were seized. I’ve got some lists here that I, I did send your father—— Ann Hathaway: Yes.

Ms. THOMPSON [continuing]. Of the companies that were seized, and those companies were brought to court. It was a class-action suit done against them, and finally

they decided to, with the money they made with that, to send it back to (uh) some

people in a lot of countries.

Ann Hathaway: Yes.

Mary Thompson: People from Australia, United States, and Canada who were playing those sweepstakes and lotteries. It is very hard for them to send like $10,

$20, or $40 back to 30 million people. I would have to call everybody and say, ‘‘OK,

how much did you lose? We’re gonna send it back to you.’’ So what they decided to do instead is offer a court settlement of $110,000, ah, to about, let me see, it’s about 1,200 people that are going to be getting that money, OK? What they did is

they called your father up, there’s an attorney by the name of Robert Duran, which

I didn’t know. They called him up, and they told him about that story. And he said, ‘‘Listen, you have to pay taxes on that.’’ Ann Hathaway: Yes.

Mary Thompson: Because it’s coming from another country. I’m at the United

States Customs Office. So what we did is we confirm everything with Mr. Duran,

and your father sends in $2,000 for his taxes because he’s a senior citizen and he’s able to pay the balance only after he receives the court settlement.

[End of tape]

In the second excerpt, which Ms. Hathaway recorded on November 25, 1998, Ms.

Hathaway is now speaking with a ‘‘Mark Davis’’ who says he is an associate of Mary

Thompson, whom we heard in the previous call. Mark says that he is the owner

of a law firm which is handling the settlement. On the phone is also a ‘‘Mr. Taylor’’ who Mark Davis says is an attorney at the law firm. Both Mary Thompson and

Mark Davis have explained to Miss Hathaway that there are additional settlements

for her father to claim. Miss Hathaway has been told that her father is now entitled

to $170,000 from a settlement, but Miss Hathaway or her father must pay $78,000

before they receive any money. Neither Miss Hathaway or her father have paid as

of the time of this call, and in the following conversation, Mark turns up the pressure and tells Miss Hathaway that he is losing money as a result and is upset that

she has not paid.

Conversation No. 2

Mark Davis: Now, I know that (uh) you spoke with Mrs. (uh) Thompson, and she

was expecting those payments, and all the time something happened. Now, you have

to know that we’re running late, and every day that passes by I’m paying interest

for that money that is (uh, uh) held at U.S. Customs.

Mr. Taylor, an associate fo Mark Davis, in the background: That’s right.

Mark Davis: And here, at the law firm, we’re not too crazy about this. So this

is why I’m trying to find answers and I’m trying to find some solutions to get

through this so you can have the money already.

[End of tape]

Fortunately, Ms. Hathaway did not send any money, but her father had already

sent $47,600 to these people, and he never received one cent in return. Although

the Ohio Attorney General’s office tried to go after these crooks, they were not able

to prosecute them because they were located in Canada. So these crooks are still

at large and are probably making calls similar to the ones we just heard.

Today we will also be haring from two other victims of similar scams, including

a witness from Michigan, Mrs. Julia Erb, who will describe how she loast $2,971

from similar calls informing her that she had won a lottery but needed to send

money to cover the taxes she would have to pay on the money.

I thank these witnesses for having the courage to come forward and tell their stories. In doing so they will help others to avoid being victimized by these criminals.

And, again, I thank Senator Collins for identifying this issue for the Subcommittee

and for the work she and her staff have done to make these hearings possible.

9

1The prepared statement of Mrs. Erb appears in the Appendix on page 65.

Senator LEVIN. I want to thank our witnesses today for having

the courage to come forward to tell your stories. It is not easy to

do what you are doing today, but in doing this, you are going to

be helping to prevent other people from being victimized the way

you were by these criminals.

Again, before I swear our witnesses in, which is traditional for

this Subcommittee, I want to thank Senator Collins. It is her energy, her effort, and her staff work, in addition to her own, which

have made these hearings possible and which hopefully will reduce

the number of people who are taken advantage of by these scam

artists and these crooks.

So if our witnesses would now all stand and raise your right

hands. Do you swear that the testimony you will give before this

Subcommittee will be the truth, the whole truth, and nothing but

the truth, so help you, God?

Mrs. ERB. I do.

Mr. HATHAWAY. I do.

Mrs. HERSOM. I do.

Senator LEVIN. Why don’t we call on you, Mrs. Erb, first. I am

trying to figure out some rhyme or reason to the order in which we

will call our witnesses, so we will do it alphabetically.

TESTIMONY OF JULIA ERB,1 KIMBALL, MICHIGAN

Mrs. ERB. Senator Collins and Senator Levin, my name is Julia

Erb and I’m a resident of Kimball, Michigan, which is about 60

miles from Detroit. I have lived in Kimball for the past 12 years

with my husband, Ed. I have six grown children. I might say four

were born in Canada, and it says 14 grandchildren, but I also have

three more as of last Monday—my son adopted them—and five

great-grandchildren. I’ve been a small business owner and am now

retired.

Starting on November 17, 2000, I began receiving phone calls

from persons telling me I had won various prizes. I don’t know why

I started to get these calls. The people on the phone sounded sincere and very excited. They asked me to send money to cover various expenses in the delivery of cash prizes, and I did, using my

Visa credit card, which I am usually very careful of because I like

to pay it off every month. Then I also started sending cashier’s

checks. I never received any of the promised prizes. I can’t believe

I did this, but in order to stop other people from my situation, from

doing what I did and losing money—I lost a total of almost $3,000,

which is a lot for me because I had a stroke a few years back,

which cost a lot—I would like to describe several of my experiences

for the Subcommittee.

My first encounter was November 17, 2000. I was called by a Roy

Taylor, who said he was calling from the First Liberty Exchange

Bank of Carson City, Nevada, phone number 1–800–223–6971. He

said I had won $60 million prize money. He said there were ten

contestants drawn down to three who would win, but I came in

first. I asked him if he was kidding and how many zeroes that was,

and he laughed and said, ‘‘Six.’’ I said, ‘‘You’re kidding, right? What

do I have to do?’’ He said, ‘‘Just be there.’’ Then he asked me for

10

my Visa credit card number and I gave it to him. He said I would

be receiving 99 British Sterling bonds which were worth $60 million, that I would receive $1,800,000 to start and that I would get

$10,000 every month after January 1, 2001.

He then switched me to a Jeff Lee, who said I had entered a

sweepstakes several weeks ago, which I didn’t remember. Mr. Lee

asked me if I had just spoken with Roy Taylor. I said, ‘‘yes,’’ and

he said he would explain what happened next. He said I would receive a package in 3 or 4 weeks verifying who I am and that I am

Julia Erb of good address and I had won $60 million. He said it

would be 99 units of British Sterling premium savings bonds and

that I would have a one-time legal fee of $1,498 which would go

to the lawyers who would put the money in my name on the bonds

for me. He asked me if I could manage that or did I need more

time.

He told me it was important that I not tell anyone about this.

I was beside myself. He also said it was imperative for security

reasons to speak to a Mr. Jordan Richards, who would record our

conversation. He said I was to answer only ‘‘yes’’ or ‘‘no.’’ Mr. Richards repeated the terms of payment, asked if I understood what I

was saying, and I answered, ‘‘Yes.’’

Then Mr. Lee, who is a real gentleman, came back on the line

and said my package would arrive in 3 or 4 weeks. I was to sign

the papers they identified and phone him when I got the package.

I was surprised I could read my notes as I scribbled any which way

while holding the phone. I could hardly write, I was shaking so.

I called Mr. Lee again on November 30, 2000, because I was concerned that my Visa showed that the $1,498 was going to a

Hyperion Bank in Kansas City, yet he was calling me from a First

Liberty Exchange Bank in Carson City. He laughed and said, ‘‘Yes,

dear.’’ I only answered, ‘‘Yes, dear,’’ too. He got a laugh out of that,

and I said I was so hyper I’d say just about anything. He said not

to worry, that he had many banks and that the one—that was the

one he used. He reminded me again to call him as soon as I received my package and told me not to worry and to take it easy.

He was very gracious.

I did get worried, however, and called First Liberty Exchange

Bank on December 19, 2000, after I didn’t receive any package. I

got a Mr. Redfield, who said he was the president of the bank. Mr.

Redfield told me that Mr. Lee was no longer there. I told Mr.

Redfield about our conversation and that the $1,498 was charged

to my Visa but I hadn’t received a package. He said he’d take care

of it.

I received a package about 11⁄2 weeks later which congratulated

me and told me I now had a ‘‘personal, exclusive two-year Premium

Bond Membership package.’’ I immediately called Mr. Redfield and

said I had the bond package. He told me to sign the two papers

in the package and mail them right back to him, which I did. The

papers I sent confirmed that on November 17, 2000, Hyperion

Bank had drawn $1,498 from my Visa account, which would enroll

me in the premium bond program, which would entitle me to win

$60 million. The letterhead on the package showed the address

from Nicaragua, but Mr. Redfield told me to return the signed paVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6601 74107.TXT SAFFAIRS PsN: SAFFAIRS
11

pers to him in Carson City. I never received any money. I phoned

the bank in Carson City, but the number was disconnected.

My second experience occurred in March of this year. I thought

I was just lucky to get another call. On March 1, 2001, at 5:45

p.m., I was called from Australia by a John Turner who said I was

in a drawing that was held every 10 years, 1971, 1981, 1991, and

2001. He said this was an Australian international lotto. The drawing was to be held on Saturday, March 3, 2001, at 8 p.m. A Michael

Wilson came on the phone and gave me a number which he said

to tell no one. Number 25185 was the number and the payoff would

be $50 million. I was to send $445 (plus $20 I paid to Fed Ex) in

a cashier’s check for a chance to win to World Marketing Service

in Vancouver, Canada. I never did receive anything.

The next encounter occurred on Wednesday, March 7, 2001,

when an Andrew Dalton called me from Australia and said I had

just won the top prize of $10 million now and $10 million in the

future. Alan Wilson then called me and said he was working with

Andrew Dalton. Alan asked me if I was a U.S. citizen or if I had

ever been to Australia. When I told him I had never been to Australia, he told me I should come to visit and he would take me

around.

Alan called me every night for about 2 weeks and asked whether

I had sent the money and to talk. According to Alan, I needed to

send him $498 for legal fees to pay the Australian income taxes on

my winnings. Alan would call around 9 p.m. every night. When the

phone rang around 9 p,m,, I would look at my husband and say,

‘‘That must be Alan.’’ One night, my husband and I went to church

and when we got home, the phone was ringing. It was Alan. He

said, ‘‘Where were you? I tried to reach you several times tonight.’’ I told him I had been to church. Alan said, ‘‘You are a lovely lady.’’ I believe he was a criminal with a conscience. I think he felt bad

about what he was doing. I really did, from his voice and all, but

then again, that’s their selling point.

On March 7, 2001, I sent a cashier’s check for $498 to R.M.G.,

in Vancouver, British Columbia, Canada. I received nothing in return. A few days later, Alan stopped calling.

The fourth encounter involved a Mario Lopez from Madrid,

Spain, at 8:30 p.m. on March 8, 2001. Mario told me he knew Alan.

Now, Mario said that King Carlos and Queen Sophia had a twoperson drawing and I was one of the two winners, the other person

being in California. He said the amount of the winnings was

$200,000—we’re getting cheaper—and he would send it to me within 1 month by Federal Express.

He said I was chosen completely at random because of the way

the Americans helped Spain and they wanted to give back to the

United States and he needed $1,900 from me. When I told him I

couldn’t afford that, he said I could win $2,000 [sic] and ten free

tickets to El Gordo, the Spanish lottery. He then said, ‘‘Well, send

$500,’’ which would cover the amount it would take to exchange

$200,000 to American dollars from Spanish money at Banco

Expano. I sent a cashier’s check for $500 to R.M.G., Suite 277,

3351 Kingsway, Vancouver, British Columbia, Canada, V5R5K6.

He gave me his phone number, which I never called, since he said

it was $9 a minute.

12

1The prepared statement of Mr. Hathaway appears in the Appendix on page 68.

I have not received any money that I was promised. I lost only a total of almost $3,000, and I feel terrible, but that was a lot of

money to me at this time. I can’t believe I was so stupid to have

done this. I just wanted to provide for my children and grandchildren. My husband and I don’t need anything at this age, but

I thought I could do something for them.

They did it very cleverly, as my bonds had to be in for a complete

month, which wouldn’t be until February 2001, and then March

would be the drawing. It was very stupid of me and I felt I was

just lucky. I had prayed always for a way to help my family, and

I believed I could after paying the income tax on all this money,

and here I am, broke. Thank you.

Senator LEVIN. Thank you. Your extraordinary good nature was

taken advantage of, and somehow or other, you’ve been able to retain it.

Mrs. ERB. Well, lots of kids around.

Senator LEVIN. I was just chatting here with Senator Collins,

that you could believe somehow or other that he felt badly about

scamming you is the scam.

Mrs. ERB. I don’t any longer.

Senator LEVIN. Believe me, he didn’t feel the slightest bit badly

about scamming you.

Mrs. ERB. They’re probably actors, very polished.

Senator LEVIN. Yes, and that is the problem that they are credible and they make people believe who are trustful people like you.

Mrs. ERB. Well, I had hoped I could help my family. I really did.

Well, I’m not much help this way.

Senator LEVIN. Well, I am sure you are helping them in a lot of

other ways, indeed.

Mr. Hathaway, let me call upon you next. You are from Columbus and we appreciate you and our other witnesses traveling here

to discuss this issue, and again, I know it is not easy to talk about

these things, but you will be saving a lot of other people from being

scammed the way you were. We also appreciate, as Mrs. Erb did,

trying to do your statement in no more than 10 minutes because

of our time constraints, and we may be interrupted at any time, as

a matter of fact, to have to run over for a vote or two votes. Mr.

Hathaway, would you proceed?

TESTIMONY OF BRUCE HATHAWAY,1 COLUMBUS, OHIO

Mr. HATHAWAY. I would like to thank the distinguished Members

of the U.S. Senate Subcommittee for providing me the opportunity

to speak with you today. My name is Bruce Hathaway. I am 83

years old, a certified public accountant and Lieutenant Colonel in

the U.S. Air Force, retired. I have come before you today to share

with you my experiences as they relate to cross-border telemarketing fraud.

My wife, Helen Hathaway, has been confined to a nursing home

since March 1997. Unfortunately, my health insurance did not

cover long-term aftercare, and I was forced into a costly self-pay

situation regarding her care. Shortly after her admittance, I began

entering direct mail sweepstakes, hoping that winnings could be

13

used to offset the burden of these additional expenses. As my participation in these sweepstakes increased, so did the frequency in

which these solicitations were received.

Over the next year-and-a-half, I spent nearly $10,000 entering

sweepstakes. On several occasions, I believed I had won a substantial amount of money, later to find out I had been deceived. I have

since learned that it was my participation in these sweepstakes

that made me vulnerable to future telemarketing scams.

In August 1998, I received a phone call from an individual identifying himself as Robert Duran, an attorney with the Canadian law

firm of Rudel, Wiseman and Associates, informing me of a $90 million settlement resulting from a class action lawsuit against a

group of United States sweepstakes companies who were defrauding Canadian citizens. By utilizing information they obtained from

the United States sweepstakes companies, I had been identified as

one of many American citizens who had been victimized by these

companies. Further, having reimbursed all of the Canadian parties

involved, I was entitled to $110,000 as my share of the remaining

monies awarded their firm for disbursement.

I received a call from a woman identifying herself as Mary

Thompson with the Canadian Tax Bureau. She called regarding 7

percent tax required before these monies could be released to me.

I asked if this amount of $7,700 could be taken out prior to sending

me the settlement, but she said that would not be possible. I then

requested that upon receipt of the settlement, I could forward a

check to cover the taxes, but again, she refused. Since we could not

reach an agreement, she said she would talk to her superiors about

releasing these monies.

Her return call concluded I could pay $2,000 up front with the

remaining $5,700 to be due 15 days after receiving the settlement

check. I acquired a cashier’s check in the amount of $2,000, payable

to Tony Wiseman, and mailed it to a couple in Montreal as instructed.

Several days later, I received another call from the Canadian Tax

Bureau, this time from a man identifying himself as James Jann.

He informed me that my settlement check was being withheld

pending the addition of another $170,000 claim. He also informed

me that these monies were subject to the same 7 percent tax rate.

I asked if I could wait until I received the first $110,000 check before paying the 7 percent tax on the second $170,000. He said this

was not an option, as there had already been one check issued in

the amount of $280,000, the sum of both settlement checks. However, I could pay $3,000 now and the remainder upon receipt of my

settlement check.

This time, I sent a cashier’s check in the amount of $3,000 made

out to Julie M. Wilson and mailed to Gloria Sax, her assistant in

Montreal. I was told that I would receive my $280,000 check delivered by armored car between October 5 and October 9, 1998, and

that the driver would accompany me to the bank to deposit the

check directly into my checking account or savings account. He reminded me that upon receipt of these monies, I would be asked to

pay the amount of $14,600, which was 7 percent owed in taxes less

the $5,000 that had been paid. I mailed the check and waited for

14

1The prepared statement of Mrs. Hersom appears in the Appendix on page 74.

the beginning of October and the receipt of the settlement check,

as promised.

On September 29, 1998, I received a call from John Taylor, who

purported to be with the U.S. Customs Department. He indicated

that he had my $280,000 settlement check. He said before these

monies could enter the United States, I had to pay a 10 percent

Customs fee, the taxes of 7 percent and Customs fees of 10 percent.

Mr. Taylor said the total was $42,600 owed, which was $14,600 for

taxes and $28,000 for Customs fees. Adding the $5,000 in taxes

that I had already paid, the grand total was $47,600.

I have asked my daughter to accompany me here today because,

as my caregiver, she is a victim of these circumstances, as well.

Had it not been for her intervention, the involvement of the Ohio

Attorney General’s Office, and the combined efforts of Robert E.

Morgan and Edward J. Earley, the scam artists would have continued trying to exploit more taxes and fees from me.

That ends my brief. This has been an honor and a privilege for

me to be here today. I am confident your thoughts will be with all

of the senior citizens across our country that have or will have fallen victim to similar scams. If it is true that these criminals are

seeking refuge in Canada, using the United States-Canadian border to avoid detection, apprehension, and prosecution from the

United States law enforcement, please continue your efforts to better the communications and assistance needed from the Canadian

authorities. Thank you.

Senator LEVIN. Thank you very much, Mr. Hathaway, for coming

forward with this story, which I know is painful to you and your

family, and we thank you and your daughter both.

Senator Collins.

Senator COLLINS. Thank you, Mr. Chairman. It is a great pleasure for me to introduce the final witness on this panel, Mrs. Ann

Hersom, who is from Acton, Maine. That is a small community in

Southern Maine, in York County, and it is a great pleasure to have

Mrs. Hersom here today. We had a chance to visit yesterday and

I want to echo the thanks of our Chairman to all three witnesses

for having the courage to come forward. Mrs. Hersom, we look forward to your testimony, if you would like to proceed.

TESTIMONY OF ANN HERSOM,1 ACTON, MAINE

Mrs. HERSOM. My name is Ann Hersom. I appreciate this opportunity to address the distinguished Members of the U.S. Senate

Permanent Subcommittee on Investigations regarding how my family was victimized by cross-border telemarketing fraud.

I am a 62-year-old business woman and my 80-year-old husband

is retired. I have owned a small gift shop in downtown Sanford

since 1994. My husband, Mr. Leon Hersom, was initially contacted

sometime in 1997 through mail solicitations offering chances in foreign lotteries. I really did not pay much attention to what my husband was doing until 1998. I suffered an injury to my back in January 1998 and had surgery in August 1998. Since 1999, I have remained at home, caring for my husband and 20-month-old grandson. My son took over the day-to-day operations of my business.

15

Since remaining at home, I became aware that my husband was

receiving numerous telephone calls during the day from telemarketers. I could not help but notice the calls. They would start

at 7 a.m. and continue until 9 p.m. at night. It was only then that

I discovered that my husband had been sending money to Canadian telemarketers and sweepstakes drawings in the United States

in the belief that he had won a lottery and needed to pay the taxes

on the winnings.

While I have no exact way of knowing how much my husband actually sent these people, I believe our financial loss is between

$15,000 and $20,000. For the records I could piece together, I know

that my husband wired via Western Union $2,700 to specifically

pay for the taxes on his winnings. In one instance, he wired $1,500,

which was all of our income for that month.

I am sure you can understand how hard it is to manage when

all your money has been thrown away. After I became aware of this

situation, I reviewed our checkbook and credit cards and found numerous checks and credit card charges made out to these people for

$300 to $500 at a time. It was so bad that I took the checkbook

and the credit cards away from him.

I then discovered that my husband was obtaining cash and mailing that directly to Canada. When he was unable to obtain cash,

he would take his medical insurance reimbursement checks from

the mail, sign them, cash them, and send the money to people in

Canada and the United States. My husband would receive approximately 20 sweepstakes mailings on Monday and five to ten sweepstakes mailings the other days of the week. These sweepstakes

mailings would be from all over the world telling my husband that

he had won the lottery and just had to pay for processing fees.

Many of the mailings had catchy slogans: ‘‘You are a winner of

$1 million and all you have to do is pay $19.95.’’ Many of the tactics from the mailings and telemarketers are also,—‘‘This is a onetime only offer, you can only do this today,’’ ‘‘you mean you don’t

want to win all this money?’’ and ‘‘you could really use this money,

couldn’t you?’’ These tactics prey on people’s minds. Senior citizens

need to be made aware that they don’t have to pay to win something.

We have started to receive telephone calls at our home from people with foreign accents. The telephone operator will say, ‘‘You

have an international collect call, will you accept,’’ and before I can

say no, someone with a foreign accent will say, ‘‘Pick up the phone,

Mr. Hersom.’’, say ‘‘yes, Mr. Hersom.’’ This has been very, very

frustrating—I try to always be the one to answer the phone.

My husband still insists that he will win ‘‘the lottery’’ and even

opened a postal box, unbeknownst to me, in order to continue to

receive ‘‘lottery’’ information. I don’t think I can fully explain how

surprising and frustrating this experience has been.

My husband was a businessman for many years who owned his

own lumber business. My husband was always very intelligent and

was good at making smart decisions. He is not the type of man I

would have imagined could fall for a con artist. However, my husband is not in good health. He suffers from congestive heart failure

and is on oxygen 24 hours a day. With the onset of his illness, it

also appeared as though he became exceedingly concerned about

16

having enough money to pay for his ongoing medical treatment, as

well as to meet normal living expenses.

I believe that as people get older and they can no longer work

to support themselves, they become fearful of how much money

they will have and how they will be able to manage. Senior citizens

are afraid that their money will not last as long as they will. This

is a deep-seated fear that younger people—who are able to work,

to make more money if they need to—do not fully understand. I

think these telemarketers prey on this fear to the point that people

respond to an enticement that under normal circumstances would

not make sense. Even now, I still monitor the mail and telephone

calls to ensure that telemarketers are not getting to him.

This entire experience has been extremely hard on our marriage.

At one point, in desperation, I told him I would leave him if he

didn’t stop. Even today, after everything we have been through— he still believes he can win the lottery. Or that he has already won

and merely has to pay a processing fee.

I hope my remarks today may alert potential victims to this type

of fraud. More importantly, I hope that spouses, brothers and sisters, and children of the elderly pay attention to their loved ones

and become involved in their life in order to prevent some telemarketer from defrauding them. Many senior citizens are alone

and fearful. They are easy targets for telemarketers, whose

scripted calls appear to offer friendship but only play on senior citizens’ fears in order to steal their life savings.

I want to say today to everyone that ‘‘if it sounds too good to be

true, it is.’’ I also want to say that senior citizens should not be embarrassed to talk about this with their families. Their families can

help them to understand that this is not their fault. They are being

preyed upon by these telemarketers and what is needed is more

people to know about this so that it can be prevented in the future.

Senator LEVIN. Mrs. Hersom, thank you for coming forward.

Thank you for your wise advice at the end of your statement. I just

wish everybody who receives a phone call could hear that advice.

The purpose of these hearings, as Senator Collins has mentioned,

is in part, at least, to spread the word about these crooks and to

try to prevent people from being taken in. There are other purposes, as well, in terms of oversight of how our laws work and possible legislation, but this is one of the primary purposes of this

hearing and these hearings which Senator Collins has scheduled.

We will now go and vote. We will be back, hopefully—are there

one or two votes, do we know? It is two votes, which means we

could be gone possibly 20 minutes. We will resume with questions

when we come back, so the three of you feel free to get up and

move about, but we will proceed with questions of the three of you

briefly, and then we will move to our second panel, upon our return. Thank you.

[Recess.]

Senator COLLINS [presiding]. The Subcommittee will come to

order. As we are waiting for Senator Levin to return, he has agreed

that I can proceed with some questions.

I first want to thank all three of our witnesses for their very

compelling testimony. As we have mentioned several times, we

hope that people who hear your tragic stories will be far more careVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6601 74107.TXT SAFFAIRS PsN: SAFFAIRS
17

ful when they receive telemarketing calls or direct mail solicitations about sending money, particularly when they do not really

know who is on the other end.

I would like to ask all three of you the same question to start

off with—Mrs. Hersom, I will start with you. Did your husband recover any of the money that he sent?

Mrs. HERSOM. No, he didn’t.

Senator COLLINS. Mr. Hathaway, did you get back any of the

money that you sent in response to the solicitations?

Mr. HATHAWAY. I am sorry, I didn’t hear all that.

Senator COLLINS. I am sorry. Did you recover any of the money

that you sent to these telemarketers?

Mr. HATHAWAY. No.

Senator COLLINS. Mrs. Erb, did you ever recover any of the

money that you sent?

Mrs. ERB. No, I haven’t.

Mr. HATHAWAY. Not one dollar.

Senator COLLINS. So all three of you, to this very day, have sustained these losses and not recovered a cent, is that correct?

Mrs. ERB. That’s true.

Senator COLLINS. And I think that highlights one of the problems

that we have here, because unfortunately, the prosecution of crossborder fraud is very complicated because of the different countries’ law enforcement systems that are involved, which make criminals

very difficult to pursue and makes it very difficult to recover money

for those who have been defrauded. I think that is an important

lesson, as well.

Mrs. Hersom, how difficult is it for the loved ones of a victim to

deal with this issue? You talked a little bit about that in your testimony. Could you talk a little bit more about what it was like for

you when you discovered that your 80-year-old husband had apparently been sending money without your knowledge?

Mrs. HERSOM. Well, when I first realized he was doing this, I

was in a state of shock because I couldn’t believe that he would do

something like this, because he has always been the type of person

that if he heard that this was happening to someone else—when

he was probably 10 years younger—he would have been shocked,

because he’s just not the type of person to do this. And it’s so frustrating to know that someone is doing this and that there’s nothing

you can do about it.

Senator COLLINS. And if you hadn’t happened to have been injured and been home when these calls and other solicitations were

coming, you might never have discovered this.

Mrs. HERSOM. I might never have discovered it.

Senator COLLINS. And to this day, you testified that your husband believes that he is likely to win one of these Canadian lotteries, is that correct?

Mrs. HERSOM. I think he really does believe it.

Senator COLLINS. Still believes. And what do you think made

him vulnerable? As you pointed out, he was a businessman. Was

it his illness? Was it concern about finances? What seems to have

been a factor in the other cases we have heard, is either wanting

to do something nice for your family, as in the case of Mrs. Erb— or in Mr. Hathaway’s case—concern about the very large nursing

18

home bills that his wife was incurring. In your case, what do you

think made your husband particularly susceptible to these kinds of

fraudulent pitches?

Mrs. HERSOM. I think, for one thing, he may have been lonely,

because he was home alone all the time and these people offered

him friendship. And I think he was concerned that he had a lot of

medical expenses. I think as senior citizens get older, they start

worrying about how long they’re going to live and is their money

going to hold out, and, of course, he knew that I’m about 18 years

younger than he is, that I would need some financial support after

he goes.

Senator COLLINS. One of the parts of this whole problem that is

most troubling to me is that these con artists are preying on very

good intentions of people and people’s trusting nature. They are

taking advantage of people who want to make sure that their families are provided for and that their bills are paid when they are incurring high medical expenses. That is what makes this even more

deplorable, because these con artists really are hitting people when

they are vulnerable.

Now, Mrs. Hersom, most Americans do not realize this, and I

think this is part of the problem, but it actually is illegal for someone to sell you a foreign lottery ticket in the United States. So any

offer that comes from a Canadian source offering a lottery ticket

is illegal. Were you aware of that?

Mrs. HERSOM. I was aware of it, but my husband wasn’t, and

when I found out this was going on, I told him that this is illegal.

Senator COLLINS. Finally, I would like to ask all three of you,

what do you think we should do—perhaps in conjunction with law

enforcement officials or groups like AARP—to try to alert senior

citizens about the dangers of these scam artists? Do you think, for

example, that public service announcements on television should

tell people that lottery tickets from other countries are illegal or

that they should be careful in sending money when they do not

know who is asking you for it? What do you think would be helpful

and might have helped in your personal case? Mrs. Hersom.

Mrs. HERSOM. I think anything that can be done would help. But

in my case, I don’t know if anything would have helped, really, because there had been programs on TV about fraudulent people like

this and I would sit him down and have him watch it and explain

it to him, and even explain how people can take your identity from

your credit card number, your birthdate, and all of this, and he still

kept doing this. So I really don’t know, but I think maybe in other

people’s cases, the more information that is out there, the better.

Senator COLLINS. I think you are right that in some cases, the

only answer is for law enforcement to try to shut down these fraud

rings altogether, but it is hard to do this given that they proliferate

so easily. I think consumer education is an important part of the

solution, as well.

Mr. Hathaway, would it have helped you if you had seen television ads or some kind of public service campaign to alert you that

Canadian lottery tickets being sold in the United States were illegal, or some other information campaign? Would that have been of

assistance in your case, do you think?

19

Mr. HATHAWAY. If I had known what I know today—I learned a

lot from that experience—I would have been much more skeptical.

But they snowed me and I respected the fact that they were attorneys, or they claimed to be attorneys. I can’t say if they are or

were.

Senator COLLINS. They almost certainly were not, I would guess.

Mr. HATHAWAY. I would think that if we could convince the Canadian Government that this scam business is going to boomerang

on the country of Canada in many respects. The scam artists are

making some money off of that and the people that aren’t involved

but have financial problems will be inclined to ignore the law, their

laws, with respect to making money. I think the scam artists are

going to encourage a lot of people that are in Canada to get involved for making easy money.

Senator COLLINS. So you would like to see a crackdown by Canadian law enforcement and more cooperation with law enforcement.

Mrs. Erb, is there something that could have been done to have

made you more aware that this was a scam?

Mrs. ERB. I didn’t know it was illegal, for one thing, and I think

advertisements would help, that say to be careful of it, and put the

ads in papers and magazines. I didn’t know it. And another thing

on their side, tell no one. They said, ‘‘You’re going to have friends

you never knew you had,’’ and I didn’t even tell my family. Only

my husband knew about it, of course. My son only found out about

it because he’s a chiropractor and he adjusts me all the time. He

kept saying, ‘‘Mom, what’s wrong? There’s something bothering

you. You’re all tense.’’ And finally, I did tell him.

Senator COLLINS. So part of the scam was to try to make sure

you did not tell anybody.

Mrs. ERB. And he said he wouldn’t, and he did say something to

his wife and she called Jennifer Granholm. I believe that’s how I

got in here.

Senator LEVIN. The Attorney General.

Senator COLLINS. Thank you very much. Thank you, Mr. Chairman.

Senator LEVIN [presiding]. Thank you, Senator Collins. The reference to Jennifer Granholm is to the Attorney General of Michigan.

Mrs. ERB. Right.

Senator LEVIN. So it was your daughter who called her?

Mrs. ERB. Daughter-in-law

Senator LEVIN. Daughter-in-law, and then she, in turn, as I understand it, put you in touch with Phonebusters.

Mrs. ERB. Right. I called and I know I talked to them, and I’ve

had letters from another gentleman there and I sent him copies of

my so-called bonds package here.

Senator LEVIN. And Phonebusters is an organization, a Canadian

organization——

Mrs. ERB. A Canadian one.

Senator LEVIN [continuing]. Which fights fraud across the borders.

Mrs. ERB. Right. I’m willing to work with them.

20

Senator LEVIN. And they are well known in Canada and known

to some extent here as a real great resource to fight fraud, and we

will welcome them in a moment.

Are you still getting phone calls?

Mrs. ERB. No, but I’m getting lots of letters.

Senator LEVIN. The scam artists are still working on you?

Mrs. ERB. Oh, yes, France, Spain, Australia, dozens there, and

I keep giving them to Laura.

Senator LEVIN. OK. Laura on my staff.

Mrs. ERB. Right.

Senator LEVIN. Are you getting any phone calls or mail these

days from these scam artists, Mr. Hathaway?

Mr. HATHAWAY. I haven’t been in the last year or two.

Senator LEVIN. Since you went to the Ohio Attorney General.

Mrs. Hersom, do you know if the phone calls have stopped?

Mrs. HERSOM. No, they haven’t stopped. We still get numerous

phone calls every day. But I’ve been doing a new thing. When they

call and ask for my husband, I ask them to wait a minute, please,

and I just put the phone down on the counter and leave it there.

[Laughter.]

Mrs. HERSOM. Let them pay for the call.

Senator LEVIN. Let them pay the extra money. If a law enforcement organization gave you a tape recorder and asked you to

punch a button the next time you got a call from one of these people, would you be willing to do that?

Mrs. HERSOM. I sure would.

Senator LEVIN. This is what Mr. Hathaway’s daughter did in

Ohio. Mrs. Erb, would you be willing to do that, if law enforcement

gave you a tape recorder?

Mrs. ERB. I did get one call from, I believe it was Australia, too,

and he congratulated me and said, ‘‘Mrs. Erb?’’ And I said yes. And

he says, ‘‘You just won another bond of British Sterling silver, one

of the bonds.’’ And I said, ‘‘Oh, that’s so nice,’’ and I led him on a

little bit. And then he said I was going to make so much money

from it, and I said, ‘‘Gee, I’ve got 99 more. Would you like to help

me make something of that?’’ Bang, the phone went down.

Senator LEVIN. I think the next panel can help us understand

what law enforcement is doing, what the response is, where people

should go when they get these calls in terms of seeking help to try

to stamp this out.

Do any of you have the service on your phone where you get the

phone number that is calling you, that you can tell what number

is calling you on your telephone?

Mrs. HERSOM. Yes, but a lot of them are unknown name, unknown numbers.

Mrs. ERB. Yes. On the foreign——

Senator LEVIN. Numbers that are not known to you, but they are

there. Do you have that service on your phone, Mr. Hathaway, do

you know, the caller ID? Do you have that on your telephone?

Mr. HATHAWAY. Yes.

Senator LEVIN. You do. Mrs. Erb?

Mrs. ERB. I don’t have it—— Mr. HATHAWAY. We changed phone numbers and that stopped a

lot of them, because we’d had the phone for over 25 years.

21

1Mr. Elliot’s Powerpoint presentation appears in the Appendix on page 77.

Senator LEVIN. I see. You changed your phone number. That is

why you are not getting phone calls. That explains it.

Mrs. Erb, you do not have the caller ID on your phone?

Mrs. ERB. No, I don’t, but I know a friend of mine said that it

wouldn’t identify anyway because it’s out of State or something like

that and it’s unknown.

Senator LEVIN. I do not know the answer to that question,

whether caller ID works across the border or not, actually.

Mrs. ERB. I don’t know.

Senator LEVIN. All right. Senator Collins, do you have any additional questions?

Senator COLLINS. No. Thank you.

Senator LEVIN. We thank you all again for coming forward, for

not just your cooperation, but for your willingness, your interest in

having your stories known, as painful as they are, so that others

can be saved the kind of pain which you have suffered and hopefully put these crooks out of business as soon as we can, or at least

put as much pressure on them as we possibly can from every direction that we can. Your contribution to that is very much appreciated. Thank you.

Senator LEVIN. We will now call our next panel. We have three

witnesses, Barry Elliot, who is Staff Sergeant in the Ontario Provincial Police; Jackie DeGenova, who is the Chief of the Consumer

Protection Section of the Ohio Attorney General’s Office; and Lawrence Maxwell, Inspector in Charge, U.S. Postal Inspection Service.

You can all just stay standing for a moment while we swear you

in under our rules, as we are required to do.

Do you swear that the testimony that you will give before this

Subcommittee today will be the truth, the whole truth, nothing but

the truth, so help you, God?

Mr. ELLIOT. I do.

Ms. DEGENOVA. I do.

Mr. MAXWELL. I do.

Senator LEVIN. Thank you very much. We welcome you. You are

experts in the area of cross-border fraud prosecution and we very

much welcome your testimony. Let’s start with Mr. Elliot, who is

a Staff Sergeant with the Ontario Provincial Police. We welcome

you to our country and thank you for coming forward. Detective Elliot.

TESTIMONY OF DETECTIVE STAFF SERGEANT BARRY F. ELLIOT,1 ONTARIO PROVINCIAL POLICE, NORTH BAY, ONTARIO, CANADA

Mr. ELLIOT. Thank you, Senator. First of all, I am Detective Staff

Sergeant Barry Elliot, OPP Anti-Rackets Section, creator and coordinator of Phonebusters and Seniorbusters, which is the national

call center located in North Bay, Ontario, Canada.

I am disappointed that I am the only Canadian here for the next

2 days, and I know that there were others who would have liked

to have come. I would like to thank the many agencies and individuals on both sides of the border for their support of Phonebusters,

too many to mention. I would also like to personally thank Premier

22

Mike Harris from the Ontario Government and his Minister David

Tabuchi for their personal support of Phonebusters, which without,

we would not exist.

I have supplied the Committee with a copy of the latest

Powerpoint presentation, which shows some obvious trends. We

have seen since 1995, an X pattern created on the number of Canadian victims of telemarketing fraud and the number of American

victims of telemarketing fraud that are being hit by Canadian-operated fraud companies, and the X represents a huge drop since 1995

in the number of reported Canadian victims. At the same time, we

see a huge increase in the number of reported American victims.

The large result of the reduction in Canadian victims is due

mainly through education. Today, more than 80 percent of the calls

that we get at Phonebusters are American victims. They are being

targeted with the three major pitches—I mean, there is a number

of them—the sweepstakes lottery pitch, which you have heard here

today, loan scams, and a number of credit card pitches. They are

targeting mainly the American elderly, as well as the American

poor.

When we identified the trend or the beginning of a trend in 1995,

we initiated the first-ever cross-border fraud meeting involving

telemarketing fraud in Toronto. One of the members of that meeting is Jonathan Rusch from the U.S. Department of Justice, who

I know is here today and will be testifying tomorrow, and I am

sure he will corroborate some of the things that I’m going to say

today.

We had a series of meetings trying to inform the Canadian Government of this very serious problem, or what we thought was

growing to be a very serious problem. Due to the complete lack of

action by the Canadian Federal Government to take this problem

seriously over the series of meetings that we had to develop a national strategy, I know that President Clinton asked Prime Minister Chretien to do something about it around 1996 or 1997. As

a result of that, there was a number of meetings again and a crossborder fraud report was presented to both heads of both countries.

A number of things happened as a result of this cross-border

fraud report. Industry Canada Competition Bureau started to beef

up its telemarketing task force in Ottawa. There was new legislation that was being developed under the Competition Act to try and

make it easier to convict fraudulent telemarketers, something similar to the telephone rules that were created here. Project Colt in

Montreal, where 99 percent of all Canadian victims are being hit

from and also where, starting in 1995 big time Americans were targeted. So there was a task force created in Montreal to do something about it, and there was also a small task force created in

Vancouver, and, of course, this was all as a result of the recommendations or part of the recommendations brought forward by

the cross-border fraud report.

Three years later, and I’d like to repeat that, 3 years later, we

now have a task force that’s been created in February 2000 in Toronto and it was largely created by people who were interested in

trying to do something about cross-border fraud and the members

at the time were the Toronto Police, Industry Canada Competition

Bureau, Ministry of Consumer Business Services, Ontario, and the

23

Federal Trade Commission. This year, the Ontario Provincial Police

and the U.S. Postal have also joined. In March of this year, 4 years

later, the RCMP and the OPP have finally signed an MOU agreeing that Phonebusters is the national call center for the country.

The three task forces are small, under-funded, and overtaken by

the sheer mass of organized criminal telemarketing that is operating daily in these areas. On any given day in Canada, we have

300 to 500 criminal operations that are mainly targeting American

victims.

I was just in Raleigh, North Carolina, at a conference sponsored

by NAAG and the National White Collar Fraud Program and all

I heard were complaints asking what is Canada doing about these

companies that are attacking Americans? The problem is continuing to get worse all the time.

The Canadian Government has reviewed the 1997 report and

gone over the recommendations that were provided and have given

themselves ‘‘A’’s on all the things that they have done. My personal

thoughts on what the Federal Government of Canada has done can

be compared to moving a truckload of sand from Toronto to Washington by using a coffee cup.

The reasons are clear for this epidemic of crime in Canada. We

have collected approximately 126,000 complaints at Phonebusters

from 123 countries, mainly from the United States. Accomplishments of the task force in Toronto, which has only been operating

for about 18 months, include shutting down 36 boiler rooms, charging 61 individuals and arresting many more who were not charged.

If you average that yearly, they are taking down about 18 rooms

a year, where we have anywhere from 100 to 200 rooms operating

daily. It is very minute.

Senator LEVIN. I am sorry, just to interrupt just for a second, I

thought you said 300 to 500 before.

Mr. ELLIOT. That was for Canada. This is just Toronto. We have

three hot spots, Montreal, Toronto, and Vancouver.

Senator LEVIN. Thank you.

Mr. ELLIOT. The reasons are clear as to what we should be doing

about it and why the problem is so big. We have a lack of real

Canadian Federal Government leadership and ownership of this

problem. We have a lack of new Federal resources, which are desperately needed by the task forces who now have to use very expensive techniques, such as wiretap, to get these guys.

The Toronto task force, for example, is operating on a shoestring

budget. They are doing a great job and they’re working very hard,

a small group of guys, about eight of them. These guys are working

and taking down one room after a time, but there’s hundreds of

rooms around them.

When they take them down and successfully charge them and

take them before the courts, we encounter an additional problem.

We have extremely light sentencing within the Canadian courts, it

does not deter the crime but only encourages the convicted to continue operating even while they’re in jail, which is usually for a

very short period of time, if they do in fact get jail time. It also encourages all the sales people who are working in these rooms to go

out and create their own businesses and make more money because

nothing is happening to their bosses.

24

1The prepared statement of Ms. DeGenova appears in the Appendix on page 123.

Canada has a great deal of success in fighting fraud domestically

because of education and awareness. We’re very proud of that.

We’ve destroyed the criminal market in Canada through education.

I can assure you that the success was not because the criminals are

afraid of spending any length of time in jail. Internationally, Canada is known and is proud to be a safe place to do business. Unfortunately, it has become a safe place for criminals to do business.

In conclusion, the Canadian Federal Government must stop

sending two tablets of Tylenol to try and cure what appears to be

an epidemic and take this cross-border crime seriously and commit

the necessary resources to successfully combat it. Thank you.

Senator LEVIN. Thank you, Detective Elliot, very much for your

very helpful testimony.

Senator LEVIN. Ms. DeGenova.

TESTIMONY OF JACKIE DeGENOVA,1 CHIEF, CONSUMER PROTECTION SECTION, OHIO ATTORNEY GENERAL’S OFFICE,

COLUMBUS, OHIO

Ms. DEGENOVA. Good morning, Chairman Levin and Senator

Collins. My name is Jackie DeGenova and I am Chief of the Consumer Protection Section at the Ohio Attorney General’s Office.

Thank you for the opportunity to speak with you today on behalf

of Ohio Attorney General Betty D. Montgomery regarding crossborder fraud.

I also would especially like to thank our victims who traveled

here today. They made a tremendous effort and a commitment, and

as you both pointed out, the courage to speak today about the

frauds perpetrated against them really are a reminder of why we

are all here today.

Their stories told this morning—Mr. Hathaway, Mrs. Hersom,

and Mrs. Erb—are simply remarkable, but unfortunately, they are

not unique to the tens of thousands of Americans victimized each

year. We know that violent crime has been on the decline in recent

years, but that international economic crimes are dramatically increasing. Like our panel of witnesses this morning, the majority of

victims that we interview at the Ohio Attorney General’s Office are

not uneducated, reckless, or feeble-minded folks who carelessly

throw away their hard-earned money. Their statements speak for

themselves. Instead, the cross-border con artists are capitalizing on

the globalization of communication, technological advances, and the

limitations of law enforcement to combat the crimes without geographical constraints.

You have asked me to comment on the stumbling blocks in investigating and prosecuting these crimes. It will come as no surprise

to you that the obstacles are many, including the fact that many

States do not have the resources to prosecute the crimes. Ohio is

one of the few States that has specific legislation requiring telemarketers to register with the Ohio Attorney General’s Office, and

it also requires certain conduct by the telemarketers when they are

on the phone. But even so, our cases are often stymied.

Certainly, as well, there is a need for more resources and a

stronger commitment by the Canadian Government to combat the

25

telemarketing fraud. Understanding, however, that we can do little, if anything, to change the flow of resources for Canadian law

enforcement, my comments today will focus on solutions we can implement within our own borders.

Five years ago, as has been mentioned, there was a need for such

white-collar crimes to be recognized as the predatory and life-altering crimes we know them to be today. Awareness of the crimes by

law enforcement and the public is at a higher level than ever, yet

adequate training and funding for our law enforcement continues

to be a problem.

We believe that improvements made in three key areas will also

facilitate investigations and prosecutions of the criminals behind

these cross-border crimes. First, the United States must follow

through on its commitment to the Canadian authorities. Second, a

reevaluation is necessary of the methods that we use to obtain information which is essential in a criminal case. And third, sufficient funds must be allocated for law enforcement to prosecute

within our own borders and to assist in Canadian prosecutions. I

will address each of these separately.

First, the United States must pledge and follow through on its

membership commitments made to Canadian authorities on the

various task forces and in its commitment to assist Canadian prosecutions. In recent years, there have been initiatives designed to

specifically combat cross-border fraud between the United States

and Canada, which Mr. Elliot had also mentioned. These are such

projects as Project Colt, Project Emptor, the Toronto Strategic Partnership Against Telemarketing Fraud, which I will refer to as the

Toronto Task Force.

Project Colt consists of six members of the Royal Canadian

Mounted Police, or RCMP, a provincial attorney general, and a

member each from the FBI, Customs, and U.S. Postal Service. Its

goal is to reduce and prevent fraudulent telemarketing operations

in Montreal by largely intercepting the money sent by the victims

before it’s received by the telemarketers. Unfortunately, there’s not

nearly enough investigators to combat the 400 boiler rooms that

have been identified in Montreal alone.

Project Emptor is a similar operation in the Vancouver area of

British Columbia. It has five members, Canadian authorities, and

one FBI member. It has had positive results by concentrating on

the theory that the forfeiture of the criminal’s assets has the most

significant deterrent effect on them.

The Toronto Task Force has United States designated members

from the Federal Trade Commission and the Postal Service, and at

the Ohio Attorney General’s Office we have forged excellent relationships with members of the Toronto Task Force and hope this

fall to become a named member of that task force.

While these initiatives have been excellent resources, the United

States must be more diligent in its commitment of assistance by

the various U.S. agencies. On Project Colt and Project Emptor, the

presence of Federal agencies has been sporadic. Prosecutors from

our office in Ohio have spent a great deal of time with the law enforcement authorities in Canada, Vancouver, Montreal, and Toronto. It’s apparent that the Canadians have a very limited understanding of the complexity of our Federal and State laws and the

26

legal system and the seemingly incongruous laws of the different

entities. Full-time membership by the United States designees on

these projects could be an effective tool to sharpen our skills necessary to investigate and prosecute these types of crimes. In addition, they can help law enforcement on both sides better understand the intricacies of the laws on both sides.

In Ohio, our most successful cross-border cases have been those

in which we have acted in a support capacity for the Canadian authorities. We have been available as a resource for legal questions.

We assist in identifying and locating Ohio victims. We follow up

with witness statements and even draft victim impact statements

for trial. We have even funded travel and expenses for victims willing to travel to Canada for the prosecutions.

Our second recommendation is to reexamine the required Federal process for States to obtain information which is essential to

criminal investigations and prosecution. In cross-border cases,

States are completely dependent upon the Federal Government to

assist in obtaining that information. The current system to obtain

information from the Canadian authorities that may be used as

evidence is through what is called an MLAT, or a Mutual Legal Assistance Treaty. These are available only through the U.S. Department of Justice, Office of International Affairs. An MLAT or other

formal request, such as extradition, requires extensive paperwork—

which, incidentally, will only be accepted in Word Perfect format—

before beginning the process of review by two government branches

before final approval. We have also encountered differing opinions

as to when a MLAT is needed for evidence to be admissible in

court.

Overall, the MLAT process takes a considerable amount of time

and is quite intimidating. Meanwhile, the telemarketers are adapting their scams based on the availability of new technology. They

are using prepaid digital phones, laptops, and personal digital assistants. We have seen the rapid increase of boiler rooms that are

transient and fly-by-night operations. In the time it may take for

us to obtain information for a search warrant or summons through

MLAT, there is a substantial likelihood that today’s telemarketing

operations will have moved on to their next victim.

The relationship of the Ohio Attorney General’s Office with the

Canadian authorities has allowed us to obtain information on an

informal basis without resorting to the MLAT process. The information can be used to develop cases but is of no evidentiary value

to us in court because of the manner in which it was obtained.

Thus, we still must obtain admissible evidence and prepare appropriate State charges against Canadian targets.

For these reasons, we suggest examination of workable, cooperative means to shorten the time for the MLAT process, or examining

ways for States to obtain evidence that would be admissible in a

court of law.

Finally, perhaps our best resource comes through funding. Suspects, witnesses, and victims are often separated by literally thousands of miles. Direct funding for States, for witnesses to travel to

Canada for pretrial and trial matters, would go a long way in support of foreign enforcement efforts. Funding to aid in case preparaVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6601 74107.TXT SAFFAIRS PsN: SAFFAIRS
27

1The prepared statement of Mr. Maxwell appears in the Appendix on page 129.

2 Exhibit No. 10 appears in the Appendix on page 283.

tion, such as perhaps purchasing video conferencing facilities to

preserve the testimony of our elderly victims, would also be helpful.

In addition, some flexibility in the rules at DOJ’s Bureau of

Criminal Assistance would assist us and enable the National Association of Attorneys General to earmark grant funds for witness

travel. I know that General Sorrell will be talking also about funding tomorrow, so I will defer to his comments for you tomorrow.

In sum, I believe that the three recommendations outlined, if implemented, will go a long way in assisting the United States and

Canadian prosecutions.

Again, please consider the stories told by the victims, and for a

moment, I urge you to step into the shoes of an Ohio Attorney General investigator or prosecutor. Every week, they have the

unenviable task of sitting next to our victims, like Mr. Hathaway

from Ohio, faced with his loss of money and what he has explained

is his loss of dignity, and attempt to explain to him why we are

unable to get back his money or that the prosecution of criminals

is highly unlikely. Our task today is to find a better approach to

fighting cross-border fraud, and I know it is a difficult one, but I

submit to you it is not nearly as difficult or regrettable as facing

our victims without any answers. Thank you very much for allowing me to testify.

Senator LEVIN. Thank you so much for your testimony.

Mr. Maxwell.

TESTIMONY OF LAWRENCE E. MAXWELL,1 POSTAL INSPECTOR

IN CHARGE, FRAUD, CHILD EXPLOITATION, AND ASSET FORFEITURE DIVISION, U.S. POSTAL INSPECTION SERVICE,

WASHINGTON, DC

Mr. MAXWELL. Thank you, Senator Levin and Senator Collins. I

really appreciate being here today. The last time I was here, you

may not remember me, as I was behind a very broad-shouldered

chief inspector during the deceptive mails hearing, so I am here

today up front and it’s a great pleasure.

I’d like to draw your attention here to something that I think

gets right to the heart of why we are here. One of our local offices

in Pittsburgh, the Allegheny region, worked with the Senior Action

Coalition and also a private advertising agency, Boswell and

Kamastra Creative Communications, and they did this pro bono.

They did this on their own as a public service. If you read the caption here, and I think it’s very compelling, ‘‘He lived through two

World Wars and fought in one. He helped raise six children and

three dogs. He saved a long time for his retirement. Don’t let one

phone call take it all away.’’ 2

This message and the information in this booklet, I think was

done extremely well and it emphasizes what I’d like to say to you

today, and again, I say this as somewhat contradictory. I come

from a long line of law enforcement. Like Senator Collins, I have

roots in Canada. My great-grandfather was a Royal Canadian

Mountie. My father was a New York State Trooper. Yet, I think the

enforcement part of law enforcement, the arrest, the conviction, is

28

1 Exhibit No. 9 appears in the Appendix on page 281.

very important. However, in the area of fraud, awareness and education are critical. If we can get the word out, I think it will do a

lot more than some of these other issues that we have faced.

One of the things we announced at your hearing on deceptive

mailings, the chief announced for the first time an ambitious consumer protection event called ‘‘Know Fraud,’’ 1 and probably at the

time, and I still think, is the most ambitious attempt ever attempted by a conglomeration of agencies. We had a number of partners, including the FTC, Department of Justice, FBI, NAAG, there

was a number of them. This card, you may see is familiar. It went

to every home in the United States. That’s 120 million addresses.

It was expensive. It was ambitious. It was multi-media. We had a

Website. We had a toll-free number. We still get letters today, and

this went out in the fall of 1999, and we are planning a second one.

My point is that the funding for this, because funding was mentioned, and again, as I’m going through my remarks here, I certainly don’t want to repeat too much for the group, the funding

came from a very innovative thinking prosecutor in Iowa U.S. Attorney’s Office. We had an advance fee scheme. We seized about $4

million and we could not identify most of the victims, or they would

get a small amount of what they lost.

So the U.S. Attorney asked us if we could put it in a special

fund, if we could forfeit it, put it in a special fund, and use it for

fraud prevention initiatives, and we said absolutely. So we got the

approvals up the line. We established the fund. We still have monies today in that fund. We used that to fund the printing and the

design of the card and some of the other aspects of it. I think it’s

an effective use and just shows that there’s a lot of things that we

can do if you get creative, and also if you do them together.

The Deceptive Mail Prevention Enforcement Act had an excellent

effect for us. Besides giving us powers like administrative subpoenas, it spreads the word. In showcasing things like we’re doing

here, it emphasizes the problem and it educates people that there

is a problem. We’ve seen a decline by 26 percent in our complaints

in deceptive mails right now. We’re not exactly where we want to

be, but a lot of that is because the legitimate portions of the industry knew this was coming. They policed themselves. They worked

with us. They worked with your staffs, and I think that helped tremendously. Probably an unanticipated result of this, it opened up

possibly some areas for the cross-border fraud, as well, because,

again, some of ours closed down.

Interesting, too, if you look at a correlation with the history of

the Inspection Service and the evolution of fraud, and I’ll just cover

this briefly, we’ve been around since the ark. As you know, we

started out with the Postmaster General, Mr. Franklin, and we

worked our way through 200 years or more of the Postal Service.

In 1872, in response to the advances made in communications

through the mail on train routes, promoters, operators, fraudulent

operators capitalized on the absence of Federal law and they would

jump from State to State to reach—with different types of schemes,

land frauds, medical quackery, whatever.

29

1The chart attached to Maxwell’s statement appears in the Appendix on page 149.

As we clamped down, in 1872, Congress enacted the Mail Fraud

Statute. It is the grand-daddy. It is the oldest consumer protection

law. In my mind, it’s the best. I think many prosecutors will still

tell you that. It’s been tampered with very little through the years.

In 1994, Congress modified it to include private couriers, and that

helps us here because we’re addressing a lot of private overnight

shipments. So the Mail Fraud Statute has held up well. We have

several other weapons, as you may remember from our hearings,

in the deceptive mails area, most notably the false representation

statutes, and we can utilize those.

However, as we talked about, in this climate, where we saw in

our history how the perpetrators would jump from State to State

in the absence of law, as we clamped down on boiler rooms, which

we did in the 1980’s and 1990’s in this country, now they’re moving

up into Canada. So we are seeing a proliferation of them.

This next chart I have here of our statistics we ran through our

mail fraud complaint system.1 And initially, if you see, in 1996

through 1999, it stayed fairly steady, and then all of a sudden the

big jump in 2000, and, of course, the question is, what happened

here? A 105 percent increase. These are complaints against Canadian operations by U.S. citizens, and my response to that would be

two or three things happening.

In 1997, of course, we started focusing on the problem of crossborder fraud. In 1999, we had ‘‘Know Fraud.’’ We also had the Deceptive Mailings Enforcement and Prevention Act, or Prevention

Enforcement Act. I think those things, the ‘‘Know Fraud’’ campaign

and some other initiatives, brought to light some of this. People

know where to go, to some extent.

One thing we learned in the ‘‘Know Fraud’’ campaign, which I

think is very relevant to what you’re focusing on, is that we did

about 40 focus groups of mixed ages. Oftentimes we talk here about

senior citizens, and it is very true they are disproportionately represented here. I mean, they’re retired, they’re home, they’re available to answer phone calls, and they’re worried about their financial futures. But there is a random selection. There are others that

aren’t senior citizens that are also victimized.

But in one case we had in Vancouver, in which there were thousands of victims, we forfeited over $12 million that we returned to

victims. The average age was 74, so that will tell you where these

people focus. They’re predatory, they’re opportunistic, and they’re

relentless.

Personally speaking, I’ve had a member of my family targeted

and I can tell you, there are remedies you can do and we’re advocated those in prevention campaigns. But the younger people that

know this, it’s even better because they can relay this to the older

people in their family.

On this chart here, we show the top types of complaints, and it’s

similar to what Mr. Elliot and the others will probably share with

you—advance fee loans, failure to provide, and foreign lotteries.

If we look at the theaters of operation in this, we talked about

there’s three areas, Montreal, Toronto, and Vancouver. Mr. Elliot

mentioned those three areas earlier. We have a member in MonVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 74107.TXT SAFFAIRS PsN: SAFFAIRS
30

treal. The focus on that is on the advanced—on the telemarketing

promotions, and it’s mostly organized in nature. We have a lot of

criminal focus on that with the Royal Canadian Mounties. In Toronto, they’re focusing on advance fee schemes. And in Vancouver,

what appears to be predominant is lottery schemes.

My concern is this. We’ve focused in the Inspection Service primarily in the Montreal area and Toronto, a little lesser extent in

Vancouver. I haven’t seen numbers of instances of lottery mail coming across the border from Canada in Vancouver. I suspect there

is a lot, and what I suspect is they’re coming across the border and

mailing it in the United States. So I think that’s an area where we

in the Inspection Service certainly can be of value.

There’s a couple of other areas I indicated in my testimony, my

written testimony, where we can focus. One would be in the area

of what I call alternative remedies. The Postal Service has a

unique position in the Universal Postal Union. There is a group

called the Postal Security Action Group. The chief inspector a few

years ago used that chair, if you will, to force through an understanding of a problem that the world was experiencing with what

we call the ‘‘419 fraud letter.’’ Many of you may have received that

letter at home. Essentially, it’s a solicitation for money from Nigeria. You give some money, we have some money for you. It predominantly comes from Nigeria, and other West African nations.

What we did, as a union, we looked at the postage, we looked at

the means of mailing, and it was determined that they were using

counterfeit postage and we were able to set up memorandums of

understanding with these countries, seize the mails, and destroy

them, and today, we’ve destroyed about five million pieces, and

that was done without any type of legal intervention. It was done

through the Universal Postal Union.

Right now, the Postal Inspection Service has been meeting very

closely with the Canada Post, our counterpart in Canada. We’re

looking at ways we can possibly complement one another’s civil

remedies. So possibly when we get a representation order here in

the United States, they’ll be able to use their prohibitory order in

Canada. We have a draft memorandum of understanding (MOU)

we are working on in that regard.

I could go on about a number of other initiatives, but I think the

point is that there is definitely alternatives we need to be focusing

on. There are other alternatives in terms of some of the funding

issues, too, such as the fund I mentioned earlier.

I would like to summarize by highlighting some of the recommendations I made in the written report that I furnished the

Subcommittee. First and foremost, Barry Elliot mentioned Jonathan Rusch. I think the Department of Justice deserves a great

deal of credit for their spearheading of the United States representation on that. Mr. Rusch has kept us focused on the importance

of the cross-border initiatives so we know exactly where we’ve

going with it. I cannot commend his leadership of the U.S. representative team to the cross-border telemarketing Task Force.

I would encourage the existing cross-border forum. What we have

going on now is very unique. It foreshadows what possibly we will

see in the future as online solicitations grow. We’re starting to see

more complaints from Europe and other countries. So what we do

31

here with Canada, what we can do with, as you said so eloquently

in your opening remarks, if we can prepare initiatives and strategies with the Canadians, together, we can possibly use them in the

future as we face other problems elsewhere.

The funding solution for the witness and the video conferencing,

what I proposed to the staffers was that possibly the Subcommittee

could consider recommending monies that are taken in fines. Perhaps we could even double the fines for cross-border fraud. But

monies taken in fines, also monies, proceeds from forfeiture that we

can’t return to victims, we could put in a fund and use that for the

video conferencing and for the witness travel whenever possible. I

think that would be very beneficial. You would hate to see, although I don’t know of any yet, you would hate to see a case not

go forward because of a situation caused by the lack of funding. I

mean, that would seem unreasonable.

We talked about the MLATs. That was mentioned earlier, too.

Again, most agents tell me that the streamlining of that process

would be very helpful and I would encourage that.

Enhancing oral communications between the cross-border council

and the agents, making it less formal should be encouraged. That’s

been a little bit formal, from what I understand, in some instances.

But the local contacts have been excellent and these task forces,

that’s certainly a great first step. The way we’re working there, I

think is excellent.

What I suggest, also, are joint training initiatives between Canadians and American law enforcement and consumer groups. If we

brought ourselves together, that was mentioned earlier, about how

we do not sometimes understand the complexities of our different

laws in our sovereign nations, the mixing of the agents, the training, the strategizing, I think would be of great benefit. It would

also establish great relationships.

And then finally, I would say in the area that troubled a lot of

us is how do you stop this plague on the phone, the constant repetitive calls and so forth, particularly when law enforcement is slow

to get some action into place. Most agents say the obvious. If we

could shut off the phone service, we’d be way ahead of the game.

In the United States, we can move under an 18 U.S.C. 1345, which

is an injunction against fraud, and we can shut down that phone

service to a known boiler room. Obviously, that wouldn’t apply in

Canada.

What the Department of Justice was pursuing, and perhaps Jonathan Rusch could expand on this tomorrow, is in last year’s crime

bill, there was a provision, which was not passed, which did address that issue. I understand they did some research with the

telephone companies and it is possible, that they can shut off

known telephone numbers coming into the States. That would be

of great immediate relief.

So apart from that, again, I do applaud the Subcommittee’s efforts in this area. Again, I think it is visionary in addressing a

problem that’s coming down the pike. I offer whatever assistance

we can provide, and thank you very much.

Senator LEVIN. Thank you very much, Mr. Maxwell.

32

Just a question not directly related to this morning’s subject, but

you said that there’s 26 percent fewer complaints of deceptive mail

relative to sweepstakes.

Mr. MAXWELL. That’s correct.

Senator LEVIN. Do you have a figure for how much less sweepstakes mail there is altogether?

Mr. MAXWELL. I can give you that. I don’t have it with me.

Senator LEVIN. Has there been a reduction since our hearings, do

you know?

Mr. MAXWELL. Yes. In fact, during the hearings, we saw some reduction, and then probably within 2 months after the hearings,

some of the postal delivery folks came to us and said, ‘‘What happened here?’’ So it was a definite reduction, yes.

Senator LEVIN. It is good to hear the reduction in the number of

complaints, that these hearings did have an effect. That is always

good to hear, and that is really what the purpose of these hearings

are. I think that Senator Collins has expressed it well, that one of

the purposes here is to help to educate our public as to what these

scam artists do to us and to our most vulnerable people, how they

take advantage of people who are trustful. So these hearings serve

a purpose in many ways, hopefully, but that surely is one of the

ways.

Just a couple quick questions before I have to leave. First of all,

relative to Ohio, you said that the telemarketers, Ms. DeGenova,

how many of the telemarketers do you think actually register of

the ones who are required to register? Do you have any idea what

percentage of them do, in fact, comply with your law?

Ms. DEGENOVA. I think the most unscrupulous telemarketers are

not going to register, even if it is a requirement. They’re obviously

breaking the law to begin with. I think you make a good point that

that registration would be difficult. We have—I think it’s preventative. Our law is preventative, also, in the fact that it sends the

word out there to unscrupulous or legitimate telemarketers that

you’re going to have to register in Ohio, and we’ve gotten several

of our convictions on that failure to register part.

Senator LEVIN. Now, Canada has the Phonebusters central number. Do we have anything like that in the United States, where everybody can call one number, so we don’t have six different law enforcement agencies and people aren’t sure whom to call? Do we

have anything similar to Phonebusters?

Mr. ELLIOT. The Federal Trade Commission has Consumer Sentinel with an 800 number, it is built on the concept of Phonebusters

and they’ve done a great job.

Senator LEVIN. All right. I guess we’ll find out how that works

later on. Do we know whether, from your perspectives, whether or

not that is working well, that 800 number that FTC has?

Mr. MAXWELL. Yes. I could say, Senator, that with ‘‘Know

Fraud,’’ we used the Consumer Sentinel for the collection of complaints and we explored possibly merging with the, to some extent,

with our fraud complaint. We get about 60,000 to 100,000 mail

fraud complaints a year. We have signed a memorandum of understanding with FTC to partner with them in the future, and about

a year ago, I received a letter—our office received, the Chief Inspector, a letter from Senator Durbin addressing that same fact, that

33

consumers don’t know where to go. It’s very confusing. We need

one-stop shopping in this country where the agencies can go and

be advised.

Senator LEVIN. You say we do need one?

Mr. MAXWELL. We definitely need—if we can build on FTC’s concept and what they’re doing, I think it’s a great place to begin.

Senator LEVIN. All right. Well, that can be explored, also, further

tomorrow.

When a person is caught in Canada, when you get one of these

shops, is that what you call them—— Mr. ELLIOT. Boiler rooms.

Senator LEVIN [continuing]. Boiler rooms—when you get one of

these boiler rooms and you actually arrest people, what is the penalty, typically?

Mr. ELLIOT. Well, depending whether they’ve got a previous

record or not—— Senator LEVIN. Assume none.

Mr. ELLIOT. Assume not, the chances of going to jail are next to

nil.

Senator LEVIN. What about fines?

Mr. ELLIOT. Fines, we’ve had some recovery of restitution, a small amount. Toronto has recovered about $500,000 over the last

18 months, which is really peanuts.

Senator LEVIN. What is the maximum fine, and what is the typical fine?

Mr. ELLIOT. Well, one of the guys in Montreal got fined $1 million for restitution, but the problem is, it looks good, but they didn’t

collect one dime. So fines and recovery, it’s not really a—it doesn’t

really work.

Senator LEVIN. It does not work well. It is not much of a deterrent.

Mr. ELLIOT. No. The only thing you can do is when you’re arranging the plea, I’ve found in the past is you have the restitution

made while the plea’s being made so that the payment can be made

to the court upon sentencing.

Senator LEVIN. Ohio used the phone to capture some of that telephone conversation we played before. How often do we use, and do

you use in Canada, recordings? In other words, when you get complaints, do we often tell the victim or their family, hey, here is a

tape recorder. We will attach it to your phone if you are willing.

All you have to do, if you are receiving a lot of these phone calls,

is to just punch this button when you get one.

Let me first ask Detective Elliot about Canada. Do you use that

a lot? Is it helpful?

Mr. ELLIOT. In my early years, I actually prosecuted cases, successfully prosecuted them. We used tape recordings as evidence

and we did not have a problem introducing them in court. The

problem was finding an informant from the room that could identify the voice on the tape. And once we did that, we were able to

get it in as evidence and it was very useful because it really

showed what the pitch was all about, the lies and deception. So

yes, it is true that we can do that.

The problem we have now with the telemarketers is they’re not

stupid. I mean, they look at every case that we do, they sit down

34

with their lawyers and they analyze how they can beat the system.

And what they do now is they make sure that the individual telemarketers can’t hear each other’s pitch. In some cases, the telemarketers don’t even know the real name of the criminal next to

them. They are attempting to evade how they can be caught and

prosecuted in court.

Senator LEVIN. Any other comments about taping telephone conversations?

Ms. DEGENOVA. I think it is very useful. Also, it’s educational if

you can play those things for the public, as we have done here

today.

I did just want to take a quick moment and mention the freezing

of assets. We can do that through the FTC in the United States,

but I think those mechanisms are more difficult when the assets

are in Canada.

Senator LEVIN. What is the penalty in the United States, by the

way, for this kind of fraud?

Ms. DEGENOVA. I think it would vary whether you’re in the State

or Federal system.

Senator LEVIN. What about the Federal penalty?

Mr. MAXWELL. The Federal system, you could get sentenced for

up to 5 years for each count or more, and fines and penalties. But

normally, they’ll serve a couple of months for a telemarketing violation. One of the serious crimes I mentioned earlier in Vancouver,

that gentleman received several months and he was able to serve

the time in Canada as part of his plea agreement.

Senator LEVIN. I did have one additional question. As to getting

witnesses to Canada, is there a problem? Are people willing to go

there to help prosecute cases? Are there any problems with travel

expenses?

Mr. ELLIOT. Well, yes. One of the problems has been with these

jurisdictional issues. Who’s going to prosecute, especially when

you’ve got witnesses from other countries, and, of course, an additional problem is the cost involved with these witnesses coming in.

The agreement we have in Toronto, for example, we have a great

relationship with the Federal Trade Commission. They provide us

with a letter of intent that we may produce to the defense counsel

stating that if you’re going to go ahead to trial, we’re prepared to

fly these witnesses in at their cost, and that’s worked out very well.

So far, they haven’t challenged that.

Regarding video conferencing, there was just a recent case in

Winnipeg where they used video conferencing with U.S. victims.

The problem with video conferencing is that it’s very expensive. It

would have been cheaper to fly the victims in than actually do the

video conferencing.

Senator LEVIN. Is the conference for the purposes of discovery?

You can’t use it at trial, can you?

Mr. ELLIOT. We don’t have the same kind of setup. Yes, we did.

We used it for trial.

Senator LEVIN. You mean the tape of a testimony—— Mr. ELLIOT. Yes.

Senator LEVIN [continuing]. Or the actual testimony at trial?

Mr. ELLIOT. No, it was the actual, live video feed, and that was

one of the things that came out of the 1997 report, was to try to

35

1The prepared statement of Jennifer M. Granholm, Attorney General of Michigan appears in

the Appendix on page 297.

come up with ways to make it easier to prosecute as far as the witnesses are concerned. But I would suggest that it’s extremely expensive. The defense counsel doesn’t like it. But, as things drop,

costs drop in the future, it may be the way to go.

Senator LEVIN. Thank you. Senator Collins.

Senator COLLINS [presiding]. Thank you, Mr. Chairman.

Mr. Elliot, first, I want to commend——

Senator LEVIN. I’m sorry. Forgive the interruption. We have

some letters that Mrs. Erb got that we’d like to turn over to you,

Canadian scam letters that you could look into and investigate for

us——

Mr. MAXWELL. We’d be happy to take them.

Senator LEVIN [continuing]. And also, we have the testimony of

the Attorney General of Michigan,1 Jennifer M. Granholm, that

we’ll make part of the record. Thank you.

Senator COLLINS. Mr. Elliot, I first want to thank you very much

for all the assistance that you’ve given the Subcommittee in this

investigation and also to commend you on the Phonebusters

project. I think it’s an excellent one and has been extremely useful.

One of the most important points that you made in your statement, or one of the ones that struck me was the fact that the incidence of Canadian victims has gone sharply down and the incidence of American victims has gone sharply up. Do you attribute

that to the education efforts that the Canadian Government has

undertaken, or could you talk a little bit more about why you see

those trends.

Mr. ELLIOT. Well, there’s a few things that have caused the

trend. No. 1 is education. We killed the criminal market through

education. I mean, we really educate the heck out of Canadians.

We drove home some simple facts, for example if you win a prize,

it doesn’t cost you ten cents to get it. We made people aware of the

fact that if you get a phone call, which we don’t get very often that

you’ve won $100,000 or $1 million, that there’s no cost associated

in an honest contest, you don’t have to buy any product. And we

drove that home over and over again. We’ve done a lot of media

interviews.

And creating that call center with the toll-free number has been

very successful, as well as the Seniorbusters program, where we

call back to victims. These are a bunch of volunteers that offer peer

support, and also kill the fresh victim market.

Now, the other big reason that criminals are targeting Americans

is your dollar is worth twice as much money. You’ve got ten times

the market. And it causes—they know about the jurisdictional

issues. They know all the problems that we have. They’ve got more

information about us than we have about them. I mean, these guys

are—this is organized crime. You know, it’s associated to other traditional organized crime. It’s an organized crime itself.

Consumer fraud, people are just beginning to realize how big

consumer fraud is. When you think that consumers drive the markets of all of our markets around the world, if you’re a criminal and

you tap into that, just think how much money you can make. And

36

1 Exhibit No. 1 appears in the Appendix on page 237.

everybody looks at these credit card pitches, like $100 or $200 for

a card that you don’t get or a low-interest-rate card, it doesn’t look

like a very serious problem. But you get a million people to send

you $200, you’ve just made a lot of money. And you think a million

people is a lot. You’ve got 200 million people here in the U.S. market that can be attacked either by phone or by mail or by Internet.

So there’s a number of reasons, jurisdictional, light sentencing,

the risk that if they’re going to get caught, it’s pretty slim, and the

risk that if they do get caught, that they’re not going to jail are all

contributing factors.

Senator COLLINS. Thank you. Ms. DeGenova, is that right?

Tell me a little more about what happened in Mr. Hathaway’s

case. You obviously did a lot of investigative work. You taped the

phone calls that he was receiving. And yet when I asked him today

whether he had received any restitution, the answer was no. Tell

us what happened and why there was no restitution in this case.

Ms. DEGENOVA. I think it comes down to resources. I think we

did have a trap and trace line. We were able to locate the boiler

room. We had it on tape, the actual scam. All of those things are

really unusual and do take a lot of legwork and it’s really a tribute

to the hard work that our investigators have done in this case.

I think we worked through Project Colt in that case and they

were just not able to free up the resources to go after that particular boiler room, and I think what the others have said about

even if you can locate those folks, the restitution itself, there’s no

assets or they’re hidden or they’re frozen or we can’t get to them

and the laws are complex. So those are some of the other difficulties.

Senator COLLINS. Is there also a problem—and I would ask all

three of you this question—with the individual case being of a relatively small dollar value, compared with the costs of prosecution,

particularly when you are dealing with multiple jurisdictions? It

seems to me there is a little bit of a catch-22 here, because it seems

that they are too expensive to prosecute the small dollars, and yet

if you added them all together, as Mr. Elliot has suggested, you are

talking about an enormous amount of money. But is the amount

of the individual fraud a deterrent to enforcement and prosecution?

Ms. DEGENOVA. It can be. I think that we need the education,

again, for folks, no matter if it is $29 or $2,900 or whatever the

case may be. I also believe that, depending on the different civil

and criminal laws in each individual State, if you’re prosecuting

here, you need to aggregate that amount. Those things can be

done, but I think even as law enforcement, we view some of those

cases, and even the general public has the sense that, well, $29

here or $59 per person. But as Mr. Elliot pointed out very aptly,

it adds up to quite a lot of money.

Senator COLLINS. And a lot of times, when there is investigation,

and perhaps if we could put the first exhibit up as an example,1

once an individual case is investigated, it turns out that there are

literally hundreds or thousands of other victims and that would be

an example in this one scam that I mentioned in my opening statement, where a woman from North Carolina lost $100,000, which is

37

a great deal of money. But when this case was investigated and ultimately successfully prosecuted, it turned out that there were

thousands of victims in 18 States. So oftentimes, if these cases that

appear to involve only small dollar amounts were investigated, it

would turn out to be a significant fraud ring involved.

Mr. Maxwell.

Mr. MAXWELL. If I may, Senator, I think that speaks to why it’s

so important to have a centralized complaint collection similar to

Phonebusters and FTC. If the agencies know, they might not be so

quick to walk away from that, because with all the priorities, with

all the cases coming at groups like Project Colt or groups we have

set up in the States, they’re going to prioritize by what looks like

the worst, the most egregious. So, like you say, we could be missing

a lot, and if we have a centralized collection somewhere where we

can check complaints quickly and move swiftly, I think that would

be of great benefit.

Senator COLLINS. Mr. Elliot, based on your experience, even

when there appear to be small dollar cases, if you add up the number of victims, is it usually a considerable amount of money?

Mr. ELLIOT. Yes, and we have the adequate law in Canada, it’s

called Defraud the Public, when we can show three or more victims

have lost something on a similar scheme, it’s no longer a $100

scam, it adds up to whatever the number of—the amount of the

loss is, and that’s what you’re convicted on. So it’s not necessary

for us to change the law to adapt to this type of crime. What is necessary for us to do is to actually prosecute and enforce it and get

the necessary—a reasonable sentence.

But just to add a little bit to that, it’s certainly our experience,

the smaller the amount of money, the less chance the victim’s going

to report it. In some cases when they’re targeting the elderly, on

the credit card protection, for example, in some of these sophisticated scams, the elderly don’t even know that they’ve been

scammed and they’re having amounts taken out of their credit

card, not realizing that the credit card protection doesn’t exist. The

higher the loss, the greater chance that the person’s going to report

it, but you still have a huge amount of people that have lost a lot

of money who are not telling anybody about it. They’re not telling

their family. They’re too embarrassed.

So, when you talk about education and you talk about having one

number, it’s not just to educate the public about what’s going on

so they can better protect themselves. You’ve also got to educate

the public to come forward, that it’s a good thing to let everybody

know what’s happened because you can help fight the fraud, just

like these three victims did today.

Senator COLLINS. One of the striking aspects of the testimony of

every single victim that we interviewed, and including the three

that we heard from today, was that once they were taken in by a

solicitation, whether on the phone or in the mail, they were inundated with other telemarketing calls and other solicitations from

the mail. This suggests to us that these fraud rings are sharing information and that there are victim lists, or as one con artist described it, sucker lists. Could you all comment on what you have

seen, based on your investigation? Is that the case? We will start

with you, Mr. Elliot.

38

Mr. ELLIOT. You have got a huge industry, not only in telemarketing fraud, but you’ve got a huge industry in creating these

fake sweepstakes mail-outs and these fake lotteries that are worldwide. In a lot of cases, you have companies, criminal companies,

that’s their only thing, is to create these sucker lists to sell the information to the fraudulent rooms, the telemarketing rooms, so

that they can call these victims.

So in Canada, I know Industry Canada, under the Competition

Bureau, are doing a complete analysis of these fake mail-outs coming out of Canada that are hitting countries around the world, and

they are pinpointing certain individuals that are responsible for all

of this. We have now found out that they are collaborating with

other criminals in other countries, because what used to be just a

North American problem is now spreading worldwide.

We just had a delegation that came in from the Philippines

which I just found out, that the major language in the Philippines

is English. We’ve got rooms that are opening up and they’re starting to use the same tactics that they used 5 years ago in the Philippines. We also have telemarketing rooms that are contacting the

Philippines and using the same marketing concepts to create the

sucker lists.

Senator COLLINS. Ms. DeGenova, in your experience, do you see

sharing of sucker lists?

Ms. DEGENOVA. We do. I would concur with Mr. Elliot’s statements. It’s an industry all to itself, hundreds of thousands of dollars to buy what could be called a mooch list or a sucker list. We’ve

confiscated them in search warrants and things like that and have

done what’s called a reverse boiler room, where we’ll call the folks

on that list and say, you’re on this list and we’re calling from the

Ohio Attorney General’s Office. That’s another good way to educate.

But I agree, and I think the problem will only proliferate with

public information and Internet and other ways to share that information. I think folks really need to be cognizant about who they

give their personal information to.

Mr. ELLIOT. Senator, may I—— Senator COLLINS. Yes.

Mr. ELLIOT. There’s also a problem with the sale of honest information, and just to give you an example of that, the credit bureaus,

for example. On the credit card pitch where they’re using—we can

get you a credit card for $300 or $400—they’re buying freshly

turned-down lists from the credit bureaus. So these people are really hot to get a credit card and they’ll do just about anything to get

a credit card and that information is being supplied by an honest

company.

Senator COLLINS. That is a very good point, and one issue we

have not discussed today, but is another area of cross-border fraud

are these advance-fee-for-loan schemes, and that kind of information would be very useful for that.

I participated in a reverse boiler room operation with the AARP

in Maine and with our Attorney General’s Office and we did do exactly what you said. We had access to a likely victim list and called

and alerted the seniors on it that they are being targeted by telemarketing scam artists.

39

Mr. Maxwell, I was very pleased to hear your comments about

the law that Senator Levin and I authored to crack down on deceptive mailings. Do you think, ironically, that because of that law, the

fraud is moving more toward telephone fraud or cross-border fraud

which would not be covered as easily?

Mr. MAXWELL. I think what we are seeing, it’s still a combination. As you were talking about the sharing of lists, we have one

operator that we refer to as one-stop shopping—the one out in Vancouver I mentioned earlier. He would use saturation mailings in locations, get the information back where people would actually put

their personal information and their phone number. Then he would

conduct his telemarketing operation from that. There are some

companies that just do mailings and then provide those phone

numbers to the telemarketers.

So I don’t know if there’s a growth spurt in the absence of the

other. I think both remain. But in the cross-border instance and

what I alluded to earlier was, I think, when we’re slowing down

our U.S. operations, at times we open up some opportunities for

others . . . in Canada, so they see more fertile ground right now

because there’s less competition. It’s like a business. It might be illegal, it might be corrupted, but it is a business and they’re competing against one another and it’s very organized.

Senator COLLINS. Finally, Mr. Maxwell, let me ask you to explain

to us the role of commercial mail receiving agencies and how they

may relate to con artists seeking to defraud consumers.

Mr. MAXWELL. That was an area that’s—the commercial mail receiving agency itself, it’s similar to a post office box, for those who

are unfamiliar with it. It’s like Mailboxes Etc. or any one of the legitimate concerns, where you can rent a box and receive mail. The

Postal Service has a requirement that you fill out an application

so that we’ll know who we’re delivering the mail to. Your identity

is required.

Over the years, registration wasn’t enforced that heavily and a

lot of commercial mail receiving agencies cropped up without identification and so forth. So as we began to tighten that up, we saw

the need to greater tighten it because these addresses were being

used to conduct frauds. Obviously, using CMRA addresses can

work particularly well in cross-border frauds, but it works from

State to State, as well. Somebody could take out a box at a CMRA

and it could say, Suite 76, Rodeo Drive, California. That would

imply to the person sending money that, hey, this is quite an operation, it’s in an exclusive part of town, and so forth. It’s not——

Senator COLLINS. When, in fact, it’s just a private mailbox, a

mail drop, essentially.

Mr. MAXWELL. Correct. And this came to light primarily as a result of some of our work in the credit card area, but also in the

mail fraud area, and we enhanced the regulations most recently

and it was controversial because, again, you’re dealing with—that

was one of the draws, to have this open-ended kind of address. It

looks very flattering, to make it sound however you want.

What we asked was that they use the designation PMB for private mailbox, and again, there was some push-back on that. We debated with the industry and a compromise was reached. So as of

August 2001, they will be required, ‘‘they’’ being anyone using a

40

1The chart referred to appears in the Appendix on page 151.

commercial mail receiving agency, to use the designation PMB,

similar to post office box, but private mailbox, or the number or

pound sign (#) that can also be a designation, which the post office

will recognize, the Postal Service will also provide a toll-free number in which consumers can call to get verification of CMRA addresses.

Having said that, the weakness in it is that not every CMRA is

registered, and we have, I think, a list right now of 13,500. I suspect there are considerably more, and from what I’ve seen just in

the New York area, there’s many of them. So with enforcement of

this and the more information we can get, it would be a lot better.

And again, I’ll qualify by saying that there are many legitimate

companies using CMRAs. CMRA operators and the industry are

now working with us very closely. We’re actually participating in

the training of their new franchise owners. We’ve had cooperation

with CMRA operators in Canada. We’ve called them and said, you

don’t have to, but can you give us some information, and they’ve

been very helpful. So, again, that’s an area we’d like to explore

with Canada Post, as well, what we could do up there.

Senator COLLINS. And finally, Mr. Maxwell, I am very impressed

with this brochure. I think it is excellent, and we have heard from

Detective Elliot what a difference public education efforts have

made in making Canadian consumers far less likely to fall prey to

these kinds of schemes.

Could you tell me a little bit more about how this was funded?

Was it a grant from the Postal Service Inspection Service, or——

Mr. MAXWELL. Actually, my understanding for this promotion,

and again, this is an example of a local initiative, where you have

the Senior Action Coalition in Pittsburgh, you have this advertising

group and also the Postal Inspection Service, and they did this for

free. I mean, they prepared this pamphlet and published it and the

seniors, and working with the postal inspectors, came up with the

language and some of the materials, and it comes in a thicker brochure almost this size, where you open it up and you have additional information. We have some of our pamphlets in there on

telemarketing fraud and some other schemes. It’s a nice package.

I’ve been impressed with that more than most I’ve seen.

Senator COLLINS. I’ve often thought that if we could somehow

distribute a pamphlet like this to every senior citizen, maybe as an

enclosure with the Social Security check—except that most people

use direct deposit now, so I do not know how you would do it exactly—we could save people a lot of grief and a lot of financial loss.

Mr. MAXWELL. I had a chart earlier, but I didn’t think time

would permit, showing the States that we have shown to be the

most frequently seen in our complaint database for cross-border—

well, that’s it there.1 The thought we had when we saw this and

in talking with some of your staff members was that perhaps that

compelling picture of the senior with that language, if it was put

in places where the overnight payments are mailed, might at the

last minute trigger the victims and stop them in their tracks, so

to speak, to question, am I doing the right thing? We are exploring

41

that. We’re looking at maybe some States where we could use that

as a prevention campaign. Sometimes it’s very effective.

Senator COLLINS. Thank you. Mr. Elliot.

Mr. ELLIOT. Just to add to your education, once we drive the telemarketers out of Canada, and assuming that we do, they’re not

going to disappear. They’re just going to move to the Caribbean

and other places. So you have to really concentrate a lot on education. There is nothing wrong with putting a telemarketer in jail,

but education is the way to go.

Senator COLLINS. Thank you. I want to thank all of you today

for being with us. Your testimony was very helpful as we grapple

with this increasing problem, so thank you very much for your efforts and your contributions, which are much appreciated.

I want to thank all of our witnesses here today. We have heard

from three victims of cross-border fraud, innocent citizens who

were targeted or whose loved ones were targeted by unscrupulous

telemarketers or sweepstakes operators who were operating out of

what they may have assumed was a safe haven on the other side

of the border. Each of these witnesses has had a special story to

tell, but the underlying theme of them is the same in each case,

and that is that they trusted the words of a smooth-talking stranger who contacted them at a vulnerable point in their lives and

preyed upon, took advantage of their honesty, their trust, their

hope, and their good will in order to swindle them of thousands of

dollars, and these cases help put a human face on the problem of

cross-border fraud.

Our elderly citizens deserve to be free from this type of exploitation and to feel safe in their own homes, and our first line of defense against such victimization is increasing education and consumer awareness.

We also have learned about some of the challenges that law enforcement officials face on both sides of the border, and I think that

some good work is underway, but clearly, there is more that we can

be doing to simplify the process and to encourage cooperation on

both sides of the border.

I also think that this Subcommittee will continue its work in this

area, and I am going to approach our Chairman about joining me

in signing a letter to President Bush urging that he make fighting

cross-border fraud a personal priority in the dialogue that he began

with the Canadian prime minister at the summit in April, building

upon the work that Detective Elliot mentioned that was started in

the previous administration.

I also think that this Subcommittee may be able to strike a direct blow against some cross-border fraud ourselves. As the result

of the information that was provided to us during the investigation

of Mrs. Hersom’s case involving her husband, we contacted Western Union. I issued a subpoena, and we have found the name and

the location in Canada where her husband sent thousands of dollars. We also have evidence of a great many other wire transfers

that were sent to the names in this particular location. So, in other

words, we have acquired some direct evidence of what appears to

be yet another cross-border fraud ring. So I will, again, be approaching the Chairman about a referral to the Department of Justice so that this matter can be investigated further.

42

Again, thank you very much for your testimony today. Our hearings will continue tomorrow, and the hearing is now recessed until

tomorrow at 9:30.

[Whereupon, at 12:27 p.m., the Subcommittee was recessed, to

reconvene at 9:30 a.m. on Friday, June 15, 2001.]

(43)

CROSS–BORDER FRAUD: IMPROVING

TRANSNATIONAL LAW ENFORCEMENT

FRIDAY, JUNE 15, 2001

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC.

The Subcommittee met, pursuant to notice, at 9:36 a.m., in room

SD–342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding.

Present: Senators Levin, and Collins.

Staff Present: Linda Gustitus, Chief Counsel and Staff Director;

Mary D. Robertson, Chief Clerk; Laura Stuber, Counsel; Christopher A. Ford, Minority Chief Counsel and Staff Director; Frank

Fountain, Senior Counsel to the Minority, Marianne Kenny,

Detailee/Secret Service; Susan M. Leonard, Congressional Fellow;

Alan F. Stubbs, Detailee/Social Security Administration; Bos

Smith, Intern; and Kim Wojcik (Senator Akaka).

OPENING STATEMENT OF SENATOR COLLINS

Senator COLLINS. Good morning. The Subcommittee hearing will

come to order.

This morning, the Subcommittee holds a second day of hearings

regarding cross-border fraud. Yesterday, we began these hearings

by hearing from the victims of cross-border telemarketing fraud.

Their testimony placed a human face on the cold statistics of financial loss and potential ruin that can result from the crimes of con

artists operating from beyond our borders, outside the reach of

ordinary law enforcement efforts, but not so far off that they cannot plague American consumers with smooth-talking fraudulent

telephone pitches and bogus direct mailings.

Our second panel yesterday placed this problem in perspective by

describing the sweeping reach and the high volume, and the growing volume, of cross-border fraud and what American and Canadian law enforcement authorities have begun to do about it. We

heard from a Canadian official, for example, who explained an initiative called Phonebusters, which illustrated both the importance

of international information-sharing and of aggressive consumer

education and awareness campaigns in combating cross-border

fraud.

We also heard from a representative of a State attorney general’s

office who explained the impact of cross-border fraud on the constituents of that State from the perspective of a prosecutor who has

worked long and well with her counterparts across the border. FiVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00051 Fmt 6601 Sfmt 6601 74107.TXT SAFFAIRS PsN: SAFFAIRS
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nally, we heard from a representative of the U.S. Postal Inspection

Service who discussed efforts aimed at stemming the flow of fraudulent solicitations and efforts made to educate the American consumer.

As I noted yesterday, the relationship between the United States

and Canada is one we treasure. It is built upon a solid foundation

of close economic, cultural, and political ties. This interconnectedness, however, makes it easier for cross-border con artists to prey

upon the citizens of another country, even while the presence of an

international border makes cross-border law enforcement far more

challenging.

As a final note before we hear from our witnesses and our Subcommittee Chairman today, I should note that one party we had

hoped to hear from is not present today. In early May, I invited a

representative from the Royal Canadian Mounted Police to testify

at these hearings. I had hoped that he would be able to discuss

with us the challenges and opportunities of fighting cross-border

fraud, as seen from his perspective as an officer of Canada’s premier national-level law enforcement agency.

Just a few days ago, however, we were informed by the Canadian

Embassy that its government had decided to prohibit all Canadian

national-level officials from participating in our hearings. This is

troubling, since a major purpose of these hearings is to foster and

promote more U.S.-Canadian cooperation in preventing and prosecuting cross-border fraud. In any event, I very much look forward

to hearing the testimony of our American witnesses today.

Again, I would like to thank Chairman Levin for agreeing to hold

these hearings and for working so closely with me on this important issue.

Thank you, Senator Levin.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN [presiding]. Thank you, Senator Collins. First, let

me thank you and again say just how important this subject is to

many of our citizens who are being fleeced by these crooks and con

artists.

Senator Collins has been extremely active in a whole host of

areas in an effort to protect our consumers in this country. Our

seniors in this country are some of the most vulnerable people who

are the targets of these crooks. These hearings were scheduled by

her and I am delighted to follow through with them because the

subject is so important.

As Senator Collins indicated, yesterday we heard from three victims of the con artists who perpetrate these frauds, and their stories were truly disturbing and truly touching. In each of the cases,

the victims genuinely believed that the crooked solicitors were telling them something truthful. They were taken in by the manner

and the claims of these solicitors. We also heard about a very successful Canadian program designed to stop these kinds of scams.

It is called Phonebusters. It is an excellent model for the work that

we could be doing in the United States.

Today, we are going to hear from three U.S. law enforcement officials who are going to talk about their views on the current state

of U.S.-Canada cooperation with respect to cross-border fraud and

45

how we can improve such coordination in the future. I also hope

that they will address the question of whether or not there are

loopholes or weaknesses in our own laws which should be corrected.

The subject matter of these hearings is similar at least in one

respect to hearings which the Subcommittee held in 1999 on deceptive mailings and sweepstakes promotions. Those hearings eventually led to the Deceptive Mail Prevention and Enforcement Act

which Senator Collins and I introduced and sponsored and got

adopted.

Like the 1999 hearings, the target of these fraudulent promotions is generally the elderly. But in the fraud that we are looking at yesterday and today, there is one key difference. The perpetrators here are outside of the United States and our law

enforcement officials don’t have as much authority to catch these

criminals.

Other countries work closely with us; Canada surely does. As

Senator Collins points out, they are a treasured neighbor, both directly and in our States, as a matter of fact, since the border rests

along Maine and Michigan as well.

But there are obstacles, no matter how good the intentions are,

to cross-border enforcement. Any criminal with a cell phone or a

laptop computer can set up a scam operation very easily in a foreign country. They don’t need to have an office or a room. Telemarketing is a movable crime that is difficult to trace. In a pinch,

cell phones can be discarded, so can computers. Even if an illegal

solicitation is traced to a particular cell phone or computer, it could

be gone by the time the trace occurs.

The fast nature of this crime makes it imperative that we work

to improve interstate, interagency and international coordination of

these cross-border frauds. Many of our Federal agencies are working to educate vulnerable groups and individuals. We heard yesterday about the ‘‘Know Fraud’’ program, which is a mail campaign

designed to fight telemarketing fraud which is coordinated with the

American Association of Retired Persons, AARP, the Federal Trade

Commission, the Justice Department, and the U.S. Postal Inspection Service, among others.

Today, we are going to hear about the Justice Department’s

grants to States for senior fraud prevention programs and about

the Federal Trade Commission’s Consumer Sentinel, a large consumer fraud complaint database.

But despite these efforts, it appears that consumers still often

don’t know where to go when they are the targets of telemarketing

scams. The Postal Inspection Service told us recently that ‘‘consumers are uncertain as to what entity they should send their

fraud complaints to.’’

There are a number of options: Local police, State attorneys general, FBI, the Department of Justice, the Federal Trade Commission, and the Postal Inspection Service, among others. One answer

to this may be to have a 1–800 number for all persons across the

country seeking Federal assistance to call, and the various cases

could perhaps then be assigned to an appropriate agency from that

point, similar to the successful Phonebusters in Canada. The FTC

has its own consumer fraud hotline, and perhaps that is the hotline

46

1The prepared statement of Mr. Sorrell appears in the Appendix on page 152.

to build on. I am not sure it has the public awareness that the

Phonebusters hotline has, but nonetheless, that is at least one possibility.

Another issue is that of coordination between Canada and the

United States in fighting these crimes. President Clinton took the

lead on this issue in 1997 when he met with Prime Minister

Chretien. At that time, they directed officials from both countries

to prepare a joint study to examine ways to counter cross-border

fraud. The United States-Canada Working Group was formed as a

result and it released its report, with a number of recommendations which the witnesses today will be discussing. That working

group continues its work and will meet again, I understand, next

week.

Again, I want to thank Senator Collins and her staff for their

pioneering work in this area, and we look forward to today’s testimony. I wish I could stay for it. My staff will be here because I

can’t.

But at this point now, in keeping with our rules of this Subcommittee, we will ask our witnesses to stand, raise your right

hand, and be sworn in.

Do you swear that the testimony that you will give before the

Subcommittee will be the truth, the whole truth, and nothing but

the truth, so help you, God?

Mr. SORRELL. I do.

Ms. WARLOW. I do.

Mr. STEVENSON. I do.

Senator LEVIN. Thank you.

We have three witnesses today: William Sorrell, Attorney General of Vermont. We are delighted to have you here. A nephew of

mine now lives in your capital, so if I can get back here before this

hearing is over, I may ask you how he is doing, even though you

don’t have the vaguest idea how he is doing.

Mr. SORRELL. Well, we only have a population of about 7,000 in

the State capital, so I might know him.

Senator LEVIN. Well, he has only been there a month or two.

Mr. SORRELL. I still might know him.

Senator LEVIN. You still might know him. It is a small capital.

Anyway, thank you for being with us, General.

TESTIMONY OF HON. WILLIAM H. SORRELL,1 ATTORNEY

GENERAL, STATE OF VERMONT, MONTPELIER, VERMONT

Mr. SORRELL. It is my pleasure to be here, Mr. Chairman. Senator Collins, thank you, too.

I am pleased to represent my office and the National Association

of Attorneys General in addressing issues of telemarketing fraud,

particularly cross-border telemarketing fraud.

Senator LEVIN. Let me ask you, if you would, to bring your mike

as close as you can. We will ask you each to summarize in about

10 minutes, so that would leave adequate time for questions.

Mr. SORRELL. The attorneys general laud your Subcommittee for

addressing this issue. As you no doubt heard yesterday, telemarketing fraud presents significant challenges to law enforceVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00054 Fmt 6601 Sfmt 6601 74107.TXT SAFFAIRS PsN: SAFFAIRS
47

ment. The financial losses to Americans number in the billions of

dollars. It is a vastly unreported crime. When the reports are

made, the cases are difficult to investigate and more difficult to

successfully prosecute. When you add the cross-border component

to it, with a perpetrator typically in Canada and the victims in the

United States, those hurdles that I talked about increase significantly.

Today, I would like to address a few concerns or problems that

the State attorneys general recognize from our experience in going

after these cases and some suggestions of congressional action that

might assist us to make our jobs easier.

The cases of cross-border telemarketing fraud—I don’t know

whether Vermont is unique, and perhaps Canadians think Vermonters are particularly gullible, but whereas nationally, I think,

the percentages differ, in our office over the last 18 months we

have looked at 90 separate cases of telemarketing fraud. Of those,

all but four involve calls being made from Canada into Vermont.

So the vast majority of the telemarketing fraud cases that we have

looked at in the last 18 months have involved a cross-border component.

The first issue I would like to address is the time that it seems

to be taking for there to be action under the Mutual Legal Assistance Treaty and extradition processes.

It seems to the States that it takes an unduly long period of time

when we make so-called MLAT requests to the Department of Justice and/or extradition requests to the Department of Justice. It

seems to us to take an unduly long time for these requests to be

addressed.

Now, we are mindful of the fact that significant crimes of violence will be placed higher on the priority list for attention. But,

anecdotally, waiting 6 months for any reaction to our requests, and

then after making necessary revisions to submissions, waiting as

long as 2 years or more for an extradition request to be sent on to

Canadian authorities, and then potentially further attendant

delays within Canada, seems unduly long to us.

When we asked the Department of Justice and the Federal Trade

Commission for information on the average length of time for the

processing of such requests, they did not seem to readily have that

information. So we would appreciate your assistance in requesting

periodic reports on a quarterly or semi-annual basis on the timing

of when requests come in and the time for initial response to the

States, and then ultimately in the extradition matters when the

communication went to the Canadian Government requesting extradition or a final determination that extradition would not be requested, and similarly, under MLAT processes, when the ultimate

request went to Canadian authorities for the documentary evidence

or other materials sought through the request.

We would ask that there be some encouragement brought to bear

to have the Department of Justice, the FTC, and State, local and

Federal law enforcement officials sit down and see if there are

ways that can speed these processes. To the extent that it is at the

Department of Justice that there are resource needs. That the Department is prioritizing, as I indicated, other matters—terrorist

bombings and such, and additional resources at the Canadian desk

48

are needed—we would ask the Congress to appropriate the funds

to make those resources available.

Formerly, there was an arrangement whereby an assistant attorney general from a State served as a fellow at the Department of

Justice in the extradition office, where the State continued to pay

the assistant attorney general’s salary, but travel and housing expenses were picked up by the Department of Justice.

It is possible that revisiting that kind of a program, reinstating

that kind of a program, would be something that would be sort of

a win-win; not a lot of extra money for the Department of Justice,

but we would have somebody there physically with the priority in

mind for handling the MLAT and the extradition requests coming

from the States.

Moving to a second issue, funding issues for travel of victim witnesses and investigators to Canada, we have issues, of course,

about the aggressiveness with which Canadian law enforcement

addresses problems when the victims are in the States and the perpetrators are in Canada. For victim witness travel to Canada, the

Canadian officials have taken the position that unless there is a

guarantee that an individual State or the Federal Government is

going to pay for victim witness travel to Canada to participate in

legal proceedings, they won’t go forward with the case in Canada

without those assurances.

I know the FTC has made arrangements to make best efforts to

fund that travel. But under Bureau of Justice Assistance (BJA)

grants, as I understand it, they cannot be used to fund victim witness travel to Canada. We would hope that those restrictions would

be eased.

When it comes to investigator travel, what we have found—and

this is anecdotal, but what we have found is that dealing with the

Canadian bureaucracy for the kinds of investigative information

that we need when we are focusing on a Canadian perpetrator—

aliases, criminal record, business associates, perhaps targeting

other ongoing Canadian investigations and such, much of the kind

of information that is not gathered, as I understand it, through the

Phonebusters operation and Consumer Sentinel—it is personal contact from law enforcement to law enforcement that works rather

than just a call into Montreal P.D. or Toronto P.D. that kind of gets

set there off on a desk.

If you can form personal contacts sergeant to sergeant, you tend

to get more positive results. So to the extent that you could appropriate funds for investigator travel, for State or local investigators

from the United States to travel to Canada for these cases, that

could be helpful to forge those kinds of personal relationships that

would foster a better exchange of information.

I will say that you could leverage the funds with some sort of a

revolving fund through NAAG, or the National Association of AGs,

whereby we would require in a successful case that the costs of investigation be reimbursed, and we would replenish that fund so it

wouldn’t be just a simple draw-down.

I know my time is running short, so just a third issue is a lack

of resources to hire Canadian counsel to try to freeze assets that

are in Canada of these perpetrators. As you probably heard yesterVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00056 Fmt 6601 Sfmt 6601 74107.TXT SAFFAIRS PsN: SAFFAIRS
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1The prepared statement of Ms. Warlow with an attachment appears in the Appendix on page

158.

day, it is like getting money out of a stone to actually recover from

these individuals.

Private counsel in Canada usually require up-front payments of

thousands and thousands of dollars as retainers to process these

cases, and we would hope that you would appropriate some funds

for that purpose. Again, a revolving fund for that purpose is something that would make sense so it could be replenished in those

cases when we successfully obtain assets in Canada after a successful prosecution.

My time is up. I would be happy to field questions now or after

the full panel has addressed you.

Senator LEVIN. I am going to interrupt the flow here just to ask

one question, and perhaps Senator Collins wants to, too.

I was unclear on one thing you said about restrictions on funds

for victim travel. I thought you said BJA.

Mr. SORRELL. Bureau of Justice Assistance monies. It is my understanding that the States are not allowed to use those monies for

victim witness travel to Canada under current restrictions.

Senator LEVIN. And that fund is a Department of Justice fund?

Mr. SORRELL. Yes.

Senator LEVIN. Then I would appreciate, if you would, Ms.

Warlow, your addressing that restriction and whether or not that

should continue. It seems to me that goes to the heart of the matter as to whether we can get the victims to Canada. The extradition thing, it seems to me, is so long and complicated and timeconsuming that if we can get victims there and if we can get people

there working with law enforcement on a much more personal

basis, as you just pointed out, it seems to me that may be the most

direct way we can do the enforcement part of this.

But in any event, if you could address those restrictions——

Mr. SORRELL. In those cases when we can get the Canadian authorities to prosecute against the perpetrators physically located in

Canada, it is absolutely key for our victims to be able to get up

there to participate in those proceedings.

Senator LEVIN. Thank you very much. Ms. Warlow.

TESTIMONY OF MARY ELLEN WARLOW,1 ACTING DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, DC

Ms. WARLOW. Thank you, Mr. Chairman.

Senator LEVIN. Identify to us what your position is.

Ms. WARLOW. Certainly, I currently hold the position of the Acting Deputy Assistant Attorney General in the Criminal Division,

and in that capacity one of the sections that I supervise is the

Fraud Section. It is our Fraud Section that, for the Division, is taking the lead in cross-border telemarketing fraud.

Frankly, one of our senior attorneys, Jonathan Rusch, is a key

player in the U.S.-Canada Working Group on Telemarketing

Fraud.

50

Senator COLLINS [presiding]. I am sorry, Ms. Warlow. We still

can’t hear you very well. They are very directional, so if you could

pull the mike up a little bit, that should do it. Thank you.

Ms. WARLOW. I was saying that I supervise the Fraud Section in

my current position, and the Fraud Section is a key component in

this. Our senior attorney on the issue of telemarketing fraud, Jonathan Rusch, is, in fact, the U.S. Chair of the U.S.-Canada Working

Group that has been referred to already. So I am the Acting Deputy Assistant Attorney General. My other job, frankly, is that I am

a senior counsel for national security and international matters,

and have had long experience working with Canada in that role.

If I may submit my written statement for the record, I would like

to at this time.

Senator COLLINS. It will be entered in full, as will all of your prepared testimony.

Ms. WARLOW. Thank you. I will try to briefly summarize what

the Department of Justice is doing to work toward more effectiveness in combating cross-border telemarketing fraud.

First, a brief overview of the problem; I don’t think I have to go

into detail. You certainly seem well-apprised of the problem and

have had a series of witnesses. I will summarize what we are doing

and then talk a bit about some areas where we need to look at how

we might enhance our effectiveness.

It is next week that the Working Group on Telemarketing Fraud

will have their annual meeting in Canada. It will be followed by,

in that same week, the meeting of the Cross-Border Crime Forum,

which is presided over by Attorney General Ashcroft and the Solicitor General of Canada, and this telemarketing fraud is one of the

issues that is the subject of that Forum.

Certainly, there is no question that telemarketing is a huge problem in terms not only of economic loss, but the injury to victims

and the severity of that injury. We have made advances, certainly,

in operational initiatives with Canada. There have been legislative

advances; Canadian law has improved. But the fact remains that

this is a pervasive crime and a very serious one.

Currently, the activity is centered in three metropolitan areas—

Vancouver, Toronto and Montreal. In Montreal, there are estimates

from our experts of 5 to 10 large telemarketing operations, and

more than that in the Toronto area: 50 to 60. And some of these

have up to 50 employees; they are major operations. In Vancouver,

the estimates are even higher, over 200, 220 to 250 telemarketing

operations, again some very small, 2 or 3 employees, some up to

40 employees. So Vancouver is a considerable center of activity for

this.

Of course, it is not the fact that we only have the phenomenon

of Canadian-based operations targeting U.S. citizens. We have had

two cases in which there were U.S. operations targeting Canadians,

out of Buffalo and Florida. But, of course, our focus here is on the

pervasive phenomenon of the Canadian-based operations.

What is appended to my statement is the report to the Working

Group on what the United States has done to implement the 14

recommendations of the Working Group. We believe we are substantially in compliance with them. I want to briefly deal with two

of those recommendations. The first one is a very general one, but

51

it is one of great significance: Treating telemarketing fraud as a serious offense, recognizing it and devoting the resources to it.

The Department of Justice has, since the early 1990’s, regarded

telemarketing fraud as a serious problem. We had three major undercover operations in the 1990’s, with 1,400 defendants in all. Just

in the last 18 months, we have had 12 significant cross-border

cases. There are summaries of those cases in my statement. I won’t

go into the details of them.

Again, you see the same pattern, the most disturbing pattern,

which is the victimization of the elderly in these cases and, of

course, any variety of schemes. As Attorney General Sorrell has indicated, they are of quite different varieties and cleverness in how

they are presented.

But one of the successes, I think, in our most recent case initiatives—first of all, I think we are doing more in part because of the

implementation of these recommendations. Also, something that is

encouraging to us is getting increased sentences.

For example, one of the cases, the case of Eduardo Cartagena, resulted in a 70-month sentence of imprisonment, and this was particularly based on the enhanced penalties which were enacted by

the Congress as part of the telemarketing legislation in the mid1990’s, and it relates to the victimization of what we call vulnerable victims, or the elderly in this case. And those penalties and

subsequent sentencing guidelines really give us the potential for

more significant sentences.

We have had, in addition to criminal prosecution, some success

in the civil area. I think I would agree very much with Attorney

General Sorrell that one of the most frustrating aspects of this

problem is with recovery of money for victims. I think generally

that is the case. It is even harder when you have a border to deal

with.

Our Civil Division has had some success in civil enforcement in

freezing assets in Canada. In one case, we were able to get $1 million back in restitution, and this might be something that we could

explore more as a way to work together. Certainly, trying to at

least get some of the funds back is extremely important to us.

As has been mentioned, we work with the States and the National Association of Attorneys General particularly in training and

some projects with the States. We have an ongoing and significant

training initiative in telemarketing both for our own people, State

and local people, and with the Canadians.

Part of our work has focused on the notion of task forces. The

development of the three task forces in Canada has been a significant help to us. These are in Montreal—and you have heard, I

think, extensively about the one in Toronto. There is also one in

Vancouver. Again, these correspond to the three centers of the

problem.

The FBI supports and works with these task forces through

something called Operation Canadian Eagle. It is a pairing operation in which, for example, the Boston field office is paired with

Montreal, Detroit with Ontario, and Los Angeles with Vancouver.

Again, these are supportive of the task forces in Canada.

This effort of the FBI—and it is certainly not the only effort—

the Postal Service and Customs Service are significant players in

52

1The prepared statement of Mr. Stevenson with attachments appears in the Appendix on page

191.

this. But Operation Canadian Eagle has resulted so far in 2 years

of its work in the charging of 62 individuals and the return of over

$2 million to victims. These Operational Canadian Eagle cases are

some of those that are summarized in my statement.

Now, the real question is how to improve cross-border cooperation. Again, since the formation of the Working Group in 1997,

which really focused our attention on the U.S.-Canadian effort, I

think we have made some significant advances in meeting those

recommendations. For example, enhanced penalties was one of the

recommendations that we had, and more training. All of these are

again detailed in the attachments to my statement.

Certainly, one of the most challenging things is looking at how

we can sustain adequate resources to support the investigation and

prosecution of these cases. They are a priority, they are difficult to

investigate. So this is an issue of how do we measure our level of

support, how do we sustain it particularly, in candor, in times

when we have not great increases in the law enforcement budget.

But that doesn’t mean it is an impossible problem. You can deal

through prioritization and making more effective use of the resources that you have.

Now, two other areas where we need to look carefully. One has

been noted by Attorney General Sorrell, and that is the problem of

dealing with the testimony of the victim witnesses who find it very

difficult to travel to Canada. We have new opportunities because

of Canadian legislation which allows videoconferencing, but this is

really in its first steps. Issues of cost and of just the logistics of arranging for even the videoconference testimony are difficult. This

is something we are going to try to work on with the Canadians.

And the final issue is that of how do we improve our cooperation

under these formal mechanisms, which are extradition and particularly the MLAT. One of the focuses of discussion at the Working

Group next week will be trying to find ways to move these requests

forward in a more timely manner.

There are legal impediments at times, there are problems, but I

think this is recognized as the most significant problem that we

have in administering our treaty in these cases. So, that will be

one of the focuses of the Working Group meeting next week, and

certainly is one area where we need to look to improve our record.

Thank you.

Senator COLLINS. Thank you for your testimony.

Our final witness this morning is Hugh Stevenson, who is Associate Director of Planning and Information of the Bureau of Consumer Protection of the Federal Trade Commission.

TESTIMONY OF HUGH STEVENSON,1 ASSOCIATE DIRECTOR,

PLANNING AND INFORMATION, BUREAU OF CONSUMER

PROTECTION, U.S. FEDERAL TRADE COMMISSION, WASHINGTON, DC

Mr. STEVENSON. Senator, thank you. I am Hugh Stevenson from

the Federal Trade Commission. Thank you for this opportunity to

talk about cross-border fraud and for holding these hearings.

53

We have submitted written testimony, and also a statistical report which I think has been referenced before during the hearings.

I would like to just highlight a few things from the materials we

have submitted.

One of the best ways to start addressing this problem of telemarketing fraud is exactly the way this Subcommittee has done; by

listening first to the victims. We heard yesterday from the victims

describing their experiences, the effect it has had on them.

We also need to listen to victims in a more systematic way, to

make the best use that we can of the information, the evidence

that they are providing to us, what they are telling us. That has

been a driving concept for us in developing the project that you referred to earlier, called Consumer Sentinel.

Consumer Sentinel is a project that the Federal Trade Commission started back in 1997, in partnership with a number of other

agencies, including Canada’s Phonebusters, whom you heard from

yesterday. The idea here is to create a central repository for consumer fraud complaints that come in from various sources, from

the FTC, from Canada’s Phonebusters, from many Better Business

Bureaus, from the National Consumer League, and the like.

We then provide secure Web access to law enforcers to those

complaints, which now number more than 300,000, and we also

provide access to other intelligence and law enforcers in the United

States and Canada. We now have several hundred agencies signed

up for that Web-based cyber tool.

What Consumer Sentinel tells us about this problem is detailed

in our report, but I wanted to highlight a couple of things. First,

the cross-border victims here come from anywhere and everywhere.

As the map we have here shows, we have received in the year 2000

significant numbers of complaints from people in every State in the

United States.

The second point to emphasize is that the loss here is substantial, with tens of millions of dollars in losses reported, and in 2000

alone about $20 million in losses reported by U.S. consumer victims

against Canadian companies.

The third thing we want to note is that this is by no means a

one-way street, the way that cross-border fraud works. The pattern

we are seeing now, though, is that the cross-border victims are predominantly U.S. consumers complaining about Canadian companies, about 70 percent of them, as we can see from this pie chart.

Now, what do we do about this? Well, on the domestic front the

FTC has for many years aggressively battled telemarketing fraud.

We have used our civil enforcement powers to get courts to put a

halt to scams, to recover tens of millions of dollars for consumers,

to use the powers that we have to work up cases quickly. This approach of putting them out of the fraud business and grabbing the

money you can, has been a very effective complement, we think, to

the criminal law enforcement approach of putting them in jail. To

borrow a phrase from one of the victims yesterday, Mr. Hathaway,

who was saying the con artist is going to ask, is this easy money,

one of the goals is to take that money away so it is not so easy

after all.

When you are dealing with cross-border fraud, though, you have

more challenges, and I think we have heard from my colleagues

54

here about some of them. Let me just emphasize a couple from our

perspective.

One, getting the information to work up a case is a greater challenge. When the fraud is international, so is the evidence, and that

means sometimes it is harder to get and sometimes it is slower to

get. I think a theme that we heard from both my colleagues from

Justice and Vermont is that speed is an issue here. How fast can

you get the evidence to chase the bad guys?

The second point is sharing information with foreign agencies

can be more challenging. The rules of the road on information-sharing mean that there is some information that is stopped at the border as we try to share with our Canadian colleagues, or in some

cases as they try to share it with us.

A third issue that Senator Levin touched on is making remedies

effective across borders is a challenge. Chasing money across borders is a challenge, and we have had some experience with this.

It is possible, but it is more difficult. And even sometimes finding

money across borders in order to chase it is more difficult when the

borders are involved. What all this means is that the bad guys can

use the borders as an obstacle to law enforcement.

We have worked to overcome these problems in a couple of ways

that I think are instructive. First, we have worked with our Canadian colleagues and our American colleagues to develop Consumer

Sentinel. We have used this as a vehicle to fight telemarketing

fraud and Internet fraud and identity theft and cross-border fraud,

and there has been a real value in grouping together the information to do that.

We have also worked on the bi-national regional partnerships

that the witnesses have referred to. We were the original U.S. partner in the Ontario Strategic Partnership. We funded witness travel. We provided computer and intelligence support, including intelligence using the data in Consumer Sentinel. We have worked up

evidence, witness declarations, for Canadian prosecutions.

The result has been there, from relatively little activity, just

since 2000 the Canadians have had more than 80 arrests and several hundred thousand dollars have been returned to American victims in restitution orders.

We have also worked for a number of years on the British

Columbia Project Emptor project, along with other agencies. Particularly, we have worked with the British Columbia Ministry of

Attorney General bringing parallel civil actions on both sides of the

border, in some cases freezing money, and in those cases returning

probably about $2 million in restitution.

We have also worked on consumer education, a theme we heard

quite a bit about yesterday, and we have brought some of our materials to show. We have more than 150 different publications,

many of them on topics relevant to telemarketing fraud.

Overall, since fiscal 1997, we have sent out over 25 million paper

publications on a variety of topics, 15 million Web online accesses

of our materials, and we have also held focus groups to develop material to focus on helping consumers and what we can do to bring

them into a toll-free number.

We have an array of different materials. We do postcards, we do

bookmarks. We try to have a series of different messages, dependVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00062 Fmt 6601 Sfmt 6601 74107.TXT SAFFAIRS PsN: SAFFAIRS
55

ing on what will appeal to consumers. If they drive a car, maybe

they have a bumper sticker. Well, maybe they don’t have a car, so

we have run this on the sides of buses.

Well, maybe they don’t ride the bus and they stay home, so we

have refrigerator magnets. Well, maybe they don’t have a refrigerator, so then we have fans. We have tried in various ways to

reach out to consumers using different messages to reach the target population.

Well, what more can we do here? There is more to do, although

there has been substantial progress made since the 1997 report on

a number of fronts.

First, to echo a theme that I think has been made here, we need

to do even more to improve information-sharing. One thing we plan

to do there logistically is to strengthen Consumer Sentinel’s role as

a central repository for consumer fraud complaints. We need to get

data from even more sources to make this cyber tool every more

cyber-smart, even more useful for the people who are using it. We

need to expand the number of people who are using it.

There are a number of tools that are on the Web. There are a

number of interesting things. One joint project with DOJ and

NAAG is an index of undercover tape recordings that have been

made for investigations that we have put on and made available

for people to use to get that information fast because speed is important.

We also are aiming to strengthen Consumer Sentinel as a vehicle

for communication and coordination. One of the issues we also

heard about today and yesterday is the problem of just communicating with the other consumer cops on the beat in order to coordinate to take effective action.

We would also like to encourage other members to be active partners in the Consumer Sentinel project. We have had a postal inspector detailed as a program manager for a year. We have had a

Secret Service agent detailed to work on the identify theft aspects

of this, and having them right there at the data hub has been very

effective.

We have also worked up some materials to promote to law enforcers the use of Consumer Sentinel as a source of information, a

cyber tool for fraud-busters.

On a broader front, on a legal front, we need to look also at how

to modify the legal framework here to improve information-sharing.

This, I think, also echoes some of the comments that have been

made earlier. There are several issues to consider: What information is it that we need to share that we have difficulty sharing, in

what cases do we share it, and also what legal vehicles are there

that could be used here.

We heard some references to MLATs, which are focused actually

on criminal matters. There are other vehicles to consider, mutual

assistance legislation or other possibilities. I think one of the

things that the Commission has recommended is working with our

colleagues in the United States and Canada to explore what the options are to move forward on that front.

We also need to explore how to make our civil remedies more effective across borders. For example, we need better tools, I think,

as the comments suggest, for chasing the offshore money. There

56

are some options out there, but the name of the game here is not

just to win against the bad guys, but to win efficiently because we

have to win a lot or else it still stays, as Mr. Hathaway said, easy

money.

Finally, we need to look for even more opportunities to cooperate

in concrete ways with our Canadian counterpart agencies. It is important to rise to these challenges both because this is a problem

right now—people are being hurt right now—but it is also an opportunity and a challenge because with the globalization of

telecom, of the Internet, of financial transfers and financial institutions, these are problems that we are going to see more often and

not less.

Thank you.

Senator COLLINS. Thank you very much, Mr. Stevenson.

One of the disturbing statements that we heard yesterday from

all three of our victims is that not one of them received a penny

of restitution as a result of the fraud that they had suffered. In

talking with attorneys general and other law enforcement officers,

we found that that is the rule rather than the exception.

Mr. Stevenson, you mentioned that the Consumer Sentinel system reported $20 million of losses that were reported by U.S. consumers last year against Canadian companies. I see that this year

the projected figure is $36.5 million, so it is certainly going in the

wrong direction.

Do you have any idea in the previous years what percentage of

recovery or restitution was in these cases?

Mr. STEVENSON. I don’t have exact figures. Certainly, the anecdotal evidence that we have suggests that the percentage of recovery is very small, and indeed the percentage of consumer victims

who complain is very small.

Senator COLLINS. One of the aspects that is going to discourage

consumers from reporting is not only the indignity that they have

suffered in feeling that they were taken advantage of—and that obviously hurts their pride—but if they don’t think there is any

chance they are going to get their money back, it discourages them

from reporting the crime.

Mr. Attorney General, based on your experience in Vermont,

have you also found that the likelihood of getting restitution for

consumers when you are dealing with cross-border fraud is low?

Mr. SORRELL. It is not just cross-border fraud, Senator. These are

scam artists; they are not legitimate businesses. I mean, we have

a pretty good track record in other consumer fraud matters when

we are going against ongoing businesses of getting reimbursement

for our consumers.

But if we obtain 1 percent of the money that goes to these scam

artists, whether it is sweepstakes issues or to reinstate their credit

history or whatever, that would be a win. The reality is you have

got to find them. I mean, these are not brick-and-mortar operations. All they need is access to a phone, and then whatever they

are using the money for, they don’t have a long useful life.

So you have got to identify them, find that they have assets so

you can get your hands on them, if you can identify them and hold

them accountable before you can grab the assets. So we certainly

57

wish we could do more in terms of getting restitution, but I think

I mentioned before it is sort of a blood out of a stone situation.

So our emphasis has really been on the education side, preventing it in the first place.

Senator COLLINS. I think that is absolutely key for just the reason that you have said. And your distinction between scam artists

who are setting up shop or a boiler room 1 day and are gone the

next, versus an ongoing, legitimate business that may be doing

some unethical practices, is a very good one.

I spent 5 years in State government in Maine and I oversaw the

department that regulated banks, securities, insurance, and licensing boards. We had a very high rate of restitution, but the banks

weren’t going to disappear, the insurance agents weren’t going to

pack up their bags in the middle of the night by and large, and the

brokerage houses weren’t still going to be there. We knew where

to find them, and I think that shows the difficulty in dealing with

this type of consumer fraud. And it is exacerbated when we have

to deal with another country, as well.

Mr. Attorney General, you were talking about whether Vermonters are more gullible, and I don’t think that is it and I don’t

think that is it for Mainers. It is just that if you live in Maine or

Vermont or Michigan or another border State, you are used to dealing with Canada all the time. It is a friendly neighbor. There are

family ties.

So sending money to Canada or receiving a phone call from Canada does not raise any red flags. It doesn’t sound any alarm bells

because of the close relationships that those of us who live in border States have with Canada. That is why I think an increased emphasis in our educational materials on cross-border fraud would be

very helpful.

The educational materials that I have seen have been absolutely

terrific, but by and large they are not aimed at being wary if you

receive a solicitation from Canada or another country, and I think

that is perhaps an area that we should pursue. I would also like

to see the consumer agencies such as the FTC and the attorneys

general do a list for consumers of warning signs, typical pitches

that they might hear. I think that kind of practical advice would

be helpful.

It is startling that Canada apparently has had more success than

we have, according to our witness yesterday, in educating its senior

citizens about the dangers of fraud. I think the FTC has been terrific, and the Postal Service, as well, and groups such as AARP.

But it seems to me that we have to constantly update our materials

to respond to what the latest fraud is. These scam artists are very

clever.

Mr. Stevenson, do you have any materials or do you plan any

materials that speak directly to the issue of cross-border fraud?

Mr. STEVENSON. We do have one brochure that addresses that

specifically and the issue of online fraud. And then there are also

obviously, as we have heard, the particular frauds involved here,

some of which are largely associated in terms of the number of

complaints with Canada, the sweepstakes and lotteries and advanced fee loans, where we also have materials that are focused on

that.

58

Senator COLLINS. Ms. Warlow, I want to talk to you about the

issue that every single person involved in trying to investigate and

prosecute these cross-border frauds has brought up to us, and that

is each one has expressed tremendous frustration with the delays

involved in the MLAT process, the Mutual Legal Assistance Treaty

process.

It is often felt, it appears, to be such a cumbersome process that

it, itself, is an obstacle to the efficient investigation and prosecution

of cross-border telemarketing fraud. We have heard the attorney

general this morning talk about having to wait months for even an

answer, and perhaps years if we get into an extradition situation.

That strikes me as unacceptable in this situation because these are

con artists who will pack up and move to another city or another

location. They are not going to be there if we don’t act quickly

when we have a lead.

What is the Department of Justice doing to try to expedite and

streamline these requests for assistance under the MLAT process?

Ms. WARLOW. Well, one thing certainly is to engage in a dialogue

with Canada about this problem. It would not be fair to Canada to

say it is only a problem with them. We also receive complaints

about the timeliness of the process when we are sent requests.

One thing I think that we can do to speed the process is not to

overemphasize the use of the MLAT. In the investigative stage, one

of the most important things is police-to-police cooperation, exactly

the sort of cop-to-cop dialogue that the attorney general has referred to.

I would hope that our folks are making it clear that you needn’t

rely on the MLAT for all forms of cooperation. The sticking point

is there are certain things you do need to look to the MLAT to get.

Senator COLLINS. I am sorry. I couldn’t hear you.

Ms. WARLOW. There are some things, however, that you do need

to use the MLAT for.

Senator COLLINS. Could you distinguish for us between when it

is required that you go through the MLAT process and what kinds

of information can you get more informally?

Ms. WARLOW. The way I have tried to describe this—and I have

done this with training for our own prosecutors and law enforcement agents—you generally think of two types of information

where you need to use an MLAT process. One is where you need

to use a compulsory measure in the other country. Now, this means

certainly a search. It also means compelling production of documents, and in a fraud case this is significant. There is a significant

need for documentary evidence, and so the need for compulsory

process.

The other is when you are reaching or looking forward to the

trial stage because it is there, when you need evidence in an admissible form, that more likely than not you are going to need some

sort of MLAT process, for example, to authenticate documents; or

in some circumstances, for example, with a deposition if you need

to compel the testimony of somebody. So these are the categories.

To the extent that you can have police-to-police cooperation, that

is good. It does certainly depend on contacts in the Federal system.

We have the advantage of having a permanent presence in Canada.

We have a FBI legal attache’s office that is quite active.

59

One thing that enhances police-to-police cooperation, frankly, is

the opportunity to do joint investigations rather than just having

the situation in which you come for help. Then, I think the information-sharing is much better. Moreover, let’s say that we are

working with the Canadians. The Canadian authorities aren’t dependent on some sort of request from us to invoke their own legal

authority. It is their own investigation.

So the extent that we can work more cases jointly, we will have

a better track record. But certainly there are going to be instances

in which we need this MLAT. That is clear, and we need to do a

better job in timeliness of response. And it is not unique to Canada,

it is not unique to these cases.

Senator COLLINS. What I am told is that many law enforcement

officers do not fully understand how much information they can get

and how much sharing of data they can do without going through

the formal process.

Do you think that is correct?

Ms. WARLOW. I would suspect it is.

Senator COLLINS. And what can we do about that to help law enforcement officials be better educated on what they can obtain

without going through the formal MLAT process?

Ms. WARLOW. I think we are doing some things in training of our

State and local counterparts. We are tending to focus more on the

State and local prosecutors. We have had a training session on

international issues, I believe, last year for State and local prosecutors. We have had a representative of a State in our Office of International Affairs. I believe we now have one either from the National Attorneys General Association or the National District Attorneys Association.

In addition, we need to be sure we have people who are available

for case-specific advice. Also, I think if we can educate our Federal

investigating agents, and we generally do have training with them,

too, they can also be points of contact for their State and local colleagues in discussing this or pointing them in the direction to talking to the Justice Department itself.

Senator COLLINS. Mr. Stevenson, I understand that Federal law

restricts in some ways the FTC’s ability to share information with

Canadian officials, and that the rules to interpret this law have not

been modified since the 1980’s, when cross-border fraud was not as

prevalent as it is today.

First of all, is my understanding correct, and if so, do you have

some specific recommendations on changes in the law that would

make it easier for the FTC to share information with its Canadian

counterparts?

Mr. STEVENSON. Yes, your summary is correct. There are certain

kinds of information that we are prevented from sharing with foreign agencies, where we can share them with State and other Federal agencies. Maybe chief among the categories is the information

that we get pursuant to administrative subpoena or compulsory

process, and that is part of our statutory setup.

The Commission has not made specific legislative recommendations so much as suggesting that this is an area that does need to

be looked at. As Mr. Warlow said, one of the good things we can

do here is, in having a dialogue with our Canadian counterparts,

60

figure out what are the most effective vehicles for sharing information, because one of the things we want to keep an eye on in

thinking about what we may be able to do is what our Canadian

counterparts may be able to do, how they would respond to greater

information-sharing, so that we can encourage greater mutual

sharing of information because the key to improving informationsharing is obviously flowing both north and south in order to make

this work as best we can.

Senator COLLINS. Mr. Attorney General, are there changes in

Federal law that you believe are needed to help coordinate the attack on cross-border fraud?

You have mentioned the need for changes in streamlining the

MLAT process and you have mentioned the resources issue. Are

there any other recommendations that you would have for the Subcommittee as we pursue remedies to the problems that you have

already identified?

Mr. SORRELL. Not specifically that I have in mind, Senator. I am

not well-versed in the issues of what information may be exchanged or not. Our emphasis has been on the internal processes

and the adequate resources to be more quickly responsive.

Senator COLLINS. Ms. Warlow, I want to give you the opportunity

to respond to an issue that the attorney general has raised this

morning, that Mr. Stevenson has raised, and that every law enforcement official we have interviewed has raised, and that is the

lack of funding from DOJ or other sources to help pay for witness

expenses and travel and those essential costs of investigating and

prosecuting a crime.

Ms. WARLOW. It is a significant problem. I think there are a couple of facets to it. One is where we are producing witnesses solely

for a Canadian proceeding. There can be limitations on how we use

our own money. For example, with our Marshals Service, the parameters of its authority deal with matters before U.S. courts.

I am not familiar with the details of the problem of the limitations on the Federal funding that the attorney general has referred

to, but I do know that there was a conclusion that those funds that

are being used otherwise to support the activities of Vermont and

other States were deemed not available for the purpose of witness

travel.

I would say that for some time it has been recognized there is

a general problem for the States and localities, not just in this particular area of crime, telemarketing fraud, but generally for the

States and localities to deal with the unusual expenses that often

attach when they have a transnational and international crime—

issues of travel, even things as simple as translation and interpretation.

So this is a problem for the States. It is expensive for us as well,

but I think particularly for the States, and in some instances the

funding for States is localized. We have had instances where a

county district attorney’s office has been taxed as to whole year’s

budget in trying to support a single complex international case. So

it is a problem.

Senator COLLINS. The final question that I want to ask each of

you deals with the problem that each of these cases tends to be relatively small-dollar. Yet, if they were investigated, they often reVerDate 11-MAY-2000 13:47 Sep 25, 2001 Jkt 000000 PO 00000 Frm 00068 Fmt 6601 Sfmt 6601 74107.TXT SAFFAIRS PsN: SAFFAIRS
61

veal a fraud ring that has targeted hundreds or even thousands of

consumers. In fact, the losses in the aggregate are quite large.

How does your offices make decisions on whether or not to put

the resources into a case to determine whether this is just the tip

of the iceberg?

What we have found in doing our own investigation involving one

of our consumers, the woman from Maine who testified yesterday,

is that when we issued subpoenas to Western Union to try to track

down the flow of funds from her husband to the Canadian scam

artists who defrauded her husband, we quickly discovered is that

it appears that this is part of a far broader fraud ring and that he

certainly is not the only victim.

Mr. Sorrell.

Mr. SORRELL. The question is how do we make a decision to proceed in a case not knowing really the magnitude of the case. This

is one area in which the attorneys general have been working, I

think, quite effectively in the telemarketing arena. We have a periodic written publication on what is going on in telemarketing

issues, but perhaps more importantly there are either monthly or

bimonthly conference calls for the individuals from the various offices that are working on telemarketing fraud matters.

So in that sharing of information there, we have been working

most closely with the States of Ohio and North Carolina that are

also under a Federal grant right now for focusing on these issues.

And it has been interesting to us to see that matters involving Canadian telemarketers—they are not just preying on Vermonters,

but they are also in other States. We are obviously a small office

and when we can see a case where there are consumer victims in

other States, then that opens up to us working on a multi-State

basis.

I think I also mentioned that I have an assistant attorney general who is cross-designated as an Assistant U.S. Attorney. Maybe

I didn’t mention that. So when we see a case that has significant

magnitude, we will work with the U.S. Attorney’s office and Canada. We are working one case right now where we have identified

18 separate scam operations being operated by the suspect in the

matter. So that is a case where the tentacles of impact go out, and

the further we look into it the more we see how broad that is. This

is the occupation these folks are in, so it is not a one-shot deal and

that is what we find.

Senator COLLINS. Exactly. When there is one victim, there are

undoubtedly many others. Indeed, one of the examples that we

looked at started with a single victim in North Carolina. It was investigated, fortunately, and it turned out to be an extensive fraud

case involving hundreds of victims in 18 States.

The reason I raise this issue is I think it shows the importance

of having either the Consumer Sentinel system or the Phonebusters system, where there is somewhere we can aggregate these

complaints, look for patterns, and then go after what are undoubtedly complex, sophisticated crime rings that are targeting thousands of our most vulnerable senior citizens.

Ms. Warlow.

Ms. WARLOW. Of course, for the Department of Justice and the

FBI, we tend to look at the more complex cases, the multi-district,

62

multi-victim cases, and ones that involve larger organizations. We

should be working with the States in exactly the way that the attorney general has described. It is the particular role of the Federal

Government to deal with these widespread crimes, and we have

particular investigative authorities, and so on. So that is, in fact,

our target.

You have stolen my thunder, I guess, because we would cite exactly things like the Consumer Sentinel program and the library of

recorded conversations as tools that allow us to identify where

there are patterns and large operations victimizing hundreds of

people. So those are exactly the kinds of resources that are very

useful in distinguishing the relatively small cases from those where

we are getting into a big operation.

Senator COLLINS. Mr. Stevenson.

Mr. STEVENSON. I think that the key is gathering the information together so that we can make intelligent cuts about it and

then communicating about it. We certainly have seen cases where

the individual loss might be $19.95 or some small amount, and yet

when we then brought the cases and we find out about the total

loss, it can be multi-million dollars a nickel at a time, so to speak.

So it is very useful to look at the information in that way to make

the cuts about where the big problems are.

It is also useful to have that kind of information in making the

cuts about communicating with other agencies about how we can

divide up the work. One thing I don’t think you are going to get

anybody to say to you is we are kind of running out of potential

defendants in this area. There is always plenty of work to go

around, and one of the challenges is how do we do this as efficiently and quickly as we can. Which targets does it make sense

for the FBI to pursue based on the criteria Ms. Warlow mentioned,

for example; which ones for the Vermont AG, and so forth?

One of the things that having the information in a network helps

you do is to see what is out there now. We have actually done dozens of law enforcement sweeps with various law enforcement partners, including Vermont and Justice, where we can look, for example, at a particular kind of fraud and say this is what we are seeing

out there now. How does it make sense to divide up this work

based on a number of different criteria that we might use?

The other thing that we have been working on is better communication about who is working on what. In fact, my colleagues at

the Justice Department, John Rusch, and elsewhere, have raised

the issue of how do we communicate better about what is going on.

And one of the things we developed in the Sentinel network is an

alert technology so that people can communicate about what they

are looking into or what they have information about, because that

kind of coordination is very important to move ahead in this work.

Senator COLLINS. Thank you. I want to thank all of our witnesses for participating today. Your contributions have been very

valuable as we grapple with the extent of this problem and possible

remedies. I very much appreciate your joining us. Thank you.

During the past 2 days of hearings, we have learned a great deal

about cross-border fraud, a growing phenomenon in which con artists in other countries, notably Canada, target victims in our own.

In particular, such cross-border criminals tend to target elderly

63

Americans and their families, innocent victims such as the three

witnesses from whom we heard yesterday.

All three of the victims who appeared here, and many more in

communities across our country, were directly targeted or had their

loved ones directly targeted by cross-border criminals seeking to

take advantage of their honesty, their optimism, and their trust.

They fell prey to very common scams, such as lottery frauds,

sweepstakes, and other attempts to swindle them out of their

money.

Their testimony also helped highlight the crucial role of consumer awareness as our first line of defense against such fraud. An

educated consumer, aware of the dangers of schemes such as a lottery scam and wary enough to suspect that promises that seem too

good to be true probably are, is the single best answer to cross-border fraud.

For this reason, I hope that the hearings that we have held have

helped to educate consumers and make them more wary about falling for such pitches. I encourage all of the law enforcement and

consumer protection agencies that are involved in this task to continue their efforts to promote better consumer education and

awareness programs. I think we can’t stop; we have to keep educating consumers because as scam artists change their approaches,

or stop using the mail and start using phones for a while and then

come back to the mail with a new scheme, their ingenuity requires

us to be ever-vigilant.

We have also heard a lot of testimony from law enforcement officials about the challenges in facing cross-border fraud and areas in

which further improvement is necessary. I want to pursue those

issues with Senator Levin to examine the budget and legislative

options that are available to us, and I would invite any of our witnesses to submit to us any further suggestions that they might

have in that regard.

On behalf of the Chairman, I would announce that the record

will be open for 14 days. There are a number of statements that

I have received from other victims and from the attorney general’s

office in Georgia, as well as from the Canadian Embassy, that we

will be submitting for the record.

Finally, I want to thank the Members of the Subcommittee staff

who prepared for these hearings, in particular Christopher Ford,

Marianne Kenny, Alan Stubbs, Barbara Cohoon, Frank Fountain,

and Mary Robertson. They are very hard-working and dedicated individuals, and they have worked very hard during the past 5

months to gather the information for these hearings and I want to

thank them.

Let me close by also thanking our new Chairman, Senator Levin,

for his efforts. We have had these hearings long planned, but since

he is now the new Chairman he could have very easily chosen not

to pursue them. He has been a dedicated advocate for consumers

and we have worked very closely on a number of consumer protection efforts. So I am very grateful to him for allowing this investigation to be concluded and these hearings to proceed.

Thank you, and this hearing is now adjourned.

[Whereupon, at 10:50 a.m., the Subcommittee was adjourned.]

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Æ