U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

89–470PDF 2003

THE INTERNATIONAL CONSUMER PROTECTION

ACT OF 2003

HEARING

BEFORE THE

SUBCOMMITTEE ON

COMMERCE, TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

SEPTEMBER 17, 2003

Serial No. 108–45

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

Vice Chairman

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

ERNIE FLETCHER, Kentucky

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

DARRELL E. ISSA, California

C.L. ‘‘BUTCH’’ OTTER, Idaho

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

TOM ALLEN, Maine

JIM DAVIS, Florida

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

DAN R. BROUILLETTE, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION

CLIFF STEARNS, Florida, Chairman

FRED UPTON, Michigan

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

JOHN B. SHADEGG, Arizona

Vice Chairman

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

LEE TERRY, Nebraska

ERNIE FLETCHER, Kentucky

MIKE FERGUSON, New Jersey

DARRELL E. ISSA, California

C.L. ‘‘BUTCH’’ OTTER, Idaho

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

JAN SCHAKOWSKY, Illinois

Ranking Member

HILDA L. SOLIS, California

EDWARD J. MARKEY, Massachusetts

EDOLPHUS TOWNS, New York

SHERROD BROWN, Ohio

JIM DAVIS, Florida

PETER DEUTSCH, Florida

BART STUPAK, Michigan

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

MacCarthy, Mark, Senior Vice President, Public Policy, Visa, USA ........... 29

Muris, Hon. Timothy J., Chairman, Federal Trade Commission ................. 5

Rotenberg, Marc, Executive Director, Electronic Privacy Information Center ................................................................................................................... 32

Schwartz, Ari, Associate Director, Center for Democracy and Technology . 41

(III)

(1)

THE INTERNATIONAL CONSUMER

PROTECTION ACT OF 2003

WEDNESDAY, SEPTEMBER 17, 2003

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION, Washington, DC.

The subcommittee met, pursuant to notice, at 10:03 a.m., in room

2123, Rayburn House Office Building, Hon. Cliff Stearns (chairman) presiding.

Members present: Representatives Stearns, Shimkus, Terry, Issa,

Otter, Schakowsky, Stupak, Green, and Dingell, (ex officio).

Staff present: Ramsen Betfarhad, majority counsel; Kelly Zerzan,

majority counsel; Jill Latham, legislative clerk; Vikki Ehrlich, deputy communications director; and Jonathan J. Cordone, minority

counsel.

Mr. STEARNS. Good morning everybody, and welcome to the Subcommittee’s legislative hearing on ‘‘The International Consumer

Protection Act of 2003.’’ My colleagues, increasingly we hear of

scams and other fraudulent and deceptive acts perpetrated against

the American consumer by persons and companies that are located

overseas.

The Federal Trade Commission data shows a substantial rise in

consumer complaints that they receive from U.S. consumers

against foreign companies. The data shows that the number of

cross-border fraud complaints collected by the FTC rose to over 14

percent of all complaints, excluding identity theft. That number

was just 1 percent in 1995.

The same data shows that over 24,000 of those complaints by

U.S. consumers were directed by foreign companies and represented 17 percent of all money lost to fraud in the year 2002. Of

the total number of U.S. consumer border fraud complaints, nearly

half had to do with foreign money offers and advance fee loans.

One quarter of the complaints involved scams around sweepstakes and free prices or gifts. Moreover, fraud and deception involving Internet auctions represented 10 percent of cross-border

complaints that were filed in 2002.

As a member closely involved in our committee’s effort to draft

anti-spam legislation, I found it particularly interesting that in

more than 70 percent of the cases an American consumer is first

contacted by fraudsters based overseas through the e-mail.

This is true of fraudsters from all countries, except Canada,

where the preferred method is still the telephone. Therefore, I

2

agree with the Commission’s view that enhancing the FTC’s ability

to address cross-border consumer fraud and deception more effectively will also have a real and substantial impact on reducing

spam.

I do think we also have a growing problem where the American

consumer is victimized by way of fraud and/or deception that finds

its genesis beyond our borders and beyond the present reach of our

law enforcement and this trend will not subside.

We all know that as consumers we are increasingly becoming

part of a highly integrated global marketplace. There is no escaping that fact. Therefore, I strongly support the efforts of the FTC

directed at combating cross-border fraud.

In principle, I support the Commission’s proposed legislation

seeking enhanced authority that it deems necessary for it to effectively combat cross-border fraud. I am confident that at this time

this legislation, when perfected, will become one of the most significant pieces of legislation authored by Congress in support of the

American consumer.

In the past few weeks, I, along with the ranking member of the

subcommittee, have been working closely with the Commission to

address our concerns with the proposed legislation, with the aim of

perfecting this very important legislation.

My objective is to ensure that the civil liberties of Americans are

in no way undermined for the sake of combating cross-border

fraud. Finally, I plan to continue working in a bipartisan fashion

with the Commission and others toward the expeditious introduction and consideration by the committee members of a good bill,

worthy of speedy approval.

I invite all of my members of the subcommittee to join in our efforts by becoming original co-sponsors of this bill. So I look forward

to our witnesses testimony and the enactment of a good bill protecting consumers from cross-border fraud this session of Congress.

And with that, the ranking member.

Ms. SCHAKOWSKY. Thank you, Chairman Stearns, for holding

this hearing on the International Consumer Protection Act of 2003.

The draft legislation that Chairman Stearns and I have circulated

grants the Federal Trade Commission additional powers to combat

international consumer fraud.

The draft bill is a work in progress, and I look forward to hearing

the expert testimony from today’s witnesses; their thoughts on the

draft bill, and the problems that the bill aims to address.

The chairman itemized the ways in which the FTC’s ‘‘Consumer

Sentinel’’ found consumer fraud as this growing problem, and the

documentation, and so I won’t repeat that. But clearly cross-border

fraud is a serious problem that Congress needs to address.

And he also raised that some of you may have and that we have

had as well, that the legislation that grants the FTC greater powers to share since it is sensitive information with foreign governments about individuals and businesses, that it raises some difficult questions for the subcommittee and the Congress as a whole

in striking that delicate balance between protecting civil liberties

and fighting consumer fraud.

We need to ensure that we don’t give the FTC a license to violate

individual rights, but still provide the tools that it needs to protect

3

consumers. We fought hard throughout our history to maintain a

free and open society, and clearly we don’t want to sacrifice those

freedoms in the name of combating consumer fraud.

And finally I want to sincerely thank Chairman Stearns and

Chairman Tauzin for working with me in a bipartisan fashion on

this important legislation. I really commend them for being inclusive and I hope that we will be able to introduce and pass a bipartisan bill in the very near future. Thank you.

Mr. STEARNS. I thank my colleague. The gentlemen from Illinois,

Mr. Shimkus.

Mr. SHIMKUS. Thank you, Mr. Chairman, and thank you, Mr.

Muris, for joining us today on an issue that is very, very important.

We just came out of a conference meeting that was somewhat contentious on many issues, and some of it that we hope you will be

addressing through the FTC and the whole issue of how do we continue to open markets and go into international trade, and use all

this new technology, and make sure that our consumers are protected.

And so we look forward to the hearing, and I appreciate your attendance, and Mr. Chairman, I yield back my time.

Mr. STEARNS. I thank the gentleman.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF WYOMING

Thank you, Mr. Chairman, for holding this hearing. It is important that legislation be thoroughly discussed in a realm that includes those significantly impacted

by a bill and you have given us the valuable opportunity to do just that.

I would also like to thank the distinguished panelists that have joined us today.

Your testimony will shed valuable light on the legislation before us and bring American consumers one step closer to the protections they need and deserve.

The marketplace continues to evolve as technologies are forever improving and affording consumers and businesses alike with more opportunity than ever before. Unfortunately, as with anything, these opportunities are not always seized in the name

of all that is right and just. Criminals are as likely, if not more so, to demonstrate

the phenomenal capabilities available today at the expense of people’s hard-earned

money and assets.

We must ensure that an adequate counter-force is not just keeping up or being

maintained, but staying ahead of the criminal game. The Federal Trade Commission

must be given the power, authority and resources necessary to do just that. The

Federal Trade Commission has proven to be enormously valuable in regulating how

business is done and protecting the rights and interests of all parties involved. We

must thoroughly, consistently and continuously examine what the FTC is able to do

and how it might be more effective in its pursuits.

There are numerous scam artists out there looking to make a buck without having to work for it. The people of Wyoming—as with people in every state—will benefit greatly by the protections and powers extended within the proposal before us

today. We must take swift action.

Again, I thank the panelists and am certain that today’s testimony will further

illuminate the path that this legislation must take in a timely manner.

I thank the Chairman again and yield back the remainder of my time.

PREPARED STATEMENT OF HON. C.L. ‘‘BUTCH’’ OTTER, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF IDAHO

Mr. Chairman, I appreciate the opportunity you have provided for this subcommittee to review and examine this legislation. I do see the value in removing

some barriers that currently prohibit the exchange of information between domestic

and foreign agencies working to protect consumers from fraud. Yet, I have real concerns with some of the extensions of power this bill seems to give the Federal Trade

4

Commission. I think there are some legitimate civil rights issues the committee

must resolve before we move legislation.

In addition to providing an unprecedented means of communications and business

opportunities, E-commerce has generated a number of complex issues relating to responsibility, enforcement, and the jurisdiction of laws regulating the Internet and

other technological means of doing business. There is no doubt American consumers

deserve the best efforts of the FTC in their pursuit to inform and warn the public

of possible scams and in the investigation of those operations that violate the law.

However, in reading certain provisions of the International Consumer Protection Act

draft bill, I became concerned that this proposal may be inadvertently circumventing the sovereignty of our nation and the rights of our law abiding citizens. I

am uneasy when this discussion reaches the point of asking U.S. agencies or commissions to enforce the laws of other nations on our citizenry, or visa versa.

Before moving forward on this issue, we must clarify that U.S. citizens will only

be accountable to U.S. law. I cannot in good conscious support something that could

require my U.S. law-abiding constituents to comply with the laws of foreign lands

as a condition of doing business on the Internet.

Furthermore, I find the current language concerning the definition of the adverse

results test unacceptable. The Federal Trade Commission cannot be permitted the

opportunity to circumvent our legal system by casting internal determinations when

applying an adverse result test in order to gain access to delayed notification rights.

While these are no doubt serious issues, I look forward to working with the commission on finding appropriate and constitutional ways to provide Americans increased protection from international scams and frauds perpetrated via the Internet

and other technological means.

PREPARED STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TEXAS

Thank you Chairman Stearns and Ranking Member Schakowsky for holding this

hearing on the International Consumer Protection Act.

I understand that this legislation is a high priority for the Federal Trade Commission, and particularly for Chairman Muris and Commissioner Thompson.

So I appreciate the Chairman’s willingness to appear before us today to lay out

the FTC’s proposals to fight deceptive practices that have an international scope and

are increasingly affecting U.S. consumers.

It’s no surprise that international consumer protection is becoming an issue of increasing relevance to this subcommittee.

Globalization, increased world trade and the proliferation of Internet-based services and commerce has dramatically changed the world in which we live.

Many of these changes have been for the better; however, they have also created

fertile ground for fraudulent activities.

Consequently, the act of fraud itself has taken on a global nature, thus making

it increasingly difficult for law enforcement and the FTC to find and prosecute perpetrators of fraud.

We’ve learned from various consumer complaints that international fraud can

take many forms.

Identity theft and financial scams are two extreme examples, but telemarketing

and spam are issues that I’d bet most of us in this room have had to contend with.

Congresswoman Heather Wilson and I have dropped a good, consumer-friendly

bill that would address our spam problem by giving consumers and the FTC the

tools they need to push back against the spammers.

And I hope that this bill we’re considering today will give the FTC even more ammunition in the fight against spam.

International problems require international solutions, and the only way to effectively fight cross-border fraud is through international cooperation.

While the FTC’s mission heretofore has been primarily domestic in nature, the

protection of U.S. consumers against fraud and other deceptive practice now dictates

that the FTC adopt an international scope.

To that end, we need to provide the FTC with expanded investigatory and enforcement capabilities, and I applaud our Chairman, Ranking Member and the FTC for

tackling this issue head on.

In our efforts to fight cross-border fraud, however, I do want to make sure that

the policies we enact protect the privacy and civil liberties of all involved parties.

Our witnesses have indicated that several provisions of this bill could raise 4th

Amendment questions.

5

These are troubling concerns that must be addressed before we move forward with

this legislation.

Given the bi-partisan nature of the negotiations thus far, however, I am confident

that our subcommittee can produce a bill that will effectively protect U.S. consumers

from international fraud while also preserving constitutional rights and privileges.

Thank you to all of our witnesses for appearing before us today.

I look forward to your testimony.

And with that, Mr. Chairman, I yield back the balance of my time.

Mr. STEARNS. We welcome the Chairman of the Federal Trade

Commission, the Honorable Timothy Muris. We welcome your

opening statement.

STATEMENT OF HON. TIMOTHY J. MURIS, CHAIRMAN,

FEDERAL TRADE COMMISSION

Mr. MURIS. Thank you very much. I am pleased to appear to testify on the International Consumer Protection Act of 2003. Mr.

Chairman, and Ranking Member Schakowsky, I personally want to

thank you and your staffs for the many hours of hard work that

you have devoted to developing this legislation.

I know that some of these issues are complex and we really appreciate you working with us. I do understand that it is a work in

progress. We have listened to the concerns that many people have

raised. We think that we can work with you and make changes

that would satisfy those concerns, and still allow us to address this

very important issue.

As you know, the FTC is the agency that is primarily responsible

in the Federal Government for protecting American consumers.

There are limitations on our ability to fight cross-border fraud that

make it increasingly difficult to meet this responsibility.

Today, cross-border fraud operators victimize large numbers of

Americans and the problem is growing. For example, fraudulent

Canadian telemarketers victimize American consumers and hide

their ill-gotten gains in foreign bank accounts.

Website operators victimize consumers worldwide and remove

their sites when they learn they are being investigated. Deceptive

spammers can easily hide their identity, disguise the electronic

path of their e-mail messages, and send messages from anywhere

in the world to anyone in the world.

Not surprisingly, this is reflected in our complaint data base that

you mentioned. We have a chart here to your right which shows

that there were more than 30,000 complaints collected in ‘‘Consumer Sentinel’’ that involved either domestic consumers complaining about foreign businesses, or foreign consumers complaining about domestic businesses.

About 80 percent of these cross-border complaints were U.S. consumers complaining about foreign businesses. With these complaints, we have had a corresponding increase in our cases involving cross-border fraud.

Last year, for example, we brought about 20 new Federal District

Court lawsuits involving foreign defendants or foreign consumers.

We have continued to litigate and settle dozens of cases involving

fraud and deception that operate cross-border.

Indeed, today we are announcing settlements in two cross-border

lottery cases that will return almost $2 million for consumer reVerDate 11-MAY-2000 10:45 Nov 14, 2003 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 89470.TXT HCOM1 PsN: HCOM1
6

dress. An increasing number of these cross-border cases involve allegedly deceptive spam, which is often cross-border in nature.

We have found that the path from a fraudulent spammer to a

consumer’s in-box typically crosses at least one international border, and usually several. In other words, this legislation is antispam legislation, and it is very important for us in the battle

against spam.

We are in the process of implementing a plan that we announced

last year, which is a five point plan to combat cross-border fraud.

It includes working with multilateral organizations, enforcement

task forces, public/private partnerships, and technical assistance

groups to developing countries.

My colleague, Mozelle Thompson, is the head of the OECD Consumer Protection Committee. The OECD recently has promulgated

very important guidelines to deal with the cross-border fraud problem.

Quite simply, we need new legislative authority. The attraction

to deal cross-border if you are a fraudster is just overwhelming.

One reason is that you can target a larger market.

Another reason is that by operating cross-border, you make it

more difficult for the relevant law enforcement authorities to deal

with you. Further, you can move your money outside the United

States, so that we need a foreign action to collect on a judgment

in the United States.

This is time consuming, expensive, and sometimes we can’t do it

at all. The legislation that we have proposed, and is reflected in the

draft bill, has four main goals. The first is to strengthen our ability

to share information with, and provide investigative assistance to

our foreign counterparts, who often are investigating the same targets that we are.

Second, we seek to improve our ability to gather information by

sharing confidential treatment of information we receive from certain sources. Without such assurances, this valuable information in

many cases, we just are not going to get it.

Third, we seek to improve our ability to obtain consumer redress

in cross-border cases by clarifying our authority to act in such

cases, and expanding our ability to use foreign counsel to pursue

assets off-shore.

Finally, we seek to strengthen our international cooperative relationships by obtaining authority to conduct staff exchanges, and to

provide financial support for certain joint products.

The Congress already has provided tools to cooperate internationally to the SEC, to the CFTC, to the FTC and the Antitrust

Division for Antitrust, and what we are seeking is similar authority for cross-border fraud.

We have consulted widely on this legislation, both within and

outside the government, and with the Congress, and we are committed to working closely with you to make it an appropriate bill

to achieve the balance that you all mentioned this morning.

We greatly appreciate the opportunity and your help in this important issue, and we look forward to continuing to work together.

[The prepared statement of Hon. Timothy J. Muris follows:]

7

1The written statement represents the views of the Federal Trade Commission. My oral presentation and responses are my own and do not necessarily reflect the views of the Commission

or of any other Commissioner. 2 15 U.S.C. § 45(a). 3See 15 U.S.C. § 53(b). The FTC also is authorized to initiate administrative proceedings to

enforce the Federal Trade Commission Act. See 15 U.S.C. § 45(b). 4 Consumer Sentinel is a database of consumer fraud complaints maintained by the FTC. Complaints are entered into the database from many sources and are accessible to more than 700

law enforcement agencies in the United States, Canada, and Australia. The database currently

contains over one million complaints. See www.consumer.gov/sentinel.

PREPARED STATEMENT OF HON. TIMOTHY J. MURIS, FEDERAL TRADE COMMISSION

Mr. Chairman, I am pleased to appear before the Subcommittee today to provide

information on the challenge of cross-border fraud and the efforts of the Federal

Trade Commission (‘‘Commission’’ or ‘‘FTC’’) to address this growing problem.1

The FTC is the federal government’s principal consumer protection agency, with

a mandate to prohibit unfair or deceptive acts or practices and to maintain vigorous

competition in the marketplace.2 The Federal Trade Commission Act authorizes the

Commission to file federal district court actions, which typically seek preliminary

and permanent injunctions to halt deceptive activity and seek to provide redress for

injured consumers.3

An increasing number of these actions involve cross-border fraud and deception,

which adversely affect American consumers and businesses. These actions often involve foreign businesses and individuals, consumers, assets, or evidence. Similarly,

an increasing number of consumer complaints collected in our Consumer Sentinel

database maintained by the Commission involve either domestic consumers complaining about foreign businesses or foreign consumers complaining about domestic

businesses.4 Thus, we are devoting additional resources to fighting cross-border

fraud within the existing legislative framework and are proposing certain legislative

changes that would give us additional tools to help address the problem of crossborder fraud. Most of our proposed changes are based on authority Congress has

already given to securities, antitrust, and banking enforcers in the international

context.

Today’s testimony begins by describing the growth of cross-border fraud and the

problems associated with this growth. It then discusses our efforts within the existing legislative framework to combat cross-border fraud. Finally, it examines the

need for additional legislation to help us fight cross-border fraud and describes our

legislative recommendations.

I. THE PROBLEM OF CROSS-BORDER FRAUD

Today, cross-border fraud operators are victimizing American consumers to an extent unknown just a few years ago, and the problem is growing worse. Globalization

of trade, improvements in the international telephone system, and the advent of the

Internet have given consumers direct access to foreign sellers. Today, there are satellite networks broadcasting advertisements around the world, with operators waiting to take orders in many languages. Telemarketers routinely call U.S. consumers

from Canada. Most significantly, electronic commerce in many instances is blurring

the effect of national borders.

Cross-border commerce creates new opportunities for consumers and businesses,

but it also poses new challenges to consumer confidence and to law enforcement.

Consumers cannot assess the credibility of many merchants located across the globe

as easily as they could with local vendors, and law enforcement cannot protect consumers as easily from fraud operators who, effectively, may be out of reach.

Using Internet and long-distance telephone technology, fraud operators can strike

quickly on a global scale, victimize thousands of consumers in a short time, and disappear nearly without a trace—along with their ill-gotten gains. For example, fraudulent Canadian telemarketers victimize American consumers and hide their ill-gotten gains in foreign bank accounts. Website operators victimize consumers worldwide and take down their sites when they learn they are being investigated by law

enforcement. And deceptive spammers can easily hide their identity, forge the electronic path of their email messages, and send messages from anywhere in the world

to anyone in the world.

A. Complaint Statistics

Not surprisingly, an increasing number of complaints collected in Consumer Sentinel involve international transactions. In 2002, 14 percent of the complaints collected in Consumer Sentinel involved either domestic consumers complaining about

foreign businesses or foreign consumers complaining about domestic businesses, as

8

5See FTC REPORT, CROSS-BORDER FRAUD TRENDS, JANUARY-DECEMBER 2002 4 (Feb. 19, 2003),

available at <http://www.ftc.gov/bcp/conline/edcams/crossborder/PDFs/CrossBorderCY2002.pdf>. 6 Id. at 9. 7 Id. at 13. 8 Id. at 10. 9FTC v. Pereira, Civ. Action No. 1:99 CV 01367 (E.D. Va. filed Sept. 14, 1999), available at

<http://www.ftc.gov/os/1999/9909>. 10 E.g., FTC v. 1492828 Ontario Inc., d/b/a First Capital Consumers Group, Civ. Action No.

02C 7456 (N.D. Ill. filed Oct. 17, 2002), available at <http://www.ftc.gov/opa/2002/10/

firstcap.htm>. A complete list of all cases that the FTC has brought against Canadian defendants between 1997-2002 is contained in MASS-MARKETING FRAUD: A REPORT TO THE ATTORNEY

GENERAL OF THE UNITED STATES AND THE SOLICITOR GENERAL OF CANADA (May 2003), available at <http://www.usdoj.gov/opa/pr/2003/May/remmffinal.pdf>.

11FTC v. Hudson Berkeley, Civ. Action No. CV-S-02-0649-PMP-RJJ (D. Nev. filed May 7,

2002), available at <http://www.ftc.gov/opa/2002/05/projectabsurd.htm>. 12FTC v. BTV Indus., Civ. Action No. CV-5-02-0437-LRH-PAL (D. Nev. filed Mar. 27, 2002),

available at <http://www.ftc.gov/opa/2002/04/btv.htm>. 13FTC v. Dr. Clark Research Ass’n, Civ. Action No. 1:03CV0054 (N.D. Ohio filed Jan. 8, 2003),

available at <http://www.ftc.gov/opa/2003/01/drclark.htm>. 14FTC v. TLD Networks Ltd., Civ. Action No. 00-CV-906 (N.D. Ill. filed Feb. 28, 2002), available at <http://www.ftc.gov/opa/2002/03/tld.htm>. 15FTC v. SlimAmerica, Civ. Action No. 97-6072 (S.D. Fla. filed Jan. 27, 1997), available at

<http://www.ftc.gov/opa/1997/02/slim.htm>; FTC v. Online Communications, Civ. Action No. CVS-96-00055-LDG (RLH) (D. Nev. filed Jan. 23, 1996), available at <http://www.ftc.gov/opa/1996/

08/road2.htm>. 16FTC v. J.K. Publications, Inc., Civ. Action No. CV 99-0044 ABC (AJWx) (C.D. Cal. filed Jan.

5, 1999), available at <http://www.ftc.gov/opa/1999/01/netfill.htm>. 17FTC v. Affordable Media, LLC, Civ. Action No. CV-S-98-669-LDG (RLH) (D. Nev. filed Apr.

23, 1998). 18 E.g., FTC v. J.K. Publications, Inc., Civ. Action No. CV 99-0044 ABC (AJWx) (C.D. Cal. filed

Jan. 5, 1999), available at <http://www.ftc.gov/opa/1999/01/netfill.htm>. 19 E.g., FTC v. Electronic Prods. Distrib., LLC, Civ. Action No. 02-CV-888H (AJB) S.D. Calif.

filed May 7, 2002), available at <http://www.ftc.gov/opa/2002/05/projectabsurd.htm>; FTC v. Assail, Inc., Civ. A. No. W03CA007 (W.D. Tex. filed Jan. 9, 2003), available at <http://www.ftc.gov/

opa/2003/02/assail.htm>; FTC v. 1492828 Ontario Inc., d/b/a First Capital Consumers Group,

Civ. Action No. 02C 7456 (N.D. Ill. filed Oct. 17, 2002), available at <http://www.ftc.gov/opa/

2002/10/firstcap.htm>; FTC v. CSCT, Inc., Civ. Action No. 03 C 00880 (N.D. Ill. filed Feb. 6,

2003), available at <http://www.ftc.gov/opa/2003/02/csct.htm>; FTC v. Zuccarini, Civ. Action No.

02C 7456.C.A. No. 01-CV-4854 (E.D. Pa. filed Sept. 25, 2001), available at <http://www.ftc.gov/

opa/2001/10/cupcake.htm>; FTC v. BTV Indus., Civ. Action No. CV-5-02-0437-LRH-PAL (D. Nev.

filed Mar. 27, 2002), available at <http://www.ftc.gov/opa/2002/04/btv.htm>. 20 E.g., FTC v. Skybiz.com Inc., Civ. Action No. 01-CV-096 (N.D. Okla. filed May 30, 2001),

available at <http://www.ftc.gov/opa/2001/06/sky.htm>. 21To date, the FTC has brought over 56 enforcement actions involving deceptive or fraudulent

spam. 22Prepared Statement of the Federal Trade Commission, Spam (Unsolicited Commercial EMail), Before the Senate Committee on Commerce, Science and Transportation, 108th Cong. (May

21, 2003). This conclusion is also supported by the FTC’s recent initiative to educate businesses

about ‘‘open relays.’’ Open relays allow third parties to route their e-mail through servers of

compared with less than 1 percent in 1995.5 Seventy-nine percent of these complaints in 2002 involved U.S. consumers complaining about foreign businesses.6 The

complaints include more than 24,000 complaints by U.S. consumers against foreign

companies, complaining about transactions involving more than $72 million.7 The

cross-border fraud schemes U.S. consumers complained about most often in 2002 involved foreign money offers, advance fee loans, prizes, sweepstakes gifts, and internet auctions.8 The obstacles we face in fighting cross-border fraud leave U.S. consumers particularly vulnerable to such scams.

B. FTC Cross-Border Cases

In the past several years, there has been a corresponding increase in FTC cases

with a cross-border component. These cases often target foreign defendants. The

FTC has brought cases against defendants in Australia,9 Canada,10 Hong Kong,11

Spain,12 Switzerland,13 and the United Kingdom.14 Many of the cases have involved

the transfer of assets to such offshore locations as the Bahamas,15 the Cayman Islands,16 the Cook Islands,17 and Vanuatu.18 The cases also frequently involve evidence located in other countries, including Canada, the Netherlands, France, Germany, Mexico, and Spain.19 Other cases involve individuals and businesses based

in the U.S. that target both domestic and foreign consumers.20

An increasing number of these cases involve allegedly deceptive unsolicited commercial e-mail, or spam, which is often cross-border in nature.21 Indeed, the Commission’s law enforcement experience shows that ‘‘the path from a fraudulent

spammer to a consumer’s in-box typically crosses at least one international border

and usually several.’’ 22

9

other organizations, thereby disguising the real origin of the e-mail. The FTC initiative, conducted in partnership with 16 other agencies in four countries, found that a significant portion

of the open relays identified were located outside the United States, in countries such as China,

Korea, Japan, Italy, Poland, Brazil, Germany, Taiwan, Mexico, Great Britain, Chile, France, Argentina, India, Spain, and Canada. 23For example, in FTC v. Zuccarini, Civ. Action No. 01-CV-4854 (E.D. Pa. filed Sept. 25,

2001), available at <http://www.ftc.gov/opa/2001/10/cupcake.htm>, the defendant had initially

perpetrated his Internet scheme using U.S.-based Internet Service Providers (ISPs) and domain

registrars. When he found out that the FTC was investigating him, he fled the country and continued to perpetrate his scheme through ISPs in the Netherlands and domain registrars in

France, Germany, and Spain. 24The FTC recently faced this situation with respect to a matter that a foreign consumer protection agency referred to us concerning a scheme run by a U.S. company in various parts of

Europe. Because of its enabling legislation, the referring agency could not bring an action

against a U.S. company. Upon investigation, FTC staff learned that no U.S. consumers were

injured by the scheme and neither the misrepresentations nor other conduct material to the

fraud occurred in the United States. Given that the jurisdictional nexus to the U.S. was unclear

in this case, as well as the practical problems that litigation would have posed, FTC staff decided not to pursue the case. By structuring its operations in this manner, the entity evaded

law enforcement authorities on both sides of the Atlantic. 25FTC v. Verity International illustrates the limits of imposing conduct remedies on foreign

defendants. 140 F. Supp. 2d 313, 318 (S.D.N.Y. 2001). In that case, the individual foreign defendants failed to comply with the asset-reporting requirements of a preliminary injunction obtained by the FTC. The U.S. court held them in contempt. In arguing against the motion for

contempt, defendants pointed out that the contempt order would be futile because they were

unlikely to enter the United States while the contempt matter was outstanding. The court acknowledged that defendants could avoid arrest by staying outside of the United States, but

granted the motion for contempt, suggesting that preventing the defendants from entering the

United States was an appropriate measure in this case. This case illustrates the limits of a contempt order on foreign defendants—as a practical matter, a foreign defendant can generally

avoid sanctions for contempt by staying outside the United States. 26This problem has arisen in many FTC-related cases. For example, a receiver appointed in

an FTC matter recently faced difficulties in obtaining relief from an Australian court. In Evans

v. Citibank Limited & others, Equity Division Proceedings No. 4999 of 1999 (Sup. Ct. New South

Wales), the receiver was not seeking direct enforcement of an FTC judgment, but instead was

attempting to use the FTC’s judgment as a basis for ordering a third-party bank to transfer

certain assets to the control of the receiver under a constructive trust theory. The court held

that the receiver’s claims were ‘‘penal’’ in nature and denied the receiver’s claim. This matter

is currently on appeal. Similarly, United States v. Asiatrust Limited, Plaint No. 57/1999, was

a case challenging the defendants’ transfer of funds to a Cook Islands trust to defeat the FTC’s

judgment in FTC v. Affordable Media, LLC, Civ. Action No. CV-S-98-669-LDG (RLH) (D. Nev.

filed Apr. 23, 1998). The High Court of the Cook Islands construed the case (which was pled

as a new action) as one involving the enforcement of a penal law. The Cook Islands court dismissed the United States’ action holding that the FTC’s action was one to enforce ‘‘regulatory

rights and powers.’’ ‘‘They are or have a flavour of punishment and I conclude that these are

at least in part, penal provisions, and fall within the relevant principle. It is also a public law

which is sought to be enforced by the state or the sovereign alone for regulatory purposes and

is one which ought not be enforced here.’’ (4 Dec. 2001 Judgment at 8). The matter ultimately

was resolved by settlement and the defendants repatriated their assets to the FTC pursuant

to a stipulated judgment. See also Impediments to Digital Trade Before the House Subcommittee

on Commerce, Trade, and Consumer Protection of the Committee on Energy and Commerce,

107th Cong. (2001) (statement of Jeff Kovar, Assistant Legal Advisor for Private International

Law, Department of State) (‘‘Most foreign judgments are already recognized and enforced in the

Continued

C. Problems Faced by Law Enforcement

Despite the FTC’s vigorous law enforcement activities, cross-border fraud operators continue to use national borders to facilitate their schemes. Those engaged in

cross-border fraud enjoy more attractive revenue prospects and face a lower likelihood of prosecution than domestic scam artists because:

• They can target a larger market.

• Evidence of their scams is often spread out in different jurisdictions, and it is difficult for the relevant authorities to share that evidence. Indeed, many U.S.-

based defendants purposefully use foreign third parties to perpetrate their

scams in an attempt to evade U.S. law enforcement authorities.23

• It is sometimes unclear which countries have legal jurisdiction to act.24

• U.S. enforcers have extremely limited ability to impose conduct remedies on foreign defendants because most courts will not enforce injunctive orders issued

in other countries.25

• The fraud operators can move money offshore, thus necessitating a foreign action

to enforce a U.S. court judgment. This is time-consuming, expensive, and, in

many cases, futile, as many countries do not enforce U.S. court judgments obtained by government agencies.26

10

U.S. under state law, but most of our trading partners do not usually grant the same treatment

to U.S. judgments.’’). 27Prepared Statement of the Federal Trade Commission, Cross-Border Fraud: Improving

Transnational Law Enforcement Cooperation: Hearing Before the Permanent Subcommittee on

Investigations of the Senate Committee on Government Affairs, 107th Cong. (June 15, 2001). 28FTC v. STF Group Inc., Civ. A. No. 02 C 0977 (N.D. Ill. filed Feb. 10, 2003), available at

<http://www.ftc.gov/opa/2003/02/medplan.htm>; FTC v. Assail, Inc., Civ. A. No. W03CA007 (W.D.

Tex. filed Jan. 9, 2003), available at <http://www.ftc.gov/opa/2003/02/assail.htm>. 29FTC v. Carlton Press, Inc., Civ. A. No. 03-CV-0226-RLC (S.D.N.Y. filed Jan. 10, 2003), available at <http://www.ftc.gov/opa/2003/01/idpfinal.htm>. 30FTC v. Mountain View Sys., Ltd., Civ. A. No. 1:03-CV-OOO21-RMC (D.D.C. filed Jan. 7,

2003), available at <http://www.ftc.gov/opa/2003/02/fyi0314.htm>. 31FTC v. Dr. Clark Research Ass’n, Civ. A. No. 1:03CV0054 (N.D. Ohio filed Jan. 8, 2003),

available at <http://www.ftc.gov/opa/2003/01/drclark.htm>. 32FTC v. CSCT, Inc., Civ. Action No. 03 C 00880 (N.D. Ill. filed Feb. 6, 2003), available at

<http://www.ftc.gov/opa/2003/02/csct.htm>. 33See Timothy J. Muris, ‘‘The Interface of Competition and Consumer Protection,’’ Prepared

Remarks at the Fordham Corporate Law Institute’s Twenty-Ninth Annual Conference on International Antitrust Law and Policy (Oct. 31, 2002), available at http://www.ftc.gov/speeches/

muris/021031fordham.pdf.

• Enforcers have less incentive to pursue fraud operators who victimize consumers

outside their jurisdictions but leave local consumers alone.

1The legislative recommendations that we make today will help to minimize some

of these burdens, as further described below. In other cases, the burdens result from

other countries’ practices. We believe that our proposed legislation, if passed, will

encourage greater reciprocity, providing an incentive for these countries to lift existing barriers to combating cross-border fraud.

D. Importance of Pursuing Cross-Border Fraud Operators

Pursuing those who victimize U.S. consumers from abroad is important to protect

consumers from the substantial harm foreign fraud operators can cause.27 Moreover,

consumers’ concerns about fraud and deception in the global marketplace could undermine their confidence in cross-border transactions and could lead them to conclude that they should only do business with local merchants. Unaddressed, these

consumer concerns could hurt legitimate businesses by shrinking the market for

their products and services. If the promise of the global marketplace is to be fully

realized, governments must assure consumers that they are working to keep markets free from fraud and deception.

Pursuing U.S. businesses who victimize foreign consumers is also critical. Stopping U.S.-based cross-border fraud and deception will help protect legitimate U.S.

businesses from dishonest competitors, as well as the reputation of the U.S. marketplace. Cooperation is also necessary to engender reciprocity: FTC action to protect

foreign consumers from fraud and deception emanating from U.S. businesses increases the willingness of foreign governments to cooperate in protecting U.S. consumers from fraud operators in their countries.

II. THE FTC’S EFFORTS TO FIGHT CROSS-BORDER FRAUD AND DECEPTION

Despite the enforcement difficulties outlined above, the FTC has continued to

fight cross-border fraud and deception within the existing legislative framework,

through its enforcement and policymaking initiatives. On the enforcement front, in

2002, the FTC brought approximately 20 new federal district court lawsuits involving one or more foreign defendants or foreign consumers, and continued to litigate

and settle dozens of other cases involving fraud and deception that operate across

national borders. In the first quarter of 2003 alone, the FTC filed new cases involving advance-fee credit cards peddled by Canadian telemarketers,28 allegedly bogus

international driving licenses advertised through spam email by defendants in Denmark 29 and other foreign countries including Israel, the Bahamas, and Romania,30

and products and programs sold over the Internet by defendants based in Switzerland,31 Canada, the U.K., and Mexico,32 that allegedly falsely claim to cure cancer,

AIDS, and other serious diseases. Although we were successful in these cases, we

encountered difficulties, as outlined above.

In addition to its ongoing work on investigations and cases, in October 2002, FTC

Chairman Timothy J. Muris unveiled a Five-Point Plan for Fighting Cross-Border

Fraud.33 The Plan recognizes the importance of initiatives on both the international

and domestic fronts and the need for action by both the public and private sectors.

Highlights of the Plan follow:

Developing an OECD Recommendation on Cross-Border Fraud: FTC Commissioner Mozelle Thompson has led the United States delegation to the

Organisation for Economic Cooperation and Development’s Committee on Consumer

11

34See <http://www.ftc.gov/bcp/workshops/crossborder/index.html>. 35See Agreement Between the Government of the United States of America and the Government of Canada Regarding the Application of their Competition and Deceptive Marketing Practices Laws, Trade Reg. Rep. (CCH) ¶ 13,503 (1995), available at <http://www.usdoj.gov/atr/public/

international/docs/uscan721.htm>; Agreement Between the Federal Trade Commission of the

United States of America and the Australian Competition & Consumer Commission On the Mutual Enforcement Assistance in Consumer Protection Matters (July 20, 1999), available at

<http://www.ftc.gov/opa/2000/07/usaccc.htm>; Memorandum Of Understanding On Mutual Enforcement Assistance In Consumer Protection Matters Between The Federal Trade Commission

Of The United States of America And Her Majesty’s Secretary of State for Trade And Industry

And The Director General Of Fair Trading In The United Kingdom (Oct. 31, 2000), available at <http://www.ftc.gov/opa/2000/10/ukimsn.htm>.

36For a further discussion of these task forces, see Mass-Marketing Fraud: A Report to the

Attorney General of the United States and the Solicitor General of Canada 31-32 (May 2003),

available at <http://www.usdoj.gov/opa/pr/2003/May/remmffinal.pdf>; see also Prepared Statement of the Federal Trade Commission, Cross-Border Fraud: Improving Transnational Law Enforcement Cooperation: Hearing Before the Permanent Subcommittee on Investigations of the

Senate Committee on Government Affairs, 107th Cong. (June 15, 2001). 37FTC v. STF Group, Civ. Action No. 03 C 0977 (N.D. Ill. filed Feb. 10, 2003), available at

<http://www.ftc.gov/opa/2003/02/medplan.htm>. 38FTC v. Duraisami, CV 03-01284-BJR (W.D. Wa., filed June 13, 2003), available at

<www.ftc.gov/opa/2003/07/duraisami.htm>. 39FTC v. Pacific First Benefit, LLC, Civ. Action No. 02 C 8678 (N.D. Ill. filed Dec. 2, 2002),

available at <http://www.ftc.gov/os/caselist/ca02c8678.htm>. 40FTC v. CSCT, Inc., Civ. Action No. 03 C 00880 (N.D. Ill. filed Feb. 6, 2003), available at

<http://www.ftc.gov/opa/2003/02/csct.htm>.

Policy since 1998 and has chaired the Committee since 2002. Under his leadership,

the OECD issued Guidelines for Protecting Consumers from Fraudulent and Deceptive Commercial Practices Across Borders in June 2003. The Guidelines recognize

that combating fraud and deception is an important priority for government consumer protection agencies. They represent the consensus of 30 countries on the importance of international cooperation to combat fraudulent and deceptive commercial practices. The Guidelines also provide impetus for legislative and policy reform

in OECD countries for combating such practices.

Public-Private Partnerships to Combat Cross-Border Fraud: The FTC has

issued a call to legitimate industry to help fight cross-border fraud, which hurts consumers as well as legitimate businesses. In many cases, domestic and foreign third

parties, such as credit card issuers and networks, banks, and Internet service providers, can assist law enforcement by providing information about foreign fraud operators. Domestic third parties may be able to suspend domain names, telephone

services, mailing services, or financial services to foreign fraud operators, who we

may not be able to reach through court orders. Earlier this year, the FTC held a

public workshop to explore these issues.34 We are continuing to work with the private sector to follow up on some of the ideas discussed at the workshop, including

better sharing of information between the private sector and the FTC. Discussions

at the workshop also highlighted obstacles to public-private sector cooperation to

combat cross-border fraud, which some of our legislative proposals seek to overcome,

as explained further below.

Technical Assistance: The FTC wants to ensure that developing countries do

not become havens for fraud. Therefore, we have conducted training missions on

consumer protection issues in various developing countries, in cooperation with and

funded by the U.S. Agency for International Development. Last year, we conducted

training sessions for consumer protection authorities from 13 Eastern European

countries. This year, we are conducting training sessions in Peru, Romania, and the

Ukraine.

Developing and strengthening bilateral and multilateral relationships:

The FTC has undertaken several activities in this area:

• The FTC has signed consumer protection cooperation agreements with Canada,

the United Kingdom, and Australia, that have enhanced our cooperation with

these countries.35 We are continuing to expand our law enforcement activities

with these countries.

• In Canada, the Commission participates in two consumer protection enforcement

task forces: Project Emptor with British Columbia authorities, and the Toronto

Strategic Partnership with a wide variety of Canadian and U.S. authorities.36

In the past year, the FTC has announced numerous joint law enforcement actions taken with the assistance of these task forces, including actions involving

credit card loss protection,37 lottery/prize scams,38 advance-fee credit cards,39

and bogus cancer clinics.40 Just this week, the FTC’s Bureau of Consumer ProVerDate 11-MAY-2000 10:45 Nov 14, 2003 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 89470.TXT HCOM1 PsN: HCOM1
12

41See www.econsumer.gov. 42Prepared Statement of the Federal Trade Commission, Spam (Unsolicited Commercial EMail), Before the Senate Committee on Commerce, Science and Transportation, 108th Cong. (May

21, 2003). 43OECD Guidelines for Protecting Consumers from Fraudulent and Deceptive Commercial

Practices Across Borders C(2003)116 (June 11, 2003). 44The Commission cannot disclose ‘‘documentary material, tangible things, reports or answers

to questions and transcripts of oral testimony’’ that are ‘‘received by the Commission pursuant

to compulsory process in an investigation’’ without the consent of the person who submitted the

information, except as specifically provided. 15 U.S.C. § 57b-2(b)(3)(C); 16 C.F.R. § 4.10(d).

tection announced its participation in a new task force with authorities from Alberta, called the Alberta Partnership Against Cross-Border Fraud.

• The FTC is a member of the International Consumer Protection Enforcement Network (ICPEN), a group of consumer protection enforcement agencies from 32

countries that meets twice a year to discuss cases, investigation techniques, and

other information. Seventeen ICPEN countries plus the OECD participate in

econsumer.gov, a public website where consumers can file cross-border e-commerce complaints online, making them accessible to law enforcement agencies

in the member countries. The site is available in English, French, Spanish, and

German.41 Complaints from econsumer.gov can help the FTC identify trends

and wrongdoers on an international level.

In addition, the Five-Point Plan recognizes that, although there are certain activities the FTC can undertake within our existing legislative framework, new legislation is necessary to help combat the problem of cross-border fraud effectively. The

remainder of this testimony focuses on the Commission’s legislative recommendations.

III. LEGISLATIVE RECOMMENDATIONS

Despite our successes, we face daunting challenges in the battle against cross-border fraud and deception. Many of these challenges reflect the shortcomings of a legal

framework developed when consumer protection was almost purely a domestic concern. In the emerging global marketplace, that framework must be expanded to

allow the FTC to act with effectiveness and dispatch to protect American consumers.

In testimony to Congress during hearings on spam, the Commission also emphasized the need for improvements to the FTC’s law enforcement powers to combat

cross-border fraud and deception perpetrated through spam.42

Indeed, an international consensus has developed on the need for countries to improve their domestic framework for fighting cross-border fraud and deception. The

OECD Guidelines discussed above specifically provide that ‘‘[m]ember countries

should review their own domestic frameworks to identify obstacles to effective crossborder co-operation in the enforcement of laws designed to protect consumers

against fraudulent and deceptive commercial practices, and should consider changing domestic frameworks, including, if appropriate, through adopting or amending

national legislation to overcome these barriers.’’ 43 The FTC’s legislative proposals

would implement this provision. Even though new legislation would not solve all of

the problems in fighting cross-border fraud, it could go far to reduce some of the

obstacles we face.

The FTC is proposing legislation in four areas:

• First, the FTC is seeking to strengthen its ability to cooperate with its

foreign counterparts, which are often investigating the same targets as

the FTC.

We are currently prohibited by statute from sharing certain information we obtain

in our investigations with our foreign counterparts. This prohibition can hurt U.S.

consumers. For example, even if both the FTC and a Canadian consumer protection

agency are investigating the same Canadian telemarketer that is defrauding U.S.

consumers, in many cases, the FTC cannot share information it obtains pursuant

to its main investigatory tool, the Civil Investigative Demand (CID), with the Canadian agency. This is true even though a Canadian action against the cross-border

telemarketer would benefit U.S. consumers.44 Similarly, in one recent case, the FTC

obtained an order against a spammer defrauding U.S. consumers and found that the

spammer had an affiliate that was perpetrating the same scam from a foreign country, targeting both U.S. and foreign consumers. The FTC cannot share the information it obtained pursuant to a CID with its foreign counterpart. The changes we are

seeking would allow us to share such information and provide investigative assistance to certain foreign agencies in appropriate cases.

13

45See Consolidated Appropriations Resolution, 2003, Pub. L. No. 108-7, Division J—Treasury

and General Appropriations, Title VI, § 610, 117 Stat. 11, 465 (codified at 31 U.S.C. § 1345). 46Securities Acts Amendments of 1990, Pub. L. 101-550 (1990).

• Second, the FTC is seeking to improve its information-gathering capabilities.

The key to combating cross-border fraud successfully is the ability to sue without

tipping off investigative targets. Once notified of FTC action, targets in these types

of cases often disappear and move assets offshore, beyond the reach of U.S. courts.

Thus, we are seeking to improve our ability to obtain more information from third

parties without requiring advance notice to our investigative targets.

Currently, we have no mechanism to require most third parties to keep CIDs confidential. Many third parties have told us that they will provide notice to the target

before they will share information with us, sometimes because they believe notice

may be required and sometimes even if such notice clearly is not required by law.

Because of this concern, we often do not send the CIDs, thus losing a potential

source of information in FTC investigations. We would like to be able to seek court

orders requiring third parties to keep CIDs confidential for a finite period of time,

which would improve our ability to gather information. This recommendation carefully balances law enforcement interests with privacy interests. In all cases in which

we want a mandate that third parties keep CIDs confidential, we would be required

to seek a court order, and the confidential treatment would be temporary. To further

improve our ability to gather information, we also are seeking improvements in our

ability to gather more information from federal financial regulators and foreign law

enforcement agencies.

• Third, the FTC is seeking to improve its ability to obtain consumer redress in cross-border cases by clarifying its authority to take action in

such cases, and expanding its ability to use foreign counsel to pursue

assets offshore.

depriving wrongdoers of their ill-gotten gains, reducing the incentives to engage

in fraud. To the extent that money can be returned to consumers, it reduces their

injury and increases their confidence in law enforcement. Among the changes the

Commission is recommending is a provision clarifying that the Commission has the

authority to take action in appropriate cross-border cases and provide restitution to

both U.S. and foreign consumers injured by cross-border fraud and deception. By

clarifying the availability of remedies, Congress can protect Americans from foreign

fraud operators and prevent the United States from becoming a haven for fraud artists targeting victims abroad. It also can send a strong signal to foreign courts considering whether to enforce an FTC money judgment when there are foreign as well

as U.S. victims.

Moreover, the Commission increasingly is facing significant obstacles in obtaining

the proceeds of fraud and deception from defendants who have assets abroad, beyond the reach of U.S. courts. The Commission therefore also seeks to target more

resources toward foreign litigation to facilitate recovery of offshore assets to benefit

defrauded U.S. consumers.

• Finally, the FTC is seeking to strengthen its international cooperative relationships by obtaining authority to conduct staff exchanges and to

provide financial support for certain joint projects.

The FTC participates in many international projects to combat cross-border fraud,

including the International Consumer Protection Enforcement Network (ICPEN),

the Mexico-U.S.-Canada Health Fraud Task Force (MUCH), Project Emptor with

various British Columbia authorities, and the Strategic Partnership with various

Ontario authorities. The FTC also consults with foreign counterparts at bilateral

and multilateral meetings. Often, it would be helpful for the FTC to provide monetary assistance to support cooperative projects and meetings of such groups. Currently, various appropriations statutes prohibit the FTC from using appropriated

funds to pay any expenses of a Commission, council, board or similar group that

does not have a prior and specific statutory approval to receive financial support.45

The FTC’s legislative proposals seek to overcome this restriction.

Congress has already provided many of the tools that we seek to agencies such

as the Securities and Exchange Commission (SEC) and Commodity Futures Trading

Commission (CFTC). For example, thirteen years ago, Congress expanded the SEC’s

powers to cooperate with foreign authorities.46 At the time, the SEC faced issues

analogous to those faced by the FTC today regarding the growth of international

fraud and deception in electronic commerce:

14

47 H.R. Rep. No. 101-240 at 2-3 (1990), reprinted in 1990 U.S.C.C.A.N. 3889-3890. 48See generally Michael D. Mann & William Barry, Developments in the Internationalization

of Securities Enforcement, 136 PLI/Corp 1999 (May 2002). 49 H.R. Conf. Rep. No. 978, 102d Cong., 2d Sess. 70-71 (1992).

The internationalization of the world’s securities markets is a trend that is

likely to continue at a rapid pace. The major forces driving this trend appear

to be: rapid technological advances in communications and computer technology

[and] the growing economic interdependence between the U.S. and its major

trading partners...Therefore, securities regulators in each nation must work

with their foreign counterparts to seek coordinated international solutions to assure fairer as well as more efficient market operations across borders.47

Since 1990, the SEC has been granted statutory authority to gather and share

relevant information with its foreign counterparts. As a result of these statutory

provisions, the SEC can offer significant benefits to those foreign authorities seeking

reciprocal cross-border cooperation. Indeed, the SEC has signed Memoranda of Understanding (MOUs) with over 30 foreign agencies. These MOUs significantly

streamline cross-border cooperation and, in some cases, has led to helpful information-sharing legislation in other countries.48 Congress has given the CFTC similar

powers and mechanisms for cooperation with foreign authorities.49 Through our legislative proposals, we are requesting similar authority.

We have consulted on our recommendations with other federal government agencies, including the Department of Justice, Department of State, the Federal Reserve

Board, the Office of the Comptroller of the Currency, the SEC and CFTC, as well

as several private companies and public interest groups, including the National Consumers League, the Electronic Privacy Information Center, and Center for Democracy and Technology. We are working closely with these entities in fashioning the

legislative provisions, both to meet their concerns and to achieve our objectives.

The Commission greatly appreciates the opportunity to provide this information

to the Subcommittee. We look forward to continuing to work with Congressional

staff on our legislative proposals.

Mr. STEARNS. Thank you, Mr. Chairman. I think I will start with

my questions. Obviously from your opening statement, it is a very

high priority, this proposed legislation combating cross-border

fraud.

And I guess that you and your staff, let’s say, after listening to

you talk about the spam that it is probably right up to one of your

highest priorities. Would you not agree?

Mr. MURIS. Yes. The FTC has become the premier government

agency for fighting fraud. One of the reasons that you needed a

Federal agency is that fraud has always crossed State borders, and

now fraud increasingly crosses international borders.

There is no higher priority that we have than fighting fraud.

There is no higher legislative priority than this particular piece of

legislation. And more and more of the fraud is done through spam.

This is anti-spam legislation. Spam is an international problem.

It is a growing problem, and it is swamping our e-mail. It is threatening. As another one of my colleagues, Commissioner Swindle,

likes to say, spam is threatening to kill the killer app of e-mail. We

really need lots of help, including the other spam legislation on

which you are working.

Mr. STEARNS. Let me go to some of the areas since we passed the

Patriot Act, and a lot of people are concerned. What do you think

of the argument that as there is no requirement for dual-criminality in the proposed legislation that will chill speech protected

under the First Amendment, and nullify the probable cause requirement of the Fourth Amendment, would you care to comment

on that?

15

Mr. MURIS. Sure. Let me leave the Patriot Act issue aside for

just a second, and focus on the concern that we would be involved

in investigating activity that is legal in the United States, particularly under the First Amendment.

We think that we have limited the bill since it was originally

proposed and we think some further changes would be helpful to

address this issue. First of all, the bill is limited to fraudulent and

deceptive commercial practices, or other practices substantially

similar to practices banned by the FTC laws.

I think that is a touchstone. Again, the touchstone is fraud. Now,

one of the things that I think is important to understand is that

across the world, people who are looking at fraud, they don’t necessarily have agencies like ours.

Indeed, if you look at across the whole world, the only agency

that maps us precisely is Australia.

Mr. STEARNS. So in all of the European Union, they don’t have

a——

Mr. MURIS. Well, many places in the European Union, they don’t

follow the FTC model. They don’t have necessarily consumer protection agencies. A lot of this is left to criminal authorities.

Now, the European Union, I think positively through Brussels is

moving to have more concern about cross-border fraud. They are

moving to implement this OECD recommendation that I mentioned, but it is important that I think that the legislation be written so that the touchstone is fraud and deception, or ‘‘substantially

similar’’ conduct.

Since we sent proposed legislation to the Hill, we have supported

such changes. I think a second point that is important to make is

that we have discretion.

We certainly do not have to provide assistance. We would not

provide assistance if it wasn’t involving with the touchstone of

fraud and deception, or substantially similar conduct.

In terms of assistance, the way the legislation is drafted, is that

we would need to consider consumer injury. Again, that is the

touchstone of what we do. So the bottom line is that I think the

concern is absolutely legitimate that we not be involved in helping

people overseas prosecute conduct that would be legal in the

United States.

And we think that the bill as was originally proposed has some

potential problems in it, and we think we have worked to address

those. We think a few other changes could be helpful as well.

Mr. STEARNS. How do you respond to the observation that the delayed notice provision is too broad, and therefore should be stricken

to ensure due process rights for individuals?

Mr. MURIS. Well, I think originally there were again some legitimate concerns about delayed notice. I think some additional

changes could be helpful there as well. For example, the provision

was written as requiring the judge to issue the delayed notice.

I think it would be better to leave it in the judge’s discretion.

This is an issue that raises many points about the Patriot Act, and

I will now address those. We don’t do criminal law. We don’t do

search and seizure. We don’t detain suspects.

16

We would need a court order for this delayed notice. The delayed

notification——

Mr. STEARNS. I agree with you that there is no comparison, but

people as a metaphor are going to say here we go, and I just think

it is important in this hearing to explore those to make sure that

there is no comparison here at all.

Mr. MURIS. Well, absolutely, plus we have a time limit, and I

think it would be useful to add that the 90 day’s extensions could

not exceed 1 year under the statute. I think that would be a useful

change.

Again, I think the concerns that people are raising are legitimate, and I think we can address them. I think the Patriot Act is

a metaphor and does not apply here. I am not obviously an expert

on the issues surrounding the application of the Patriot Act, but

whatever those concerns are—and I know that people disagree—I

don’t think they apply here.

This statute as written has a specific requirement to show that

the acts are related to fraud and deception. There is a very similar

process that already exists and has existed for many years for the

SEC and the banking agencies. I don’t think there have been a lot

of problems with that.

So I really think that we can have a delayed notification provision that makes sense. Let me just back up and mention why it is

so important to have this. We are dealing with fraudsters or people

who commit or who are engaged in fraudulent spam.

When we seek information about them from third-parties, if the

third-parties feel that they have to notify the targets of our investigation, well, the assets that they have, and maybe the parties

themselves, are going to disappear.

That is why we need a delayed notification. With ISPs, for example, and spam—this is covered in some different aspects of the proposed legislation—there are ISPs who feel that when we contact

them about fraudulent spam that they need to try to contact the

target.

Obviously that deters us from trying to get information from

them, and from them being the ISPs, about these targets. It does

not make any sense that we can’t have a provision subject to court

supervision, and subject to the requirements that I mentioned,

where we can have delayed notification.

Mr. STEARNS. Let me just ask one quick question. You are going

to make the information that you collect available to other governments. So people are going to say is it necessary for the FTC to

disclose this information to other governments, and are there safeguards that must be established if it is disclosed for the protection

of privacy.

So that is just a broad comment, and so if we could answer that,

then I think we have sort of taken care of some of the main concerns here.

Mr. MURIS. I think those concerns are legitimate. What we found

in working with our law enforcement partners around the world is

that they will give us information and engage in reciprocal arrangements if we can promise them confidentiality.

17

They will give us the information on condition often of confidentiality. The way that the law is right now is that even if we are

investigating the same target, and say with the Canadians. We

have a lot of telemarketers in Canada who are targeting U.S. consumers.

The Canadians have on their own done what I think is a very

commendable thing. They don’t want Canada to be a haven for

cross-border fraud, even though the fraud is aimed more at the

United States than at the Canadians.

But we are limited in our ability to share information and to receive information from the Canadian law enforcement partners.

This bill would allow us to do that, and I think with appropriate

safeguards.

Mr. STEARNS. I thank the chairman, and the gentle lady, Ms.

Schakowsky.

Ms. SCHAKOWSKY. Yes, I would like to yield if he would like to

the ranking member on the committee for a statement.

Mr. DINGELL. Thank you for your graceful kindness to me. I have

already inserted a statement into the record through the kindness

of the committee. I would like to welcome the chairman of the Federal Trade Commission here, Mr. Chairman. Thank you for being

with us.

We look forward to working with you. You are addressing a very

important matter, and I am pleased to see that the Federal Trade

Commission is proceeding vigorously to address a matter of real

concern and growing concern to Americans. I thank my colleague,

and I thank you, Mr. Chairman.

Ms. SCHAKOWSKY. Thank you. It is really the same areas that I

wanted to explore and just get some clarity on the dual criminality

issue, for example. You are seeking language that specifically

states that ‘‘a violation of Federal law is not required for the Commission to render assistance to a foreign law enforcement agency.’’

Is that right? Is that still the language that we are working with?

Mr. MURIS. I actually think that we could strike that specific language, because the additions that we have proposed in terms of

tying it to fraud and deception, or ‘‘substantially similar’’ conduct.

I think with those additions it will adequately protect us.

I think the language that you are talking about is unnecessary

and in some ways unnecessarily provocative. I would note just one

more thing, that these limits which I think are good and appropriate, are limits that the SEC, and the antitrust laws, and other

laws, don’t have. But I think that we can work with them, and I

don’t think that they are a problem.

Ms. SCHAKOWSKY. Good. I would certainly feel more comfortable

without those particular words, but nonetheless, are there examples of information where there has been no violation of U.S. law,

and maybe in another country they would consider—well, why was

it there in the first place? What are we thinking about in that instance?

Mr. MURIS. Sure. Here is the problem. The problem is that when

you first start an investigation, you don’t know precisely what the

issues are and what he violations are, and because there are so

many different laws that don’t exactly match up with ours.

18

We want the touchstone to be fraud and deception and ‘‘substantially similar.’’ For example, there is spam legislation, and there

will probably be spam legislation here, and besides this, more specific spam legislation overseas.

They might not precisely match up, even though they are essentially aimed at the same thing. The spam legislation might talk

about deceptive headers in one place, and it might talk about it

slightly differently in another place.

So even at the end of the day, where you might be going after

precisely the same conduct and it is illegal in both places, particularly at the beginning, it is not going to be exactly clear that they

match up precisely.

So we think that rather than have the broader discretion that

the SEC and other people have, if we say fraud and deception and

‘‘substantially similar’’ conduct, we think that addresses the concern and should avoid problems.

Ms. SCHAKOWSKY. Okay. You talked about the need for confidentiality. Give me an example of new authority in terms of confidentiality that this would offer.

Mr. MURIS. We have some interesting problems particularly

when we deal with foreign criminal authorities. Since we are not

a criminal authority, they would like certain assurances out of us.

For example, one thing that is related to your question is that

they often won’t cooperate with us and share information unless we

have something explicit that says that we can make criminal referrals, because that triggers their ability to share information with

us.

They also are concerned about giving us confidential information

if it would be subject to release under our Freedom of Information

Act. I can’t overstate that if we are going to deal with spam and

deal with cross-border fraud, we need cooperation from foreign authorities, and we need this legislation to get that.

We are the biggest economy in the world, and we are going to

benefit many times over in a world of reciprocity, because everyone

essentially wants to sell in the United States.

There are going to be many more people, and there are going to

be many more times when we benefit from the reciprocity than

other people benefit. The Canadian example is an excellent one.

Canadian consumers are not the ones who are primarily harmed.

It is American consumers.

But the Canadians do not want the reputation of being a haven

for cross-border fraud, and we are limited in our ability to cooperate with them right now. Under this legislation, it would be easier

for us to cooperate with them, and that is going to be mutually

beneficial. But it is American consumers who are the primary targets.

Ms. SCHAKOWSKY. And clearly that is the goal of this legislation,

but the FOIA exemption, for example, could it not give broad exemption to banks and other financial institutions to share confidential information about their customers at their discretion?

19

Mr. MURIS. Again, This is not open-ended fishing expeditions. We

need and we have rewritten the proposals from what we originally

proposed, and we have a few more suggestions to tie it directly to

the touchstone of fraud and deception.

On the delayed notice, I mentioned giving courts discretion is important. On the FOIA, I think that a law enforcement exception is

appropriate. It is well recognized. It has existed for years.

We just need to make sure that it applies in this particular context, because quite frankly when people were writing these laws in

terms of the Federal Trade Commission, we didn’t have a cross-border problem. We didn’t have an Internet.

What happened with the telemarketers is that in the United

States, with various States and various law enforcement officials,

we really cracked down on fraudulent telemarketing in the United

States.

Well, lo and behold a lot of them relocated to Canada, and when

people drafted these various laws, including FOIA, and including

the laws that deal with us, they didn’t have this in mind. So we

are really completely consistent with the original principles of law

enforcement exceptions for FOIA.

Ms. SCHAKOWSKY. Thank you.

Mr. STEARNS. I thank my colleague. The gentleman from Illinois.

Mr. SHIMKUS. Thank you, Mr. Chairman. Tim, again, it is good

to see you and have you here. We are wrestling here in the national arena with the Patriot Act, and this relationship between

how do you enforce the laws, and how do you get agencies to talk

to each other, and also international agencies, international law enforcement with our law enforcement.

And I think that is part of the challenge, and what is admissible,

and what is not admissible. So this is very similar to that whole

debate. A lot of the witnesses, or some of the witnesses in the next

panel will talk about civil liberty concerns with the bill.

And I am hoping that you can address some of those for me, and

explain what is the reasoning for the Freedom of Information Act

exemptions.

Mr. MURIS. Let me just talk at a broader level, and then come

down to specifics. We have a serious problem in dealing with fraud.

As a law enforcement agency, we need to be able to cooperate in

the same way that we cooperate with domestic agencies. We need

to be able to cooperate with our foreign counterparts, and that is

really all we are asking.

Whether it is a domestic setting, or a foreign setting, there are

obviously concerns about the powers of the government. I understand those concerns. I think that our track record as an agency

is excellent. We are a small agency with limited resources.

We have virtually no reputation for going on wild goose chases,

and we are going after people who are fraudsters. Essentially all

we are asking is to have the same kinds of abilities as many other

agencies have to cooperate and share information subject to that

information not becoming public.

20

The same cooperation that we have with domestic officials, we

want to have that with foreign officials. I think in general that

some of the concerns raised were legitimate, and in working with

the staffs, and working with the Senate, we have proposed lots of

changes to address those concerns, because indeed I think they are

legitimate.

Mr. SHIMKUS. And you know that one of our primary roles is to

have oversight of the Federal agencies that we have jurisdiction of.

Do you think or don’t you think—I mean, I do—that there probably

should be some reporting requirements to us so we can perform our

oversight role?

Mr. MURIS. Absolutely, and that was something that we didn’t

have in the original proposal. People have raised that, and I think

that is a good idea. It is going to take 3, 4, or 5 years to get some

experience. So I think it would be better to have an initial 3-year

reporting requirement, over 3-year cycles.

I think that will give us a real opportunity to gather experience

and to explain the experience. We are on a steep upward curve

here in cooperation internationally and learning how to cooperate

internationally.

We are trying emulate in some ways what has happened internationally on price fixing. Congress has given a lot of this authority, in terms of dealing with international cartels and price fixing.

In the last several years, there has been excellent enforcement,

and some important cases pursued. We are trying to emulate that

experience with cross-border fraud. We are several years behind,

but this legislation would be extremely helpful.

Mr. SHIMKUS. Thank you, Mr. Chairman, and I yield back my

time.

Mr. STEARNS. Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman. Mr. Chairman, I ask

that my statement be made part of the record.

Mr. STEARNS. By unanimous consent, so ordered.

Mr. STUPAK. Thank you.

Mr. Chairman, Federal Trade Commission records show that

about 46 percent of the complaints of cross-border fraud originate

from Canada, and so I am trying to ask some questions along those

lines on this cross-border fraud.

Some of the members have brought it up earlier, but what protections would there be in place, and I know that we have some

proposals from the FTC there to combat this cross-border fraud,

but what protections would be in place to limit the disclosure of

private consumer information to foreign governments, and what

protections will exist to limit the foreign government’s use of that

information?

Mr. MURIS. First of all, let me just describe what we do domestically. I think we have an excellent track record. We cooperate with

other Federal agencies, with State Attorney’s General, with local

law enforcement authorities, obviously with U.S. Attorneys.

What we are proposing is to be able to engage in the same sorts

of cooperation. The most important safeguards are in terms of the

touchstone; that we are dealing with fraud and deception. There

are obviously a lot of legal requirements that are imposed upon

21

government officials, in terms of ethical and other requirements

about what they can do.

There is a concern that we not be used to investigate conduct

that is legal under U.S. law. I think that is a legitimate concern.

I think various changes in the statute, in the draft since it has

been proposed, would address that.

Including that we would have a lot of discretion. In terms of delayed notification, which is very important to us because we need

to get information about people who we think are engaged in spam

or other fraud, and we don’t want them to be notified.

We think that additional safeguards like discretion on the part

of the judge would be useful. So I can’t over-emphasize enough that

we already are engaged in enormous cooperation with law enforcement agencies and have been for a long time within the United

States.

Because the problem is migrating, particularly to Canada as you

mentioned, and because these people are targeting U.S. consumers,

we are asking for the same kinds of ability to cooperate with the

same kind of protection with people outside of the United States.

Mr. STUPAK. Well, let me ask this question, and is the FTC then

really the agency that should be handling this? Do you work with

the State Department since we have sort of like foreign countries

involved?

You mentioned that domestically that you work with State Attorney Generals, like the State Attorney General of Michigan, and

since we border Canada, should they be involved in this? Do we

have the right agency here in doing this?

Mr. MURIS. Well, we are the primary agency in the Federal Government that deals with consumer fraud. Now, quite frankly, I am

happy to get more agencies involved. We are hoping to get more

criminal enforcement. We put an emphasis on criminal enforcement.

We have several U.S. Attorneys working with us on investigations of spam, for example. I think you need a Federal coordination

agency with enforcement authority, and that’s us. Obviously in

terms of the State of Michigan, we work closely with that State,

and with other States that border Canada.

They are obviously quite interested in this. Of course, the telemarketers are telemarketing all over the United States. Just in

terms of telemarketing, for example, since the telemarketing sales

rule went into effect about 8 years ago between the States and the

Federal Trade Commission, we have brought something like over

1000 cases.

We work closely together and the coordination function is important, and that is what we do.

Mr. STUPAK. Should there be pressure from the State Department to put more—well, I hate to use the word pressure, but to at

least discuss it with Canada? It sounds like if we can drive them

out of this country, and they just go north to Canada, whatever

pressures we use to get them out of our borders and send them

elsewhere, couldn’t those same pressures be used in Canada, and

use a cooperative approach to try to drive them out?

22

Mr. MURIS. Well, in fact that is what we are doing, and that is

why we need this law, because we are hindered—the kind of cooperation that we engage in with the State of Michigan and with

the U.S. Attorneys, we can’t do all of that with the Canadian officials.

The Canadians—and again to their credit, these are companies

targeting, or mostly targeting, U.S. consumers, and the Canadians

do not want to become a haven or known as a country where they

have these people attacking the United States.

Mr. STUPAK. Right.

Mr. MURIS. They are working with us and this legislation will

allow us better to be able to work with them. If we are investigating the same target, we can engage in the kind of information

sharing that we can with the Attorney General of Michigan.

Mr. STUPAK. Well, a lot of telecommunications companies, especially telemarketers, are in India. If we pass this legislation, would

it help you, whether it is Canada, India, or wherever it may be?

Mr. MURIS. Absolutely. Unfortunately the problem is growing

and it is only going to get worse. The problem of the Internet is

a problem. The Internet has had tremendous benefits, but it has

also opened up the potential to do fraud over the Internet.

If we are going to seriously attack fraud, we need legislation to

allow us to deal with a cross-border problem, because quite frankly

more and more of it is becoming cross-border.

Mr. STUPAK. Well, maybe I should be talking to you about my

drug law, and I am trying to get the FDA to crack down on these

Internet sales, and it has been 5 years, and they won’t even give

us a yes or a no on my legislation. Maybe I ought to come to the

FTC. Thanks.

Mr. MURIS. Thank you.

Mr. STEARNS. I thank the gentleman. Mr. Issa, the gentleman

from California.

Mr. ISSA. Thank you, Mr. Chairman. Commissioner, I’ve only got

a couple of questions, and perhaps as time goes on some of the others will be answered, and so I won’t ask too many. But if I understand correctly, your proposal would result in a year of delayed notification.

Mr. MURIS. Yes, but again, I think we should change the language from where the judge has to do it, to where it is in the

judge’s discretion. That is a legitimate point that people have

made, and let me just give you the context again.

For example, I mentioned the ISPs and spam. We go to some

ISPs right now. We know it is spam, and they know it is spam, and

they feel that they have to try to contact the target of our investigation. That doesn’t make any sense to me, but they read certain

laws that way, and we are asking that the law be changed so that

we can get information from them without scaring our target away.

We try to get money back for consumers. Well, once the target

gets a hint of what we are doing, the money, not surprisingly, disappears.

23

Mr. ISSA. And I appreciate that. I guess being a Californian and

being aware of the dot.com year which started off as one quarter,

and then become 1 month, and some would say became a week, I

am a little incredulous that we would allow spamming to go on for

a year.

It seems like an inordinately long period of time in what is an

almost instantaneous business, and one in which movement and reorganization, et cetera, would go on. Would you conceivably allow

for a much shorter period of time, before you would have to go back

and renew on, let’s say, a monthly basis with a Federal Judge? I

am very concerned that saying, look, we just sort of have this 1

year guideline, is about 12 times longer than I would think would

be necessary.

Mr. MURIS. Here is the problem. First of all, the renewal that we

are talking about would be in essence in 90 day increments. The

problem is we can’t find these people right now, even domestically,

and finding them—the spammers may move on, but it is often the

same spammers and the same sellers.

We have to issue—we call them CIDs, but they are subpoenas essentially. We have to issue 10 or 15 subpoenas sometimes just to

track somebody at all. You can’t track them directly over the Internet because of the anonymity. You have to follow the money.

So even though they have moved on in real time, if we are going

to deal with these people, our investigations have to take a long

time. Internationally, unfortunately, a year is not very long. Obviously if our experience is that—one of the reasons that the report

function would be so useful would be that we would be able to

track some of this.

But I think that 90 day increments is not long at all. I am a Californian myself. I grew up in San Diego, and we originally——

Mr. ISSA. Hi, neighbor.

Mr. MURIS. We recently brought a case involving so-called

‘‘phishing.’’ It involved a juvenile in California who was spaming

and claiming that he was—I think it was AOL, and he stole hundreds of identities of people, and he would charge to their credit

cards. It took us a long time to track that down.

Mr. ISSA. Was he still a juvenile when you were done?

Mr. MURIS. Yes.

Mr. ISSA. Too bad. And following a slightly different path, what

are the foreign government entities with which you would share

and what would be the control on personal information?

Would you be willing to be specifically limited in sharing to that

same judge that issued the subpoena? In other words, not all countries, all entities, are equally trustworthy. We could specify off the

top of our heads on those Canadian entities that are our counterparts, and the protections are somewhat similar.

But I have no idea who you share with in India and what the

impact would be. Is that something that you envision specific oversight by the subpoena power on or some other agency?

Mr. MURIS. There are a couple of things there. The original proposal that we made was probably too broad, and we in working

with people have cut it back. It is clear that we need to have discretion in how we are sharing, and we need to have guidelines.

24

Again those are changes that we have made as people have raised

these legitimate concerns.

The guidelines that now are drafted, and which give us discretion, tell us the things that we need to be worried about. We need

to be worried about consumer injury. We need to be worried about

that we are dealing with fraud and deception, or ‘‘substantially

similar’’ conduct.

I think that those guidelines are tighter than they were originally and I think they are appropriate. I think obviously that we

need to have a little experience, and then Congress could evaluate

to see if they want to broaden them, or tighten them.

Mr. ISSA. Thank you. Thank you, Mr. Chairman, for holding this

hearing, and obviously this is an important piece of legislation, and

I appreciate you making this available to us.

Mr. STEARNS. I thank the gentleman. The gentleman from Texas,

Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman, and like my colleagues,

I am glad that our subcommittee is holding this hearing. When I

was first approached on the International Consumer Protection

Act, I looked at it from the spam perspective, but I know that it

is much bigger than that, simply because my colleague on the committee, Congressman Wilson and I, have been working for three

sessions to pass anti-spam legislation. And we are working in our

committee now to see if we can do it, and to empower the FTC to

be able to be the enforcement agency.

And I know the concern that I have is that a lot of our States

have passed very tough laws, but again spam comes across State

boundaries as well as international boundaries, and my argument

is that we need to do something here on spam, and empower the

FTC. And again this International Consumer Protection Act will

give you that ability to deal with our trading partners, whether it

be Canada, or India as Mr. Issa said, or other countries that we

work with on lots of other ventures, and of course we can do it on

spam also.

You indicated that the legislation was needed to improve the

international cooperation necessary to combat the cross-border

fraud. Do your counterparts in other countries have this ability? I

know that you answered that a little bit about the criminality of

it.

But do other countries have the ability—and particularly in consumer issues, like spam, and unsolicited faxes, and things like

that—to cooperate on an international level in the same or similar

ways that you are seeking here?

Mr. MURIS. Well, that is an excellent question, and we are on a—

what I would hope is a very steep increase in international cooperation, which will really be facilitated by the passage of this legislation.

We also have the various agreements with other countries, and

the OECD recommendation which I mentioned, which was passed.

It could not have been done without the unanimous agreement of

the countries, but guidelines on cross-border fraud will I think encourage much greater cooperation.

25

I mentioned in a comment or a question from the Chairman that

the European Union is moving more in this direction. I think the

concern over spam is undoubtedly driving a lot of this, and I am

hoping that we can emulate the cooperation that has just occurred

in the last really 5 years on going after price fixing, and the antitrust problem of price fixing.

We can do the same thing with excellent international cooperation on fraud. Quite frankly passing this legislation will be a tremendous signal to our trading partners and to the other countries

around the world that we are serious about this problem.

We have organized to a significant extent law enforcement agencies in the United States over the last couple of decades to attack

the fraud problem. It is a problem that will always be with us, like

theft or other problems, but we need to deal with it. We hope to

be able to engage in the same kind of organization internationally.

Mr. GREEN. Mr. Chairman, I don’t have any other questions, but

I thank you, and hopefully we will be able to do a one-two punch

not only in this legislation, but also the strongest anti-spam legislation that Congress can pass. Thank you, Mr. Chairman.

Mr. STEARNS. I thank the gentleman. Mr. Terry.

Mr. TERRY. Mr. Chairman, I only have one short question. You

had mentioned that you felt that it was a legitimate concern that

the conduct needs to be illegal in the United States for you to become involved.

I agree with that, but if the conduct would be illegal in the

United States, what are the barriers to cooperation with a foreign

government like Canada? I guess what I am saying is what is the

need for this type of a bill if the conduct is illegal here?

Mr. MURIS. Well, first of all, what I have said is in terms of the

touchstone that we would like are fraud or deception, or ‘‘substantially similar’’ conduct, because the agencies overseas and countries

overseas don’t line up, even if they are going after the same practices, they don’t necessarily line up with laws that read exactly like

ours.

The problem is, and Canada is a perfect illustration, the telemarketers have set themselves up—such as many of the fraudulent

telemarketers in Canada—to target U.S. consumers. We cannot cooperate with the Canadian authorities the same way that we can

cooperate with domestic authorities. That is what we are asking,

to be able to work with——

Mr. TERRY. What specifically though is preventing you from

being able to cooperate? What in our laws, rules, regulations, or

whatever, prevent you from cooperating, especially if it is illegal

conduct here?

Mr. MURIS. There is a whole series of things that we cannot do.

We cannot guarantee confidentiality of information. We can’t share

information outside the United States.

So both ways we have a problem. We have a problem getting foreign judgments enforced, which part of this legislation would address. There are courts that read our laws in ways that we think

this legislation would fix, so that they would enforce a foreign judgment.

26

I mean, the simplest problems that I alluded to a second ago is

that we can’t share the information. There is a Canadian telemarketer, for example, targeting the United States. We can’t share

information we found through one of our subpoenas with the Canadian authorities.

If the Canadian authority makes a request to us, we can’t investigate and help that Canadian authority, and give him the information back, even though the Canadian authority is trying to track

down someone who is targeting U.S. consumers. The law prohibits

us from taking all those steps that I have just mentioned.

Mr. TERRY. And that’s where my confusion comes in, because we

are all aware of at least on the criminal side that there is cooperation in investigations with other countries, and it does not seem to

me that they are coming before us.

Maybe in Congress’ past, they have given that type of specific authorization. Whereas, the difference that you are—your actions are

only civil and not criminal.

Mr. MURIS. That is the point precisely. As Congress has given

this kind of authority to all sorts of agencies, as to both civil and

criminal, and there are these multilateral assistance treaties,

MLATS, which Congress has passed authority for on the criminal

side.

There are the SEC, and the CFTC, and the banking agencies,

have a lot of the authority that we are asking for, and some of it

going back many years. We don’t have it, and that is exactly what

we are asking for.

Mr. TERRY. Well, to further my purpose here, when you want to

use this proposed new law, and let’s say it is in effect, will this be

raised by the way of Canada coming to us, or Mexico, or a foreign

government, or is it usually initiated because of a complaint filed

by an American citizen that they have been defrauded, and then

you follow up and investigate?

Mr. MURIS. Certainly if we have a world of mutual cooperation,

we will benefit many more times than other countries, because we

have the biggest economy. People want to sell. The legitimate companies want to sell to us and the fraudsters want to sell to us, because our economy is so big, and our people are so rich.

So in a world of increased reciprocal obligations and reciprocal

cooperation, we will be the winner. What the Canadians are doing

is quite commendable. You know, Canadian consumers are not primarily the victims. It is Americans. But they don’t want to be a

haven for cross-border fraud.

That is commendable, and what we are asking for is the ability

to be able to cooperate with them in a more effective way that will

protect American consumers.

Ms. SCHAKOWSKY. If the gentleman will yield.

Mr. TERRY. Yes.

Ms. SCHAKOWSKY. My understanding though is that this is because consumer complaints from the United States have ended up

sometimes at a stone wall because we don’t have the authority. But

is that not true that this is really generated because we want to

be able to protect our consumers from whom we are hearing about

these problems?

27

Mr. TERRY. Absolutely. And taking back my time. That is exactly

the point that I want to make, is that I think the philosophy behind this bill should be the protection of American consumers, as

opposed to simply an agreement of cooperation when another country contacts us.

Both are commendable, but certainly my priority would be the

protection of U.S. consumers.

Mr. MURIS. I agree with that and I understand that, but what

I am saying is that because we are the biggest economy, and because we are such an attractive target, in a world where countries

agree to cooperate with each other, it is our consumers who are

going to be benefited many more times than others.

Mr. STEARNS. I thank the gentleman. The gentleman from Idaho,

Mr. Otter.

Mr. OTTER. Thank you, Mr. Chairman. I have a written statement that I would ask for unanimous consent to have entered in

the record.

Mr. STEARNS. By unanimous consent, it is so ordered.

Mr. OTTER. Mr. Chairman, and ranking member, I thank you

very much for this important hearing. I have some concerns about

it, and most of those concerns I think have already been voiced by

other folks.

But in the draft legislation, and I want to refer you to Section

8, confidentiality, delayed notice of process, and specifically Section

21A, confidentiality and delayed notice of compulsory process for

certain third-parties, pages 15 and 16.

My question is that I am concerned about the current language

in relationship to the adverse testing result, or the results of testing. Could you explain why the FTC thinks it is necessary to have

the power to determine the possibility of adverse results without

first consulting with the appropriate judge, and presenting and

seeking such latitude as you are asking for?

Mr. MURIS. My understanding is that generally we would have

to go to a judge, with the exceptions that are already in the statute, and so I don’t think we are asking for unilateral——

Mr. OTTER. Excuse me, but the exceptions that are in the statute

relative to fraud, foreign fraud?

Mr. MURIS. Well, it is the exceptions that are in the Electronic

Consumer Protection Act statute. I don’t think they relate specifically to foreign fraud. They relate generally to law enforcement. I

don’t think that we are asking for any new or unique unilateral

powers, or ex parte powers.

Mr. OTTER. Prior to the passage in October of 2001, and what we

refer to affectionately, and sometimes not so affectionately, as the

Patriot Act, law enforcement had some of these abilities, and referring primarily to organized crime, and drug trafficking, and pornography.

But even they had only a 48-hour waive time, and then they had

to go back to a judge, and with compelling evidence, get the judge

to agree to the continuation of surveillance, or wire tapping, or

whatever it was.

28

And so I did not know that this also—I remember it being pornography, RICO, and drugs. I don’t remember it referring to fraud.

Mr. MURIS. Well, I think that there is confusion here. We don’t

do criminal cases, and we don’t do search and seizures, and we

don’t detain suspects. We are talking about delayed notification,

like when we go to a third-party to get information about a

spammer or someone engaged in fraud. We are talking about confidentiality, preventing the target from being notified.

I mean, some of the concerns, and I think there are obviously legitimate concerns in the criminal context. We don’t have those powers. We are obviously not talking about some of the abilities, the

extraordinary abilities that exist in the criminal context.

Mr. OTTER. Who would then prosecute these cases?

Mr. MURIS. We prosecute cases civilly, and we are trying to get

criminal authorities more involved. Overseas, sometimes these

cases are prosecuted criminally. I personally think more fraud

cases should be tried criminally.

It is very hard quite frankly to get criminal prosecutors to do

that. We have powers, and we are very effective, because we can

get money back for consumers when we can find the money. Obviously if the parties were notified, the money would disappear. So

that is one of the reasons that delayed notification is important to

us.

Mr. OTTER. Well, I am not totally satisfied with that answer, but

I want to go on, because my time is going on, and this question

that I have refers to Section 5, Powers of the Commission.

And I believe that the way that this draft—if I had the latest

draft—as it is currently written, it allows the FTC to investigate

U.S. citizens because they may have broken a foreign law. Can you

help me out with the sovereignty of a U.S. citizen over a foreign

law?

Mr. MURIS. We will get to you a whole series of changes that we

think would address some of the concerns that you have. Do you

have the July 15 draft? We think that there are a lot of changes

that could be made to address some of these concerns, and we

would be glad to sit down——

Mr. OTTER. I do have the July 15 draft.

Mr. MURIS. We would be happy to sit down and walk you

through those. A concern has been raised, and we understand the

concern. We think we need to make changes to address it that we

would be investigating people for conduct that is not illegal under

U.S. law.

We want the touchstone of this statute to be narrower and to be

fraud deception, or ‘‘substantially similar’’ conduct. So I think the

concern that underlies your question is a legitimate one, and we

think there are appropriate limitations that should be put in the

statute.

Indeed, we can live with these limitations, because we think they

are appropriate. These are limitations that are narrower than the

limitations right now that the FTC, and the CFTC, the banking

agencies, and others have in dealing with these issues.

29

Mr. OTTER. Thank you, Mr. Chairman.

Mr. STEARNS. I thank the gentleman, and we thank the chairman for his being a witness and his attendance, and his staff for

coming, and we will move to the second panel.

The second panel is Mr. Mark MacCarthy, senior vice president,

public policy, VISA, USA; Mr. Mark Rotenberg, executive director,

Electronic Privacy Information Center, (EPIC); and the third is Mr.

Ari Schwartz, associate director, Center for Democracy and Technology. Let me welcome the three of you, and we welcome the opening statements of the individuals. Mr. MacCarthy, we will let you

start here.

STATEMENTS OF MARK MACCARTHY, SENIOR VICE PRESIDENT, PUBLIC POLICY, VISA, USA; MARC ROTENBERG, EXECUTIVE DIRECTOR, ELECTRONIC PRIVACY INFORMATION

CENTER; AND ARI SCHWARTZ, ASSOCIATE DIRECTOR, CENTER FOR DEMOCRACY AND TECHNOLOGY

Mr. MACCARTHY. Thank you, Mr. Chairman, and Ranking Member Schakowsky. My name is Mark MacCarthy, and I am the senior vice president for public policy at VISA USA. Thank you for the

invitation to appear here today.

We appreciate the opportunity to talk about the important issues

raised by the International Consumer Protection Act of 2003. I

would like to thank the committee for focusing on this important

issue.

Fraudulent activities should not be beyond the scope of law enforcement efforts simply because the fraudulent actor and the victim are located in different jurisdictions. Enforcement agencies in

different countries should be able to cooperate and to share information in order to address cross-border fraud.

I would also like to thank Chairman Muris and the other members of the Federal Trade Commission, especially Commissioner

Mozelle Thompson, for their efforts in this area. Commissioner

Thompson especially worked with the Organization for Economic

Cooperation and Development to draft the recommendations that

Chairman Muris referred to, for governments to cooperate in this

area.

In February the FTC held a workshop, a public workshop, where

businesses and consumer groups, and law enforcement officials all

shared the view that there needs to be better cooperation between

the FTC and its counterpart agencies in order to combat cross-border fraud.

The legislation before you generally accomplishes that objective.

Mr. Chairman, the VISA payment system is the largest consumer

payment system in the world. There are more than 1 billion VISA

branded cards in the world, and they are accepted at millions of locations in more than 150 countries.

The VISA card transactions volume now exceeds $1 trillion annually. The development of the electronic marketplace has been a

wonderful thing, and VISA has been proud to participate in the development of that new market, but it has created new opportunities

for fraud.

30

An Internet merchant can establish a website in one country,

and provide products and services to customers in another country,

and perhaps engage in fraudulent and deceptive conduct, where

they know that they will not be accountable in the country where

they are selling the products.

VISA has programs in place to protect consumers from fraud.

This kind of fraud and other kinds of fraud. We provide a zero liability policy for the unauthorized use of VISA cards. This zero liability policy goes beyond the protections in the current law.

If a customer has not made a particular transaction, VISA will

ensure that the customer is not responsible for that fraudulent

charge. We have other anti-fraud programs. Verified by VISA allows cardholders to authenticate their identities on-line. Our cardholder information security program has a set of data security requirements for Internet merchants and others who share, and hold

VISA cardholder data.

In addition, VISA’s sophisticated global networks detect fraud at

its earliest stages by analyzing cardholder accounts for unusual

spending patterns. A brochure describing these various programs is

attached to my written testimony and available on the table for

those of you who want to pursue that.

But as a testament to VISA’s ongoing fraud prevention efforts,

VISA’s general fraud level has declined since the early 1980’s.

Fraud within the VISA system is now at an all-time low of just 7

cents for every $100 of transactions.

We have some information on the extent of the cross-border

fraud which tends to confirm the information that Chairman Muris

shared with you. For U.S. cardholders who are victims of fraud, approximately 80 percent of the problem occurs within the borders of

the United States. That means that 20 percent comes from abroad.

But our risk management staff feels that increasingly fraudulent

merchants are operating off-shore by working with financial institutions that are located outside of the United States. This makes

the FTC’s cross-border fraud initiative even more urgent.

VISA tracks the level of fraud, and the number of high-risk merchants through a especially designed high-risk merchant program.

This program also allows us to discipline merchants who have excessively high charge backs.

When fraudulent activity does occur, VISA works with law enforcement, including with local investigators, with the FTC, with

the FBI, with the Secret Service, with Treasury officials and with

other law enforcement personnel.

I appreciate the opportunity to appear before you today. We

think that our systems provide a comfortable and secure way for

customers to shop on-line. Combating fraud will continue to be a

major priority for VISA and its member institutions, and I would

be happy to answer any questions that you might have on what

VISA does or the legislation before you.

[The prepared statement of Mark MacCarthy follows:]

31

PREPARED STATEMENT OF MARK MACCARTHY ON BEHALF OF VISA U.S.A. INC.

Chairman Stearns, Ranking Member Schakowsky and the Members of the Subcommittee, my name is Mark MacCarthy. I am Senior Vice President for Public Policy for Visa U.S.A. Inc. Thank you for the invitation to participate in this hearing.

Visa appreciates the opportunity to address the important issues raised by the proposed H.R.lll, the ‘‘International Consumer Protection Act of 2003,’’ which would

increase the authority of the Federal Trade Commission (‘‘FTC’’) to address crossborder fraud and deception. I also would like to thank the Subcommittee for focusing on this important issue of cross-border fraud. Fraudulent activity should not be

beyond the scope of enforcement efforts simply because the fraudulent actor and the

victim are located in different jurisdictions. Enforcement agencies in different countries should be able to cooperate and share information in order to address crossborder fraud.

Finally, I would like to thank Chairman Muris and the other members of the

FTC, especially Commissioner Thompson, for their efforts in this area. Chairman

Muris focused on this issue in November of last year. Commissioner Thompson

worked with the Organisation for Economic Co-operation and Development to draft

recommendations for governments to cooperate in this area and to pass appropriate

legislation. In February the FTC held a public workshop where businesses, consumer groups, and law enforcement officials shared the view that there needs to be

better cooperation between the FTC and its counterpart agencies to combat crossborder fraud. The legislation before you today generally accomplishes that objective.

The Visa payment system, of which Visa U.S.A. is a part, is the largest consumer

payment system, and the leading consumer e-commerce payment system, in the

world, with more volume than all other major payment cards combined. There are

more than one billion Visa-branded cards, and they are accepted at millions of locations in more than 150 countries. Visa card transaction volume now exceeds one trillion dollars annually. Visa plays a pivotal role in advancing new payment products

and technologies to benefit its 21,000 member financial institutions and their hundreds of millions of cardholders worldwide.

Electronic payments are an important part of electronic commerce and cross-border transactions. Visa believes that it has responded and continues to respond effectively to the ever-changing challenges posed by the increasingly global nature of

consumer transactions. In this regard, Visa has a keen interest in fraud prevention

and combating emerging fraud techniques.

Although electronic commerce is a large and growing channel for the sale of goods

and services to consumers, as recognized in the proposed International Consumer

Protection Act of 2003, the development of the electronic marketplace also has created new opportunities for those engaged in fraud and deception. One such opportunity lies in cross-border operations. An Internet merchant can establish a Web

site that can be accessed from anywhere in the world and thereby offer and provide

products or services to customers without fear that it will be held accountable under

the laws of the country where the customer is located.

Visa recognized early on that the Internet and other advancements in communication technologies would result in heightened concern over the potential for fraud.

Visa’s operating rules provide zero liability for the unauthorized use of Visa credit

cards and debit cards, including where the unauthorized use results from fraud. In

this respect, Visa rules go beyond existing consumer protections under federal law.

Part of zero liability is a global merchant chargeback mechanism. If there is a problem with a merchant and a customer has not made a particular transaction that

a merchant has attempted to put through the Visa payment system, the Visa

chargeback system will ensure that the customer is not responsible for the fraudulent charge.

As the leading consumer electronic commerce payment system in the world, Visa

considers it a top priority to remain a leader in the development of technology, products, and services to protect consumers from fraud. Visa currently has in place

many security measures to prevent fraud. For example, one of Visa’s fraud control

programs, Visa’s Secure Commerce Program, includes Verified by Visa. Verified by

Visa is a service that allows cardholders to authenticate their identities while shopping online. Cardholders using Verified by Visa add a personal password of their

choosing to their existing Visa cards. When cardholders get to the ‘‘checkout line’’

of a participating online store, they enter their personal password in a special

Verified by Visa window. The password links legitimate cardholders to their account

information. This verification process protects consumers’ cards from unauthorized

use and provides greater control over when and where cards are used. Visa’s Secure

Commerce Program also includes the Cardholder Information Security Program,

32

1See, e.g., Visa’s brochure ‘‘Protecting Consumers From Identity Theft.’’

which is a set of data security requirements for merchants, gateways, and Internet

Service Providers, and any other entity that holds cardholder data.

In addition, Visa’s sophisticated global networks are designed to detect fraud at

its earliest stages by analyzing cardholder accounts for unusual spending patterns

and other confirmed risk characteristics to identify likely fraudulent activity. Once

potential fraudulent activity is identified, Visa’s network immediately contacts the

cardholder’s issuing financial institution, which will then notify the cardholder of

the abnormal activity to ascertain whether the transactions were authorized. Visa

also maintains the Exception File, a worldwide database of account numbers of lost/

stolen cards or other cards that issuers have designated for confiscation, referral to

issuers, or other special handling. All transactions routed through the Visa payment

system have their account numbers checked against the Exception File.

Additionally, Visa now offers Personal Identity Theft Coverage as a new optional

benefit for Visa cardholders, which provides eligible cardholders with coverage ranging from $1,000 to $15,000 in reimbursement for lost wages, legal fees, and other

costs associated with recovering from identity theft.

Visa’s fraud programs extend beyond the transaction level to educate consumers

to better understand and prevent fraudulent activity. Visa provides consumer-oriented information about its fraud prevention programs on its Web site and provides

security guidance for consumers focused on e-commerce risks. Visa also helps consumers better understand and prevent fraud through preparation and dissemination

of materials on fraud prevention topics, such as identity theft prevention.1 Visa also

has partnered with the consumer network Call for Action, to provide free, confidential counseling for victims of identity theft.

In short, Visa maintains ever-evolving practices to respond to the latest techniques of those who attempt to commit fraud. Visa strongly believes that its practices should enable consumers to feel comfortable using their Visa payment cards

both domestically and abroad. Indeed, as a testament to Visa’s ongoing fraud prevention efforts, Visa’s general fraud level has declined since the early 1980’s, with

cross-border fraud levels also remaining low despite the emergence of e-commerce.

Fraud within the Visa system is at an all-time low of just seven cents per $100

transacted. For U.S. banks and U.S. cardholders who are victims of fraud, approximately 80% of the problem activity occurs within the U.S. borders. Visa maintains

fraud offices throughout the world to handle issues and administer fraud prevention

programs. In addition to protecting the consumer through zero liability, Visa tracks

the level of fraud and the number of high-risk merchants through a specially designed high-risk merchant program.

Finally, when fraudulent activity does occur, Visa works with law enforcement by

notifying issuers of compromised account numbers and requesting that the issuers

contact the investigating agency. Visa also works closely with local investigators,

the FBI, Secret Service, Treasury Officials, and other law enforcement personnel on

a wide range of fraud issues.

Visa appreciates the opportunity to appear before you today. We believe our payment system creates a comfortable and secure environment for consumers engaged

in both domestic and international transactions. Combating fraud will continue as

a top priority of Visa and its member financial institutions.

I would be happy to answer any questions that you may have.

Mr. STEARNS. I thank the gentleman. Mr. Rotenberg, welcome.

STATEMENT OF MARC ROTENBERG

Mr. ROTENBERG. Thank you, Mr. Chairman, and members of the

committee. I appreciate the opportunity to be with you this morning. The Electronic Privacy Information Center is a public interest

research group here in Washington. We work with a wide range of

consumer and civil liberties organizations both in the United States

and around the world, and I would like to begin by commending

you, Mr. Chairman, and the other members of the committee, and

the FTC, for the work on this act.

We think that this is a good proposal and an important proposal,

and one that responds to growing concerns obviously that American

consumers have about fraud and theft on the Internet.

33

At the same time in expressing our support for this proposal, I

need to emphasize ongoing civil liberties concerns that we have

about his legislation. Now, I testified in the Senate this summer on

the companion measure, and I see some changes have been made,

and I think that this is a step in the right direction.

I was also pleased to hear the Chairman say this morning that

he thought that provision regarding creating authority to prosecute

people in the United States, where it would not be illegal under

U.S. law, and it could be removed, that is a very important change,

and we were pleased to hear him say that.

We were also pleased to hear him say that he would favor reporting requirements for the use of this new authority, and we think

that is important as well to evaluate how the FTC uses its powers.

But nonetheless, we have serious concerns regarding the impact

of this bill on the Freedom of Information Act, and also on privacy

safeguards that Americans currently have, and I would like to devote my time if I could to those two issues at this point.

I need to take just a moment to try to explain the structure of

the Freedom of Information Act, because I think there may be

some confusion in this area. The law as passed by Congress and

enforced by the courts recognizes a presumption and the openness

of records held by government agencies, and this is very important

for our open form of government.

It allows the public to understand the activities of its government

and to actively participate in decisionmaking. That that presumption is limited by a series of exemptions, and there are nine exemptions covering a wide range of activities, from national security

matters, and enforcement matters, to matters involving the protection of personal privacy.

And invariably what happens when people seek information from

a Federal agency, if the agency believes that it needs to protect the

information because it falls within one of these exemptions, it will

apply the exemption, and withhold the information, and then the

two parties may go to court and argue about the scope of the exemption.

In fact, my organization, because it has been involved in many

FOIA suits with many Federal agencies, and sometimes we get the

information, and sometimes we don’t. But I think we all respect the

process, even the agencies do in applying their exemptions.

We have even had the experience with the Federal Trade Commission where we pursued a FOIA request to try to get access to

the complaints that the Commission was receiving from consumers

about privacy matters, because we wanted to see how well the

Commission was responding to the concerns of Americans.

Some of the information was disclosed and some of it wasn’t.

That is not unusual. The key point is that this bill proposes to create a new statutory exemption, in addition to the exemptions that

already exist, and I think that this is a mistake.

I think the FTC can say to foreign governments that it wants to

work with that we currently have the ability in law to protect the

confidentiality of information in ongoing criminal investigations.

We currently have the ability in law to protect confidential sources,

to protect business information, and privacy information.

34

We do not think it is necessary under our law to create a new

exemption to be able to cooperate with you in these international

investigations. So we feel quite strongly that it would not be necessary to create a new FOIA exemption as this Act proposes to do.

Now, I would also like to say a few words about the impact of

the bill on privacy safeguards, and this is important as well. We

give the Federal Government an enormous amount of authority to

pursue criminal investigations, but we do so in a way to enable

oversight and accountability, and frankly to make sure that the

government does its job as it should.

One of the core principles in our Fourth Amendment that enables

the search by government of a person’s private possessions is notice

to the target of an investigation, and you will see it on the t.v.

shows and you will read it in the cases, but in our country the police simply cannot go into a home without providing notice to the

homeowner that a police officer is about to enter.

And we carry that principle across many, many different areas

of criminal investigations. Now, there are a few significant exceptions. As one of the members pointed out earlier, in the wiretap

area, for example, we create a 48 hour period of time that allows

for delayed notification, so that someone who is the target of an investigation and thinks that they may be subject to an intercept is

not able to allude capture and detection.

And that is recognized in law, but a proposal for a 90 day delayed notification, or a 1-year notification, is really quite extraordinary, and I don’t see what the basis would be for such an extensive notification.

I have other suggestions, which I would be glad to provide to the

committee. I would just like to say finally, Mr. Chairman, I think

that it is very important with legislation like this to understand

not only does it impact the rights of Americans, but we also send

a very powerful message to other governments that we work with

about how criminal investigations are to be undertaken.

And I think that the United States has shown that open government and privacy protection are not incompatible with effective law

enforcement.

[The prepared statement of Marc Rotenberg follows:]

35

36

37

38

39

40

41

Mr. STEARNS. I thank the gentlemen.

Mr. Schwartz.

STATEMENT OF ARI SCHWARTZ

Mr. SCHWARTZ. Thank you, Mr. Chairman, and members of the

subcommittee. Thank you for inviting the Center for Democracy

and Technology to testify here today. As you suggested earlier, Mr.

Chairman, the International Consumer Protection Act will mark a

substantial expansion of the scope of the powers of the Federal

Trade Commission.

CDT has been supportive of the work of the Federal Trade Commission over the past nine years, as it has helped consumers combat fraudulent and deceptive practices in a network economy, and

especially on the internet.

As the number of people on-line continues to grow, e-commerce

has become global in nature. Not surprisingly, global consumer

42

fraud has followed. As the FTC works to combat identity theft,

internet fraud, to curb deceptive spam as we have been talking

about earlier, and to protect privacy on-line, there is no question

that the FTC needs authority to work with its international counterparts.

While the CDT is supportive of the goals of the Act and Chairman Muris’ desire to work internationally, we believe that it is necessary to ensure proper safeguards are also in place to protect privacy and due process rights of individuals, while protecting consumers at the same time.

For the most part a proper balance has been struck in the act.

However, we still remain concerned with two provisions in particular. First, we agree with the concerns that Mr. Rotenberg

raised about delayed notice, and we do not think that the delayed

notice provision as it stands adequately protects individuals.

Historically under the Fourth Amendment of the Constitution,

individuals are given direct notice if the government wants their

information in an investigation. If the government wants a record

from my home, they have to knock on my door and serve me with

a warrant.

As more information is held by third-parties—insurance information, credit cards, purchases, et cetera—government agencies have

pushed to get this information without warning the subject of the

investigation.

As more and more information moves to the network world, and

thus, more information is held by third-parties, privacy and due

process concerns are raised by this activity. In the past, subjects

could move to stop mere fishing expeditions when they receive notice, and under this bill there would be little pushback on an FTC

that exceeded jurisdictions in these cases.

CDT suggests that the delayed notice provision be removed entirely, but that at the very least it should be amended to remove

the most vague of the acceptable reasons or the adverse results for

such an action in order to limit potential for abuse. I have provided

suggestions for doing so in my testimony.

Secondly, in here, and I was working off of the July 15th version

of the bill, as that is the only version that we have seen, CDT remains concerned about the lack of dual criminality. Simply put the

provision as it stands in that July 15th version could allow foreign

governments to investigate American citizens in cases where no

U.S. law has been broken, a clear violation of due process rights.

It has been suggested that the Act’s provision in requiring the

FTC only to take part in cases where the foreign law is substantially similar to U.S. law would mitigate this concern. However, it

is not the foreign law that should be compared to the U.S. law.

It is the investigation that the foreign government is undertaking. The FTC should be required to show that the case under

consideration be worthy of investigation under their own jurisdiction, and we have also suggested language that can mitigate these

concerns as well.

While I address several other issues in my written testimony, I

would like to conclude by emphasizing that these are broad and important new powers that the FTC needs to get its job done internationally.

43

Therefore, we hope that this committee will continue to oversea

the Act implementation, especially with regard to accountability,

privacy, and due process rights as it is put into effect. Thank you

again for having me here and I look forward to your questions.

[The prepared statement of Ari Schwartz follows:]

PREPARED STATEMENT OF ARI SCHWARTZ, ASSOCIATE DIRECTOR, CENTER FOR

DEMOCRACY AND TECHNOLOGY

I. SUMMARY

Chairman Stearns, Ranking Member Schakowsky, and Members of the Subcommittee, the Center for Democracy and Technology (CDT) is pleased to have this

opportunity to testify today on the cross-border fraud proposals of the Federal Trade

Commission (FTC).

The draft bill before the Subcommittee, the International Consumer Protection

Act, is landmark legislation, reflecting a major expansion in the scope of the enforcement activity of the FTC. The problems to which this bill responds are certainly deserving of attention. As the number of consumers online continues to grow, and as

we see significant increases in Internet usage by businesses and individuals in countries around the world, e-commerce has become global in nature. Not surprisingly,

global consumer fraud has been an undesirable side effect, threatening the trust

that is an element of e-commerce. As the FTC steps up its efforts to prevent Internet fraud, to curb deceptive spam, and to address other obstacles to Internet commerce, there is no question that it needs authority to work with its counterparts

overseas to more effectively protect consumers. The International Consumer Protection Act transforms the FTC into a regulatory agency of truly international reach.

Yet, while CDT supports the overall intent of the Act, and while we highly respect

the work of the Commission and its staff, and commend especially Commissioner

Thompson and Chairman Muris for their leadership in this area, we would be concerned with any authorities that would infringe on the privacy and due process

rights of individuals or diminish accountability of government agencies.

For the most part, the International Consumer Protection Act achieves the right

balance. CDT has worked with the Commission to address several of our areas of

concern either through text changes or through a better understanding of how the

FTC operates.

However, CDT still has concerns with the bill that have not been addressed. In

particular:

• The delayed notice provisions of the bill are very broad and would give the FTC

the ability to obtain access to sensitive financial and other information without

notice. We recommend narrowing the scope of the delayed notice provision to

specific and justified circumstances.

• The authorization for FTC cross-border cooperation in cases involving conduct

that would not be illegal if committed in the US (the lack of ‘‘dual criminality’’)

opens the potential for diversion of scarce resources. At this phase in the development of the FTC’s cross-border activity, it should focus on conduct that that

is serious enough so that it would be illegal under US law.

We urge the Committee to amend the bill accordingly.

II. ABOUT CDT

CDT is a non-profit, public interest organization dedicated to developing and implementing public policies to protect and advance civil liberties and democratic values on the Internet. One of our core goals is to enhance privacy protections for individuals in the development and use of new communications technologies.

III. CDT’S CONCERNS WITH THE INTERNATIONAL CONSUMER PROTECTION ACT OF 2003

Delayed Notice of Access to Sensitive Records (Section 8)

Section 8 of the International Consumer Protection Act concerns the question of

notice to the subjects of investigations that their records are being disclosed to the

FTC. Notice of disclosure is a central element of fair information practices. Notice

has become increasingly controversial as more and more records about individuals

and companies are held by third parties. Obviously, if the government wants records

from you that are relevant to an authorized investigation, it can force you to disclose

them with a subpoena or other process, and it gives you notice when it serves the

subpoena on you. This is the normal Fourth Amendment model and is the way that

investigations were traditionally conducted. The recipient of the subpoena has the

44

opportunity to contest the subpoena, to protect against fishing expeditions. But more

and more records about individuals and companies are held by third parties—including banks, merchants, insurance companies, credit card companies, and online

service providers—who may have no interest in seeking to ensure that a subpoena

is narrowly focused, since the records do not pertain to them. Increasingly, the government is seeking to prohibit holders of data from disclosing to their customers the

fact that the government has sought their records. This means that the person

whose privacy is being breached has essentially no opportunity to challenge the subpoena.

It is in this context that we are concerned about the delayed notice provision of

the International Consumer Protection Act. Section 8 would grant the Commission

power to access data about someone without providing notice to the individual and

allowing the individual to challenge the subpoena. The delayed notice provision is

not limited to cross-border investigations, but applies as well to purely domestic activity of the FTC. The fact that delayed notice might be used in the international

consumer protection context heightens our concern, for it means that records will

be disclosed to foreign governments, against whom redress may be extremely difficult if the records are misused.

We would prefer to see the entire delayed notice section removed to clearly ensure

due process rights for individuals and set a strong example for consumer protection

agencies around the world that notice is an important element of fair investigations.

At the very least, the definition of ‘‘adverse result’’ should be more narrowly drawn

so that the powers cannot be abused. We recognize that there are various definitions

of ‘‘adverse result’’ on the books. The definition used by the FTC should be keyed

to the specific and documented needs of the Commission. In particular, CDT recommends that subparagraph (2) (‘‘impeding the ability of the Commission to identify

or trace funds’’) and subparagraph (8) (‘‘otherwise seriously jeopardizing an investigation or unduly delaying a trial’’) be removed from the definition of ‘‘adverse result.’’ These two criteria seem so broad that they could apply to every investigation.

(Every case involving fraud is likely to involve difficulty in identifying or tracing

funds.) The serious problems faced by the Commission would be covered by the

other components of the definition.

FOIA Exemptions (Sections 7 & 9)

The bill contains two different Freedom of Information Act (FOIA) exemptions.

CDT believes that all FOIA exemptions should be approached with caution, since

transparency is an essential value for a functioning democracy. Specifically, FOIA

is often the only means to ensure government accountability. Moreover, ‘‘so-called

(b)(3)’’ exemptions not only prevent individuals from obtaining information, but also

are sometimes mis-interpreted by agencies as broad prohibitions against proactively

disclosing information they would otherwise deem necessary to distribute to the

public.

Section 7 of the International Consumer Protection Act would grant an exemption

for foreign investigative materials given to the FTC. It is CDT’s understanding that

this provision is intended to parallel the existing exemption from FOIA in the Federal Trade Commission Act for materials acquired by the Commission by subpoena

or voluntarily disclosure in lieu of subpoena in the course of an investigation. We

understand the basis for this exemption, but recommend that it be narrowly drafted.

For example, we recommend that the withholding be limited to circumstances where

the foreign government agency has ‘‘requested confidential treatment as a condition

of providing the material.’’ In addition, CDT notes that Congress is still given the

authority to gain access to these materials. Therefore, we encourage this Subcommittee to diligently pursue oversight of international consumer investigations to

ensure effectiveness, since the public will not be able to scrutinize these activities

through FOIA.

The second FOIA exemption, Section 9 of the Act, would exempt material voluntarily submitted to the FTC, ‘‘to the extent such disclosure could reasonably be expected to reveal either the identity of a person, partnership, or corporation that is

the subject of such a disclosure, or the identification of a particular financial account, its ownership, or a confidential record of account activity.’’ The original

version of the bill had a particularly broad exemption that could have permitted the

FTC to withhold, in a wide range of circumstances, information about fraud schemes

targeting large numbers of individuals.

CDT worked with the FTC staff to develop the current language, to ensure that

the name of the corporation or entity disclosing the information is exempt without

removing from public view the fact or nature of the complaint itself. This language

is an attempt to achieve a balance that will encourage companies to share information with the FTC and still require disclosure under the FOIA of adequate informaVerDate 11-MAY-2000 10:45 Nov 14, 2003 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6621 89470.TXT HCOM1 PsN: HCOM1
45

tion to inform and protect the public. As this provision is intended to encourage the

sharing of information, CDT urges the Subcommittee to monitor its implementation.

If companies are still not sharing information with the FTC as intended, this exemption should be revisited.

Dual Criminality (Sections 5 and 7)

As a general rule, US law enforcement agencies should cooperate with foreign

governments only in the investigation of conduct that would be illegal under US law

if it were occurring here. This is the concept of ‘‘dual criminality.’’ It does not require that the laws of other countries use the same or similar words as ours as a

pre-condition of cooperation. Rather, it is a principle that protects US citizens and

ensures a prioritization of US law enforcement resources by focusing cooperation on

those circumstances where is illegal under US law or would be illegal if occurring

in the US. We are concerned that the draft bill rejects the principle of dual criminality, and would thereby authorize the FTC to spend taxpayer resources aiding foreign governments in investigating conduct that the US Congress has not deemed

worthy of attention in the US. Dual criminality is especially important in the context of competitive practices and advertising, for some countries have very different

definitions than we do of what is legal in terms of price comparison advertising and

other competitive practices.

The International Consumer Protection Act represents the first major legislative

expansion of the FTC’s authority in cross-border fraud enforcement. We recommend

a more incremental approach—extend cooperation to things that would be illegal

under US law, before stretching resources and procedures to cover conduct that

would not be illegal in the US. We recommend, therefore, in Section 5 of the bill,

that the new subsection 6(j)(1) be revised to refer to ‘‘possible violations of laws prohibiting fraudulent, unfair, or deceptive commercial practices that are prohibited or,

if committed in the United States, would be prohibited by any provision of the laws

administered by the Commission,’’ and that the proposed subsection 6(j)(2) be

dropped. A similar change would be necessary in Section 7.

Other Concerns

We have a few other suggestions:

• The definition of ‘‘foreign law enforcement agency’’ is over-broad, and includes

agencies that are really not law enforcement. It seems, for example, that the

bill’s definition of ‘‘foreign law enforcement agency’’ would be broader than the

term ‘‘law enforcement agency’’ when used in reference to a State or local agency in the US.

• Under the new subsection 6(j) (15 U.S.C. 46(j), we recommend deleting (B) of the

definition. Requests from foreign governments should be in writing, just as requests for disclosure from domestic agencies must include a written certification

under subsection 6(f) (15USC46(f)).

IV. CONCLUSION

CDT commends the FTC for its initiative in the area of cross-border-fraud—a

problem particularly important in the age of the Internet. We believe that a balance

can be achieved to both protect consumers and protect the privacy and due process

rights of individuals. The FTC should be given reasonable authority to cooperate

cross-border, so long as any new powers are narrowly defined, are subject to checks

and balances, and their impact on privacy and due process is limited.

We stress the important role that this Subcommittee has in overseeing the implementation of this Act. We urge the Subcommittee to hold hearings in the coming

years on the effectiveness of this legislation and to especially monitor the accountability, privacy and due process concerns that we have raised today.

Mr. STEARNS. I thank the gentleman. I will start with my first

series of questions. Mr. Rotenberg, when I was hearing you talk

about procedural requirements and safeguards, since these are civil

matters, how would you overcome the problem associated with a

notification to people if you did not have delayed notification?

They would simply risk a flight. They would take their money

and their evidence, and they would be gone. So don’t you need to

in a civil matter just to have a delayed notification?

Mr. ROTENBERG. Well, I think that is an argument that might

favor delayed notification. I don’t think it answers the question of

46

what the duration would be. I think that 90 days or a year is simply too long.

One area which I am fairly familiar with is the wire tap area,

and obviously if you have—

Mr. STEARNS. Is the wiretap more in criminal or is that more—

Mr. ROTENBERG. Well, it is criminal, but let me explain how—

Mr. STEARNS. I mean, is there a difference between the civil and

the criminal?

Mr. ROTENBERG. Right.

Mr. STEARNS. So that you are talking about a civil delay, which

would be much more acceptable than maybe criminal?

Mr. ROTENBERG. Right, but in either scenario, you still need

means of oversight and accountability, because frankly you want to

be sure that an investigation is moving forward, and if you say to

an agency that you have a year before anything needs to be said

to the public about an investigative matter, I would have concerns

about how seriously the agency is pursuing the matter.

So the example that I was going to in the wiretap area, where

you don’t want to tip off the target, typically law enforcement will

get 30 days to pursue the investigation, which is the period of a

typical wiretap application.

And if after 30 days, they have not obtained enough information

to bring the indictment, they will go back before the court and ask

for an extension, and say please give us another 30 days. We are

still gathering evidence.

I think that a similar mechanism would work here. I mean,

maybe you draw the line at 30 days, and create some mechanisms

for renewal.

Mr. STEARNS. Mr. MacCarthy, VISA being as large as it is, you

are probably an expert on identifying and combating cross-border

fraud, and I guess you might give us some of the ideas of the

emerging fraud techniques that you are using in VISA, and I guess

some of the challenges that you have in combating fraud.

Mr. MACCARTHY. I think that the best way to answer that question probably is to tell you a little bit about our charge back system, and how it works, and how we keep track of merchants who

are experiencing excessively high charge back rates.

Consumers have an ability if they have problems with merchants

to talk to their financial institution that issued their card, and

make a complaint, and these complaints can be in various kinds.

They can be that I didn’t get the item that I paid for, and it can

be that I got an item, but it wasn’t what I wanted. It was of inferior quality; or it can be that I did not engage in that transaction

at all.

And that kind of complaint is the one that is most worrisome to

us, because it indicates that there might be some fraud or identity

theft involved in the circumstances. And it is at that point that

tour zero liability policy kicks in.

If there is fraud and the consumer was not engaged in that

transaction at all, and did not authorize it, then there is no liability

on the part of the consumer. But we keep track of all those complaints, and we note which merchants are involved in those complaints, and merchants that have a high percentage of their sales

involved in these kinds of charge backs, or an excessively high

47

number, an absolute number of these charge backs, we put them

on a list of high risk merchants.

And we monitor them to make sure that they reduce their problem transactions within a timely basis. Now, often those merchants

are just—they are having back office problems, and some of the difficulties that are creating problems for them in their relationship

with consumers.

But sometimes they are fraudulent merchants, and sometimes

they are engaged in patterns of deception and fraud with consumers. And when that happens, we are typically in touch with law

enforcement.

We provide them with information that relates to these kinds of

circumstances. In other circumstances the law enforcement people,

the FTC come to us with a request for information about a particular merchant, and in those circumstances what we tend to do

is we pass the investigating agency, the FTC or whoever, on to the

financial institution that has the relationship with the merchant.

Those financial institutions are the ones who sign up the merchant for using a VISA card. They have all the records and the

data about that particular merchant. And from then on the financial institution and the law enforcement agency, and the FTC, engage in a discussion and a dialogue about sharing information.

What we are seeing is that more and more internet merchants

and fraudsters are moving to a situation where they are dealing

with an off-shore bank, and they are not dealing with a U.S. bank.

And so when we tell the FTC or other law enforcement agencies

in the United States that the bank involved is a bank outside of

the United States, and the merchant is located outside of the

United States as well, they then have to turn around and try to

deal with that foreign institution.

And typically they have to be able to deal with foreign law enforcement institutions to get the information that they need, and

that is why the FTC’s initiative in this area to have greater cooperation is something that is so important. We are seeing more,

and more, and more the circumstance of where when we provide

the information to the FTC, it is information about foreign merchants using foreign off-shore banks.

And they then have to turn around and go to foreign institutions

to get the information that will allow them to pursue the investigation.

Mr. STEARNS. My time has expired. The ranking member, Ms.

Schakowsky.

Ms. SCHAKOWSKY. Really, my only question is to establish your

willingness, Mr. Rotenberg and Mr. Schwartz, to continue to—if

you would be willing to continue to provide us language and suggestions, because Mr. Muris confirmed that what we are dealing

with is a work in progress.

And you can see that questions about the fine balance have been

raised on both sides of the aisle, and it seems to me that in this

collaborative process that we have been having that we have a real

good chance at developing a bill that addresses both the consumer

protection concerns and the civil liberties concerns.

So I want to thank you for your input until now, but the latest

draft that came from the FTC yesterday was an improvement. It

48

still does raise those other questions, and my hope is that with

your help and with the cooperation from both sides of the aisle that

we can move forward. So I just wanted to reaffirm your—

Mr. SCHWARTZ. Yes, we are definitely interested in working with

you, and we have been working with the commission for the past

few weeks on this as well, and I would like to echo Mr.

MacCarthy’s praise of Commissioner Thompson, who has been particularly open and has had an open-door policy, and letting us come

in and talk over some of the issues with him.

Ms. SCHAKOWSKY. And I would like to say that as well. I had a

long conversation with him yesterday, too, and so it seems that all

the important stakeholders have been at the table, and continue to

be, and I think that is the way that we ought to operate around

here. Thank you.

Mr. SHIMKUS [presiding]. Mr. Otter.

Mr. OTTER. Thank you, Mr. Chairman. Let me also associate myself with the remarks of the ranking member. I appreciate the

problem that you have, but I am also concerned about what we do

to the basis of our republic, and especially the right to privacy, and

especially all of those rights and liberties that we enjoy as a result

of the basis of our constitutional government.

Mr. Rotenberg, you said during your testimony that these agencies were subject to oversight and accountability. Where?

Mr. ROTENBERG. That is a very good question, Congressman. I

think the point that I was trying to make was that they should be

subject to oversight and accountability. And there is a number of

ways that this happens.

And obviously the oversight committees play a role, and the

courts play a bit of a role, but I also think the public plays a very

important role, and part of my concern about the limitations on the

use of the open government laws in this bill is that it would make

it more difficult for the public to find out how the FTC operates,

and what information is being turned over to other agencies and

other governments.

And as I looked more closely at the July 15th draft, I noticed

something also that was interesting. While those new exemptions

for FOIA are being created, there still is a provision in there that

says that nothing in this bill limits the ability of the Congress or

the courts to get access to the information, which means that it has

occurred to someone that it would not be a good idea to make this

enforcement authority completely secret.

That information will be available to the Congress, but I think

that it needs to be available to the public. So my answer to your

question, Congressman, is that oversight happens partly because

the public has the ability to understand how its government is operating.

Mr. OTTER. While I don’t disagree with your response, I would

only engage in a further discussion here for enlightenment; that

that may well be the oversight. But that I still find absent the accountability.

Accountability to me would mean that we could take some action

against the agent or the agency, and actions that was appropriate

in a violation of the Fourth, Fifth, and Sixth, or whatever amendment that it was.

49

And I find that absent across the board in our government, and

by the way, the public is not extending these authorities to the government. The Congress is. It is our responsibility to provide if you

will the framework of the rules and regulations by which our government operates.

The public’s responsibility is to decide whether or not we ought

to be the ones making that decision, and the Administration’s responsibility is to push that just as far as they can, and it has been

my experience that they always have. And so we must be very,

very selfish I think about the authorities that we extend, and I still

find absent in all of this stuff the accountability. Who gets punished if they violate the liberties, if they violate the rights or privacy? Who gets punished? Do you define punishment in here?

Mr. ROTENBERG. Congressman, the answer to that point is no. I

don’t think there is sufficient accountability.

Mr. OTTER. Am I right in reading—excuse me, but am I right in

reading, is that the results of the accountability? Is that how we

manifest accountability, is by some sort of punishment, or firing

them, or whatever?

Mr. ROTENBERG. Well, I think there are a variety of techniques.

I mean, one thing which we recommended earlier this summer,

which the chairman supported this morning, was new reporting requirements.

And our view was that if you are going to give an agency new

authority, you have to know how that authority is being used, and

those reporting requirements can be very detailed. It can be required on an annual basis.

It should be made available to the public, and anyone who wants

to know how much information was turned over to which governments, and what were the outcomes. They should have a right to

know that. That is part of the accountability.

I am concerned as you are also, Congressman, about a provision

in this bill which basically creates immunity for private parties to

turn over personal information to the FTC as it pursues these investigations with foreign governments.

There is a new immunity provision in this bill, and it basically

says to a bank, or a telephone company, or an internet service provider, that if the Federal Trade Commission comes to you and asks

for information for one of these investigations, and you turn it over

wrongfully it is later determined, you are still immune from any

prosecution because of this act.

Now, I can understand on the law enforcement side why they do

that. That’s how they get cooperation. But the effect for the customer of those companies is that the rights that they would have

otherwise have been removed. So I am completely in agreement.

Mr. OTTER. I just want to ask the panel one more question, and

that is we keep talking about fraud and deception, and fraud and

deception, and that it is a civil result. Can you ever conceive where

fraud and deception would eventually turn into a criminal action,

and where would we get the evidence then to pursue the criminal

action once we have established fraud and deception?

Mr. ROTENBERG. That is another important point. I think the

term civil is being misused a little bit this morning. I mean, these

50

are authorities of the government that fall in the broad category

of criminal investigations.

And when we talk about civil litigation and civil discovery and

delayed notification between private parties, it is completely different. In fact, in that context, people usually know when their

records are being sought in a civil matter, because the way that

they are obtained is through subpoena and civil discovery.

It is an unusual process to be able to obtain information secretly,

and we do that in criminal investigations because of specific concerns that we have about targets of those investigations.

Mr. OTTER. If I might ask both Mr. Schwartz and Mr. MacCarthy

to respond to that question.

Mr. SHIMKUS. Without objection, go ahead.

Mr. MACCARTHY. I don’t have much to add on the civil versus

criminal part of your question, but if I could take the opportunity

to quickly respond to Marc’s point about immunity. It puts companies like ours in a very awkward situation if we receive a request

for information from the government, and it is all perfectly legitimate and above-board, and we cooperate with that.

And in a later process it sounds that somebody somewhere and

not us, but somebody somewhere else didn’t follow all the rules and

regulations. If then we are liable for violating other rules, it makes

it very, very difficult for us to be cooperative in that kind of circumstance. So for us the immunity provision does create an enormously important part of the legislation.

Mr. SCHWARTZ. I don’t have that much to add either. I would just

say that the comment that Chairman Muris made earlier that he

saw some points where he would like to see more criminal actions

taken in some of these civil cases.

And I was kind of interested to hear what he meant by that, and

what kind of cases that he was talking about there in particular.

He did not really go into too much detail there, and I would be interested to follow up on that point.

Mr. SHIMKUS. Thank you, Mr. Otter. Mr. MacCarthy, in regard

to complying to a request for information as you were just mentioning, from the FTC, is that simply a letter, or are you replying

to a subpoena? The Chairman had mentioned that they still use

subpoenas.

Mr. MACCARTHY. It depends on the individual agency and the individual case. Often it is a CID or a subpoena that we are responding to. Whenever it is necessary, we require that in order to respond appropriately to the agencies.

Mr. SHIMKUS. All right. And in those subpoenas the information

is usually fairly specific isn’t it?

Mr. MACCARTHY. That’s correct.

Mr. SHIMKUS. And then, Mr. Rotenberg, wouldn’t one of the abilities of accountability be the subpoena? Can you describe what the

process that is proposed in here? This is not an agency-issued subpoena is it? They have to go outside the agency where there would

be some review?

Mr. ROTENBERG. Right. But still—and this was in response to the

question from Mr. Otter. Still in other circumstances, there may be

some remedy available to the target of an investigation where a

51

subpoena is wrongfully issued, or information is improperly disclosed.

The effect of the immunity provision here is to remove those options, and I would just suggest, Mr. Chairman, that in understanding the use of this new authority that when it is directed

against people who aren’t engaged in criminal conduct, there can

be very serious repercussions, and I think we need to be aware of

that.

Mr. SHIMKUS. Well, I think that is one of the reasons why at

least for myself that it is important that when they seek this type

of information that they have an independent review of the request

and the information for which they are acting upon is real.

And that’s why I think that a subpoena is absolutely necessary,

and that does cover VISA and other entities in its specifics. So I

would probably vote against this bill if it wasn’t for that fact. Mr.

Schwartz, do you have anything to add on the subpoena aspect and

whether that provides sufficient accountability?

Mr. SCHWARTZ. No, I don’t.

Mr. SHIMKUS. All right. The other area of discussion seems to be

the 90 day notice, and Chairman Muris had mentioned that they

need the 90 days because it is difficult to track internet fraud in

particular, and that 48 hours may not be enough.

Mr. Rotenberg, you mentioned that maybe 48 hours would be

more appropriate at 90 days, and then maybe another 90 days, and

then another 90 days. And, Mr. Schwartz, you didn’t mention anything about even 48 hours. So could you rebut the Chairman’s, or

agree, whatever you want to comment.

Mr. ROTENBERG. I should clarify, Mr. Chairman, because maybe

I was a little confusing in my remarks. There are actually a couple

of different ways delayed notification works, in the wiretap realm.

The 48 hours actually refers to the ability to conduct a search

without going to a judge, and without obtaining a warrant. And if

you have emergency circumstances, you can conduct that search

and come back 48 hours later, or within 48 hours, and get the warrant.

The number that I was focusing on, and which I think is actually

a good number for this bill, is 30 days. I think 30 days is a good

period of time. And if it is the case in this on-line environment that

things are happening quickly, and people are moving funds quickly,

I would say that you would want to act sooner rather than later.

I think that 90 days or a year just opens the door to make it

more difficult to move these investigations quickly. So that would

be my proposal.

Mr. SHIMKUS. And I think that is a valid proposal. Mr. Schwartz.

Mr. SCHWARTZ. Well, as I said, I think that we would be open

to discussing how to make this clear. I think under the July 15th

draft that there was no—that the judge basically had to approve

it, and Chairman Muris went into some details, saying that they

want to open up the idea of making sure that there is a court order

and under a judge’s discretion.

If that is the case, the idea of looking for some kind of flight risk

as part of this I think would be appropriate, and the issue of—I

do agree that it is more difficult on the internet to track, and the

time periods may be a little bit different there.

52

If you look at some of the spam cases that they have gone into,

a lot of them are bouncing mail off servers in Shanghai specifically

to hide the tracking of where the mail comes from, and I think that

does prove that there is some international aspect to it that they

don’t have in the telemarketing cases.

So the time period I think is up for discussion. Thirty days with

renewal sounds reasonable, I think; and 60 and 90 days sounds

reasonable, depending on the circumstance, and I think we should

discuss that in a little more detail. It is not something that we

have really vetted with the FTC at this point.

Mr. SHIMKUS. Thank you. I think those comments are helpful,

and certainly we will consider those. On behalf of Chairman

Stearns and the ranking member, and the entire subcommittee. I

thank you for your time coming in here today and helping to shape

this important legislation, and the subcommittee now stands adjourned.

[Whereupon, at 11:43 a.m., the subcommittee was adjourned.]

Æ