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93–526 PDF 2004

S. HRG. 108–486

INTERNET FRAUD HITS SENIORS:

AS SENIORS VENTURE INTO THE WEB, THE

FINANCIAL PREDATORS LURK AND TAKE AIM

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

WASHINGTON, DC

MARCH 23, 2004

Serial No. 108–32

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING 

LARRY CRAIG, Idaho, Chairman 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

MIKE ENZI, Wyoming 

GORDON SMITH, Oregon 

JAMES M. TALENT, Missouri 

PETER G. FITZGERALD, Illinois 

ORRIN G. HATCH, Utah 

ELIZABETH DOLE, North Carolina 

TED STEVENS, Alaska 

RICK SANTORUM, Pennsylvania 

JOHN B. BREAUX, Louisiana, Ranking 

Member 

HARRY REID, Nevada 

HERB KOHL, Wisconsin 

JAMES M. JEFFORDS, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

LUPE WISSEL, Staff Director 

MICHELLE EASTON, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Larry E. Craig ..................................................... 1

Statement of Senator Susan Collins ...................................................................... 2

PANEL I 

Jeffrey Groover, inmate, Federal Correctional Institution, Yazoo City, MS ...... 3

PANEL II 

Dave Nahmias, Deputy Assistant Attorney General, Criminal Division, Department of Justice, Washington, DC ................................................................ 8

Lawrence E. Maxwell, Assistant Chief Inspector, U.S. Postal Inspection Service, Washington, DC ............................................................................................. 27

J. Howard Beales, III, Director, Bureau of Consumer Protection, The Federal 

Trade Commission, Washington, DC .................................................................. 47

Tanya Solov, director of Securities, North American Securities Administrators 

Association, Chicago, IL ...................................................................................... 70

David Jevans, chairman, Anti-Phishing Working Group, Redwood City, CA .... 77

(III) 

(1)

INTERNET FRAUD HITS SENIORS: AS SENIORS 

VENTURE INTO THE WEB, THE FINANCIAL 

PREDATORS LURK AND TAKE AIM 

TUESDAY, MARCH 23, 2004 

U.S. SENATE, 

SPECIAL COMMITTEE ON AGING, 

Washington, DC. 

The committee met, pursuant to notice, at 10:34 a.m., in room 

SD–628, Dirksen Senate Office Building, Hon. Larry E. Craig 

(chairman of the committee) presiding. 

Present: Senators Craig and Collins. 

OPENING STATEMENT OF SENATOR LARRY CRAIG, CHAIRMAN 

The CHAIRMAN. Good morning, everyone. The Special Committee 

on Aging will be convened. The subject today, Internet Fraud Hits 

Seniors: As Seniors Venture into the Web, the Financial Predators 

Lurk and Take Aim. I would like to thank our witnesses for joining 

us today on an issue of growing national concern, the emerging use 

of the Internet to perpetuate fraud against our nation’s senior citizens. 

According to a recent survey, those 65 years of age and older are 

the fastest-growing group online, increasing their presence on the 

Internet by 25 percent in 2003. As seniors go online in record numbers, fraud perpetuated through the Internet is dramatically on the 

rise. Thousands of Internet fraud victims in 2002 were senior citizens and those numbers nearly doubled in 2003. Seniors are also 

targeted in disproportionate numbers by scams originating across 

borders and overseas. 

We know that the Internet offers a vast global marketplace for 

consumers and businesses alike. Unfortunately, scam artists also 

recognize the potential of the Internet for criminal enterprises. The 

same scams that were once conducted by mail and phone are now 

easily perpetuated through the Internet, and new scams emerge 

every day. Criminals know that they can commit fraud online in 

a faster and more cost-effective way. They also know it is harder 

to get caught. 

Therefore, to effectively fight this crime, it is critical that the 

State and Federal law enforcement agencies work closely together. 

In cases of Internet fraud committed across borders, it is important 

for domestic law enforcement to work effectively with their foreign 

counterparts. As part of this hearing, I am pleased to announce a 

new public awareness Initiative with Federal agency partners to 

2

educate the senior population on the new dangers of Internet 

fraud. The FTC is our lead partner in this effort. 

In conclusion, I also urge the law enforcement agencies represented here today to be on the alert for Internet fraud related to 

the new Medicare prescription drug discount card program that 

this committee reviewed just a few weeks ago. Although no Internet fraud reports have been reported as of yet, we must remain 

ever-alert to new ventures or avenues of criminal activity. 

Before I introduce our first panel, let me turn to my colleague 

Susan Collins who, through her committee, has already done work 

in this area. 

STATEMENT OF SENATOR SUSAN COLLINS 

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

I am very pleased that you are holding this hearing today on 

such an important issue. I have long been concerned about the 

problem of Internet fraud, particularly those scams targeting our 

elderly. The Internet is a phenomenal tool of commerce and communication, but it also provides a powerful tool to those who would 

use it for criminal purposes. 

The Permanent Subcommittee on Investigations, which I formerly chaired, held a series of hearings related to fraud and the 

Internet. We began the series in 1998 with a hearing on the very 

topic that we are addressing today, Internet scams and how they 

affect consumers, particularly our senior citizens. 

I recall saying at the time, this was 6 years ago, that 175 countries were connected to the Internet and approximately 50 million 

Americans were using the Web. I thought that was astonishing at 

the time. Well, today, of course, that number has grown to at least 

203 countries and 165 million Americans who regularly use the 

Internet to pay their bills, shop online, or simply to search for information or communicate with their friends and family. 

There is no question that the Internet has been a boon for business. The remarkable ease and speed with which transactions can 

be conducted over the Internet have made the world a smaller 

place. Consumers have the ability to engage in a variety of commercial activities across State and even national borders, including 

shopping, banking, and investing, all from the comfort, privacy, 

and safety of their own homes. An unfortunate corollary to this 

ease of access, however, is that those who wish to use the Internet 

to defraud innocent people can also work just as easily from the 

privacy, comfort, and safety of their own homes, or anywhere else, 

for that matter. Because the Internet can be used to transfer text, 

pictures, music, as well as money, credit card numbers, and other 

personal information, the potential for criminal use of the Internet 

is infinite. 

Corresponding to the explosive growth of the Internet, the number of consumer complaints of Internet fraud to the Federal Trade 

Commission continues to rise. Of the nearly 302,000 fraud complaints filed last year, more than 166,000 people reported that they 

had been victims of Internet-related fraud. That is more than a 

doubling of the number of victims in the last three years. The cost 

of this escalating fraud? Nearly $200 million, including $12.8 million paid out by defrauded seniors, many of whom are living on 

3

limited incomes. Those are only the ones who actually took the 

time to file complaints with the FTC. The real number is undoubtedly much higher. 

Seniors can be especially vulnerable to Internet fraud. Some of 

the very achievements that they have worked their whole lives to 

attain contribute to this vulnerability. Many seniors have strong 

credit records earned over years of faithfully paying their bills on 

time. This good credit is being abused by thieves who steal their 

credit card numbers to run up bills on their accounts, or by others 

who promise huge returns on an investment that never materializes. 

Law enforcement officials know that almost any crime that can 

be committed in the real world can also be committed in the virtual 

world. In fact, the Internet allows criminals to target their victims 

more quickly, less expensively, and with much less chance of getting caught. 

So again, Mr. Chairman, I salute you for undertaking this effort. 

I think one of the most important things we can do for our seniors 

is to educate them and alert them to the potential for fraud. I know 

that has been the focus of your efforts as chairman, and I salute 

you for that. 

The CHAIRMAN. Senator, thank you very much for that statement. Those facts, the statistics of access to and, now, regular use 

of the Internet are really phenomenal and are still moving by large 

numbers in this country. 

Now let us move to our panelists and our first panel. Our first 

panelist is Jeffrey Groover, a former Internet service business 

owner and currently an inmate of the Federal Corrections System, 

who will share with us his experience with Internet fraud. I must 

tell you, Jeffrey, I am pleased that you were willing to testify today 

and you were allowed to testify. I think it is important for the 

record that we hear first-hand from someone who has effectively 

used the Internet for criminal activity. 

Mr. Groover, since you will be testifying as to the facts in a case 

that you have first-hand knowledge of, we need to take your testimony under oath. Would you please stand and raise your right 

hand. 

Jeffrey Groover, do you solemnly swear that the testimony you 

are about to give before the committee is the truth, the whole truth 

and nothing but the truth, so help you God? 

Mr. GROOVER. I do. 

The CHAIRMAN. Please be seated. Again, we thank you for your 

willingness to testify. Please proceed with your testimony. 

STATEMENT OF JEFFREY GROOVER, INMATE, FEDERAL 

CORRECTIONAL INSTITUTION, YAZOO CITY, MS 

Mr. GROOVER. Good morning, Mr. Chairman, distinguished senators. Thank you. My name is Jeffrey Groover, and I would like to 

thank you for the opportunity and privilege to speak to the committee today. 

I am 43-years old, I’m from West Palm Beach, FL. I have worked 

in the computer networking and telecommunications fields for the 

past 18 years. In 1996, I started a small Internet service provider 

4

company that we sold in 1999; then I started a telecommunications 

and Internet company. 

During the following year, I found myself in financial difficulties. 

The Internet bust had left me in a financial crisis. I began to fraudulently obtain credit to keep my business going and to support my 

former wife and two small children. I was subsequently caught and 

convicted in Federal court of unauthorized use of an access device. 

I was given a substantial Federal prison sentence. 

I stole the identities of a few individuals, including Mr. Nelson 

Doubleday, a wealthy Florida resident and co-owner of the New 

York Mets. The techniques are lengthy and technical. However, all 

that I needed was your name and the approximate area where you 

lived, and in a few hours I could obtain your full name, your address, your date of birth, your Social Security number, your wife’s 

name, your previous address, and any vehicles or property that you 

owned. 

After applying online for a credit card in your name and being 

approved within a few minutes, I would receive it in a few weeks. 

Then I would run a complete credit report from any one of the online credit reporting agencies and find out who you had credit accounts with. From there, I could tap into your bank account, providing that I had the right circumstances. I did all this through the 

Internet. 

Everyone is susceptible to this type of fraud. That is not to scare 

everyone; that is just to make everyone aware that the Internet is 

to be used with caution, especially senior Internet users. With just 

a few small changes, it can also be a safer place to do business as 

well as conduct credit and financial transactions. 

I came here to assist my country and in some small way to find 

redemption for what I’ve done. I lost my home, my business, my 

freedom, and most of all, my wife and children, for what I did. The 

punishment is severe, and rest assure that I will not do it again. 

However, that will not stop other people from continuing to do this 

type of crime due to the ease in which it can be done. 

I believe, though, that I can provide you with some recommendations that will stop a large portion of these crimes. 

One recommendation is this: To require credit reporting agencies 

to implement a pass-key system in order to access an individual’s 

credit report. This will save billions of dollars each year in credit 

fraud done through the Internet or otherwise. When an individual 

applies for credit, they must enter their pass-key authorizing their 

credit file to be accessed. If the pass-key is incorrect, then their file 

is locked and further contact with the correct individual will be 

necessary to unlock it. This will stop this type of fraud at the inception. 

Furthermore, procedures should be implemented to allow a consumer to lock their credit file at their instruction from anyone attempting to gain access to it. For instance, if they go on vacation, 

away on business or an extended hospital stay, at the time they 

need their credit report they would simply go online and unlock 

their file. All this could be implemented easily and without major 

changes to the credit reporting agencies’ system. 

5

Although I do not have enough time here now to provide you in 

great detail on how to prevent these types of crimes, my knowledge 

and experience is available to you anytime. 

I once again apologize to Mr. Doubleday and the other victims 

and hope they will forgive me. I am happy to be of assistance to 

you in this matter and will answer any questions you may have, 

as well as make further recommendations to the committee. 

Thank you once again, Mr. Chairman and members of the committee. 

The CHAIRMAN. Well, Jeffrey, thank you for that testimony. 

Again, I must say I do appreciate your willingness to come before 

the committee this morning and speak as openly as you have about 

your own actions, but also to offer up suggestions as to how the 

Internet might be improved. 

Can you state for the record the charges you were convicted of 

and the time that you are currently serving? 

Mr. GROOVER. Yes. It was Title 18, United States Code Subsection 1029, unauthorized use of an access device. I was sentenced 

to 46 months in Federal prison. 

The CHAIRMAN. How was the law enforcement in Florida finally 

able to catch up with you and your unlawful action on the Internet? 

Mr. GROOVER. Basically, Senator, law enforcement was able to 

catch me because not only was I committing criminal activity, I 

was raising a family and trying to keep a legitimate business 

going. Had I only been focused on being a criminal, they would 

have had a much tougher time catching me, if at all. So basically 

what I am saying is that the people that are doing this type of 

crime, if they are solely focused on being criminal, then it is tougher to catch them. In my case, I guess you could say no man’s legs 

are long enough to walk on both sides of the fence. 

The CHAIRMAN. Well, that and, I am assuming by what you just 

said, because you were staying in one location and not moving 

around or attempting to in any way evade the law, did that assist 

in their being able to catch you? 

Mr. GROOVER. Yes, I would say so. 

The CHAIRMAN. Why do you think the Internet is becoming the 

weapon of choice in perpetuating financial crimes in this country? 

Mr. GROOVER. The ease of use and the Internet has become ubiquitous throughout the world. So they can move around, criminals 

can move around easily, and put up a Web site here or do activity 

anywhere around the world on the Internet and they can contact 

another individual or another piece of equipment anywhere in the 

world. 

The CHAIRMAN. In your situation, were the victims, like Mr. 

Doubleday, compensated for their losses? 

Mr. GROOVER. Well, I was ordered to pay restitution in the 

amount of $271,902, and I’ve been making payments while in prison. In general, the bank and credit card companies lost the money, 

not as much the individual. I would like to state for the record I 

was not targeting Mr. Doubleday because he was a senior citizen. 

That just happened out of chance. 

The CHAIRMAN. How much did calculations of the chances that 

you would be caught play into your decision to commit Internet 

6

fraud? I should say that in the backdrop, Jeffrey, of your talent, 

your experience on the Internet coupled with what we believe is a 

more difficult crime to catch people in. How did that all fit into 

your particular action? 

Mr. GROOVER. Well, it’s kind of hard to look back at this point, 

but I believe that I thought I would not get caught because of my 

expertise in the computer and Internet field. I didn’t think that I 

would lose my family, my business, my possessions. I didn’t think 

I would be put in a human warehouse a thousand miles from my 

home. I didn’t think about all of those things. So it’s kind of hard 

to say what I was thinking about at that time. Had I thought long 

and hard, I wouldn’t have done it. 

The CHAIRMAN. Sure. You have mentioned at least one measure 

and you spoke of possibly others. How would you advise law enforcement in the pursuit of Internet criminals between States. I say 

that because you said you stood still. If you were intent on a criminal act and if you were operating, if I can use the term, from a 

criminal mind, you said it would have been much more difficult to 

catch you, or to catch someone like you. What recommendations do 

you offer up to law enforcement? 

Mr. GROOVER. That is correct. Actually, in explanation, I initially 

started out trying to pay back the credit that I was using, and I 

was paying some of it back. But it doesn’t always work out that 

way. So I did stay in one place. 

What I would recommend to law enforcement is to set up an 

Internet crime clearinghouse to coordinate efforts between agencies; to set up an online Internet crime information center where 

citizens can find out about companies and people that are doing 

crime on the Internet. The object is, is to keep the criminals running and moving without giving them an opportunity to stay in one 

place and create large amounts of these frauds that are going on. 

The CHAIRMAN. For a young person to be active on the Internet 

and have certain skills is one thing; for senior citizens who have 

never ventured on and are now venturing on in great numbers, as 

both myself and Senator Collins mentioned, what can senior citizens learn from your case of Internet fraud? 

Mr. GROOVER. They should learn the following. Deal with reputable companies. Don’t give out personal information over the 

Internet, such as Social Security numbers and birth dates. When 

in doubt, check out the company. If you can’t reach them by phone, 

they don’t publish a physical address on their Web site, they don’t 

exist. Report fraudulent activity right away, and follow up on it. 

Don’t open suspicious e-mail messages or attachments. If you think 

someone has stolen your identity, immediately inform in writing 

the credit bureaus, all of your creditors, including credit card companies, and make sure that you state that no credit is to be issued 

unless you are contacted first. 

Also, take a class on Internet use and join a users group in your 

area, and learn how to share and exchange ideas and information 

the way it was meant to be done. 

If there is any benefit from what I’ve recommended, let it be that 

I have helped people to become empowered to protect themselves 

better from these types of crimes. 

7

The CHAIRMAN. Well, Jeffrey, thank you very much for those suggestions. Now let me turn to my colleague Senator Collins for questions she might ask. 

Senator COLLINS. Thank you, Mr. Chairman. 

Do you think that you would have been able to commit the financial crimes that you did engage in were it not for the Internet? 

Prior to the Internet, would you have been able to get access to the 

information that you needed to steal other people’s identities and 

then use their credit? 

Mr. GROOVER. No, Senator. 

Senator COLLINS. So this is a crime that you would not have 

been able to even conduct were it not for the Internet? 

Mr. GROOVER. Correct. 

Senator COLLINS. One of the problems of identity theft for the 

victims is that often it takes them a great deal of time to realize 

that they are victims of identity theft, and by that time, hundreds 

of thousands of dollars can be charged to their credit cards. How 

did your victims discover that you had stolen their identities? 

Mr. GROOVER. That I’m not exactly clear on, but I would imagine 

that they probably got a call from a credit card company of some 

sort and—asking them about a particular charge or something of 

that nature. 

Senator COLLINS. Do you have any other specific recommendations for us on how individuals can protect themselves or what procedures banks or other sources of credit could put in place to help 

prevent Internet thefts? 

Mr. GROOVER. Yes, I do. The first one would be to request a pass 

code to be used for all online credit card transactions, different 

from a PIN. 

Senator COLLINS. What do you mean by a pass code, exactly? 

Mr. GROOVER. Like a word or a phrase or something like that, 

or even a long number, that would be used that would verify that 

you are actually the person that is the owner of that credit card. 

For example, right now if you drop your credit card outside and 

someone picks it up, they can go right online and start using it. 

Without—with a code that they would have to use that would be 

verified in the automatic verification system, they would be required to enter that code, and if they didn’t have that code, the 

transaction would be declined. 

Senator COLLINS. Are there any other recommendations you 

would like to share with us? 

Mr. GROOVER. To require all merchants to have their credit cards 

processed by a U.S. bank and not done offshore. This would prohibit some of the scams that are going on right now in which they 

are running up let’s say $150—or under a ceiling of $150 or $180 

in each transaction, and when it’s offshore, they don’t have to get 

a clearing for that transaction, and are guaranteed payment. So 

when it is done offshore, they are going to get their money no matter what, the criminal is, whereas when it’s done by—it’s processed 

by a U.S. bank, the credit card companies don’t lose anything and 

neither does the credit card holder. 

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

8

The CHAIRMAN. Well, Jeffrey, we thank you very much again for 

your willingness to testify, your openness and your candidness as 

to what we might do to assist in stopping either the criminal or, 

obviously, someone who finds themselves in a situation, as you did, 

where you acted in a criminal way to assist yourself. So we do appreciate that very much, and we can ask you to stand down. Thank 

you. 

Mr. GROOVER. Thank you. 

The CHAIRMAN. We would ask our second panel to come forward, 

please. 

Good morning, everyone. We appreciate our second panel being 

with us. Let me introduce them to the committee. 

David Nahmias, Deputy Assistant Attorney General for the Department of Justice, Criminal Division; Lawrence E. Maxwell, Assistant Chief Inspector for the U.S. Postal Inspection Service; Howard Beales, Director of the Bureau of Consumer Protection for the 

Federal Trade Commission; Tanya Solov from the Chicago Secretary of State’s Office, representing the North American Securities 

Administrators Association; and Dave Jevans. 

Mr. JEVANS. Jevans. 

The CHAIRMAN. Jevans, like Evans. 

Mr. JEVANS. Just like Evans, but with a J. 

The CHAIRMAN. All right. Thank you. Chairman of the Anti—this 

is a fascinating term, Senator—Phishing Working Group, who is 

working closely with the finance and e-commerce industry on Internet crime. In this instance, ‘‘phishing’’ is pronounced—or spelled ph-i-s-h-i-n-g. David, be willing and able to explain yourself on that 

one. All right? Fine. 

Dave, we will start with you. Please proceed. 

STATEMENT OF DAVE NAHMIAS, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, DC 

Mr. NAHMIAS. Good morning, Mr. Chairman. I am pleased to 

have this opportunity to appear before this committee and discuss 

what the Department of Justice is doing to combat Internet fraud, 

with particular regard to its impact on senior citizens. I have submitted written testimony for the record, which I will briefly summarize now. 

As Howard Beales of the Federal Trade Commission can discuss 

in more detail, Internet use by all demographic groups, including 

seniors, continues to increase rapidly. Unfortunately, Internet 

crime is increasing even more rapidly, with both Internet fraud 

complaints and identity theft complaints filed with the FTC tripling in the past 3 years. Scams ranging from bogus investment 

deals to schemes that exploit online auctionsites are widely prevalent on the Internet and pose serious risks to the financial well 

being of senior citizens and other Internet users. 

The Department of Justice and our law enforcement and regulatory partners take these trends very seriously, and we have devised a number of responses that includes an aggressive program 

of criminal enforcement. Last year, for example, the Department 

spearheaded two nationwide takedowns of prosecutions directed at 

online economic crime. Operation E-Con, announced in May 2003, 

9

and operation Cyber Sweep, announced in November of last year, 

involved the combined total of more than 215 criminal investigations directed at schemes that victimized more than 214,000 people 

out of more than $276 million. These operations resulted in the arrest or conviction of more than 255 people, including more than 70 

indictments stemming just from Operation Cyber Sweep in November. 

These two takedowns included prosecutions of large-scale Internet fraud schemes involving bogus investments, phishing and other 

identity theft schemes, fraudulent online pharmaceutical sales, and 

other cases in which senior citizens and others were at risk of loss 

or harm. In Operation E-Con, for example, one case successfully 

prosecuted by the U.S. Attorney’s Office for the Eastern District of 

California involved an online Ponzi scheme known as the Tri-West 

Investment Club, which took in nearly $60 million from 15,000 investors worldwide. Another online Ponzi scheme that Operation ECon shut down defrauded more than $8 million from 23,000 investors. 

These online investment frauds are of particular concern for seniors, who seek financial information online more than any other 

group of Internet users and who typically have more assets to lose 

and less opportunity to recover from losses. 

The Federal courts generally appear to be handing down significant sentences for these offenses. For example, in one case of 

phishing that the U.S. Attorney’s Office for the Eastern District of 

Virginia prosecuted as part of our Operation Cyber Sweep, the lead 

defendant received 46 months imprisonment and her confederate 

was sentenced to 37 months in prison. 

In another Cyber Sweep identity theft and fraud case prosecuted 

by the U.S. Attorney’s Office for the Southern District of New York, 

one defendant, who with his co-conspirators had stolen banking 

and pedigree information which they then used to open PayPal accounts and fund those accounts by direct transfers from victim 

bank accounts, received 30 months imprisonment. A codefendant is 

awaiting sentencing. All those sentences, of course, in the Federal 

system are without parole. 

Currently there are several Federal sentencing guideline enhancements that may enable prosecutors to seek higher sentences 

in fraud cases where senior citizens are victimized. But these enhancements sometimes do not capture the full harm done, especially by identity theft. The administration, therefore, has supported the Identity Theft Penalty Enhancement Act, S. 153, which 

would create a new offense of aggravated identity theft to ensure 

a minimum 2-year sentence enhancement in a variety of serious 

fraud-related offenses and would expand the scope of the existing 

identity theft statute, 18 U.S.C. Section 1028(a)(7). The Senate has 

passed that bill, and this morning one of my colleagues from the 

Criminal Division is testifying before a subcommittee of the House 

Judiciary Committee in support of the House version of that act. 

The successes that we have had to date against online fraud 

would not have been possible without support from and close coordination with many law enforcement and regulatory partners. I 

am pleased to say that the FTC, through its outstanding Consumer 

Sentinel data base of consumer complaints and its enforcement efVerDate 0ct 09 2002 10:24 Jun 18, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\93526.TXT SAGING1 PsN: JOYCE
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forts, has been a valued partner in the takedowns I discussed, 

along with the Postal Inspection Service, the FBI, the U.S. Secret 

Service, the Bureau of Immigration and Customs Enforcement, and 

other Federal, State, and local agencies. 

We also work closely with foreign governments, such as Canada 

and Nigeria, and with private sector groups such as the AntiPhishing Working Group. 

Finally, training our prosecutors and investigative agents about 

Internet fraud and educating the public about how to prevent and 

avoid Internet fraud are key pieces of our overall enforcement 

strategy. 

Mr. Chairman, that concludes my opening remarks. I would be 

happy to take questions from the committee now or after all the 

witnesses on this panel have testified, as you prefer. 

[The prepared statement of Mr. Nahmias follows:]

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The CHAIRMAN. Thank you, Dave. We will ask questions, either 

individually or collective, of all of you after the testimony is given. 

Now let me turn to Lawrence Maxwell, Assistant Chief Inspector, 

U.S. Postal Inspection Service. 

STATEMENT OF LAWRENCE E. MAXWELL, ASSISTANT CHIEF 

INSPECTOR, U.S. POSTAL INSPECTION SERVICE, WASHINGTON, DC 

Mr. MAXWELL. Thank you, Mr. Chairman. I appreciate appearing 

before you, particularly on this very timely and important matter. 

I have submitted some lengthy comments comprehensive 

with——

The CHAIRMAN. All of those become a part of the record. Thank 

you. 

Mr. MAXWELL. Great. I will summarize those here briefly. 

This has become more of a concern. In my formative years as an 

agent, certainly we saw a lot of victimization of elderly in telemarketing and boiler rooms. Back in the years I worked in New 

York, we investigated many, saw a lot of potential happy lives ruined. As this evolved, today, now with the Internet, as you have 

just heard, things have become a lot more of concern, with the 

speed of the Internet and the ease of it. Where I previously worried 

about the generation before me, now, as I approach those years, I 

am starting to worry about myself as well and my generation. We 

face the same issues. 

The Inspection Service enters in—I will just briefly give you a 

history. We mirror the long, colorful history of the United States. 

We were formed by Benjamin Franklin. We were formed to protect 

the Postal Service and, as it turned out, we were the only Federal 

agents at the time that could serve in the hinterland protecting 

mail shipments, anything of secure value. Of course, we have had 

a colorful history battling stage coach robberies and train robberies. 

As we came into the modern era, the inspectors became very 

much involved, in their continued fight to protect the Postal System’s carriers from robbery attack, but we also have a reputation 

for protecting the consumer. That is equally important, as initially 

all correspondence, all communications, all business was conducted 

via the mail. 

So Congress in the 1870’s enacted the Mail Fraud statute, which 

today remains favored by prosecutors. It is a tremendous statute, 

has great potential even in this modern era. In fact, it was not 

until a hundred years after its enactment that it was even modified. That was not to give it more teeth, it was actually to give it 

more reach. In 1994, I believe, with the crime act, it was modified 

to extend to private couriers. So it still remains a very viable weapon in our arsenal. 

As I said, our focus continues to be to protect the American consumer. We pride ourselves in that. We reach every home in America, every business in America with delivery. We have a profound 

responsibility to the American public. 

Our fraud program consists primarily of about 300 inspectors. 

We are 1,900 strong; we are one of the smaller Federal agencies. 

We are funded purely through the Postal Service, so we have a litVerDate 0ct 09 2002 10:24 Jun 18, 2004 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 C:\DOCS\93526.TXT SAGING1 PsN: JOYCE
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tle room for growth, but we have to learn to do things smartly and 

we have to find creative ways to help us in that quest. 

Our arrest statistics throughout my career have pretty much 

stayed on par with what they were in prior years. We investigate 

roughly 3,000 or 4,000 fraud cases a year of all different types, primarily investment schemes, advance fee schemes. Of course now 

we are venturing into identity theft. As you just heard it is the 

fastest-growing crime in America. We make about 10,000 arrests a 

year. 

What we do not pride ourselves on is the concept more-is-better 

in terms of arrest. What we have learned, and this is almost heresy 

coming from a law enforcement officer, but what we have learned 

is the less arrests we can make, as long as we prevent the crime, 

fewer people are hurt. That is where our focus has been. I know 

Senator Collins is aware of this from prior campaigns we have conducted. I will just give you an example. 

Some of the cases we have had in mail fraud—and we have had 

cases resulting in, just last year, $2 billion in court-ordered restitution to consumers that were victimized in fraud—we forfeited $36 

million. We put our forfeiture funds back into our fight against 

crime, much of which goes to our prevention efforts. But through 

some creativity several years ago, creativity and vision by a U.S. 

attorney and by the Postal Inspector agents, they approached us 

about formulating a special account with funds earmarked for 

fighting fraud, the thought being fraud is the one crime you can 

actually educate someone to protect themselves. We bought into 

that concept in a considerable way, and I still believe very strongly 

in fraud prevention through consumer education. 

As you consider the Internet and the senior citizens now venturing on the Internet—and I read some studies where Direct Mail 

quoted 75 percent of homes in America now have Internet access, 

which sounds high to me but certainly not shocking. As more people venture onto the Internet, the seniors that go on, certainly if 

they are smart enough to navigate the Internet, they are smart 

enough to be educated and taught how to protect themselves. 

As I said before, what is old is new today. So what is new on the 

Internet really is not new. We just have to teach people to find 

ways to see fraud as they encounter electronically. The Internet is 

a lot faster than the written word or mail solicitation. 

What we have done is, of course, to partner. You have heard in 

prior testimony, Operation Cyber Sweep. We were proud to be part 

of that. Project kNOw Fraud in 1999, with our friends from FTC, 

probably our strongest partners in this fight. They are very consumer-oriented, we share our databases, we try to go to that concept of one-stop shopping for the victim, because in No Fraud we 

learned that most consumers do not know where to complain. It is 

kind of tragic that, you know, you have all of these complaints, or 

possibly good criminal intelligence, and we are not made aware of 

it. 

Just last year, in the National Fraud Against Senior Fraud 

Awareness Week, which was a result of our approaching Senator 

Collins and Senator Levin who passed a resolution declaring Senior 

Fraud Awareness Week then conducted a campaign using literature which I have put outside, the hearing room which is very 

29

effective. I applaud your efforts for that support and hope to see 

more of these cooperative initiatives in the future. Any time you 

have an event of that media attention and public information, it is 

a great way to get the word out. It is a way of reaching people. 

What we have done with several of the cases that I mentioned 

earlier, monies coming from forfeitures and fines were directed by 

the court and by the U.S. attorney, in agreement with us, to put 

into this special consumer protection fund. Those are the monies 

that we have used for Project kNOw Fraud, which I mentioned earlier, for our campaign around the senior fraud awareness week. We 

are also applying it—again, with identity theft, we have a tremendous potential with the Internet, both with ‘‘phishing’’ and ‘‘spoofing’’, as I think will be covered in greater depth later. We have had 

several cases which involve identity theft. It is not only, as you 

mentioned in the first testimony, when people become aware, it is 

how long it takes to correct the problem. For example, one in their 

golden years certainly do not need that torment as they go on 

through the last decades of their life. 

We did produce a professionally done DVD video, which is about 

12 minutes in length. We have a number of them outside. If you 

have not seen it, I would encourage you to view it. It is very well 

done, if I say so myself, but we had some professionals help. It presents in a very short way but a dramatic way what you should look 

for to protect against identity theft. It leaves you with an impact. 

What I would leave the panel and certainly open up to questioning is my view on this education and prevention remains 

strong. If there is a way to funnel funding for agencies to continue 

this, either through fines, perhaps through forfeiture, I would welcome that and certainly be happy to work toward that effort. There 

are other powers we probably could use that might help on the 

Internet. It is a little more of a difficult problem than what we 

faced with the West African 419 letter, for instance. Those were actual tangible letters. We seized about 5 million of them after we 

reached agreement with the countries of Nigeria and Ghana, and 

we were able to destroy them before they did the damage. 

However, what happened, was when they realized we were stopping them from getting their pitch to their victims, they moved 

onto the Internet. That is a little tougher challenge for us. So we 

have some thoughts on that, but anything you or the committee 

could recommend would be greatly welcomed by us. 

I thank you for your time. 

[The prepared statement of Mr. Maxwell follows:]

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The CHAIRMAN. Lawrence, thank you very much for your testimony. Now let us turn to Howard Beales, Director of the Bureau 

of Consumer Protection for the Federal Trade Commission. 

Howard, welcome to the committee. 

STATEMENT OF J. HOWARD BEALES, III, DIRECTOR, BUREAU 

OF CONSUMER PROTECTION, THE FEDERAL TRADE COMMISSION, WASHINGTON, DC 

Mr. BEALES. Thank you, Mr. Chairman, and thank you, Senator 

Collins. I look forward to this opportunity to provide our testimony 

about Internet fraud and its effect on senior citizens. 

The Internet is one of the most revolutionary marketing and 

communications tools that we have seen in a long time and it plays 

an increasingly central role in consumers’ lives. Unfortunately, as 

consumers have turned to the Internet, so too have scam artists. 

Last year, for the first time, Internet-related fraud complaints exceeded other fraud complaints, comprising 55 percent of all fraud 

complaints. It was also the first year in which consumers reported 

that the Internet outstripped the telephone as the point of their 

first contact with the fraudulent scheme. 

However, Internet fraud does not yet appear to be affecting seniors age 60 and over as much as other age groups. During 2003, 

only 28 percent of the complaints from seniors concerned Internetrelated fraud, and only 6 percent of the Internet-related fraud complaints from all consumers came from seniors. Moreover, seniors 

continue to report that their first contact with scammers came predominantly by telephone. In our experience, Internet scams generally do not target the elderly as a specific group, but they seek 

consumer victims regardless of demographic criteria. 

Nonetheless, Internet scams that cause significant financial injury can be particularly devastating to seniors, many of whom live 

on limited or fixed incomes. Scams that facilitate identity theft are 

of particular concern. ID theft strikes all segments of the population, and it is not surprising to find that older Americans are also 

targets of this crime. 

Although consumers who are age 60 or over are no more likely 

to become victims of identity theft, the crime appears to affect 

them in distinct ways. For example, while 33 percent of all consumers who filed ID theft reports experienced some sort of credit 

card fraud, 44 percent of those 60 or older were victims of credit 

card fraud. A greater percentage of older Americans reported ID 

theft attempts to the FTC than did the general population. 

Under our civil law enforcement authority, the FTC has brought 

actions to stop practices that involve or facilitate identity theft. Our 

cases have attacked pretexting, where scammers use false pretenses to obtain consumers’ confidential financial information. We 

have also attacked phishing, where criminals use spam to trick 

consumers into revealing confidential payment information. These 

schemes use Web sites that appear identical to the sites of legitimate companies with whom consumers do business, and they as 

consumers to update or validate their information. In fact, just yesterday the FTC and the Department of Justice announced a joint 

law enforcement initiative that shut down a phishing scheme. 

48

Last year, auction fraud accounted for nearly half of all Internetrelated fraud complaints consumers reported to the FTC. Among 

consumers age 60 and over, it was 29 percent of all Internet-related complaints and ranked third in the top 15 product or service 

complaints reported by consumers. In light of this data, the Commission launched Operation Bidder Beware, an enforcement sweep 

targeting Internet auction scams. The sweep combined the efforts 

of the FTC, 29 participating State attorneys general, and numerous 

local law enforcers. Working together, we brought more than 50 

criminal and civil enforcement actions against various Internet 

auction scams. We also kicked off an extensive Federal-State consumer education campaign featuring a dedicated Web page with information on how to avoid auction fraud. 

Another source of misleading Internet promotions is products or 

services that promise to cure or treat serious diseases or conditions 

such as cancer, heart disease, arthritis, and diabetes. Older consumers constitute a large part of the market for health-related 

services and remain vulnerable to misleading claims and fraudulent practices. 

To address these problems, we launched Operation Cure-All, a 

coordinated FTC, law enforcement, and consumer and business 

education initiative with a bilingual Web site. Last month, the FTC 

announced a final order banning a Canadian company from offering a sham cancer therapy on its Internet Web site which referred 

U.S. citizens to the company’s clinic in Tijuana, Mexico, a true 

North American free fraud. 

One of the problems in prosecuting Internet fraud is that the 

Internet knows no boundaries, and cross-border fraud on the Internet is a serious problem. In 2003, 47 percent of cross-border complaints involved the Internet, up from 33 percent the year before. 

To date, the Commission has had foreign targets in over 60 cases 

and pursued assets offshore in more than 10 foreign countries. To 

enhance our ability to pursue these cases, the Commission has recommended a package of legislative changes that will facilitate cooperation with foreign law enforcement authorities. Unless we can 

build stronger enforcement cooperation across borders, more and 

more Americans will fall victim to imported fraud. 

Internet fraud causes significant injury to consumers and harms 

public confidence in the Internet as an emerging marketplace. The 

FTC will continue to combat Internet fraud through aggressive law 

enforcement and consumer education. To date, the Commission has 

brought 319 Internet enforcement cases. Because prevention is 

often the best medicine, the FTC takes an active role in educating 

consumers about Internet scams. We have developed publications, 

launched dedicated Web pages, and worked with numerous Federal 

agencies and private sector partners to develop and disseminate 

plain-language consumer education materials in English and Spanish to protect all consumers, including seniors, from Internet fraud. 

We will continue that effort and we look forward to working with 

you and the committee on the combating senior fraud initiative. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Beales follows:]

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The CHAIRMAN. Howard, thank you very much. 

Now let us turn to Tanya Solov from the Chicago Secretary of 

State’s Office, representing the National American Securities Administrators Association. Tanya, welcome to the committee. 

STATEMENT OF TANYA SOLOV, DIRECTOR OF SECURITIES, 

NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, CHICAGO, IL 

Ms. SOLOV. Thank you very much. I am honored to have the opportunity to appear before you to present the States’ views on protecting senior citizens against investment fraud on the Internet. 

As the securities director for the State of Illinois, I interact with 

elderly investors who approach me at senior investor education 

events or call my office with complaints of fraud. My office works 

with criminal authorities to prosecute companies and individuals 

who commit crimes against seniors, and bring civil actions for injunctions and restitution. We also educate seniors through publications, videos, and seminars. 

In a perfect storm, a number of significant events come together 

to create a devastating impact. State securities regulators are deeply concerned that a prefect storm for investment fraud is brewing, 

and our nation’s 35 million seniors are most at risk. These days, 

seniors are seeking higher returns than those offered by certificates 

of deposit and other traditional income-generating investments. 

The collapse of the bubble economy and rising costs for medical insurance, prescription drugs, and basic living expenses have driven 

seniors to the Internet in search of alternative investments. 

Most seniors do not randomly surf the Internet looking for a 

place to put their savings. Instead, they use the Internet as a reference tool based on a solicitation or information they have received from a friend or an associate or during a free seminar. Others may just happen upon an investment Web site, or they are recipients of unsolicited e-mail solicitation, many of them touting 

penny stocks, real estate, or oil and gas ventures. 

The Internet has made it simple for a con artist to reach millions 

of potential victims at minimal cost. Investment scam artists do not 

have to spend money setting up boiler rooms, making phone calls, 

or sending mailings. They can quickly set up Web sites targeting 

investors with scams involving prime bank notes, viatical settlements, foreign ventures, and Ponzi schemes. 

Fraud can be especially damaging for older investors because 

their portfolios have less time to recover. Often, older victims do 

not report crimes because they do not want people to know they 

have lost money or made an unsound investment. Also, they do not 

know how or where to complain. 

So what can be done to combat Internet fraud? State securities 

regulators believe in combining enforcement efforts and financial 

education as the dual approach to protect investors. Seniors and all 

investors should always call their State securities regulator if they 

suspect an investment fraud. State regulators can tell the public 

whether or not the investment is registered in that State, whether 

the salesperson is licensed to do business, and whether or not there 

is any disciplinary history associated with the salesperson or company. 

71

A list of regulators is available on the North American Securities 

Administrators Web site at www.nasaa.org. 

In addition to education, State regulators are engaging in vigorous enforcement against Internet con artists. My colleague, Kansas Securities Commissioner Chris Biggs, recently announced that 

an investment scam promoted over the Internet resulted in a prison sentence of 44 months for the perpetrator and—fortunately in 

that case—a return of most of the investors’ money. In that particular case, the fraudster was using the Internet and direct mail 

to solicit investors for a company called Venture Capital Investments. He guaranteed a high return and claimed that the investments were FDIC insured. In only 5 weeks, the fraudster raised 

about $85,000 from 30 investors. We brought a poster showing the 

Web site that was used in that particular scam. It is off to my right 

there. So it does look like a legitimate Web site, with frequently 

asked questions and other points there. That is what the seniors 

were directed to. 

In my own State of Illinois, seniors and other investors were solicited to send small sums of money, in some instances as little as 

$100, to put into an entity that claimed to invest in developing 

countries. In the end, the scam collected over $20 million. Because 

the con artist in that case spent most of his investment locally, 

many of his purchases were seized, forfeited, and sold. The investors who applied for restitution received their money back, and the 

scamster and 12 other defendants were sent to prison. 

State securities administrators are pursuing similar cases across 

the country and they are also participating in a senior outreach initiative that is designed to educate seniors to protect themselves 

from investment fraud. A highlight of this initiative is the Senior 

Investor Resource Center, which is sponsored by NASAA. The 

NASAA senior resource Web site includes commonsense solutions 

to protect assets from investment fraud and links to a variety of 

investor education publications and programs offered by State securities regulators and others to assist seniors. The Web site also includes a checklist of questions seniors should ask before making an 

investment decision, and information about the current top fraud. 

In conclusion, I would like to say that investment fraud against 

seniors is increasing at an alarming rate. Seniors and all investors 

need more, not fewer, cops on the securities beat. This committee’s 

examination of Internet fraud as it affects the growing online senior population is an important step in highlighting the problem and 

working toward a solution. My office and other State securities administrators will continue to play an active role in protecting seniors regardless of whether a large multimillion-dollar scam is involved or a single defrauded investor. 

I thank you and your committee for allowing me the opportunity 

to appear today. I look forward to answering any questions that 

you may have. 

Now in final conclusion, we do have a 30-second public service 

announcement that I was hoping to show regarding Internet fraud. 

The CHAIRMAN. Sure. Let us hear it. 

Ms. SOLOV. Thank you. 

[The prepared statement of Ms. Solov follows:]

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The CHAIRMAN. Thank you. Well done. Directly to the point. 

Now let us turn to our last panelist this morning, David 

Jevans—I am working at it, David—the chairman of the AntiPhishing Working Group, who is working closely with the finance 

and e-commerce industry on Internet crime. David, welcome to the 

committee. 

STATEMENT OF DAVID JEVANS, CHAIRMAN, ANTI-PHISHING 

WORKING GROUP, REDWOOD CITY, CA 

Mr. JEVANS. Thank you, Mr. Chairman. 

I have been asked today to provide some insight on the problem 

of e-mail phishing, its impact on senior citizens as they get online 

and increase their use of the Internet. 

First, I would like to start out with a definition of phishing. 

The CHAIRMAN. Thank you. [Laughter.] 

Mr. JEVANS. Then I will address the spelling. 

The CHAIRMAN. All right. 

Mr. JEVANS. ‘‘Phishing’’ is a hacker term for a particular type of 

e-mail fraud. The fraud is perpetrated by scammers and spammers. 

Typically, a spam is sent to random users on the Internet pretending to be from a legitimate bank, Internet service provider, ecommerce company, or Government agency. This e-mail looks exactly like an e-mail that you would expect to receive, complete with 

e-mail address, logo, and other branding elements of the legitimate 

Web site. However, the e-mail is not really from who it says it is 

from. It is from a fraudster. They are luring the consumer to a fake 

Web site in order to trick them into revealing their credit card details, bank account information, online banking password, or other 

personal identity information. 

I would like to show some black-and-white printouts of some 

screen shots of phishing sites and illustrate how realistic they are. 

First, you will see here an e-mail that appears to come from 

eBay. It has the logos. I have circled some elements here. At the 

top it will have a spoofed e-mail address. So it says it is from Secret Service at ebay.com. It will have the logo. It will have links 

that claim to be from eBay—they say go to eBay billing center. 

However, they are actually disguised links to some other Web site. 

When you click on those links, you will be brought to a Web site 

that looks just like, for example in this case, the eBay site. You will 

see the logo, you will see requests for sensitive information, such 

as your user ID and password. Many times you will see other information being requested, such as your credit card information, your 

address, and in this case, your ATM PIN code. 

Here is one that is a little more nefarious. This is from a major 

bank. What they have done here is, in the main window, they take 

you to the real bank Web site. You can see it at the top there. That 

is the Web site of the real bank. However, there is a pop-up window asking you to log in with your card number and your password 

and expiration. If you type that information into that window, it 

goes to a server in Russia. 

Banks and e-commerce companies are not the only targets. Here 

is one from a major Internet service provider, AT&T. The fraudster 

is using their logo and claiming that you have to update your credit 

card information to continue to keep your account active. 

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Last summer, the FBI termed phishing the hottest and most 

troubling new scam on the Internet. Indeed, reports of phishing attacks jumped over 400 percent during the 2003 Christmas holiday 

season, according to the most recent analysis by the Anti-Phishing 

Working Group. Worse, the increasing realism of these phishing 

messages, including logos and professionally designed forms for entering credit card information and bank account data, have made 

them ever more successful. The average positive response rate is 

between 1 and 5 percent for the people who receive them. 

Phishing attacks are also increasing in frequency, scope, and sophistication. Recently, Citigroup, Lloyds TSB, Barclays Bank have 

all been subject to phishing attacks that spoofed their identities in 

pursuit of customer account, debit and credit card data. Within the 

last year, Wachovia Bank, Bank of America, US Bank, Bank of 

Montreal, Westpac Bank, and ANZ Bank of Australia have all been 

hit by phishing scams. Although financial service firms were obvious initial targets for phishing attacks, adept identity thieves have 

expanded their phishing operations to exploit a number of Internet 

consumer brands and Government agencies, including Yahoo!, 

eBay, PayPal, Monster.com, Bestbuy.com, Microsoft MSN, and even 

the FDIC. 

The term ‘‘phishing’’ comes from the analogy that Internet 

scammers are using e-mail lures to fish for passwords and financial 

data from the sea of Internet users. Now, it is spelled with a ph 

instead of an f. Ph is a common hacker replacement for an f, and 

it is a nod to the original hacking, really, from the early 1970’s 

known as phone phreaking. In fact, it is the origin of a lot ph-spelling used in many hacker pseudonyms and hacker organizations. 

Phishing scams are of particular concern to the senior community. A recent survey by Nielsen/NetRatings indicates that those 65 

and older are the fastest-growing group online, and they are increasing their presence on the Internet by 25 percent in 2003. 

These consumers are new to the Internet and, as such, are not educated about the dangers of phishing fraud. 

Another significant demographic fact is that persons over the age 

of 50 control at least 70 percent of the nation’s household net 

worth. It is estimated that the elderly will control approximately 

$10 trillion in assets within the next 10 years. Because phishing 

is a financial crime, seniors make particularly appealing targets. 

Fortunately, it is still difficult for phishers to target seniors specifically. However, there are e-mail data bases available on the Internet that are used by spammers for sending spam. These data bases 

often do categorize e-mail addresses by the interests of each consumer. Thus, it is feasible for a phisher to obtain or derive a list 

of e-mail addresses that could be used for more targeted attacks. 

The senior population make appealing targets, and should be 

particularly careful of phishing attacks because they potentially 

have the most to lose. If a banking or investment account were to 

be compromised, the phisher would have access to significant assets. Also, if personal identity information, such as a Social Security number, is obtained by a phisher, the criminal can apply for 

bank loans or credit cards using the identity of the consumer. Because many seniors have good credit ratings and more sizable asVerDate 0ct 09 2002 10:24 Jun 18, 2004 Jkt 000000 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 C:\DOCS\93526.TXT SAGING1 PsN: JOYCE
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sets, the phishers will be able to obtain larger loans and credit limits. 

I recommend that consumers exercise caution when they receive 

any e-mail that requests personal identity or financial information. 

Any e-mail that takes you to a Web site that requests such information should also be inspected carefully. Because the sender can 

be faked in e-mail, consumers cannot trust that an e-mail was sent 

to them from their bank, ISP, or e-commerce site just by looking 

at the From field of the e-mail. 

I would like to share a few recommendations for consumers to 

protect themselves. 

First, examine the Web address or URL of any Web page you are 

taken to by an e-mail. If that Web page does not match the Web 

address you are used to, be very suspicious. 

In my experience, I have almost never seen a legitimate reason 

for a Web site to ask for a Social Security number. Any site that 

asks for this information should be regarded with great suspicion. 

Similarly, there is no reason for any site to request your ATM 

PIN or password. Any site that requests this is fraudulent. 

If you receive an e-mail purporting to be from a company, bank, 

or even Government agency that you do not do business with, and 

this e-mail requests personal identity or financial information, be 

extremely suspicious. There have been instances in recent months 

where e-mails were sent out purporting to be from the FDIC or 

Regulations.gov Government agencies. These e-mails have used 

scare tactics to frighten consumers into divulging personal information. 

Consumers should always use anti-virus software and keep it up 

to date. You should also do weekly scans of your computer for viruses or Trojans. 

My last tip is consumers should also keep their computer software up-to-date with the latest updates from Microsoft. There are 

new updates issued by Microsoft every week or two, and they are 

usually to fix new security problems that phishers could exploit. 

The Anti-Phishing Working Group has been organized to develop 

an acceptable solution to e-mail phishing scams. This is an organization of over 180 members from financial institutions, law enforcement, ISPs, and the e-commerce community. I am the chairman of 

the organization, and my day job is senior vice president at 

Tumbleweed Communications, a vendor of secure e-mail and antispam technology. 

The Anti-Phishing Working Group has established the 

www.antiphishing.org Web site as a repository of information about 

phishing. The site contains a news feed of articles about phishing 

as well as an ever-expanding archive of known phishing e-mails 

and Web sites. Proposed technology solutions, lists of vendors and 

Government agencies who can help combat phishing are also listed 

on the site. 

The working group members are exploring technology solutions 

to allow businesses to authenticate or digitally sign their e-mails 

to consumers. These techniques would allow consumers to determine that the sender of an e-mail was really who it purported to 

be. There are other technology solutions being tested, including detection and scanning services. 

80

Members of the Anti-Phishing Working Group are working together to develop educational messages and best practices for consumers and companies. The working group is working with other 

organizations that are looking to combat Internet fraud, including 

the Bankers Information Technology Secretariat and the Information Technology Association of America. Consumers should also be 

aware that the Federal Trade Commission and the U.S. Department of Justice have advisory bulletins and other information 

available on their Web sites. 

That concludes my remarks. Thank you. 

[The prepared statement of Mr. Jevans follows:]

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The CHAIRMAN. Well, David, thank you for that testimony and 

that explanation. In fact, as you were showing that first eBay lure, 

I guess, I am having these quick memory flashbacks. Literally on 

Saturday of this past weekend, I was at my son-in-law’s home, who 

makes his living servicing the Internet for a provider, and we were 

accessing eBay to look at some activity on eBay and he went by one 

of those, saying, Oh, that is a phony, and just passed it by. I never 

asked why. 

I now know. He knew, obviously, because he spends a good deal 

of his professional life there. But it is fascinating that you would 

pull that one up today, because that was literally one that he had 

on his computer or had been sent to him, and he passed it by very 

quickly, saying, That is a phony. I never questioned him. But I find 

that very curious. Thank you. 

Dave, let us come back to you. You mentioned Senate Bill 153, 

that has already passed the Senate. Hearings are going on today. 

Could you reiterate for us the importance of having Federal statutes that impose stiff penalties on these types of crimes that are 

embodied within Senate Bill 153? 

Mr. NAHMIAS. Well, as I mentioned, the existing penalties are, in 

most cases, pretty good, both the underlying Federal sentencing 

guidelines and enhancements that can be used where the criminals 

target particularly vulnerable victims or people particularly susceptible to crimes. 

In the case of identify theft, our concern is the way the guidelines work. Someone who commits identity theft, which is almost 

always part of another crime, they get your identity to use your 

credit card information or commit some other fraud. Under the 

guidelines those crimes merge and there is no additional penalty 

in most cases for the identity theft portion of that crime, even 

though it tends to create a different kind of harm to the victim. We 

are supporting this bill that has passed the Senate, which would 

impose a—in most cases a 2-year minimum additional penalty on 

top of the underlying penalty for the crime committed with the stolen identity information, and thereby serve as a deterrent to people 

who would potentially commit crimes with identity theft information. 

In the case of a crime that relates to terrorism, the additional 

penalty would be 5 years, and we believe that that would be an important enhancement to the overall scheme of punishing people 

who commit these kinds of crimes. 

The CHAIRMAN. Can you tell us more about the involvement of 

organized criminal networks in financial fraud cases in general, 

and I should say, who are the major players and where do they 

originate from as you now know it? 

Mr. NAHMIAS. Some of my fellow panelists may be able to speak 

to this as well, but——

The CHAIRMAN. In all of these questions, as the person asked 

pauses at the end, if you have additional information to put into 

it, please do so for the record. Thank you. 

Mr. NAHMIAS. I think in our experience our prosecution of Internet fraud cases indicate, you see everything from individuals like 

the person who testified on your first panel, to organized groups, 

both domestic and international. We are not aware of any specific 

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cases in which traditional organized crime groups such as La Cosa 

Nostra or motorcycle gangs have been particularly involved in 

these kinds of Internet fraud schemes, although much of the activity does involve groups of people acting together. The only other 

thing I would say is Internet crime is an extension of traditional 

fraud schemes as Mr. Maxwell was talking about. It is the same 

schemes we have seen for years using this particularly—— The CHAIRMAN. Just a new vehicle? 

Mr. NAHMIAS. A new vehicle which is a very valuable vehicle for 

criminals because it is so anonymous, easy to do over distances and 

very hard for law enforcement to crack into because the data is 

often fleeting, and unless you get onto it quickly it may be gone. 

So as traditional organized crime groups see how these new tools 

can be used, there is not reason to think that they will not try to 

use them as they have other tools in the past. 

Mr. MAXWELL. I would agree with that, Mr. Chairman. The only 

additional information I would throw out is because most of the situations we have had here in the United States are primarily one 

individual or two. Child exploitation sometimes involves a couple or 

two or three people, but in most fraud schemes we have had it has 

been one individual or two with the exception of those coming from 

abroad. 

We have some concerns about some of them coming from the 

former Eastern Bloc via the Internet. It was mentioned I think earlier there was a site going back to Russia. Those are the concerns 

because they present such a challenge in terms of prosecuting and 

enforcement, and those are the difficulties we are facing now. 

We are exploring strategies, primarily with Canada. There is a 

cross-border crime forum, as you are probably very well aware of, 

which we have an Internet telemarketing group, and we are part 

of that along with our colleagues in the other agencies and FTC. 

That shows a lot of promise, but it has been going on for 10 years 

and we still have a lot more to accomplish, but that will be a proving ground for what may come in the future. 

The CHAIRMAN. Anyone else? Yes, David. 

Mr. JEVANS. Mr. Chairman, in the last 7 months we have seen 

phishing sites from being largely hosted in the United States to 

being hosted primarily in Eastern Europe as well as in Asia. This 

makes it very difficult to tear the sites down. Instead of being able 

to tear it down in a few hours, maybe half a day, it can take up 

to 160 hours, basically a week, to tear the sites down. 

The other thing we have seen is that these do tend to be groups 

of two or three people who largely meet in online chat rooms. They 

are basically working from home, and it will be a spammer, a 

fraudster and maybe a virus writer. 

Ms. SOLOV. If I may also, from the State perspective, the fraud, 

for example, that I mentioned from the State of Illinois, that started as a one-man operation by a retired electrician in a very small 

town in Illinois. Then as he made money, he drew other people in 

to assist and ultimately there were, I believe, 18 defendants in that 

case, most of whom were convicted. That is what we are seeing at 

the State level. 

But very commonly, with regard to investment fraud, individuals 

are invited to a free seminar where they get coffee and donuts and 

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an explanation about, for example, some great real estate venture. 

Then they are encouraged to go to a website to ‘‘verify’’ that all of 

the information presented at the seminar is in fact true and accurate. We find that that is often happening with senior citizens who 

attend seminars and then use the Internet as a verification tool. 

The CHAIRMAN. You said something I think very important, and 

I watched it in older people who I know and some within my family, who never were heavy stock investors, but they accumulated 

substantial amounts of money and they had a lot of CDs, and the 

CD market, as you know, is no place to be today because of the interest being paid, and so they are really impacted by a decline in 

revenue that they had adjusted to because of their CDs, and they 

are out looking and asking, and I have parents, my wife has parents, who ask us those questions. Where do we go to get a better 

return on our investment? I think they must be phenomenally susceptible to the kind of thing you have spoken to. 

Ms. SOLOV. Yes, and that is a line that is very commonly used. 

The con artists say, ‘‘You are not really making any money on the 

certificate of deposit. In fact, you are probably losing money ultimately, so here are some alternative investment opportunities.’’

The CHAIRMAN. I mentioned something in my testimony—and 

maybe, Dave, you can respond to it, or certainly any of you who 

wish. A few weeks ago we held hearings in this room on the implementation of the soon-to-be prescription drug discount card, and 

there is a lot of work being done to stand up websites where they 

can go online and look at different opportunities, go online to look 

at difference in pricing. We are asking seniors to become much 

more knowledgeable in accessing the Internet for the purpose of accessing knowledge on how to buy drugs and all of that type of 

thing, and this will accelerate. Have any of you done any thinking 

about the potential fraud that is going on in that area, and has the 

Department of Justice taken notice of this as a real possibility? 

Mr. NAHMIAS. Senator, that is a very good question, and actually 

the FDA, the Food and Drug Administration is the agency on the 

front line of that issue of ensuring that the drugs are safe. Although the Department of Justice and our law enforcement regulatory partners need to provide a supporting role in terms of the 

FDA’s enforcement effort, that issue is being examined by a task 

force in the administration. The Conference Report for the Medicare Modernization Act required the Secretary of HHS to examine 

the issue of drug importation and look at limits on resources and 

legal authorities. I know both within the Department of Justice 

and within the administration, that is an area that we are looking 

at because of the concern that on the one hand we are expanding 

the funding in that area and directing people to the Internet as a 

source of information; on the other hand we realize that where 

there is money and where there is the Internet, there is a potential 

for criminal activity. So I think that is an area that we are concerned about and we are trying to get on the front end of. 

The CHAIRMAN. You are right to assume there is going to be a 

substantial amount of money flowing in that respect. 

Anyone else wish to comment on that? 

Mr. MAXWELL. It presents a little bit of a problem from my agency’s standpoint. I have had several discussions with our counterVerDate 0ct 09 2002 10:24 Jun 18, 2004 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 C:\DOCS\93526.TXT SAGING1 PsN: JOYCE
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parts at Food and Drug Office of Criminal Investigation, and also 

I met with our counsel’s office, and I guess our jurisdiction really 

was somewhat limited to the fraud end of those types of promotions. If they can enhance some of the other provisions in terms 

of either under a DEA schedule or some other type of avenue for 

us, we could probably have more reason to be involved. We certainly do welcome and we recognize the problem. I remember there 

were hearings on this two or 3 years ago and that created quite a 

stir. 

The CHAIRMAN. Lawrence, let us stay with you. We have all 

talked about seniors and their fixed incomes, but also we talked 

about the money they have and the money they seek to invest, and 

they have tremendous buying power as a class of citizen in our 

country, and they give a lot. They are very charity minded. 

Are you able to tell us if any charity monies given by seniors has 

found its way into the hands of suspected terrorist organizations? 

Mr. MAXWELL. That is the question of the hour, actually, because 

we had inspectors assigned to Green Quest, which was the first initiative back under Treasury, and it has morphed into some different names now, but with a focus primarily on that type of activity. What we saw was some limited cases where it could clearly be 

drawn, and of course, you have read some of the headlines where 

certain individuals were charged, I think in Illinois was one I read 

about where they were dismissed later because there was not 

enough to show that tie into terrorism. 

It is clearly a concern from a security standpoint if nothing else, 

but also from a fraud standpoint, people being victimized based on 

their good nature. We have a lot of types of these things happening, like right after 9/11 we would see them crop up. After any 

calamity generally you will see these things emerge. 

It is just very difficult to identify them quickly enough to take 

action before people are hurt. So the sooner we hear, the better always. 

The CHAIRMAN. David, is a false website, let us say in a post9/11 event where monies are being asked for for charitable purposes and it is a fraud, is that considered phishing? 

Mr. JEVANS. That is typically not considered phishing unless 

somebody is sending out spam e-mails to pull people into one that 

may be replicating a legitimate one. So you may see things where 

there is a legitimate site out there collecting monies and someone 

sets up a fake one, and they pull people in that way definitely. 

The CHAIRMAN. Go ahead, please. 

Mr. BEALES. If I could just add to that. What we see most often 

in fraudulent charitable solicitations is badge fraud, where the——

The CHAIRMAN. It is what? 

Mr. BEALES. Badge fraud. The appeal is to help the local police 

or fire fighters or some local connection like that. We have brought 

those kinds of cases and worked with State and local partners in 

those kinds of matters, but what we have—that is where we most 

frequently have seen the fraudulent kinds of solicitations. 

The CHAIRMAN. Howard, let us stay with you. You mention in 

your testimony seniors continue to be hit by telephone fraud 44 

percent of the time. Is it true that phone use for senior scams is 

decreasing as the use of the Internet is increasing? 

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Mr. BEALES. It certainly is in our complaints. We are seeing 

more and more Internet and less and less telephone. That is very 

much the trend, but it is hard to say how much of that is real and 

how much of that is the nature of complaints. Complaints are easier online, so for people who are online and where the contact is online, they may be more likely to file a complaint and that would 

change the relative proportions. 

There is clearly still a lot of telemarketing fraud out there, and 

we are bringing numerous telemarketing cases that go after those 

problems. 

The CHAIRMAN. Do you know if Internet fraud now exceeds the 

U.S. Mail service as a means of scamming people over 60? 

Mr. BEALES. It certainly does as a means of the first contact in 

our complaints, and again, with the same caveat, that it is hard to 

tell how much of that is real and how much of it is complaints. 

The CHAIRMAN. President Bush signed anti-spam legislation last 

year. How is the fight against spam going at this moment? 

Mr. BEALES. The fight against spam is going to be a long and difficult one. There is no single or easy solution unfortunately. We 

have brought already more than 60 cases under the FTC Act, challenging fraudulent and deceptive spam. We have numerous other 

investigations in the pipeline and will continue to devote a lot of 

resources to it. 

We are engaged in rulemakings to implement parts of that statute. We just published a broad advance notice of proposed rulemaking on the kinds of rules that might be necessary. We are also 

working closely with the criminal authorities to try to develop cases 

that may be appropriate for criminal prosecution under Can Spam. 

There is progress, and but it is slow and it is going to take time. 

Mr. JEVANS. Mr. Chairman. 

The CHAIRMAN. Yes? 

Mr. JEVANS. We have noticed that there has been some decrease 

in spam to the companies that launched major lawsuits a week or 

so ago. That would be Microsoft, AOL. Earthlink and Yahoo came 

together and launched quite a number of lawsuits. AOL has come 

out and said they have seen a decrease in the amount of spam. 

However, the overall amount of the spam on the Internet, which 

we are measuring on a daily basis, has not decreased. 

The CHAIRMAN. Is it increasing? 

Mr. JEVANS. It continues to increase, and it may be just that it 

is moving away from those big entities who have a lot of legal muscle, and just moving out to everybody else. 

The CHAIRMAN. Thank you. 

Tanya, would you highlight for us the top three investment 

schemes that seniors seem to be drawn to and why? 

Ms. SOLOV. The top one is probably I would say the scheme 

where investors are asked to invest in a company that is just going 

public, and generally these are ‘‘startup companies’’ that usually 

deal with either technology or medicine. They are companies that 

are touting that they have the cure for cancer or for AIDS or other 

ailments. So that is probably the top scam that we are seeing. 

Second, we are seeing a tremendous number of scams involving 

real estate ventures. The public has heard that one segment of the 

economy that continues to grow and is doing really well is real esVerDate 0ct 09 2002 10:24 Jun 18, 2004 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 C:\DOCS\93526.TXT SAGING1 PsN: JOYCE
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tate. So the con artists have set up shops indicating that they are 

investing in real estate ventured. 

Third, I would say prime bank notes or foreign investments. 

Again, senior have heard the term—and other investors too—one 

must diversify. So they are encouraged to invest in foreign investments, foreign currencies and at companies that are allegedly investing in developing countries. 

The CHAIRMAN. David, who is liable if a consumer falls for a 

phishing attack and their information is stolen and misused? 

Mr. JEVANS. Typically if it is a credit card that has been stolen, 

generally the consumer is protected under Regulation Z, and the 

bank typically or the merchant will be liable on the Internet, if it 

is using an Internet merchant, it would be the merchant. However, 

if a consumer’s bank account information is—— The CHAIRMAN. But right now we just heard Dave say that the 

theft of the identity is not punishable as much as what you use the 

identify for; is that correct? 

Mr. NAHMIAS. They are separate crimes and you can charge 

someone, but under the sentencing guidelines currently they merge 

for sentencing purposes so there is no additional penalty, and 

frankly, prosecutors often do not charge them because you have to 

prove more and you do not get any bank for your buck. 

The Chairman. I see. 

Go ahead, David. 

Mr. JEVANS. Typically people are prosecuted under wire fraud, 

mail fraud, bank fraud. So if it is a credit card, the consumer is 

usually OK. It is usually the merchant who is liable. If it is a bank 

account that has been basically broached, legally in the United 

States it would be consumer who is liable because they have divulged their password to someone who is not the bank. However, 

fortunately, banks will make consumers whole, and in the rare case 

it happens, they will usually reimburse them. 

If a Social Security number is taken and loans are taken out 

against the consumer, if they can prove fraud they can usually get 

restitution, but that can be a long drawn-put process. 

The CHAIRMAN. David, I am going to ask you this last question, 

and you all may want to respond to it. We recently, at least within 

the last year and a half or two, saw a movie with Tom Hanks and 

Leonardo DiCaprio, in which Leonardo was the ultimate checkwriting artist and ID scam artist. True story. He was ultimately 

caught by the FBI and their Check Fraud Division, and ultimately 

used by them to take down other check writers. You have just 

heard Mr. Groover this morning offer some suggestions. Obviously, 

he was talented enough at the time to take a lot of money out of 

ID theft and credit cards. You are apprehending people who are obviously very talented at what they do to access and to develop 

fraudulent documents and materials on the Internet. Are you using 

them? Are they willing to come forward after caught? Is their information and their knowledge a usable commodity? Do you solicit 

from them for information blocking the kind of scams that go forward, or are they simply stuck in a Federal pen and left there? 

Mr. JEVANS. Regrettably, most of them have not been caught, 

particularly in the phishing side of things which is technologically 

advanced. We have established some communication with people. 

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The ones who have been caught mostly have been amateurs. The 

more technical ones, there have been dialogs. We understand what 

they are doing. There appears to be correlation between what they 

are doing and virus writers. As we all know, catching virus writers 

is extremely difficult. There are rewards out of hundreds of thousands of dollars and nobody has been really caught yet. 

I thought that Mr. Groover had some very good points and some 

of those could definitely help. 

The CHAIRMAN. Did you take notes? 

Mr. JEVANS. Absolutely, absolutely. 

The CHAIRMAN. Can you imagine going back to the office and 

saying, ‘‘I have just gotten this information from a convicted felon?’’ Mr. JEVANS. I will be. [Laughter.] 

The CHAIRMAN. All right. 

Mr. JEVANS. I thought his idea about a pass key to your credit 

reporting information was definitely a good one and would not require wholesale re-engineering of that system. However, you do 

have the vulnerability that if you type that into a fraudulent 

website, that person has got it, so there are some technical things 

that need to be worked out there. 

The CHAIRMAN. Anyone else wish to react to that last comment 

or question? Howard? 

Mr. BEALES. Senator, I think there is a delicate balance that the 

Congress worried very much about in re-authorizing the Fair Credit Reporting Act at the end of last year, between security of credit 

information, which is clearly important, and ease of access to credit 

on behalf of consumers who need credit. There really are some difficult tradeoffs there. I think there are a great many Americans 

who do not know they have a credit report, let alone able to remember the pass key that they would need to get into it—— The CHAIRMAN. Until they are told—— Mr. BEALES. That is bad. 

Mr. MAXWELL. Senator. 

The CHAIRMAN. Yes. 

Mr. MAXWELL. To get right to the heart of what you said earlier, 

I did not have the pleasure of meeting Mr. DiCaprio, but I did meet 

Mr. Frank Abagnale, who was what the movie was based on. 

The CHAIRMAN. Yes. 

Mr. MAXWELL. We invited him to speak at one of our fraud training symposiums, and a fascinating individual, as you would expect. 

He mentioned that he does one venture a year for the Federal Government to pay back what he had done to the country, because I 

engaged him in conversation and she shared that with me. 

We have videotaped telemarketing, people convicted of telemarketing cases, investment schemes, and we use them in our 

training effort. If David will forgive me, we also invite them to the 

defense bar sometimes, to come and help train our agents, so it is 

very valuable. Yes, I took notes as well. 

The CHAIRMAN. The criminal mind is usually a pretty bright 

mind. 

Mr. MAXWELL. Yes, very much so. 

Mr. NAHMIAS. I would agree. We learn a lot from the people we 

catch. Usually our preference is both to have them incarcerated 

and to learn from them, rather than other alternates, but the FedVerDate 0ct 09 2002 10:24 Jun 18, 2004 Jkt 000000 PO 00000 Frm 00098 Fmt 6633 Sfmt 6633 C:\DOCS\93526.TXT SAGING1 PsN: JOYCE
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eral sentencing guideline system is set up to create great incentives 

for people to cooperate with the Government. The other thing I 

would say, is while I think Mr. Groover had some good ideas, I was 

pleased that some of the ideas he has such as interagency coordination to collect complaints are already in effect. 

The CHAIRMAN. I did see you smiling once there when he made 

that comment. 

Mr. NAHMIAS. It is nice to know that we are ahead of the criminals on some things, and really a lot of the credit for that goes to 

the FTC. 

The CHAIRMAN. Tanya, gentlemen, thank you all very much for 

your testimony today, as we continue to try to stay on top of this 

rapidly evolving issue. I oftentimes tell this story, and I will conclude with it. 

I have a mother-in-law who lives in a retirement community in 

Tucson. Five years ago there was a lovely pool room in that retirement community, and I walked by there with my father-in-law, and 

nobody was using it. Two pool tables, the lights were out. I said, 

‘‘Nobody plays pool here?’’ He said, ‘‘Not really.’’ At that time, and 

still today, my wife is much better on the Internet and with a computer than I, and she was teaching my father-in-law and motherin-law to gain access to the Internet. They said, ‘‘You ought to do 

this for the rest on this living group.’’ That evolved into the taking 

out of the pool room and the putting in of a computer room. I think 

there are 12 terminals there now. 

I was down there recently. My father-in-law has since passed 

away, but my mother-in-law is still very active. Walked by there 

at about 10 o’clock one night in a community in where the average 

age is probably 78 to 80, and there were five people in there, talking to their grandchildren and their kids, and on eBay, so the 

world is changing very rapidly for that senior community. They 

were slow to come to the Internet, but they are now coming very 

rapidly, as I mentioned, and we are now encouraging them to go 

there, and certainly my generation of baby boomers, they are all 

going to be pretty computer literate when they get to that age. So 

what we do here now and the foundational work we do to catch the 

fraud and the criminal that will access them through the Internet, 

is I hope productive work. 

I thank you all very much for being with us this morning. The 

Special Committee will stand adjourned. 

[Whereupon, at 12:09 p.m., the Special Committee was adjourned.]

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