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1 FEDERAL TRADE COMMISSION

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5 PUBLIC WORKSHOP:

6 PARTNERSHIPS AGAINST

7 CROSS-BORDER FRAUD

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14 Wednesday, February 19, 2003

15 9:00 a.m.

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19 Federal Trade Commission

20 6th and Pennsylvania Avenue, N.W.

21 Washington, D.C.

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1 P R O C E E D I N G S

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3 MR. STEVENSON: Please welcome the Chairman of

4 the Federal Trade Commission, Tim Muris, who has made a

5 priority of combating cross-border fraud in his time here

6 at the Commission. Ladies and gentlemen, Chairman Tim

7 Muris.

8 MR. MURIS: Thank you very much, Hugh, and

9 thank everyone for braving the weather and the streets to

10 get here. And welcome to our Workshop on Public/Private

11 Partnerships to Combat Cross-border Fraud. And I also

12 want to give a special thanks to our international

13 visitors.

14 We have convened this workshop to explore how

15 the public and private sectors can cooperate and innovate

16 to fight cross-border consumer fraud. For many reasons,

17 the time is right for this discussion. The evidence of

18 cross-border consumer fraud and the harm it causes to

19 consumers and legitimate businesses appears to be

20 growing. This morning we are releasing statistics from

21 Consumer Sentinel, our central complaint database, which

22 show that cross-border complaints by U.S. consumers rose

23 in the past two years from 11 percent of our total in

24 2000 to 14 percent last year, a jump from about 14,000

25 complaints in 2001 to over 24,000 last year.
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1 The nature of the complaints also is changing. 

2 When we first started looking at statistics on cross3 border fraud, most of the complaints focused on

4 telemarketing of deceptive and fraudulent schemes based

5 in Canada. While telemarketing schemes are still

6 widespread, complaints about cross-border Internet

7 related schemes located all over the world also have

8 grown from 22 percent of the total two years ago to 34

9 percent last year.

10 The costs of cross-border fraud are high for

11 both consumers and businesses, both in terms of monetary

12 losses and consumer confidence. The FTC has been taking

13 steps to fight foreign scams that harm consumers. We've

14 gone to federal court using our civil powers under the

15 FTC Act to obtain injunctive relief and consumer redress

16 for U.S. and foreign consumers. We have worked on

17 investigations with foreign consumer protection agencies

18 and pursued regional partnerships with U.S. and Canadian

19 civil and criminal law enforcement officials in British

20 Columbia and Ontario. These partnerships have resulted

21 in dozens of law enforcement actions here and in Canada.

22 Last year we filed about 20 new lawsuits

23 involving foreign defendants or foreign consumers and

24 continued to pursue dozens of other cases against frauds

25 operating across national borders. Many of these cases
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1 deal with the top fraud areas identified in the new

2 Consumer Sentinel statistics: advance fee loans and

3 credit cards, foreign lotteries, sweepstakes and related

4 prize promotion pitches, and Internet offers. In other

5 cases, we face cross-border issues such as defendants

6 transferring funds offshore to avoid paying consumer

7 redress.

8 We expect our cross-border fraud caseload to

9 increase in the future. In the first two months of this

10 year alone, we have filed cases against advance fee

11 credit cards pedaled by Canadian telemarketers, bogus

12 international driving licenses advertised through spam by

13 defendants in Denmark and other foreign countries, and

14 products and programs sold over the Internet by

15 defendants based in Switzerland that falsely claimed to

16 cure cancer, AIDs, and other serious diseases.

17 Indeed, tomorrow we will hold a press

18 conference to announce the filing of a case against U.S.,

19 Canadian and U.K. defendants using the Internet and

20 telemarketing to advertise so-called treatments at a

21 clinic in Tijuana, Mexico. These treatments use an

22 electromagnetic device that purportedly could kill cancer

23 cells and cure consumers of breast, lung, brain, and

24 liver cancers.

25 We need to do more to bring cross-border fraud
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1 under control. Recently we have begun to implement our

2 five point plan for fighting cross-border fraud, which I

3 announced this past October. One of the five points and

4 the impetus of this workshop is to explore new ways for

5 the government and the private sector to work together. 

6 We hope the discussions over the next two days will

7 provide us with a concrete action plan for such

8 partnerships.

9 Today we will study existing models of public/

10 private sector cooperation and discuss the opportunities

11 for cooperation with various financial sector entities. 

12 We have invited banks and other financial institutions,

13 credit cards, ACH processors and money transmitter

14 services. Tomorrow morning we will explore potential

15 partnerships with commercial mail receiving agencies and

16 industry and self-regulatory organizations.

17 We will then focus on the role of Internet

18 businesses: ISPs, web hosting companies, and domain

19 registration authorities. We look forward to discuss

20 what we can do together in information sharing, risk

21 analysis, identification and location of investigatory

22 targets, training, asset recovery, and consumer education

23 to reduce cross-border fraud.

24 Again, I would like to welcome you all here and

25 thank you for participating in what we expect to be a
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1 productive and enlightening workshop. In addition, I

2 would like to thank my fellow Commissioner -- (break in

3 tape)[Commissioner Mozelle Thompson, and Ted Kassinger,

4 General Counsel of the Department of Commerce, who] --

5 served as an attorney with the U.S. Department of State

6 and the U.S. International Trade Commission.

7 On a personal note, this is the sixth job I've

8 had in the federal government, and one of the great

9 pleasures is to meet the many other outstanding people

10 who serve in the government. And it's been a pleasure to

11 meet Ted and to work with him and to welcome him here

12 today. Thank you, Ted.

13

14 [Presentation of Videotaped Remarks by

15 Senator Susan Collins, Chairman Senate Committee on

16 Governmental Affairs (Separate document:Collins.pdf)].

17

18 MR. KASSINGER: Good morning. I guess I'm

19 about three jobs behind Tim in my government career. I

20 appreciate that introduction. Good morning, Commissioner

21 Thompson, ladies and gentlemen. It's a pleasure to be

22 here to join you in this important program on cross23 border commercial fraud. I want to thank the Federal

24 Trade Commission on behalf of our agency, certainly, for

25 its ongoing work and leadership on this important topic.
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1 Promoting trade is a core mission of the

2 Commerce Department. We seek to create opportunities for

3 U.S. businesses and entrepreneurs to market globally,

4 reaching for those multitudes of customers abroad who can

5 enable business and employment growth that are otherwise

6 unattainable in merely the U.S. market. But equally

7 important, the competition unleashed by expanding

8 international Commerce benefits consumers by increasing

9 choices of products and services.

10 But whatever expansion and commercial

11 opportunities our agency and others might achieve through

12 negotiating reductions in trade barriers or removing

13 unfair foreign trade practices will be diminished if

14 private sector participants lack confidence in the

15 transactions in which they engage internationally.

16 Those who would defraud others have never

17 recognized geographic borders, but clearly the

18 opportunities and the temptations for nefarious behavior

19 have only increased with the advent of new technologies,

20 and perhaps the ever increasing experience of consumers

21 who travel and do business around the world. But if

22 borders no longer shelter victims, they still offer cover

23 to the unscrupulous, and that is the important target of

24 the work of the Commission here today with you. It has

25 to be a public/private partnership. 
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1 The Commerce Department supports these efforts. 

2 On our own, we've been doing a few things that we think

3 can serve as examples of the way that the public/private

4 sectors can cooperate to address the cross-border fraud

5 problems and other challenges of the Internet age. Let

6 me just touch on a few of them.

7 First, consumer privacy. For several years

8 consumer privacy issues have been the subject of intense

9 discussions with our major trading partners. The

10 fundamental questions that we debate domestically do not

11 change in the international arena. In both contexts,

12 governments are properly concerned with the need to deter

13 and to prosecute fraud and to defend against unwanted

14 invasions of privacy.

15 On the other hand, there is the need to guard

16 against overly prescriptive measures that will chill

17 entirely desirable and legitimate commercial activities

18 having real consumer benefits. Pursuing the right

19 balance requires the identification of legitimate

20 business needs for personal information, as well as

21 effective safeguards against the misuse of such

22 information that needs protection.

23 We have found occasionally that in assessing

24 these questions, our trading partners often proceed from

25 different assumptions than we do about the value and
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1 legitimacy of personal data collection activities and the

2 best means to safeguard against fraud and abuse of that

3 data. An important case in point is our ongoing dialogue

4 with the European Commission concerning its directive on

5 data protection. That directive is designed to protect

6 European consumers' personal identifiable information

7 from misappropriation and misuse by data controllers or

8 companies who receive personal information for any

9 reason. Most importantly from the U.S. perspective, the

10 directive restricts the transmission of such data outside

11 the EU unless information that is being sent will receive

12 adequate protection.

13 Unlike the approach taken by Europe for

14 protection of personal information, the U.S. approach to

15 privacy primarily has relied on a combination of

16 industry, self-regulation and sectoral privacy

17 legislation in areas like financial and medical records. 

18 Over the years, we have sought to find a way to bridge

19 these differences in approach so that data flows would

20 not be cut off by the directive while addressing the

21 legitimate privacy interests of European consumers.

22 After two years of negotiations, the United

23 States and the European Commission reached agreement on a

24 framework known as the safe harbor. The safe harbor is a

25 voluntary arrangement whereby U.S. companies may elect to
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1 follow seven privacy principles governing how they will

2 use and protect personal information that they receive

3 from Europe. U.S. companies that agree to adhere to the

4 safe harbor principles are deemed to satisfy the

5 requirements for adequate protection under the EU

6 directive. The promises made in these areas are

7 enforceable through third party dispute resolution

8 mechanisms backed by the potential for FTC enforcement.

9 The solution reached in the safe harbor

10 negotiations is one that has allowed transatlantic data

11 transfers to continue without our government imposing

12 rigid rules on U.S. companies that would make transacting

13 business more difficult. Of course, there are costs to

14 businesses when measures to protect consumers are put

15 into place. These measures, however, are what make it

16 possible to have a healthy market with a trust that is

17 the true currency of commercial transactions. We believe

18 the safe harbor serves as a good example of cross-border

19 convergence on a measure that actually protects consumers

20 in a manner that does not limit consumer choice and

21 options in the marketplace.

22 The safe harbor framework also exemplifies our

23 general approach to avoiding one size fits all regulation

24 and of relying on sectoral self-regulation when possible. 

25 We thus generally support the adoption of industry codes
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1 of conduct and voluntary adoption of best practices. 

2 Nevertheless, such codes and practices do not always meet

3 consumer expectations and requirements, and certainly,

4 fraud will occur even within the best framework of

5 enlightened principles.

6 For this reason, in addition to the relief

7 afforded by vigilant law enforcement measures, businesses

8 and consumers alike need to know that they will have

9 prompt and effective private recourse in the event of

10 injuries caused by cross-border transactions. Litigation

11 in these circumstances is particularly a poor option in

12 most cases for consumers. We thus have encouraged the

13 adoption of alternative dispute resolution mechanisms as

14 being particularly apt to support consumer confidence in

15 the marketplace.

16 With the growth of ecommerce, there has been a

17 proliferation of ADR providers offering on-line and 

18 off-line dispute resolution for everything from low cost

19 eBay transactions to more complicated, high dollar

20 insurance disputes. In addition to ADR services, on-line

21 seal programs, such as the Better Business Bureau's BBB

22 Online, grant web seals of approval to those on-line

23 merchants that agree to comply with a set of consumer

24 protection guidelines and agree to submit to ADR in the

25 event of dispute. With this in mind, I'm glad to see
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1 that the agenda for the workshop includes a panel on the

2 role of industry associations and self-regulatory

3 organizations in dealing with cross-border fraud.

4 Let me mention just two other activities in

5 which the Commerce Department has been involved that are

6 relevant to the workshop. First is the recently signed

7 Convention on Cybercrime. The U.S. government, acting

8 principally through the Departments of State, Justice and

9 Commerce, participated actively in the negotiations

10 sponsored by the Council of Europe of the Cybercrime

11 Convention. The United States has now signed the

12 Convention. It is the only multilateral convention on

13 the subject of cybercrime, and it will provide

14 significant benefits for U.S. consumers who are the

15 potential victims of cross-border fraud. When it enters

16 into force, the Convention will fill many of the

17 jurisdictional gaps that plague law enforcement agencies

18 trying to investigate and to pursue criminals in the

19 cross-border context. 

20 It has three parts. First, it requires each

21 party to establish certain substantive criminal offenses,

22 such as computer fraud. Second, it requires that each

23 party be able to carry out certain procedures in domestic

24 cases, such as tracing the source and the destination of

25 messages. And finally, it requires parties to give each
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1 other assistance in cases involving computer-related

2 crime and electronic evidence.

3 The Convention is consistent with U.S. law. It

4 will not require the criminalization of legitimate

5 business activities that are not currently regulated or

6 prohibited. It is also technology neutral, not requiring

7 law enforcement or businesses to implement efforts

8 through a particular kind of network or program. In our

9 view, the Convention achieves the goal of enhancing our

10 ability to investigate and prosecute cyber crimes,

11 including cross-border fraud, without imposing

12 significant burdens on businesses and consumers who want

13 to transact business over the Internet.

14 Finally, let me say a few words about who is,

15 which the workshop will cover tomorrow. Since the

16 inception of the Internet domain name system, contact

17 information on registrants has been available through a

18 series of who is databases. These web-based directories

19 allow Internet users to type in a given domain name and

20 then to retrieve registrant contact information. The Who

21 Is database provides a layer of accountability and

22 transparency to the Internet and is vital to many

23 categories of users, including intellectual property

24 owners, law enforcement agencies, Internet service

25 providers, consumers, and parents.
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1 The Department of Commerce supports the

2 availability of complete, accurate and up-to-date who is

3 information. The collection verification and provision

4 for public availability of who is data are an important

5 part of our contract with New Star, the manager of the

6 dot U.S. country code top level domain. We support the

7 important work undertaken by ICANN, the Internet

8 Corporation of Assigned Names and Numbers, to improve

9 ICANN's who is database.

10 To this end, we are working in the ICANN

11 Government Advisory Committee to assure that key public

12 policy concerns, including privacy, law enforcement and

13 protection of intellectual property rights, are taken

14 into account as ICANN furthers its policies in this area. 

15 I look forward to learning the perspectives of the

16 participants in this workshop on ICANN's work.

17 There is a world of new opportunity in the

18 increasingly globalized business climate using

19 information technologies, including the Internet, to

20 enable global business to take place as if the parties

21 were in the same place. But with this opportunity comes

22 increasing dangers of fraudulent and otherwise unsavory

23 behavior by those who would take advantage of the

24 increased level of anonymity afforded by the Internet. 

25 The U.S. government is working to put in place an
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1 international legal framework in which most countries are

2 working to protect consumers, and that is consistent with

3 our policy goals of encouraging technology, and neutral

4 and flexible enforcement mechanisms. Efforts by

5 individual U.S. companies and consumers to combat cross6 border fraud are also a central part of this fight. 

7 Thank you for having me this morning. I wish

8 you an informative and productive workshop.

9 (Applause.)

10 MR. STEVENSON: Thank you very much, Ted. I'll

11 now turn the program over to FTC Commissioner Mozelle

12 Thompson. Mozelle will be leading off this morning's

13 discussions with an introductory roundtable of

14 distinguished guests. I want to thank Mozelle, again,

15 for his leadership in this area, and I wish you all a

16 productive next couple of days.

17 Thank you very much.

18 COMMISSIONER THOMPSON: Mr. Chairman, I regret

19 having missed your comments, but I read and summarized

20 them last night. 

21 MR. MURIS: Well, I'm sorry to see (inaudible),

22 but thanks for coming.

23 COMMISSIONER THOMPSON: Good morning. I'm

24 trying to get people a little excited here, you know. 

25 You and his staff did a lot of work to put this all
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1 together. The weather was not quite as cooperative, but

2 we do have people from all around the world here. I see

3 a lot of friends and familiar faces. We welcome you here

4 to the FTC.

5 Let me tell you a little bit about this panel

6 this morning and, Hugh, I'm counting on you to give me

7 the big -- all right? It reminds me of the last time I

8 gave a speech. I gave a speech in Singapore, and they

9 have this habit of using a cowbell to let you know you

10 have like three minutes left. Of course, I had never

11 heard this before. So they started ringing this bell,

12 and I thought that the building was on fire or something. 

13 But we're not quite as bad here.

14 Anyway, I'm very happy to see you all here

15 today to talk about -- to participate in this important

16 workshop. I'm Mozelle Thompson. I am one of the five

17 Commissioners here, at least the last time I checked. As

18 many of you know, I spend a lot of time working on issues

19 dealing with international consumer protection. Before I

20 go too far, my General Counsel requires me to say that my

21 comments today are my own and not necessarily those of

22 the other Commissioners or the Commission as a whole. 

23 And I may even change my own views by the time this panel

24 is over.

25 But that being said, we wanted to start this
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1 morning with taking a little bit of a -- a little higher

2 plain view of this issue, because we're going to spend a

3 lot of time talking about some of the technical and

4 procedural aspects of cross-border fraud and things that

5 we can do. But I wanted to give at least the audience

6 and some of the panelists some opportunity to reflect on

7 what it is that we're looking at in terms of cross-border

8 fraud and why it is so important.

9 I'm going to take just a second to at least

10 give you some background from my standpoint. I think we

11 have right now many opportunities, both domestically and

12 internationally, to consider the role of global economy

13 and how it's going to grow. And what's clear to me is

14 that we're seeing an increasingly demand driven economy,

15 one dependent on how much consumers trust the marketplace

16 and feel comfortable participating in it. And its

17 continued growth will demand that all consumers be

18 included and given an opportunity to participate.

19 So what that means is, that for this

20 marketplace to thrive, the consumers are placed at the

21 center of a value proposition. It is a market that

22 recognizes the importance of providing a basket of tools

23 that give consumers the means to feel safe and confident

24 to participate globally. Now, among those tools are the

25 rights and remedies that can protect them from harm, harm
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1 that can result from fraud and deception and even

2 security breaches. And these tools can be exercised by

3 governments, businesses and consumers themselves.

4 Now, there are two reasons why this is probably

5 more important now than other times in our history. 

6 First, it is no secret that all western economies are

7 experiencing a little bit of economic distress. It has

8 been said that 80 percent of the U.S. economy is

9 represented by consumer spending. Similarly, in France

10 it's 50 percent and in the U.K. I think it's about 65

11 percent. So a small change in consumer confidence one

12 way or the other can have a significant impact on all of

13 our economies. As a result, government and business

14 alike are focusing on the importance of consumer spending

15 and how do we maintain economic health and stimulate

16 future economic growth.

17 Now, a second condition also exists, one that

18 is one of the byproducts of increased globalization and

19 improved technology. It's that information is so much

20 better that markets have become more demand driven,

21 because consumers can rapidly move their money from one

22 place to another, and they also have a greater

23 expectation what their merchants and their governments

24 will do for them and expect them to be more responsive to

25 their individual demands. In other words, consumers in
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1 this economy want a more direct voice in telling

2 companies and governments exactly what they want and

3 exactly how they want it.

4 So, the consumer trust that we see that will be

5 necessary to have future economic growth will depend a

6 lot on how we manage consumer expectation -- and I think

7 that we all have some challenges in that regard -- and

8 how we define what constitutes value. And finally, how

9 do we measure success? Ideally, we can all provide

10 guidance through a combination of laws and rules in our

11 self-regulatory programs, but it is clear to me that

12 neither government nor consumers or industry, in and of

13 itself, can address the issues alone. And that's why

14 we're all together today, because we can talk a little

15 bit about the things that we do individually, but also

16 how they work together. And building on that foundation,

17 we have a much better opportunity to get at one of the

18 key problems that undermine consumer confidence, cross19 border fraud.

20 Now, we have a great panel here today of very

21 interesting people. First of all, I thank you all for

22 getting here. We come from various places. To my right

23 is Commissioner Sitesh Bhojani of the Australian

24 Competition and Consumer Commission. He is also the

25 current President of ICPEN, the International Consumer
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1 Protection and Enforcement Network. He is coming from

2 down under. And, you know, it also reminds me of -- we

3 live in town. We probably had the hardest time getting

4 here, because it's like broadband. It's always the last

5 mile that is our town.

6 We also have Steve Bartlett, who is the current

7 President and CEO of the Financial Services Roundtable in

8 Washington, who is one of the principal spokesmen of the

9 banking and financial services industry. He has also

10 been here a little while. He previously served as a

11 congressman. So we thank you for being here.

12 We have Susan Grant, who is Vice President for

13 Public Policy for the National Consumers League, who is

14 co-chair of the Internet Working Group of the

15 Transatlantic Consumer Dialogue. And I'm happy to say

16 she has also been an active participant in our delegation

17 to the OECD Consumer Policy Committee.

18 And we have Scott Cooper from Hewlett Packard,

19 who I believe is the Director for Public Policy, isn't

20 he?

21 MR. COOPER: I wish. Manager.

22 COMMISSIONER THOMPSON: Okay, Manager. That's

23 not what he usually tells me.

24 MR. COOPER: Executive VP.

25 COMMISSIONER THOMPSON: Okay. But it's great
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1 to have him here. He has also been a participant in some

2 of our consumer policy committee delegations.

3 And so I want to give everybody -- since you

4 all have come so far. These two came from western

5 Massachusetts, where snow is really not that big a deal

6 up there as it is down here. So I wanted to give

7 everybody a chance to say a little something, and then

8 maybe we can talk a little bit about how we see the world

9 out there. 

10 MR. BHOJANI: Sure.

11 COMMISSIONER THOMPSON: Okay.

12 MR. BHOJANI: Thank you very much, Mozelle. 

13 Ladies and gentlemen, a warm and hardy good day from the

14 land down under. I'm not sure whether the FTC has

15 actually planned this or not, and I know that the global

16 economy and the global marketplace is leading to

17 convergence in a number of areas. For example,

18 competition policy and most likely consumer protection

19 policy. But I don't know whether there is some

20 suggestion here that we should also be trying to look at

21 convergence in global weather patterns, because I know

22 I've just been brought up from a city that is undergoing

23 some very serious bush fire conditions to a city that is

24 undergoing very serious freezing conditions.

25 COMMISSIONER THOMPSON: We would be happy to
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1 send you some of our snow.

2 MR. BHOJANI: Thank you. We need it down

3 there, so we would be happy to have it transported. But

4 seriously, ladies and gentlemen, on behalf of the members

5 of the International Consumer Protection and Enforcement

6 Network, I would like to acknowledge and commend the

7 Chairman, Commissioners and staff of the Federal Trade

8 Commission for their vision in conducting this

9 partnerships against cross-border fraud workshop.

10 Indeed, the government -- consumer protection

11 law enforcement agencies forming ICPEN, as we

12 collectively refer to it, have recognized the importance

13 of partnering and close cooperation to effectively combat

14 the surge of cross-border fraud in an increasingly global

15 marketplace. The network itself is an example of a

16 public section partnership established to fight cross17 border consumer fraud. There is also a significant need

18 and tremendous opportunities for public sector/private

19 sector partnerships to combat cross-border fraud, which I

20 believe will be recognized and emerge from discussions

21 over the next day and a half to two days.

22 Ladies and gentleman, the ICPEN agencies

23 recognize that consumer fraudsters and scammers engaged

24 in international commerce act on three basic principles. 

25 One, they do not respect traditional legal boundaries. 
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1 Two, they are aware that law enforcement agencies do have

2 to respect sovereign boundaries. And three, they

3 organize themselves and perpetuate their consumer fraud

4 across legal boundaries to minimize the risk of detection

5 and to maximize the difficulties of any effective law

6 enforcement action being taken against them.

7 So certainly ICPEN members acknowledge that

8 policy and lawmakers are undoubtedly endeavoring to

9 address these issues and are working with them to do so. 

10 One example is the work of the OECD Committee on Consumer

11 Policy under the leadership of FTC Commissioner Mozelle

12 Thompson regarding an OECD recommendation to governments

13 for OECD member countries about appropriate guidelines

14 for protecting consumers across borders from fraudulent

15 and deceptive commercial practices. However, ICPEN

16 members also generally recognize that an effective global

17 marketplace -- that is, one that consumers are willing to

18 participate in and do not distrust -- requires the

19 presence of consumer protection law enforcement agencies

20 to ensure compliance with existing consumer protection

21 laws.

22 Ladies and gentlemen, this is not just about

23 consumer protection. It's also about fair competition in

24 avoiding firms gaining market share from consumers by

25 deceptive, dishonest or fraudulent means which would
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1 damage competition and the global marketplace. As

2 consumer protection law enforcement agencies, ICPEN

3 members can best fulfill their roles by properly testing

4 the limits of existing laws and making cooperation with

5 international counterparts a priority. More details of

6 ICPEN's initiatives, activities and the level of

7 commitment against cross-border fraud can be obtained

8 from this booklet, which I'll ensure is available as we

9 break.

10 What I would like to do is to let you know that

11 in conclusion, with determination and enthusiasm the

12 agencies forming the International Consumer Protection

13 and Enforcement Network are committed to enhancing the

14 level of cooperation between them, thereby enhancing the

15 network's effectiveness and outcomes for consumers. When

16 taking enforcement action, their objectives include one

17 or more of the following: to establish the unlawful

18 conduct, including clarifying the law or developing

19 precedent. This is particularly important in the context

20 of matters involving cross-border conduct; to stop the

21 unlawful conduct; to obtain compensation or restitution

22 for victims; to undo the effects of contravention; to

23 deter and prevent future unlawful conduct and, where

24 appropriate, to punish the wrongdoer.

25 Now, ladies and gentlemen, those enforcement
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1 objectives provide tremendous opportunities for effective

2 public/private partnerships against cross-border fraud. 

3 In that way, ICPEN is a public sector partnership

4 certainly committed to fighting cross-border fraud, and

5 thereby encouraging consumer participation in the global

6 marketplace and contributing to building consumer

7 confidence in the global economy.

8 I look forward to the opportunities and

9 discussions about how the public sector can work with the

10 private sector in the next couple of days. Thank you,

11 Mozelle.

12 COMMISSIONER THOMPSON: Thank you. Steve?

13 MR. BARTLETT: Thank you, Commissioner. Since

14 this is a cross-border conference international, I have

15 two comments on international diversity and the cultural

16 diversity. One is, I'm from Texas, which is actually

17 related to why I was late. I apologize. But in Texas,

18 even on a bad weather day, if you leave your home 15

19 minutes away an hour and a half before the conference is

20 to start, you can generally believe that you might make

21 it there on time. But not here.

22 Second, while we were all bored, I'm sure --

23 I'm sure you were all bored yesterday and stuck at home

24 with the closing of everything. I happened to pick up on

25 the web that there was one institution in Washington,
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1 D.C. that remained open during the great -- during the

2 great Washington ice storm on President's Day, and that

3 was the Embassy of Iceland. They seem to know how to

4 deal with things better than we from either Washington or

5 Texas.

6 I have a few things to say. First,

7 Commissioner Thompson, my commendation to you for

8 organizing this conference and helping us all to focus on

9 these issues, as well as the leadership of Chairman

10 Muris. I am one that believes that the FTC should take a

11 stronger role in fraud prevention and fraud apprehension,

12 and a stronger role in consumer protection than perhaps

13 FTC has been allowed to in the past. And I think that

14 this is a good example of that.

15 I plan to kind of take it from the 30,000 foot

16 view and not try to give you all of the answers, mainly

17 because I don't know them. However, during questions and

18 answers, if you want to give me one of the answers, I can

19 ponder about what the question should have been. Later,

20 in the next two days, there will be plenty of people to

21 give answers. I do bring particular attention to Bob

22 Jones, Fleet Bank Boston, and Robin Slade of BITS, which

23 is the sister organization to Financial Services

24 Roundtable, who, I think, will provide some rather

25 detailed and telling and informative data on fraud
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1 reduction initiatives that have been taken -- and results

2 of those initiatives that have been taken over the course

3 of the last 12 months by financial services institutions

4 themselves.

5 It should be stated at the outset that

6 financial institutions -- particularly large financial

7 institutions -- in general have a particular interest in

8 the area of fraud in general and of cross-border fraud

9 specifically, because our companies are in fact the

10 victims. Now, consumers are victimized in terms of

11 inconvenience and sometimes the inconvenience can be

12 quite overwhelming. That's one of the challenges that we

13 have to face. But in terms of the monetary loss, the

14 monetary loss almost exclusively goes to the institutions

15 themselves.

16 And then secondly -- so not only are we the

17 financial victim. But then secondly, our companies end

18 up losing customers, in some cases, as customers blame

19 their financial institution for the fraud as opposed to,

20 one would think, logically blaming the fraudster. But

21 nevertheless, the financial institutions themselves

22 become victims in two ways.

23 Financial Services Roundtable is an

24 organization of a hundred of the largest financial

25 services companies in the United States, without regard
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1 to whether they used to be banks, or used to be insurance

2 companies, or used to be investment banks, or used to be

3 consumer financial companies. Or, generally, they are

4 now all of the above. Our companies collectively have

5 about 1.3 trillion dollars in market cap. That is give

6 or take two or three hundred million dollars less than it

7 was a year ago, with a total income or revenue of 500

8 billion dollars and 1.6 million employees.

9 We contribute collectively -- by survey we just

10 completed, we contribute 1.1 billion dollars in

11 charitable contributions -- direct charity -- to the

12 communities that we serve, and provide some 60 billion

13 dollars a year of community development lending on

14 investment. In short, the size matters these days in

15 terms of finance. That's not to say that there is not a

16 significant and a very powerful role for smaller

17 institutions. But it is true. I can say that if you

18 live in it, if you work it, if you drive it, if you work

19 at it, if you wear it, if you consumer it or if you enjoy

20 it, some or all of that part of the American life was

21 probably financed by one or more of these 100 companies.

22 I have four points to make on the topic. One

23 is that the -- is that restrictions on appropriate

24 information management, particularly within a company --

25 a large company -- does not -- not only does not reduce
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1 fraud. Oftentimes those restrictions on information

2 management will cause more fraud. Secondly, the cross3 border fraud is a mere image of age old fraud thousands

4 of years old, whether it's across the street or across

5 town.

6 Third is that electronic transactions, both the

7 speed and the convenience, and the low cost of

8 electronics transactions are a dramatic positive for the

9 world today. Perhaps as positive and as much benefit as

10 anything that we've seen in recent decades. It improves

11 the living standards, both for Americans and for citizens

12 throughout the world. Fourth is that we ought to examine

13 -- and here's the area in particular I don't have the

14 answers for a few of the questions. We ought to examine

15 or reexamine some of the relationship between both the

16 regulatory agencies and the law enforcement agencies and

17 the private sector financial institutions. I think there

18 are some areas there for improvement.

19 So first, enhanced consumer protection cannot 

20 -- enhanced consumer protection cannot be achieved by a

21 reduction of information flow. Oftentimes we hear

22 advocates advocate stronger privacy protection, which our

23 companies also advocate, but then the results or the

24 enforcement of that stronger privacy protection is not

25 privacy protection or consumer protection at all, but
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1 it's a restriction of information flow. In fact, in

2 terms of fraud reduction, it is the appropriate

3 management and the fast access to information, both

4 within companies and between companies, that both

5 identifies fraud quickly, can stop it and can oftentimes

6 apprehend the criminal.

7 I think in one case about a year ago or two

8 years ago, one of my companies with an office in Omaha, a

9 fraudster showed up to cash a cashier's check, or take

10 out $100,000 or so to deposit with a cashier's check. 

11 The bank teller -- in this case, it was a bank. The bank

12 teller looked on the screen and saw the account was in

13 California. Matched up the age, height, weight and other

14 descriptions on the screen. Realized that the person in

15 front of them didn't match with the information on the

16 screen. Called the FBI and a 10 million dollar fraud

17 ring was broken up. Introduce 90 day limitations or

18 restrictions on information flow, the various opt in and

19 opt outs that are often suggested, and that information

20 would not have been available.

21 The second example -- and I won't go through

22 the details. You all know how stolen credit cards are

23 quickly apprehended. That's all done through information

24 flow. I've watched it done. I invite any of you to come

25 and help -- come and watch. It's often done with four,
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1 five or six different companies. Sometimes companies

2 within the same parent company. Sometimes different

3 companies analyze the transaction in a matter of minutes

4 and can stop the fraudulent transaction quickly.

5 Second, cross-border -- it's important to note

6 that cross-border fraud is part and parcel, just simply a

7 faster version of age old fraud. We all think about the

8 Nigerian scam or the 419 Coalition, which purports that

9 some five billion dollars of money has been defrauded

10 through the Nigerian scam. I'm not confident that it's

11 actually that much, but I don't know how much it's been. 

12 But the Nigerian scam is basically a modern day

13 electronic version of the old pigeon drop in which

14 somebody -- two people would walk up to somebody else,

15 the victim, on the street and say I just found some

16 money, and if you will vouch for me and tell me your bank

17 account number, I'll be happy to share it with you. So

18 some things don't change. They just become electronic. 

19 That doesn't mean it's not a significant problem. It is

20 a significant problem, but it's the same problem as it's

21 always been.

22 Third, it is important to note positively and

23 affirmatively that the dramatic rise -- the cross-border

24 rise of both ATM remittances and debit cards is an

25 enormously positive development for the world population
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1 in all manner of ways. From a globalization viewpoint,

2 it dramatically assists the globalization of the economy

3 in a positive way. It also introduces a level of

4 fairness that is otherwise unavailable. It's just simply

5 not fair for people who are living in one country to have

6 to consume the enormous amounts of costs and

7 inconvenience and wrong money -- currency exchange rates

8 and costs of telegraphing or money ordering money, when

9 in fact ATM technology is so widely available.

10 So remittances is a positive thing, both for

11 the United States as well as other world economies, but

12 more importantly, it's a matter of fairness and it's a

13 positive thing for the individuals involved. 

14 The same with debit cards. Debit cards are the

15 fastest growing phenomenon in finance today -- in

16 consumer finance today. I think Visa estimated that they

17 are now up to -- in 2001 up to 960 billion dollars of

18 debit card transactions. It is both dramatically -- it

19 has been well accepted. Far better accepted than credit

20 cards or paper checks overseas in developing countries,

21 but it's also amazingly well accepted not by us baby

22 boomers, but by the generation X-er's in the millennium,

23 because they like it. They like the idea of not ringing

24 up their credit, knowing exactly how much money they have

25 in their account at any one time. And if they can't
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1 afford a cup of Starbucks coffee, then they just simply

2 won't buy it. So values have made it into the new

3 generation and are reflected in the new debit card.

4 And last, if I can find the other page of my

5 notes, is the role of industry and law enforcement. It

6 seems to me that there are some areas that we ought to

7 explore together for ways of improving the use of

8 information. The information that we have and trying to

9 get that information to others.

10 One that does come to mind is the current

11 suspicious -- the so-called suspicious activity reports

12 (SAR) system that we have now. It may well be -- and I

13 will probably overstate this badly, so the opinions I

14 express are only the opinions of Mozelle Thompson and not

15 -- no. But I'll probably overstate this.

16 COMMISSIONER THOMPSON: Let me tell you, if

17 that is the worst thing anybody has attributed to me this

18 week, then I'm doing okay.

19 MR. BARTLETT: It could be that our current use

20 of the suspicious activity reports is the elephant in the

21 corner. Everyone knows it is not working very well. It

22 does work some -- occasionally -- but really more as a

23 verification or as a way of backup. We're going back to

24 check on something that we already knew was fraudulent as

25 opposed to apprehending fraud itself.
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1 The last estimate, it now looks like -- we

2 don't have the final data. But it looks like there will

3 be some 300,000 SARs filed in the year 2002. That's an

4 estimate based on extrapolation of the first five months

5 of 2002. That compares to 200,000 in 2001, which

6 compares -- I think it was something like 70,000 in the

7 year 2000. It's like the old Davis Bacon paper reports. 

8 And as I understand -- and I may be wrong on this. In

9 reading through all the data, it appears SARs are still

10 paper filed and they are pieces of paper.

11 If a bank officer or -- these are not just

12 banks. If a financial institution officer actually does

13 have a suspicious report -- that is, they think they have

14 a Joe Terrorist in front of them and they want to

15 apprehend him -- they literally go to part three, line

16 32n, to say terrorist about to knock down a building. 

17 There is no mechanism that I know of for -- and, again,

18 I'm at the risk of overstating. The mechanism is not

19 apparent for how you would actually report a terrorist.

20 Instead, financial institutions are protecting

21 themselves by filing everything that fits the 2,000 or

22 5,000 dollar category, depending on whether it is an

23 institution or a clearing house, and then let the

24 government sort it out. And no government in the world,

25 and least of all the U.S. government, has a capacity to
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1 sort out that many reports. Again, I don't know the

2 answer, but I suspect that if we all work on it together,

3 we could figure out a way to actually cause suspicious

4 reports to be filed in a timely way to get to people that

5 would have that information.

6 Similarly with identity thief, there is today

7 an insufficiency at the federal level of prosecution of

8 identity thief. And one of the difficulties that our

9 institutions have is when we identify an identity theft

10 that has happened, the best we can do in most cases --

11 there are exceptions to this -- is to take it to the

12 local DA. Usually the theft that we have identified

13 involves one transaction or one identity and it's hard to

14 make much of a case on it. So the local DA may or may

15 not prosecute, and if they do, it may or may not achieve

16 any significant punishment to stop it.

17 One of the things that our organization will be

18 proposing will be to make identity theft a federal crime

19 -- a federal cause of action -- and then devote some

20 resources to it, because in fact it is -- in my opinion,

21 it is the number one cause for concern/alarm/distrust of

22 institutions among American consumers today.

23 So fraud, whether it is across the street or

24 across the world, is fraud, whether it is done with a

25 pigeon drop or with electronic information. And then
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1 fraud, both identity theft -- the identification and

2 prevention of fraud can be done faster and better by the

3 appropriate management of electronic information as

4 opposed to closing down electronic information.

5 COMMISSIONER THOMPSON: Thank you. Thank you. 

6 Susan?

7 MS. GRANT: Thank you. Well, I would like to

8 start by commending the FTC for having the only clear

9 sidewalk that I've seen in Washington so far, but getting

10 to that sidewalk is a big challenge. Almost as big as --

11 COMMISSIONER THOMPSON: Are you accusing us of

12 doing something deceptive?

13 MS. GRANT: No, no, it's great. I realize that

14 you're not responsible for those big snow banks on either

15 end of the street. But it's almost as big a challenge

16 getting around town as dealing with cross-border fraud. 

17 My job is to frame this issue from the consumer

18 perspective.

19 As the marketplace expands beyond national

20 boundaries, it provides a lot more opportunities to

21 consumers, obviously, to find goods and services that

22 meet their needs, to comparison shop for the best prices

23 and to transact more conveniently, especially now 

24 on-line. But consumers aren't sure it is safe. In our

25 surveys about on-line shopping, we find that consumers
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1 are nervous about putting their financial information 

2 on-line. They worry about the privacy of the other

3 information that they provide and the security of that

4 information once it is in the hands of the merchant, and

5 they're concerned about whether or not the merchant will

6 be fraudulent.

7 It is true that many of the scams that we see

8 now on the Internet are the same as we've seen conducted

9 by telephone and mail, but there are new ways of paying. 

10 For instance, not only debit cards but intermediary

11 services such as Pay Pal, that don't give consumers the

12 same protection that they have -- the legal protection

13 that they have with credit cards. So that is a concern.

14 We talk to consumers daily. We know from our

15 conversations with them that they are clueless about the

16 differences between jurisdictions and national laws, and

17 there is no reason, frankly, why they should understand

18 that. And they also assume that somebody is looking out

19 for them. In our on-line shopping surveys, we've found

20 that a significant number of consumers think that

21 merchants are screened by someone before they can put up

22 a web site on the Internet to make sure that they are

23 legitimate.

24 And consumers also expect government agencies

25 to help them if they are defrauded with their individual
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1 complaints. They want their money back, and they don't

2 want to hear about barriers. They also expect that their

3 banks, courier services, ISPs and others that facilitate

4 transactions will protect them and help them. And once

5 they are burned in cross-border transactions, they're

6 very wary about taking that risk again. So going back to

7 a key point that Commissioner Thompson made, the

8 potential of the global marketplace cannot be fully

9 realized if consumers don't have trust and confidence in

10 using the Internet and other new medians to take

11 advantage of the global marketplace.

12 Consumer organizations do and want to continue

13 to work with governments and businesses to combat cross14 border fraud, both with consumer education -- which we

15 do. I put out as an example a brochure that we produced

16 with a grant from MasterCard about how to shop safely 

17 on-line. But also working to influence corporate policy

18 and government policy about what are the best ways to

19 protect consumers and helping to get information about

20 suspected fraud to the appropriate government agencies.

21 COMMISSIONER THOMPSON: Thank you, Susan. 

22 Scott?

23 MR. COOPER: As the traditional role of cleanup

24 on fine points, I'm going to agree with the previous

25 commenters. And of course with this panel, it's quite
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1 easy.

2 COMMISSIONER THOMPSON: We'll change that.

3 MR. COOPER: Then I'll open myself up to

4 constructive criticism. First of all, I would echo what

5 Steve said about businesses can be victims as well. And

6 I think this is not always something that we want to

7 publicize, but I think businesses can be just as much a

8 victim of cross-border fraud as consumers. And so we

9 have a vested interest to try to find solutions that will

10 work in the real world to get at these issues.

11 I think there is also a distinction that can be

12 made between large businesses, such as Hewlett Packard,

13 that have preexisting relationships with law enforcement

14 officials around the world. We can take care of our own

15 problems, but small businesses may be an entirely

16 different situation and almost in a sense are surrogates

17 for consumers themselves. When they have -- when a small

18 business has a fraud problem or a problem with patterns

19 of abuse, in a sense they are acting as a consumer more

20 than they're acting as a business.

21 So I think that the world that we're talking

22 about here is much larger than just consumers, or just

23 larger than, say, trans-border businesses, multilateral

24 businesses and consumers. You also have a whole subset,

25 I think, of small businesses that need to be included in
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1 this as well.

2 I think Susan's point, though, really gets to

3 the heart of it. And that is, until we can get a handle

4 on cross-border fraud, consumers are not going to feel

5 confident by entering into transactions on the Internet

6 or other fora that would otherwise empower them. That if

7 consumers can find ways by feeling protected to shop

8 anywhere they want to on-line across borders, then that

9 truly is consumer empowerment. That is something that

10 serves consumers' interests. It is very likely to drive

11 down prices. It is very likely to lead to more

12 information being available to them, and so that is just

13 a good thing in itself.

14 But they're not going to feel that way until

15 they feel comfortable that the marketplace out there is

16 truly clean and well lighted, and, obviously, that is not

17 the case today. So it is in everybody's vested interest

18 -- or in the case of businesses, enlightened self19 interest -- to try to resolve and to try to at least get

20 a handle on cross-border fraud.

21 It has been pointed out by Sitesh that this is

22 clearly a difficult issue because of the jurisdictional

23 issues. We have already seen that in the off-line world. 

24 It is only accentuated, I think, in the on-line world. 

25 And so that may be a place where I think we need to have
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1 more of a continuum of effort by both the -- a

2 partnership by both the legal authorities as well as the

3 private sector and consumer groups to try to get a handle

4 on these things.

5 I think there are some very cautionary lessons

6 out there about what happens when things do go wrong and

7 they aren't addressed soon enough. And I think at least

8 in the United States the classic example is the 900

9 number, where in the late '80's and early '90's you had a

10 very -- at that time a very sophisticated technology in

11 900 numbers, where a lot of information could be gotten

12 easily to consumers at a relatively low cost with a

13 billing mechanism through the phone companies that

14 seemed, you know, very, very straightforward and

15 transparent.

16 Of course, we know what happened to the 900

17 numbers. It became sort of the nesting place for

18 fraudulent activity, scam artists, you know, and sort of

19 downscale information services and the whole industry

20 just went south. And ultimately it probably would have

21 been superseded by the Internet anyway, but it went south

22 well before the Internet came along. And so you

23 essentially had this very important technology, or

24 transition technology, and that the lesson,

25 unfortunately, we have to take from that technology is
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1 that when things go wrong, it is very hard to pull it

2 back.

3 I'm not saying that that is going to be the

4 case for the Internet, because I don't think it is and I

5 think we're well beyond that inflection point where

6 things could go south. But clearly it is a problem as

7 far as the continued growth of the Internet, of

8 electronic commerce and especially global electronic

9 commerce. And for all the reasons we discussed, global

10 electronic commerce is a great tool for consumers. It is

11 a wonderful opportunity for empowerment of consumers, as

12 well as sort of the growth of the global economy as a

13 whole. The more transactions you have, the better off

14 the world economy is going to be.

15 So dealing with these problems is something

16 that I think really brings everybody to the table, or

17 should in a sense bring everybody to the table to find

18 practical solutions, and I think that certainly includes

19 business as well. As far as developing these new

20 solutions, I think there are some models out there that

21 we can look at that are successful. I think one is the

22 telemarketing world that the FTC developed, again, in the

23 early '90's. And there I think that the key was the fact

24 that within that legislation was an agreement that the

25 states -- the State Attorneys General -- could enforce
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1 the federal rule.

2 And so you had in a sense that ecumenical

3 approach toward enforcement where you had a single law. 

4 You had -- you had a national rule enforced by the FTC,

5 but under the FTC the State Attorneys General could move

6 in to go after interstate boiler rooms on telemarketing,

7 which was the great problem. A bit like the Nigerian

8 scam, you had people boiler room, say, in Florida, to

9 pick an example, preying only on citizens in Iowa. Well,

10 the Attorney General of Iowa -- in that case Bonnie

11 Campbell -- was really limited in what she could do to

12 protect her citizens, you know, of her state. So you

13 needed to get some approach that was national to go after

14 problems that really were in a sense local.

15 That, I think, is the model we need to look at

16 here, is that if we can all work together across borders

17 to try to develop a model similar to, I think, the

18 telemarketing model, that, I think, may be the goal we

19 need to look for. And just parenthetically, I hope that

20 that same model that was used in telemarketing of

21 bringing in the Attorneys General may also be the model

22 that we see in Congress -- this Congress, I hope -- of

23 developing privacy legislation so that the states will

24 indeed be able to enforce a national uniform federal

25 privacy law. I think consumers need it. They should
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1 have had it for years. But also, it should not be done

2 at a state by state level. So that is, again,

3 parenthetically our desire at HP for privacy.

4 I think what is being done now, the start of

5 developing this public/private partnership, is moving in

6 the right direction. In particular, I want to commend

7 the work that is being done on econsumer.gov. I think

8 Pablo is in the audience. I know Hugh and Maneesha are

9 as well. I think that is an example of where mainly I

10 think OECD countries, but others as well, have joined

11 together to pass on information back and forth when they

12 discover cross-border fraud.

13 What I think the next step may be for

14 econsumer.gov is the development of a continuum, so that

15 when you have not only problems with fraud -- outright

16 fraud -- but say patterns of abuse, or even where there

17 may be cases just of consumer disputes that need to be

18 resolved, that is not going to be the job of

19 econsumer.gov or even local authorities such as the FTC

20 that will not handle, obviously cannot handle, case by

21 case disputes.

22 What I would suggest is that we need a

23 continuum where you have groups -- and I think in the

24 United States it might be the Better Business Bureau. I

25 think globally you have through the Better Business
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1 Bureau and groups like Eurochambres and the Consumer

2 Council in China and eCom in Japan the development of

3 something called the Global Trust Mark Alliance, where

4 you have an umbrella of organizations that will supply a

5 trust mark to give credibility to companies that are

6 offering a web site on-line, but also a dispute

7 resolution process, so that if a consumer has a problem,

8 they know where to go with their concern.

9 In the United States, the BBB will handle not

10 only problems that come up through their own member

11 companies, but where they can, they will also handle

12 disputes of companies that don't belong to the BBB. And

13 they will also publicize the results of that, and if

14 there is a pattern of abuse and a company is showing that

15 pattern, they will either pull the seal -- publicly pull

16 the seal from that company, or if they're not a member,

17 list that on a public web site who those companies are. 

18 So if you are a consumer that is trying to do due

19 diligence, the first steps you should probably do is go

20 to the BBB web site and see if the company that you're

21 dealing with is on that site as a bad actor.

22 That may be part of the solution, I think,

23 globally as well, but if you can get a system where you

24 have dispute resolutions built into consumer redress that

25 belongs to trust mark systems that are all
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1 interconnected, then I think consumers can feel more

2 confidence in shopping on-line looking for those seals. 

3 And also when those seal programs discover a pattern of

4 abuse for potential fraud, they should have the

5 obligation of passing that on up to the local authorities

6 or to econsumer.gov, so that you have a continuum back

7 and forth of the public/private partnership that we're

8 all talking about here.

9 I would also hope that when econsumer.gov

10 discovers cases that they may think are really disputes,

11 rather than patterns of abuse or fraud, that there is

12 some way of getting those disputes back to the

13 organizations -- the trust mark organizations -- that can

14 actually handle that, rather than, I think, is the case

15 now where they're just kind of -- the case is accepted by

16 the FTC, but nothing can be done because they can't

17 handle individual disputes. So again, I think developing

18 that continuum may be one of the next steps, I think,

19 that can be taken. I think all the actors are out there. 

20 We just need to kind of develop the on ramps between

21 them.

22 Lastly, I think that there are groups out there

23 that are very active in trying to come up with this

24 partnership, and I'll just mention a couple of them. One

25 is the Global Business Dialogue in Electronic Commerce. 
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1 We have done a lot of work on developing guidelines and

2 best practices for things like ADR -- for dispute

3 resolutions -- as well as privacy and trust marks. The

4 ICC, I think, is becoming more active in this area, and I

5 think will hopefully be more active within the OECD

6 process in coming up with solutions a bit like we're

7 talking about today.

8 I'm also pleased that the GBDE has been able to

9 work with Consumers International in developing best

10 practices and guidelines that both consumer groups and

11 businesses could agree should be the best practices of

12 what merchants and ADR providers should provide in the

13 way of dispute resolution services. We will be having a

14 meeting here in Washington on March 19th with GBDE and

15 Consumers International. I think we're close to finding

16 agreement on a memorandum of understanding. I've been

17 saying we've been close now, I think, for at least six,

18 maybe nine months. Sooner or later I'll be right, but I

19 think we're even closer now.

20 So I think that there is a lot going on that

21 hopefully can be part of that partnership, and we would

22 welcome thoughts about how we can continue them.

23 COMMISSIONER THOMPSON: Thank you. Well, we

24 all heard a lot this morning. And I recognize that there

25 is a cowbell ringing in the corner. It is interesting
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1 that there seems to be people coming from a wide range of

2 places, but actually reaching some consensus on some very

3 important principles. One is the importance of actually

4 looking at cross-border fraud and trying to find new ways

5 to combat it, not through traditional ways that we've

6 been looking at it. Because in some ways, I think in

7 this area almost more than any other area I've seen in a

8 long time, that it is very clear that laws and rules are

9 effective for those who obey laws and rules.

10 But for those who are engaged in cross-border

11 fraud, the traditional barriers that we see, how we

12 traditionally think about compartmentalizing information

13 and then confidentiality and other things, actually work

14 to the disadvantage of consumers sometimes and more to

15 the advantage of those who commit fraud.

16 But I think there are three areas where I see

17 some real opportunities for partnerships. One is how we

18 talk about consumer expectation. You know, Susan, you

19 talked a little bit about what consumers think and who

20 they think should be responsible, and where they think

21 they can be getting information. And I think that from

22 the business side, and the government's side, it is

23 important for us to talk to -- engage in partnerships

24 together where we can talk to consumers about what they

25 can expect, what they should expect and when they should
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1 ring bells and whistles. That is part of the challenge,

2 too.

3 Second, is providing more tools for consumer

4 empowerment, including not only some of the areas that

5 you talked about, Scott, like BBB Online and creating

6 dispute resolution mechanisms, but actually even

7 technological tools that consumers can use to actually

8 have a safer transaction.

9 And finally, I think that, Steve, you and

10 Sitesh talking about a couple of other issues that are

11 really important. One is how do -- one thing I'll note,

12 Steve, that what a lot of people don't recognize, is

13 before we started talking about global economy, the

14 financial services industry was involved in global

15 economy already. And so the idea of greater cooperation

16 between government and business, not only to understand

17 what's going on out there but also to make enforcement

18 more effective, are areas where we can have some real

19 partnerships.

20 Now, I wanted to have more cross talk. We

21 don't have that much more time. I wanted to give the

22 audience a chance to ask some questions, if they have

23 them. Any questions out here? Don't be shy. I was a

24 law professor. If you don't ask questions, I'll start

25 asking you.
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1 Okay. And it will be helpful if you identify

2 yourself so we know who you are.

3 MR. EVANS: My name is Rob Evans. Steve, I was

4 just curious on your comments. You talked about the

5 restrictions on the use of information and data and how

6 that is counterproductive. But isn't part of the problem 

7 not so much on the fraud prevention, but at least in some

8 of the large institutions, the marketing folks are so

9 aggressive in their telemarketing that you do see abuses

10 from very legitimate organizations that are kind of

11 running very aggressive telemarketing and mail

12 solicitations, and in the same spectrum of marketing

13 practices, you've got the really bad players.

14 Is this a problem? I mean, in terms of the

15 large institutions, that the fraud prevention people have

16 their mission for which the data is vital, yet the

17 marketing people are using that information so

18 aggressively that it is perhaps creating a fertile ground

19 for the real fraudsters?

20 MR. BARTLETT: Well, I don't -- you know, that

21 is, of course, the horns of the dilemma that we're all

22 trying to struggle with. First of all, it is important

23 to note categorically that it is the availability and the

24 use and the collection of information -- electronic

25 information -- and the ability to use it that is the
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1 number one, and probably number one through ten,

2 protection against fraud by consumers. And that is often

3 overlooked and that's why I appreciate the chance to say

4 it again in response to your question.

5 With regard to marketing, that is, of course,

6 where the current political debate is. It would be a

7 major breakthrough for public policy, for the public

8 debate, if we could, in fact, engage in the privacy

9 debate, or the consumer protection debate, as a debate on

10 the appropriate use of consumer information for marketing

11 purposes. The difficulty -- let's use one example,

12 Gramm-Leach-Bliley. Gramm-Leach-Bliley, while all of the

13 words that were used about Title V of Gramm-Leach-Bliley

14 said we want to -- we want to allow the use of

15 information for other than marketing purposes, and then

16 put some opt in and opt out restrictions or opt out

17 restrictions on marketing, that wasn't the way the bill

18 was drafted.

19 And try as we might, we couldn't get it drafted

20 that way. It ended up drafting where it is the -- the

21 opt out applied to use of all information with, I think,

22 it was seven specific American Airlines Advantage miles

23 type of restrictions. And so everything else then fell

24 into it and all the restrictions weren't applied. So if

25 we could get the debate down to the appropriate use of
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1 the information, in giving consumer choices on the use of

2 the information, it would be a major -- major -- step

3 forward.

4 So that's point one. You're right. I don't

5 accept the widespread notion of abuses. There are abuses

6 that occur. You know, I got a call yesterday from the

7 Disabled Firefighter Veterans of North Arlington County

8 or something that was, you know, pretty clearly having

9 nothing to do with either disabled or firefighters. That

10 is an age old -- an age old scam done on the telephone

11 having nothing to do with the collection of information. 

12 No doubt he was calling from the phone book.

13 The FTC's recent efforts at a national do not

14 call list, and the Congress and the House passing a bill

15 last week is a step forward. I have to say, though, it

16 is a significant step backwards if we don't get national

17 preemption for a national do not call list, because then,

18 instead of a national do not call list, we will have 51 

19 -- or if you count the territories, 57 do not call lists

20 with an overlay, and thus, you don't have any do not call

21 lists or you have 57 of them and who knows and how can it

22 be enforced? So preemption is key to providing consumer

23 protection. That's probably not the -- consumer choices

24 with regard to the use of the information on marketing. 

25 And preemption becomes key to that.
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1 MS. GRANT: Can I just respond to that? We

2 don't have time to do the whole on-line privacy debate

3 here, and I'm not going to attempt to do that. But I do

4 want to point out that Gramm-Leach-Bliley has huge

5 loopholes in it for the sharing of customer information

6 when it comes to marketing with other parties with whom

7 you have some kind of promotional arrangement. And that

8 is troublesome.

9 But even outside of the context of financial

10 institutions, in telemarketing over the last several

11 years we have seen a trend towards using what's called

12 pre-acquired account information, where telemarketers are

13 sharing consumers' financial account information in order

14 to facilitate sales. And the Federal Trade Commission

15 has recently enacted new rules concerning that. We are

16 beginning to see that kind of information sharing among

17 on-line vendors and there are no rules restricting that,

18 and that's of major concern to us.

19 MS. WOODARD: Okay. My name is Gwendolyn

20 Woodard. I would like to know what plan does the FTC

21 have in place to deal with cross-border fraud when it

22 comes from another continent or another country? How

23 would you deal with that when it is perpetrated on U.S.

24 citizens?

25 COMMISSIONER THOMPSON: Well, we're working on
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1 that right now. One of the things that we do -- this is

2 one of the reasons that Hugh's unit exists, which is the

3 International Consumer Protection. Let me talk about two

4 different levels. One, on a direct individual level we

5 take complaints and we look for trends or types of

6 problems within those complaints, and that we then take

7 action against certain kinds of fraud schemes that we see

8 are particularly pervasive, whether it is foreign

9 lotteries, as you heard earlier with Senator Collins

10 referring to, or whether it is different kinds of

11 fraudsters who are trying to victimize American citizens.

12 We do take actions, and we work together with

13 our colleagues internationally in ICPEN, which is --

14 because what we find, if it's victimizing our citizens,

15 they're usually victimizing other citizens in other

16 places, too. So that we try to coordinate some of our

17 activities so that we have an international law

18 enforcement presence. Now, I will tell you now on a more

19 macro level that there are current barriers that prevent

20 us from sharing some kinds of information and that some

21 countries don't have the same kinds of remedies or

22 investigatory powers as other countries.

23 One of the things we're working on with the

24 OECD Consumer Policy Committee is to have a

25 recommendation to the 30 largest economies about very
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1 specific types of things they should be doing in order to

2 bring down some of those barriers to make cross-border

3 law enforcement more effective. I am hopeful that we

4 will be able to get through that this spring. It is

5 something important that we're working on, because we're

6 realizing a lot of those restrictions, they only bind law

7 enforcers. They don't bind the fraudsters. So those are

8 some real challenges that we're seeing, but we're working

9 on that right now.

10 But that's not to say that we are not also

11 working bilaterally. We have relationships with the

12 ACCC, with the Canadians and with various other countries

13 to deal with fraud on a cross-border basis and we do it

14 fairly regularly. Very regularly.

15 MR. BHOJANI: Can I just add to this with a

16 specific example to highlight what the FTC is doing to

17 protect American consumers? There was a matter that

18 involved a fraudster from Australia. A gentleman who

19 decided that the world's population was too large and he

20 wanted to take a unilateral action to reduce it by

21 selling oral contraceptives over the Internet. Now, oral

22 contraceptives in America cannot be sold without a

23 prescription, just as they cannot be sold in Australia

24 without a prescription.

25 The FTC and the ACCC have worked together to
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1 shut down that web site, and that gentleman has even been

2 put behind bars for contempt of court in Australia as a

3 result of the joint enforcement cooperation between the

4 FTC and the ACCC in Australia.

5 COMMISSIONER THOMPSON: But it is clear that we

6 have to do more. Other questions? Going to this side

7 first.

8 MR. WESTON: My name is Rick Weston.

9 COMMISSIONER THOMPSON: Where are you from,

10 Rick?

11 MR. WESTON: I am from California. You can

12 tell, because I didn't know about the dress code today. 

13 I'm also a technologist.

14 COMMISSIONER THOMPSON: Oh, that explains it.

15 MR. WESTON: I'm the CTO of the Registrars

16 Constituency.

17 COMMISSIONER THOMPSON: Can I take off my tie,

18 then?

19 MR. WESTON: You can.

20 COMMISSIONER THOMPSON: Okay.

21 MR. WESTON: I'm also a director of the second

22 largest community development credit union.

23 COMMISSIONER THOMPSON: Good.

24 MR. WESTON: The Santa Cruz Community

25 Development Credit Union in California.
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1 COMMISSIONER THOMPSON: Sure.

2 MR. WESTON: And my question is for Steve. 

3 When you talk about sharing information between

4 organizations for non-marketing purposes, I was wondering

5 if you could speak about the accuracy of that information

6 and ensuring that. It doesn't seem appropriate to share

7 information that may be inaccurate about these

8 individuals. Have you given any thought to that?

9 MR. BARTLETT: Well, it's not especially

10 productive, either, so no one has an incentive to share 

11 -- to have non-accurate information or to share it. So

12 have I given thought that either individuals or companies

13 or governments have non-accurate information about

14 individuals? I'm certain that that's true. I'm certain

15 it has always been true. I'm not sure that that tells me

16 what to do other than institutions try to get as accurate

17 information as they can.

18 If it's for marketing purposes, it almost falls

19 into the “no harm no foul.” That is to say, if a company

20 has a policy of making sure that when one of their

21 customers pays off their student loan, that they're given

22 a reminder or an opportunity to open up an IRA, if they

23 don't have one, and using the same payments they had been

24 making to their student loan. And so if they call or

25 write and say you're paying off your student loan. 
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1 You've been paying $325 a month. If you put the same

2 amount of money into an IRA, here's how much you can have

3 in 20 years. And if the customer says, oh, sorry, bud, I

4 paid off my student loan 20 years ago and I'm now 65

5 years old, you have bad information. It falls into the

6 “no harm no foul” and so they turned down the product.

7 Accuracy of information is something that we

8 all work on. I'm not sure that it tells us about the use

9 of the information. The use of the information should

10 still be permitted to benefit the customers.

11 MR. COOPER: Commissioner, can I make one

12 comment on that? Over here to your left.

13 COMMISSIONER THOMPSON: No. Do I hear a

14 comment from the business community?

15 MR. COOPER: Or at least from Hewlett Packard. 

16 At Hewlett Packard we don't share with third party at

17 all, so that's neither here nor there. I think the point

18 you're raising, though, the accuracy of information, gets

19 to what I think may be the crux of what should be a

20 debate, I think, when we look at privacy legislation this

21 Congress, and that is the opt in and opt out. Because

22 obviously if you have an opt in, it is because people

23 want to share that information with you. So the accuracy

24 of that information goes up exponentially. You don't

25 have the deducts and the m-mouses that you have to, you
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1 know, scrape away from your files.

2 Having said that, I think it is a legitimate

3 debate, because obviously when you have an opt in, you

4 get a lot less information than you would from an opt

5 out. If you do go for an opt out, we think it definitely

6 has to be clear and conspicuous. We think that the FTC

7 has turned those words into a term of art, and we think

8 that the FTC has the right approach to what clear and

9 conspicuous should mean.

10 But at HP we do only opt in. There are a few

11 legacy systems where we're moving over. Legacy systems

12 are always a problem. But for the most part, we are

13 almost entirely opt in at HP. We think that that

14 information is good information. We will stand by that

15 information. Again, we think that would be a legitimate

16 place for a debate in Congress.

17 COMMISSIONER THOMPSON: I would love to take

18 more questions, but I think our time is about up. I

19 wanted to thank our panelists for being here. Can we

20 give them a little applause?

21 (Applause.)

22 I know quite a few of us will be around for the

23 remainder of the conference and here for questions. One

24 of the things that you will hear from us over the next

25 few days is exploring exactly what partnerships mean. 
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1 But I hope that what we will see come out of this is

2 opportunities to have a continuing dialogue so that we

3 can get at not just the 10,000 feet level on these

4 issues, but to be more specific and talk about real ways

5 that we can have partnerships.

6 So I thank you all for coming and I hope you

7 enjoy the rest of the conference.

8 (Applause.)

9 Why don't we take a 15 minute break and then

10 we'll start up again then.

11 (Whereupon, there was a brief recess in the

12 proceedings.)

13 MS. SLADE: We're the sister organization to

14 the Roundtable. Our members are the 100 largest

15 financial institutions. This was formed in 1996 by the

16 CEOs of those member institutions in order to address

17 technology and ecommerce related issues.

18 I manage the Fraud Reduction Program. I was

19 hoping today to have with me Bob Jones, who is the

20 Director of Operating Risk Management for FleetBoston

21 Financial. He is stuck in Boston. Bob co-chairs our

22 Fraud Reduction Steering Committee, which provides

23 oversight to the entire program. So I am presenting

24 Bob's presentation for him. If Bob were here, probably

25 the first thing he would say is fraud, we're against it. 
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1 That's Bob.

2 FEMALE SPEAKER: Excuse me.

3 MS. SLADE: Yes?

4 FEMALE SPEAKER: Is your microphone on?

5 MS. SLADE: I'm not sure. Is that better? Can

6 you hear me now? I feel like that commercial.

7 Okay. The Fraud Program was launched in 1998. 

8 It is one of the very first initiatives we took on. The

9 main goal of the program was to bring together the key

10 risk management representatives of the various financial

11 institutions in a noncompetitive environment in order to

12 discuss strategies for combating fraud.

13 There is a presentation available, if you don't

14 already have it. It is out on the table to the left as

15 you go out the door. And I will briefly run through the

16 slides. There is more information in the presentation

17 than I will give to you today. So as I said, really the

18 goal was just to bring the proper folks to the table so

19 that we could start talking about trends in fraud and how

20 we can combat them.

21 We have a Fraud Reduction Steering Committee

22 that has approximately 17 different financial

23 institutions, and then representatives from the American

24 Bankers Association, the Canadian Bankers Association and

25 the Independent Community Bankers Association as well. 
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1 This group is responsible for the direction and oversight

2 of the entire program. So it is purposely small and

3 strategic.

4 There are nine different working groups, and

5 within those nine working groups we have over 300

6 individuals from various institutions, the Federal

7 Reserve and also the various other industry organizations

8 participating. They focus on collections, debit cards,

9 electronification -- and that would be electronification

10 of a paper check -- identity theft, internet fraud, legal

11 and regulatory issues, shared databases, statistics and

12 successful strategies.

13 We have found that the most powerful benefit of

14 this program comes from the sharing of successful

15 strategies for combating fraud. And again, we've been

16 able to form a culture of trust among those that

17 participate so they feel open in sharing the information. 

18 This is probably one of the only areas or initiatives in

19 BITS where we bring folks together and they don't feel

20 competitive. So it really does work well.

21 In order to fully participate in the program,

22 we suggest involvement in three areas. One is to, of

23 course, join one or many of the working groups

24 surrounding the fraud issues. Two, to participate with a

25 national shared database of fraud information. And then
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1 also to participate in a quarterly loss reporting program

2 that is administered by the American Bankers Association. 

3 So that would be really the full involvement in the

4 program. I will talk more about the shared database and

5 about the reporting program later on in the presentation.

6 So among the educational tools that we have

7 created for our membership is a comprehensive guide to

8 account people and transaction databases, a white paper

9 on the electronification of the paper check, and then

10 later this month we will be releasing two additional

11 white papers: one on identity theft and one on internet

12 fraud.

13 I'm going to run through some of the activities

14 of the working groups, just a quick overview of what they

15 are currently working on. The collections working group

16 is our youngest working group. We formed it last year. 

17 The goal was to, again, bring together the key

18 collections folks from the various institutions in order

19 to create networking among the participants. Kind of

20 open the lines of communication in order to help

21 streamline the processes that are taking place. This not

22 only benefits the financial institutions. It also

23 benefits the consumer as well.

24 The debit card and ATM working group is

25 currently completing a foreign analysis survey to examine
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1 losses by country. This is, again, to do some trending

2 to figure out where the fraud is occurring, why it's

3 occurring, how it's occurring and then if there is

4 correlation. For example, is there a correlation between

5 floor limits for authorizations on debit cards in a

6 particular country to the type of fraud that is being

7 experienced there?

8 The electronification working group last year

9 released a white paper entitled, “The Evolution of Fraud

10 Prevention Technologies in a Truncated Environment.” The

11 goal of the paper was to research when we electronify a

12 check, how does it bypass our current fraud systems that

13 were developed for paper? So it was some intensive

14 research. It took a year and a half to complete. We

15 then presented our findings to vendors of fraud

16 technology in order to get them to enhance or create new

17 products.

18 The identity theft working group, as I said, is

19 about to release a white paper on identity theft. It

20 quantifies the problems and outlines best practices and

21 minimum guidelines for financial institutions to put into

22 place in order to help combat identity theft.

23 The Internet fraud working group similarly is

24 working on a white paper on successful strategies. It

25 focuses primarily on new account openings and
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1 transactions on-line.

2 The legal and regulatory working group was

3 developed, well, one, to keep us all informed on

4 implications that could occur in proposed or new

5 legislation, as well as just to provide support to the

6 various working groups under the fraud program when legal

7 issues arise.

8 Our shared database working group has been

9 lately trying to determine if we are able to either

10 leverage a national shared database or create a national

11 shared database for negative employee information. There

12 is a problem with employees that are found to have

13 committed fraud. They are released and within days are

14 hired at a bank down the street. So that's something

15 that we need to help prevent. So that's what that group

16 is looking at. Obviously, there is a lot of legal

17 concerns there, so this will take some time.

18 The statistics working group works closely with

19 the Quarterly Loss Reporting Program. They continue to

20 refine the report and develop new methodologies for

21 reporting. Again, I'll speak to that very shortly.

22 The successful strategies working group is

23 really a showcase for vendor technology. It is a way for

24 vendors to meet by conference call and present their

25 products to several financial institutions at one time. 
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1 So it helps us to get the information out to our members

2 as to what the new products are that exist.

3 And the Quarterly Loss Reporting Program. I

4 think the statistic speaks to it best, that between 1999

5 and 2001 those participating in the Quarterly Loss

6 Reporting Program administered by the American Bankers

7 Association experienced, on average, a 3 percent annual

8 decrease in losses per account versus an industry

9 increase of 1 percent. We're able to determine this by

10 the ABA 2001 Deposit Account Fraud Survey that was

11 recently released.

12 And really we find that this exists because of

13 sharing of information. Being able to -- once the report

14 is complete and each individual institution submits their

15 fraud losses by quarter, the ABA takes the information. 

16 They compile it. They trend. They do statistical

17 information that is given back to the institution. But

18 then they meet by regional conference calls, and it is

19 during these calls where the successful strategies are

20 identified. Really, the most benefit out of this is on

21 those calls, not the information itself. You're able to

22 meet with peers within your own region, and if one bank

23 is experiencing a lot less fraud in one area than

24 another, you're able to ask them, what are you doing that

25 is working? So it really has -- the members find
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1 tremendous value in this program.

2 We currently have 40 -- approximately 40

3 institutions participating in the check fraud loss

4 reporting. We have new reporting this year that is being

5 rolled out this year. Two new reports. One is Loss

6 Avoidance, and loss avoidance is the money we avoided

7 losing by stopping a fraud. This is important to know,

8 because fraud continues to rise, but so does our loss

9 avoidance, meaning less exposure for the banks. So it is

10 important to see that what we're doing, the processes and

11 the technology that we're putting in place, actually is

12 working.

13 We also have a methodology for reporting debit

14 card fraud losses. Again, these show very few

15 institutions participating, but it's just been rolled out

16 and sign-up is just occurring. So this has changed. In

17 the last couple of weeks, we've probably added six or

18 seven banks in each of the new reportings, and it will

19 continue to grow until the end of the first quarter of

20 this year.

21 So that's an overview of what we're doing at

22 BITS. You know, again, our focus has been more on types

23 of fraud rather than -- which happen across borders

24 rather than fraud -- cross-border fraud. But again,

25 that's our program. So I'm happy to take any questions. 
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1 Do we have a microphone? I don't know. Do we need a

2 mic? No? Okay.

3 MR. WESTON: I have a question that relates to

4 two of your areas.

5 MS. SLADE: Okay.

6 COMMISSIONER THOMPSON: No, I think we do.

7 MS. SLADE: Sure. We need a mic.

8 MR. WESTON: My name is Rick Weston. I have a

9 question about two of the areas that you've discussed.

10 MS. SLADE: Okay.

11 MR. WESTON: One happens to do with the sharing

12 of information and the Internet group. I'm wondering if

13 you collect the IP address that a transaction -- a debit

14 card transaction comes with from a merchant that is doing

15 Internet business.

16 MS. SLADE: If I could address that one first. 

17 I was really hoping to have Bob Jones here, because he

18 would be able to speak to the individual financial

19 institution perspective on this. And, also, we were --

20 Visa was going to be on the panel, who is doing a

21 tremendous amount in the fraud area relating to debit

22 cards and cross-border fraud.

23 So I'm afraid I don't have an answer for you on

24 that, because that's not something BITS as a group has

25 looked at. But it certainly may be something that the
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1 individual institutions are doing.

2 MR. WESTON: How would we find out? The reason

3 that I ask is that the Internet is effectively mapped. 

4 It's geography is described by IP addresses. And if

5 merchants -- Internet merchants -- registrars could

6 identify an IP address or a block of IP addresses as

7 having a significant amount of fraud, then that would

8 help as far as like the ability of the merchants to

9 determine if there is more risk by doing business with

10 the person from there.

11 MS. SLADE: Well, certainly when we break, if

12 you could provide me with your card, and I can provide

13 you with mine, I'll be happy to ask the group for some

14 further information on that.

15 MS. GRANT: Hi. Susan Grant from the National

16 Consumers League. I'm wondering if when you detect a

17 particular type of fraudulent activity that perhaps is on

18 the rise whether that triggers any kind of public

19 education on your part, either of your financial

20 institution members or of the public in general. I'm

21 thinking particularly of an increasing scam that we're

22 hearing about involving fake checks that are being given

23 to consumers in payment for things like cars that they're

24 trying to sell on the Internet, where the checks are for

25 more than the purchase price and they're told to deposit
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1 the money and wire the excess back to the crook, as it

2 turns out.

3 And we're especially concerned about this,

4 because when consumers ask their financial institutions

5 if the checks have cleared, they say yes, meaning that

6 the hold time is over, but not meaning that the check is

7 good. Consumers don't understand that, and they get left

8 holding the bag when the check bounces. Is that the type

9 of thing that might trigger any kind of educational

10 efforts on your part?

11 MS. SLADE: Yes. For instance, in the Internet

12 fraud area, that is one area where we are currently

13 working on how do we communicate with our customers. It

14 wouldn't be the area that I represent, or the risk

15 management area may not be the ones to speak to the

16 consumer. But we do provide information back to that

17 area in order to disseminate the information. But, yes.

18 MS. FOX: I'm Jean Ann Fox, Consumer Federation

19 of America. Are the reports that you described available

20 to the public? For example, the debit card loss report. 

21 Can we have a copy?

22 MS. SLADE: No, because we -- actually, the

23 only folks that get the reports are those that

24 participate in the survey. They are also the only ones

25 that are allowed to participate on the quarterly call. 
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1 The information is very sensitive. Obviously, if it got

2 into the wrong hands, they would see where what is

3 working where, and we certainly wouldn't want to do that. 

4 But the information is highly confidential.

5 MS. FOX: Well, we're interested in knowing the

6 general trends of whether debit cards are more or less

7 risky to use on the Internet than credit cards. We tell

8 people not to pay with a debit card on-line. We don't

9 want to know your specific bank names. But it would be

10 very helpful to the public to know the relative risk of

11 paying with a debit card versus a credit card.

12 MS. SLADE: Well, I certainly think we can

13 explore the possibility in sharing high level information

14 with not just the public, but also Maureen and I have

15 talked about it with the FTC. How can we leverage what

16 we're doing in order to benefit the greater? So it is

17 something that we'll certainly explore and talk further

18 about.

19 MR. BURG: I guess I have the microphone, so I

20 can go next. I'm Elliot Burg from the Vermont Attorney

21 General's office. I wanted to echo the earlier question

22 from the gentleman from California, but expand it a

23 little bit. Do you know if in the databases that are

24 being created there is information that would allow one

25 to identify originating parties for what are called tele-
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1 initiated entries -- telemarketing initiated automated

2 clearinghouse transactions? 

3 It's the same question, being able to trace

4 back in cases where people have reported fraud who the

5 originating party is. So is that a question that you

6 need to pass on to Mr. Jones?

7 MS. SLADE: Yes, absolutely.

8 MR. BURG: Okay.

9 MS. SLADE: I would have to do that. That is

10 not something we've addressed in BITS. But when you mean

11 tele-initiated entries, are you speaking about ACH

12 transactions?

13 MR. BURG: Yes, I am.

14 MS. SLADE: Okay. 

15 MR. BURG: So do these databases cover ACH

16 transactions?

17 MALE SPEAKER: What is ACH?

18 MR. BURG: Automated clearinghouse

19 transactions. So these are electronic funds transfers

20 from people's accounts. You look at your bank statement

21 and suddenly there is $400 gone electronically.

22 MS. SLADE: Well, again, this is NACHA, which

23 is the organization that has oversight for the ACH world. 

24 We are working with NACHA on their fraud area as well,

25 and that's something that I could certainly obtain some
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1 information and would be happy to get back to you.

2 MR. BURG: Okay. And do you know if any of the

3 database information in the past has been provided to law

4 enforcement agencies?

5 MS. SLADE: To law enforcement? I'm not sure. 

6 The PPS, which is Primary Payment Systems, has the

7 largest database currently. A national shared database

8 by the financial institutions for fraud transaction

9 information. I'm not sure. I would have to check with

10 PPS to see if that is shared outside the financial

11 services community into law enforcement.

12 MS. FOX: Well, then, would you know if it is

13 shared with your financial regulators?

14 MS. SLADE: I'm not sure, no.

15 MR. MIERZWINSKI: Ed Mierzwinski with U.S.

16 PIRG. One of your early slides talked about databases

17 you were establishing to fight fraud. I think you had

18 something like a 190 million accounts. Were those

19 consumer accounts or fraud accounts?

20 MS. SLADE: That is -- well, it is fraudulent

21 accounts. But that's over a period of years and it's

22 transaction information. That is the PPS database that I

23 was speaking to.

24 MR. MIERZWINSKI: So I guess my question is

25 really, doesn't the Gramm-Leach-Bliley Act allow you to
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1 share information for the purpose of fraud prevention?

2 MS. SLADE: It depends. We are restricted as

3 to the types of information that we can share. As I was

4 saying, we're trying to develop a negative employee

5 information database and there are lots of restrictions

6 as to whether we can do that or not. And we're thinking

7 that maybe through the USA Patriot Act that there may be

8 some leeway for us to create such a database. It's

9 something that we feel is extremely important. Fraud

10 rings easily infiltrate financial institutions and place

11 people in there to work, and if we don't have a way of

12 sharing that information, they are just going to move

13 from institution to institution.

14 MR. KANE: Thank you. A very good morning. My

15 name is Paul Kane from ICB, a company in the U.K. I'm

16 delighted to be here, and thank you very much for

17 inviting me. I'm speaking tomorrow on a different

18 matter. It is a great shame your colleagues have not

19 joined, because I came a day early specifically to ask

20 them questions, bearing in mind the cross-border

21 relationship of this particular seminar.

22 A couple of questions, and I appreciate your

23 looking at the higher level: the overall statistics. 

24 But one thing that would help small merchants such as

25 ourselves -- we do like helping in transactions -- or
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1 helping customers, as it were, and we do multiple

2 transactions per customer. And I think actually Rick

3 highlighted this as well, is that we're all on the same

4 side. You know, we want to catch the bad guys, and there

5 are a number of reasons why we want to catch the bad

6 guys.

7 As a merchant, we want to make sure we are not

8 defrauded. As a bank, you're in a fortunate situation,

9 because if you are aware that a card is being stolen, for

10 example, you can notify the merchants. The only problem

11 is, it takes a long time (10 to 15 days) for the banks to

12 actually notify the merchants that a card is being

13 stolen, and in the interim it is the merchant that

14 unfortunately suffers the loss.

15 In the games that we are in, which is

16 predominantly software, we're dealing with electronics so

17 we don't actually lose anything. But for merchants in

18 hard product -- in other words, where boxes leave their

19 store through the electronic market -- the problem is

20 they have lost real cash. You, the banker, are

21 indemnified, because its credit card holder is not

22 present.

23 And what would really be helpful -- and I

24 certainly hope that these couple of days could focus on

25 where we could go -- is to try and facilitate better
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1 exchange of information. The lady from the Consumer

2 Protection -- sorry, the customer authority over there --

3 was suggesting let's share information. We are on the

4 same side and we really, really want to try and help beat

5 this fraud product.

6 One of the things as well -- and this is

7 slightly perverse. As a retailer -- as a merchant -- we

8 suffer chargebacks in the event of a consumer claiming

9 that the transaction was fraudulent. The merchant will

10 lose the funds that they charged to the card. Now, from

11 a merchant perspective, that is a significant -- could be

12 a significant cost, particularly where boxes are leaving

13 factories.

14 But from a banking perspective, you get the

15 chargeback fee, and you get the commission on the

16 original transaction -- I don't -- this is in the U.K. I

17 don't know what happens in the U.S. But if you think

18 there are somewhere in the region of 150 million

19 fraudulent transactions, and if you think that the

20 chargeback fee associated with that in the U.K., again,

21 is around about 15 pounds, 20 odd dollars, on the

22 chargeback side it is big, big money not to tell the

23 merchant that fraud is taking place, or it's a fraudulent

24 card.

25 So one of the things I think the FTC could help
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1 the small businessman, or any businessman involved in

2 electronic commerce or involved in taking credit cards,

3 is to try and have a streamlined approach where banks can

4 notify the merchant of the specific details of cards that

5 are being stolen. Address verification. We can do it in

6 the U.K., but the problem is, we have to act on a

7 nondiscriminatory basis. So if we withhold information,

8 we get nailed. Whereas you or the banking system is such

9 that you don't have to share information, as just been

10 witnessed by the consumer agency there.

11 So it's a great shame your colleagues couldn't

12 come, because I have a number of questions -- specific

13 questions -- to them. But certainly I hope the FTC could

14 help us within industry and try and help law enforcement

15 agencies combat fraud together on a global basis. And it

16 would work. 

17 MS. SLADE: That certainly has been something

18 that we have tried to do. Those banks that participate

19 on our Fraud Reduction Steering Committee have, in the

20 past, tried to work with the retail organizations in

21 order to help discuss issues and problems that are

22 occurring between the two and how can we work together to

23 combat fraud.

24 We had a retail working group. Some of the

25 issues that we found were that in the retail community
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1 the fraud areas are not as --

2 (End of tape.)

3 MS. SLADE: -- for instance, in financial

4 institutions. We had a hard time getting the right

5 people to the table to talk about the issues.

6 But one of the things we did discuss in a

7 couple of the forums that we had is, again, what has been

8 so successful for the banks is this national shared

9 database of transaction information where you're able to

10 scan checks through. Again, if the merchants were able

11 to leverage such a system, that could help to catch the

12 fraud much, much faster.

13 So, again, if that's something that you have

14 some interest in, I would be happy to give you a name of

15 a person at PPS that you could talk to about that from

16 the merchant perspective. It is something that the banks

17 would like to see merchants do, that we do think you will

18 find benefit in it.

19 MS. COONEY: I'm afraid we have to have a final

20 question. Sitesh Bhojani?

21 MR. BHOJANI: Thank you. Yes, Sitesh Bhojani

22 from Australia. Robin, I was wondering whether BITS or

23 any of your individual members have actually contemplated

24 -- it's related to some of the questions that have

25 already been asked -- having a public position as a
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1 policy -- a public policy statement -- that BITS or your

2 individual members will assist law enforcement agencies,

3 because they don't want their businesses being used or

4 facilitating fraudulent activities.

5 The presentation was terrific in the sense it

6 was focusing on fraud committed on the banks. But what

7 about the banks' roles or the financial institution's

8 roles when their business is being used for unlawful,

9 illegal behavior? Do they have a public policy view on

10 that about no, we're not going to allow ourselves to be

11 associated with fraudulent unlawful activities? If we

12 are made aware of those activities, we will do whatever

13 we can to assist the law enforcement agencies to combat

14 those issues.

15 MS. SLADE: Well, obviously I can't speak for

16 any of the individual institutions and, again, I wish Bob

17 were here. He could address that from his perspective

18 with FleetBoston. We do work with law enforcement. They

19 have been participating with us on our identity theft

20 white paper. We do facilitate. However, we can and

21 we've been asked to put together for the U.S. Postal

22 Inspection Service a list of contacts for debit cards, in

23 order so that if some fraud occurs, they can directly go

24 to this list of the individual representatives from the

25 various institutions in order to stop something sooner.
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1 So we do -- at least from the BITS perspective,

2 we do help as much as we can. I just can't speak to what

3 the FIs are directly doing with law enforcement. So I'm

4 sorry about that, and again, I'm sorry -- it would have

5 been a great panel.

6 MS. COONEY: Well, we thank you, Robin, for

7 coming and for participating. For those who are

8 particularly interested in having some of the debit card

9 and credit card issues addressed, there will be a panel

10 later on today at 3:15. And Mark McCarthy from Visa will

11 be on that, as well as others, so hold those questions. 

12 Hopefully we'll have some answers for you.

13 I think we really heard two themes this morning

14 addressed by Robin and brought up by the group, which is

15 a shared commitment against cross-border fraud and

16 working together for better information sharing. From

17 the FTC perspective, we look forward to working with BITS

18 on doing better information sharing between us, and we

19 thank you for coming today.

20 MS. SLADE: And if I could just -- just one

21 last thing. Please feel free to contact me. You have my

22 phone number. You have my e-mail address. I know there

23 are questions that you have that I'm just not able to

24 speak to, but I will be happy to find the answers for

25 you. So please don't hesitate to contact me.
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1 Thank you.

2 MS. COONEY: Thank you.

3 (Applause.)

4 MS. COONEY: If everyone would hold their

5 chairs, we're going to go immediately into the next

6 panel. Thank you.

7 MR. STEVENSON: All right. Well, we're ready

8 to move ahead. We took things a little out of order

9 there. I thank Robin Slade for singlehandedly handling

10 that last matter. We really appreciate that. We now

11 essentially resume our regular scheduled programming

12 here, in that this is the panel on partnerships.

13 And we thought to introduce this more detailed

14 discussion of cross-border fraud here that we would start

15 by talking about what the problem of cross border fraud

16 looks like. Commissioner Thompson talked about looking

17 at this from 10,000 feet, and what we're trying to do now

18 is, we're landing the plane and trumping around to see

19 what the weather looks like on the ground. And we would

20 like to look at the question of what cross-border fraud

21 looks like, both from the perspective of the complaints

22 that we receive and the cases that we have brought, given

23 the current weather conditions.

24 I was thinking this is kind of like putting

25 together a weather report that we don't have all of the
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1 relevant information here. That's pertinent to some of

2 the questions that have been asked. But looking at the

3 information we do have, all together, we can start to

4 discern some trends.

5 And let's look first at what the consumer

6 complaints tell us. We are, as our Chairman mentioned,

7 issuing a statistical report, and this is on the cross8 border fraud complaints that were submitted in 2002 to

9 the Consumer Sentinel system, the fraud related database

10 and web tool. I'm sorry that we don't yet have the

11 copies of that, but we should have them tomorrow. The

12 weather has slowed us down a day on that. But let me

13 touch on some of the highlights of that.

14 First, to do my little infomercial here, for

15 those of you who don't know the Consumer Sentinel

16 project, it is a project that actually combines

17 complaints from many public and private partner sources,

18 including complaints from several of the organizations

19 that are represented on this panel. 

20 In the United States we have, for example, the

21 Better Business Bureaus. Many of them contribute

22 complaints. The National Consumers League, Susan Grant's

23 organization, has what is called NFIC or the National

24 Fraud Information Center that has contributed complaints

25 for many years. The FBI has its Internet Fraud Complaint
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1 Center, which is now contributing data. Other

2 organizations, the Postal Inspection Service and, of

3 course, the FTC. And then north of the border, we have

4 PhoneBusters, Barry Elliot's organization, which has been

5 a partner in this for a number of years -- I think over

6 five years now.

7 And these are like the weather stations that

8 are reporting in on what the weather is looking like. 

9 Given the weather these days, we need a bigger map as we

10 expand in more -- as this problem expands in more places. 

11 And so there is the project which Scott Cooper mentioned

12 earlier, econsumer.gov. This is a site where consumers

13 can file consumer complaints directly on-line, and it is

14 sponsored by now 17 countries.

15 Well, what does this consumer data tell us?

16 Overall, as you can see, a distinct warming trend. The

17 absolute number of consumer cross-border complaints has

18 increased substantially in absolute numbers as this chart

19 shows. There are a couple of ways in which we should

20 probably put this in perspective. One, to some extent

21 this reflects some success in partnerships and some

22 increased outreach. An increased number of partners and

23 a contributing increase in numbers of data sources

24 together to create the overall picture.

25 Another way of looking at this is to look at it
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1 as a percentage of the total. As our Chairman mentioned,

2 and if you look at the top of these two charts, the red

3 represents the cross-border fraud complaints. It's still

4 a smaller percentage of what we have rising, although not

5 as dramatically as the absolute numbers go up. The

6 bottom chart tells us something interesting, too, though. 

7 We see that the number of cross-border complaints

8 involving the Internet has increased both in absolute and

9 in percentage terms. More and more complaints generally

10 that we see are Internet related and that's also true of

11 the cross-border complaints.

12 The other important thing to bear in mind is,

13 of course, that just looking at these complaint numbers

14 alone understates the number of cross-border fraud

15 complaints. Why? Because consumers often don't know

16 that they're dealing with a foreign business. The

17 business might be using a domestic P.O. Box or a private

18 mail box. It might have a web site or an e-mail that is

19 linked to a foreign connection. The money might be

20 transferred to a foreign country -- consumers don't

21 necessarily know all of that.

22 But let's look at the universe where the

23 consumers do know about a foreign connection and what

24 kinds of things are they complaining about. Well, we see

25 a lot of -- you know, especially in telemarketing,
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1 advance fee loans and prizes and sweepstakes are

2 particularly heavily represented there. On the Internet,

3 we have perhaps some more -- a varied group of

4 complaints. A lot of these foreign money offers -- this

5 is the Nigerian or West African scam kind of thing. And

6 indeed, this probably understates the number of consumers

7 reporting this in that it does not include foreign money

8 offers that have been referred to our UC spam database,

9 which has a tremendous number of pieces of spam received

10 every day. The precipitation there is too heavy to even

11 fully measure the effect of this.

12 We also see Internet auctions as an area where

13 we received a substantial number of complaints, at least

14 in absolute terms, although bear in mind how big the

15 number of transactions are in that area. And then a

16 variety of other issues. Another way to take a cut at

17 this data is in terms of looking at the ones that come

18 through econsumer. As Scott Cooper described, there is

19 sort of a continuum here between the hardest core fraud

20 and something at the other end of the spectrum, and we've

21 also seen an increase in the number of complaints

22 involving things like Shop at Home and just basically

23 non-delivery issues as well.

24 Well, where are the businesses that the U.S.

25 consumers know about that they're complaining about? And
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1 again, this is a cut on the U.S. consumer data. There is

2 also data from consumers elsewhere. Well, the complaints

3 are about companies in all manner of places. 

4 Telemarketing certainly has been heavily associated with

5 Canada. This map shows U.S. consumer complaints about

6 the three largest Canadian provinces. We see, as we have

7 for some time, that prize scams are particularly commonly

8 associated with Quebec in the Montreal area. Advance fee

9 loans with the Ontario and particularly the Toronto,

10 Ontario, area. And then British Columbia we see prizes

11 and lotteries as a large number of the complaints there.

12 Here we see the victim locations. This is a

13 pin map put together by the Canadian Better Business

14 Bureau looking for a set period of time where the

15 consumer victims were, for advance fee loans, operating

16 out of either Ontario or Canada in general. And what we

17 can see here is that the complaint precipitation, if you

18 will, is all over the map. This is an illustration of

19 the fraudsters aiming both to target consumers in a large

20 number of locations, so that they are defused -- they're

21 spread out -- and also to target them where the

22 fraudsters don't live.

23 When we look at the Internet related

24 complaints, we see that they are more widely distributed. 

25 We put together a chart like this when we did a workshop
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1 in, I think, 1999, and the numbers in absolute terms of

2 Internet related cross-border complaints were quite

3 small. But over time they have increased and we see

4 connections with a large number of countries around the

5 world. The ones here in green are, I think, the top 12

6 in terms of the countries where there are complaints

7 associated with them.

8 Well, let's think also, then, about what does

9 this problem look like from the point of view of the

10 cases that we have brought. There are here -- many of

11 our cases, not surprisingly, are associated with Canadian

12 telemarketing, and telemarketing operating out of the

13 Toronto, Montreal and Vancouver areas. There have been a

14 number of cases there. There have been the victims to

15 look at. The victim declarants have been throughout the

16 United States, as one would expect from the complaint

17 data. Recently there has been a connection with United

18 Kingdom victims as well.

19 There has been quite a bit of attention to the

20 issue of cross-border scams. These are just various

21 newspaper articles. And there have been a lot -- there

22 has been a lot of case activity with the U.S. and Toronto

23 partners in something -- this is an example of the

24 Toronto Strategic Partnership, which a couple of people

25 here today -- Don Mercer and Barry Elliot -- have been
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1 involved with. And there has been -- I think it's fair

2 to say that the Strategic Partnership has found no

3 shortage of targets to go after.

4 More broadly, we have seen -- we have had

5 foreign targets in over 60 cases in various countries

6 around the world. This is just a representative sample

7 of that. Another way of looking at this is where we

8 chase the money. And we've chased money to various

9 international destinations. Canada, of course. A number

10 of countries in the Caribbean, from Belize to the Bahamas

11 and the Caymans to St. Kitz or Nevis, but also other

12 countries around the world, including Vanuatu, The Cook

13 Islands, and the Isle of Man. And so that is another

14 sort of cut on the international component of some of

15 these cases.

16 Of course, also, sometimes it is the U.S. based

17 practices that are the problem, or U.S. based businesses. 

18 We've had a number of cases where we have found foreign

19 consumer victims essentially mixed in with our U.S.

20 victims, and we've actually had occasion to return over

21 two million dollars in redress to foreign consumers. 

22 Here are some of the countries that have come up most

23 often in terms of the redress paid out.

24 And finally, I wanted to describe a couple of

25 the basic allegations and a couple of the cases that we
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1 have brought. It gives some illustration of the ways in

2 which people have actually perpetrated some of these

3 scams across borders. The first example is a first

4 capital case. Here we sued the defendants in what was

5 really a fairly typical advance fee credit card scam, and

6 here is basically how it worked.

7 They would get a phone call and the consumer

8 didn't know where that call was coming from. The phone

9 was ringing. And it was offering them a credit card for

10 a fee. They paid the fee. They didn't get the credit

11 card. That's the basic scam. What is more interesting

12 about this, though, from an international perspective, is

13 if they agreed to pay and they paid, they didn't get the

14 credit card, but they got a package of materials that was

15 ostensibly what they had requested. And that package

16 came from an address in Maryland. And from this, the

17 consumers couldn't easily see that -- from this

18 transaction that the defendants were, in fact, located in

19 the Toronto area.

20 Also, the money that they paid for this credit

21 card that they didn't get was direct debited from the

22 consumer's bank account by a U.S. based processing

23 company. The case, as it developed, showed that the

24 processing company electronically forwarded the money

25 daily to defendant's bank account in Toronto. So it's an
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1 example of how third parties can be used in some way or

2 another, both to carry out a scam and also to conceal

3 from the consumer the international aspect of it.

4 A second case that we have had that is an

5 interesting one from an international point of view is

6 the Verity International case. This is sometimes called

7 the modem hijacking case. And basically the consumers

8 were using the Internet and they had their phone modem --

9 or their phone line connection basically rerouted so that

10 they were charged for phone calls to Madagascar as a

11 result of doing something on the Internet.

12 In fact, the calls were routed to the United

13 Kingdom where they -- with the idea being that they would

14 be then routed to Madagascar, but they were, in fact,

15 what was called short stopped in the United Kingdom. 

16 There is also an Irish connection in the case in that

17 Verity International is an Irish business entity. This

18 was a very large scheme, but there was -- we fortunately

19 received a large flurry, or a large blizzard, if you

20 will, of complaints. I think that the blizzard there was

21 more than 600 in a very short period of time, and that

22 permitted us to take action quickly to prevent more

23 significant injury from occurring. But speed there was

24 the key to preventing large scale injury.

25 And the third case that I wanted to mention is
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1 the Zuccarini case, also referred to, I think, as the

2 pace jacking case or the Cupcake Party case. This is a

3 case where people were going to a web site. Might have

4 intended to go to the Harvard Law Review or the Better

5 Homes and Gardens or the Cartoon Network or something,

6 but they typed something wrong in the URL and instead,

7 their web page was hijacked and they were taken to

8 various opening windows of pornography.

9 What is interesting about this from the

10 international point of view is that when we first filed

11 the case, the domain name registrar was in the United

12 States. The web hosting company was in the United

13 States. And the domain holder of these -- as I

14 understand it, the porn sites to which people were

15 redirected was or were in the United States. But after

16 we filed the case, all of these moved offshore, so that

17 you have a domain name registrar in Germany, a web host

18 in the Netherlands and the domain holder in this case in

19 Canada. Obviously, in another case all of these could

20 start -- could start offshore which would make it an even

21 greater challenge even to find where the web site

22 operator is. 

23 So I offer those to illustrate some of the key

24 challenges that we have experienced in the cross-border

25 enforcement area. One is obviously obtaining the
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1 evidence, which can include the consumer victim evidence,

2 electronic evidence, shipping evidence or the financial

3 records. The second challenge is recovering the money --

4 chasing the money -- when it goes across borders. The

5 third is stopping the conduct when either it is occurring

6 across borders or has somehow involved a third party that

7 is across borders. And the fourth issue to emphasize

8 here, I think, is the challenge of moving fast enough to

9 make a difference.

10 Now, in rising to these challenges, we do have

11 partnerships to build on, and we'll hear from this panel

12 about various of them. One is the Consumer Sentinel

13 project that I've already described, which is an on-line

14 -- provides some on-line vehicle for sharing information

15 as well as a public site. And there are enforcement

16 challenges -- enforcement partnerships. I offered the

17 example earlier of the Toronto Strategic Partnership. 

18 But the challenge is to do more and to build on these.

19 And with that, I would like to then turn to our

20 next panel to describe some of the partnerships that

21 already exist and what we can learn from those

22 partnerships and how we can build on them. Some of these

23 address cross-border fraud directly. Some address a

24 somewhat different subject. But I think they teach us

25 here about how we can proceed further in the cross-border
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1 fraud against consumers area.

2 And with that, I would like to turn to our

3 panelists. I would like to start with Barry Elliot, if I

4 could. I mentioned earlier the PhoneBusters project,

5 which in and of itself is a really remarkable public/

6 private partnership. And I'll ask Barry to describe what

7 some of the challenges were in setting this up and some

8 of the lessons that you've learned from that experience.

9 MR. ELLIOT: Thanks, Hugh. I noticed I grabbed

10 the handout for ICPEN, and we have our own Canadian

11 telemarketers page here, which is interesting. What we

12 did in Canada was really accidental in how we created

13 PhoneBusters. We identified a problem with telemarketing

14 fraud back in '91. I identified the problem, and I

15 started to ask people to send me some information, which

16 was a big mistake, because everybody did.

17 And we did a -- I started by myself. I gave

18 out my phone number and my fax number, and my fax number

19 and my phone number has not stopped ringing. So what

20 happened was, we started central source and complaints

21 into one location, which clearly showed what the problem

22 was, and we looked at addressing the solution to the

23 problem, which was to -- you know, to prevent the

24 criminals from, you know, operating -- obstructing their

25 ability to operate legally, education and tactically
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1 going after them where we could and put them in jail.

2 And when I first started in '91, it was mainly

3 a national problem. We didn't have the international

4 component, and it was mainly out of Montreal targeting

5 the rest of the country. And we specialized in one

6 pitch, which was the prize pitch. What surprised me was

7 the most effective method of the three was education. 

8 That was the best and the most effective method and

9 really resulted in a huge reduction over the last 10

10 years in the number of victims of telemarketing fraud in

11 Canada.

12 Unfortunately, there is another component to

13 telemarketing fraud which has developed which is the

14 international aspect of it, where the criminals in

15 Canada, instead of quitting when we kill the market, they

16 just found other markets, mainly in the U.S. and now

17 around the world. In our database, our call center that

18 receives information, we've got complaints from, what,

19 140 different countries. I didn't even realize there

20 were that many countries out there. And I'm sure that we

21 have victims from whatever countries are left. They just

22 don't know where to call.

23 When we looked at combating this thing as a

24 police service -- this national problem -- I immediately

25 went out to, you know, bring in some partners, because it
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1 was a huge problem. And right from the get go, which was

2 January 1993, we brought in both the Federal Provincial

3 Police, as well as the private sector and regulatory

4 agencies, to form partnerships to attack the problem. We

5 felt that if we could bring everybody together, you know,

6 we could really attack this thing and do something about

7 it.

8 And I didn't, again, realize how successful I

9 was going to be until we did it. And just to give you

10 one example of how successful the private sector was in

11 working with us, was the credit card. The number one

12 method of payment at that time was credit card over the

13 phone on the illusion that you had won a car, what we

14 called the pin pitch back then. And the consumer would

15 give the credit card over the phone. Of course, that was

16 instant cash for the criminal. I mean, that was just

17 instant cash.

18 So we worked with the CBA, the Canadian Bankers

19 Association, Visa and MasterCard and we brought them in

20 as partners. It took a while, but I was able to show the

21 banks that they were losing millions of dollars per annum

22 on merchant credit card fraud, because not only were they

23 ripping off the consumers, but, you know, at the end of

24 the day they would run a few extra charges through the

25 cardholder's account before shutting down the company and
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1 reopening under a new merchant name, you know, just

2 around the corner.

3 So by working with the private sector, we were

4 able to -- by central sourcing all the data into one

5 location, we could identify these merchant accounts very

6 quickly. And the first thing that my staff would do

7 would be to ask, you know, how did you pay? They said

8 credit card. And what bank do you deal with and what is

9 your credit card number, and, of course, they would give

10 it to us, and they shouldn't. And we would contact the

11 bank, find out where the merchant account was and

12 contact, you know, the bank that had issued the account

13 and, you know, we shut it down.

14 And PhoneBusters got to be so well known in the

15 banking industry in Canada that, you know, one phone call

16 could save the bank a lot of money. And, of course, that

17 account was closed and it saved the consumers a lot of

18 money, because they didn't have the ability to take your

19 credit card over the phone.

20 Well, the criminals didn't quit. We were able

21 to save the banks millions of dollars. We shut them out

22 of being able to get merchant accounts fairly quickly and

23 they stopped getting them. But they went to the next

24 fastest way to get money, which is courier and money

25 order. So what we did was, we went out and got the
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1 Canadian Courier Association to join PhoneBusters, which

2 is another private firm -- FedEx, UPS and all those

3 different agencies. And we were able to work with them

4 very closely and to intercepting a number of these

5 packages, because there was about a two day time period,

6 and it was very successful.

7 Well, of course, the criminals didn't stop

8 there. They went, you know, to Western Union money

9 transfer, which is the number one method now. And we

10 work very closely with Western Union and the Money Gram

11 to try to do as much as we can in reducing this problem.

12 But my point is, is that the partnerships -- the private

13 sector partnerships -- and what we've done with

14 PhoneBusters has been -- you know, we couldn't have done

15 it without the partnerships.

16 The OPP, the RCMP -- and the OPP is the Ontario

17 Provincial Police -- and the Competition Bureau are the

18 major partners -- major funding partners. We have the

19 Better Business Bureaus, both in Canada and the United

20 States, the Federal Trade Commission and a number of

21 other agencies, including the American Association of

22 Retired Persons and the Canadian Association of Retired

23 Persons, and anybody that has an interest in what we do,

24 whether it is seniors or whether it is other groups.

25 And I was listening to Senator Collins' speech
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1 here earlier, and she was talking about education being

2 the key to success. And really, that is what it's all

3 about. You know, you can put people in jail, and

4 unfortunately in Canada the average sentence last year

5 for all the charges that we laid, especially with the

6 partnership, was two years probation. And I can

7 guarantee you that's not scaring too many criminals in

8 Canada from continuing to defraud the public in other

9 countries and making millions of dollars.

10 You know, I was giving a lecture in Ottawa at a

11 Competition Bureau seminar, and I alluded to, you know,

12 how do you fight these guys? And when you're dealing

13 with the police, you're dealing with, you know,

14 regulatory bodies, even private sector institutions --

15 we're all moving at the speed of sound when it comes to

16 fighting crime. And, you know, we all have our rules

17 that we have to follow. We have to put requests in by

18 computers. We have to get permission to anything. It

19 all takes time to do this stuff. The criminals don't

20 have to worry about that. They move at the speed of

21 light. The only time we can catch them is if one of them

22 trips and we can catch up to them.

23 So, you know, the solution to the problem --

24 and there is a solution to this problem. I think we've

25 proved it in Canada. And it goes back to education,
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1 because it doesn't really matter how fast the criminal

2 goes, if when he gets to the consumer's door and the

3 consumer says no, then we don't have a fraud. Now, that

4 doesn't solve everything, especially identity theft which

5 is, you know, a new problem to deal with.

6 But I cannot, you know, say enough about

7 working together and sharing information. And again,

8 when it comes to sharing information, you hear all kinds

9 of stories about well, we can't tell you this because

10 it's confidential. I think -- I mean, when it comes to

11 sharing information and doing things with law

12 enforcement, I mean, it is critical for this information

13 not only to be shared with law enforcement and other

14 agencies. But it is critical for those places, such as

15 PhoneBusters, to make sure that information doesn't sit

16 there. That it gets out to where it can do some good,

17 whether it's with the financial institution, whether it's

18 another body in another country, so that that web site or

19 that bank account can be closed without affecting any

20 ongoing investigations. 

21 PhoneBusters is kind of an interesting place. 

22 It's in northern Ontario and it looks a lot like

23 Washington today. We have about 50,000 people up there. 

24 It's sort of a small place about three hours north of

25 Toronto. But it doesn't really matter where you central
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1 source the data today. It doesn't matter where your call

2 center is as long as you've got the information.

3 And the other thing is the marketing. I mean,

4 when it comes to education, you want to be able to

5 educate the public, plus market where the public can get

6 the information that they need to be educated, whether

7 it's econsumer.gov or wherever that is, and having one

8 place to call. If you've got -- if you don't come

9 together with a common solution, and a common number and

10 a common central like, you know, econsumer.gov, you know,

11 you really have a bunch of places. You're just -- you're

12 just going to confuse the public. 

13 So not only do you have to have, you know,

14 partnerships -- strong partnerships -- but you've got to

15 come together with a package, a strategy -- a national

16 strategy. In this case, I think we're talking about a

17 worldwide strategy to fight these guys, and it's the only

18 way you can beat them.

19 MR. STEVENSON: Barry, let me ask you to focus

20 on the -- you mentioned some of your partners: Visa,

21 MasterCard and the Canadian Bankers Association. Can you

22 describe generally what reservations they might have had

23 about working with you more closely, say, starting back a

24 number of years ago, and what was the most -- what made

25 it more attractive or more persuasive to them to work
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1 with you?

2 MR. ELLIOT: Well, they didn't. You know, I

3 just made life miserable for them. I kept bothering

4 them. I can tell you some success stories and some

5 stories that weren't successful as far as partnerships. 

6 When it came to the banks, it was strictly by showing

7 them that they were losing money that it was in their

8 interest to get involved. You know, the funny thing was,

9 they didn't know that they were losing money and how they

10 were losing it, and we had to show them. But once we

11 showed them that, they got involved.

12 But the interesting thing was, is they were

13 concerned that by educating the public about the

14 criminals with these merchant accounts, that they were

15 concerned that these criminals would go underground. And

16 at that time, you probably remember stories that were

17 going out that there was, you know, credit cards going

18 out to everybody. You know, seven year old kids were

19 getting credit cards. Your dog was getting a credit

20 card. I mean, they were just sending out credit cards to

21 everybody. They were doing the same thing with merchant

22 accounts. I mean, merchant accounts were really easy to

23 get.

24 And there were a lot of dormant merchant

25 accounts that were out there, so they were concerned that
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1 by going public they would open themselves up to higher

2 losses. But they took the risk and went with me. At the

3 end of the day, we were able to save them a ton of money

4 and it was, you know, primarily for that reason that they

5 got onboard. And they stayed onboard, and we've been

6 able to keep credit card as not a method for

7 telemarketing criminals to use, whether they're attacking

8 somebody in Canada or outside Canada by using a Canadian

9 bank.

10 To tell a not a success story, is the Canada

11 Post, originally. They're coming onboard now. But, you

12 know, we tried to get them to get involved in a bigger

13 way, but they took the attitude that it is not their

14 problem. It's a police problem. And they wouldn't go as

15 far as the courier companies would go as far as

16 intercepting mail to return it to the victims. They

17 would just deliver it, and once it was delivered, you

18 know, it became somebody else's problem. So it was just

19 a question of continuing to work with those people, doing

20 a number of meeting interviews and pointing out some of

21 the weaknesses in the system, that put pressure on Canada

22 Post to finally come onboard. They're now a member of

23 the task force in Montreal.

24 Telephone companies is another area where we've

25 still got a lot of work to do to get them to be more
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1 cooperative and to share information and to be more

2 aggressive in cutting, you know, numbers associated to

3 fraud.

4 MR. STEVENSON: Let me turn now to Phyllis

5 Schneck and ask her how the experience that Barry has

6 described in terms of the partnership activities compares

7 to the partnerships you've been involved with. And maybe

8 start by describing the background of the work you've

9 been doing.

10 MS. SCHNECK: Good morning. Can you hear me?

11 MR. STEVENSON: You may want to pull that up

12 toward you a little bit.

13 MS. SCHNECK: I wish we could have shared some

14 information with the National Weather Service ahead of

15 time here. My name is Phyllis Schneck. I wear two hats. 

16 I'm an executive of a company in Atlanta called

17 eCommSecurity. We work in sort of outsourced utility

18 computing. We support the whole network to keep you 

19 on-line. The capacity in which I am here today is as

20 Chairman of the Board of the FBI's InfraGard Program.

21 I am a fully private sector entity, but

22 InfraGard is a partnership between the private sector and

23 currently the FBI and the government. And I'll get to

24 that in a few minutes. What is unique about us is our

25 size. We're 7200 members and growing rapidly daily. We
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1 have a presence in every state in the United States,

2 because we are present at each FBI field office. In some

3 ways, we're a great success story, and we're proud to say

4 that. In a lot more ways, we have a lot of work to do

5 and that's what I was going to present today.

6 The big key is that information sharing. And

7 there is some funny stuff about this, and there is some

8 very hard things about this. If you look at our biggest

9 challenge, it's the cultural difference in working with

10 the private sector and working with the government,

11 whether it is infrastructure protection, which is what

12 we're focused on to protect the country, your

13 transportation infrastructure, your emergency services,

14 water or government services. All of the critical

15 infrastructures, and cyber crime, as that fans through

16 it, is a large part of that.

17 If you take that analogy and mark that over to

18 cross-border protection, that is a big key part of not

19 only cyber and infrastructure protection. But we can

20 take some of the same things that have sort of trumped us

21 a little bit and apply them there. When you look at that

22 information sharing problem, a lot of our members are

23 noticing -- and I tell this to the FBI all the time. 

24 When we see something on CNN before the FBI has cleared

25 it to go out to their partners, that is an issue. That
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1 is an issue for our members, because we're wondering why

2 we take time from our private sector lives to do this if

3 we can't get the information soon enough.

4 It is a cultural difference when the

5 government, “clears information to go out to public

6 distribution.” Now, I say that with a caveat that

7 classified information should never ever, ever get sent

8 out and does not. We win wars in this country based on

9 what the other side doesn't know we know. So that's a

10 whole separate entity.

11 The information we're looking at is -- for

12 example, 7200 member base. You travel 100,000 miles a

13 year. You're Delta Platinum Medallion members. You're

14 the eyes and ears of this country. What are you seeing

15 that could go back into the FBI through a trusted

16 communication channel? Through a relationship? Through

17 someone you trust that will take your call, that could

18 come back out to the other 7,000 members and say hey,

19 this is what we saw? How can we vet it?

20 An example of that is, I gave a keynote at a

21 conference in September on critical infrastructure

22 protection. We had high level executives from the

23 Marines and the CIA giving talks there on terrorism. And

24 we had four Egyptians come in wanting to pay $7,000 each

25 in cash -- the only I.D. they had was their Egyptian
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1 passport -- and wanted the CD-Rom sent back home to

2 Egypt. And somebody reported that into the FBI, and with

3 all due respect to the FBI, our partners, they get 40,000

4 leads a day from people seeing aliens. So how do you vet

5 honestly what comes in?

6 And that's what InfraGard is about, and that's

7 what these partnerships are about that I'm hearing from

8 Barry as well. Setting up those relationships so that

9 you know where to go. You already have someone that you

10 can call. And everyone and every InfraGard chapter has

11 state and local law enforcement relationships now. An

12 FBI coordinator that is paid by the FBI and tasked to

13 manage that chapter as part of his or her job. We're

14 working with the Secret Service and the Electronic Crimes

15 Task Forces, the offices of Homeland Security in each

16 state, as well as building a direct relationship with the

17 new Department of Homeland Security, the details of which

18 will get ironed out when parts of the FBI are fully moved

19 over there on March 1st.

20 MR. STEVENSON: Phyllis, can I ask you?

21 MS. SCHNECK: Yes.

22 MR. STEVENSON: Are there systematic ways in

23 which you approach building those relationships?

24 MS. SCHNECK: Most of this is human. When you

25 pick up a phone and want to know something, and that
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1 person will either tell you or not tell you, it's based

2 on trust. When you're in business, the deal usually

3 comes down on how much that person trusts you to do it

4 right. And what we've found is that if you just set a

5 person up with a random set of numbers that you can call,

6 it doesn't work. But if they meet Jerry Beck now, the

7 InfraGard Coordinator from Atlanta -- and I've been to a

8 meeting or two with Jerry -- all of a sudden information

9 goes back out.

10 And that's been our strongest point in setting

11 up those relationships. The state and local are coming

12 now secondary. Not that we should have done it that way,

13 but that's what has been happening. So now you can call

14 your state and local police, depending on the right

15 person to report information.

16 Another incentive we give is -- the private

17 sector has to get something out of this, because you're

18 putting in your time unpaid to do this. And so what's

19 happening is, the FBI is offering these relationships,

20 and the other organizations, so that you can call them

21 and report things to them and get their input. And in

22 return, we are getting information out now slowly, and

23 then, again, building that relationship with the

24 Department of Homeland Security to get more out. So the

25 key is incentive. You need a two-way benefit to this
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1 information sharing.

2 We're also doing this internationally to look

3 at more of the issues here today. I'm going over to

4 Japan on the invite of the Japanese government, with my

5 counterpart at the FBI, in March to brief the Deputy

6 Prime Minister on how we set up InfraGard in the United

7 States and how we set up other partnerships. The

8 Canadians have been extremely great as far as setting up. 

9 We work with the Royal Mounted -- I'm not saying that

10 right. The Royal Canadian Mounted Police. We have

11 worked with some of the people also in setting up how we

12 would do -- not only set up their own InfraGard type

13 organization in Canada, but how we would actually share

14 information cross-border between U.S. and Canada, which

15 is pretty unheard of with any other country and the U.S.,

16 as you might imagine.

17 So a lot of the critical infrastructure

18 protection and cyber crime information sharing is a good

19 analogy to how these other partnerships are getting set

20 up. Someone asked earlier for a list of IP addresses. 

21 Now, we don't have that for cross-border fraud. I have

22 that for Internet fraud. So that is something that as

23 these partnerships grow more mature, you can start

24 collecting that data. But then the question becomes,

25 when do you share it? It helps organizations to hold
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1 information from a business perspective if you know

2 something that your competitor doesn't. It helps the

3 country, and it helps the world at this point, if you can

4 share it at a high level. And the balance in that is

5 really what we need to work on. That is probably the

6 biggest, biggest challenge.

7 MR. STEVENSON: Thank you. Let me turn now to

8 Joseph Sullivan from eBay and maybe picking up on the

9 issue of how -- what role relationships play in the work

10 that you've done. And maybe you can describe how eBay

11 has worked with law enforcement.

12 MR. SULLIVAN: Well, starting out eBay

13 initially was a company just in the United States with

14 users just primarily in the United States. But eBay has

15 expanded greatly in the last couple of years, and we're

16 now in 27 different countries. We have 62 million users

17 around the world in many countries that we don't even

18 have offices or web sites.

19 That has created a huge challenge for us, and

20 what we've tried to do is what we've done successfully in

21 the United States, and that is, build relationships with

22 law enforcement agencies in the particular countries. I

23 have found that it is very difficult if there is somebody

24 committing a fraud on eBay, and they are committing that

25 fraud from eastern Europe, to get law enforcement in the
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1 United States interested in doing anything about it. And

2 I speak partially from experience, because before I went

3 to eBay I was a federal prosecutor in Silicon Valley. 

4 And I know that when companies in the Valley, like eBay,

5 brought fraud cases involving perpetrators in other

6 countries, it was very difficult for us to take the case.

7 Typically, in these cases you're dealing with a

8 request for IP addresses from hosting services in third

9 party countries that a U.S. law enforcement agency has to

10 go through the Department of Justice, Office of

11 International Affairs, through a MLAT, if there is a MLAT

12 treaty in place. If not, through a letter rogatory. And

13 it can take -- it used to take me six months to get bank

14 information on one account in, say, Poland. And then I

15 would get that, and I would learn that actually all the

16 money had been transferred to another bank in another

17 country, and I would have to start the process all over.

18 So what we've tried to do at eBay has been to

19 develop relationships in third countries and also work

20 with U.S. agencies that have assets in place in third

21 countries. So, for example, the FBI has Attaches around

22 the world in different countries. The Secret Service has

23 them as well. And we have found that those agencies are

24 willing to bring cases to local law enforcement in other

25 countries. We have done hiring within e-Bay to bring
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1 people into the company from law enforcement agencies in

2 other countries to help us understand the law enforcement

3 culture and what those countries would be open to doing.

4 In that regard, for example, you saw on -- I

5 saw on your slides that Romania was fourth in the top 10

6 countries where fraud complaints are coming out of. I

7 think Romania is a big -- has been a big area of concern

8 for eBay. I have had investigators go to eBay -- from

9 eBay to Romania. We've offered to provide training to

10 the Romanian cyber crime police on how to investigate

11 crime on the Internet. We've worked with the FBI

12 Attaches there and with the Secret Service. And we've

13 developed a referral process, so that we can refer cases

14 to the Secret Service and the FBI, who will then pass

15 them on to the Romanian cyber crime police.

16 The Internet Fraud Complaint Center based in

17 West Virginia, which is the FBI National White Crime

18 Center, NW3C. I'm not sure what the 3C stands for. But

19 as a clearinghouse, they were mostly open to receiving

20 complaints from individual victims. We went to the IFCC

21 last year and we talked to them, and we learned and

22 helped give them suggestions where they now allow

23 companies to provide complaints as well, so that eBay

24 could complain on behalf of our users, or file a

25 complaint, so that action can be taken. IFCC also has an
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1 international division, and we've developed a

2 relationship directly with them so we could refer cases

3 directly up to them.

4 MR. STEVENSON: Do you encounter problems in

5 terms of people requesting information from you --

6 foreign law enforcers? Are there issues there about --

7 what issues are there in terms of giving and sharing

8 information with them, knowing who you are dealing with,

9 you know, both in terms of the organization and whether

10 the person is from the organization?

11 MR. SULLIVAN: There are two obstacles to

12 sharing data. One being the companies' privacy policies. 

13 And because we are located in different countries, and

14 because we get user data from different countries, we

15 have to have different rules for each country. As was

16 mentioned earlier today, EU has very -- has more

17 restrictive privacy rules than the United States. In the

18 United States we can -- we address things when sharing

19 with law enforcement in the United States typically

20 through a subpoena or through a process where we receive

21 a letter on letterhead from the agency for certain

22 information. And if we are able to verify that the agent

23 and the agency exist and are at that location, then we

24 will share information with them.

25 In third party countries, we do get requests
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1 from third countries. We typically try and have a law

2 enforcement officer in this country work with the law

3 enforcement in the third country if we don't have a

4 presence in that country. If we have a presence in the

5 country, we will have -- we have in-country, what we call

6 a trust and safety expert, who handles all requests for

7 data from that particular country.

8 In that regard, I can think of some recent

9 examples where we were doing an investigation with the

10 Postal Inspection Service in San Jose. We realized that

11 some records were available over in England. And because

12 we have on our staff in the United Kingdom a former

13 Scotland -- New Scotland Yard detective, who now

14 coordinates all of our efforts in the U.K. on the trust

15 and safety side, he was able to contact his former

16 colleagues and find out whether they would be willing to

17 participate in the investigation. And within 48 hours

18 the British authorities had the data to share with the

19 U.S. authorities and we were able to make it happen.

20 If the Postal Inspector in San Jose had to go

21 to the U.S. Attorney's Office, and the U.S. Attorney had

22 to draft a MLAT request and provide it to DOJ

23 International Affairs, who then gave it to the State

24 Department to forward over to the U.K. through the MLAT

25 process, and then it worked its way down through the
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1 national to the local, it would have taken a lot longer

2 than 48 hours.

3 MR. STEVENSON: Maybe we should turn then to

4 the Postal Inspection Service. I think that's a helpful

5 illustration of the challenge of moving the information

6 in terms of the speed. We have the pleasure -- I think

7 John Skoglund is here from the Postal Inspection Service,

8 who has worked on -- this is perhaps described as

9 analogous to some of the issues we've been talking about. 

10 But I think it is an interesting example of the business

11 mailing partnership which John has been involved with.

12 Maybe you could describe that for us a little

13 bit.

14 MR. SKOGLUND: Sure. What I'm here to address

15 really doesn't fully address the cross-border issue, but

16 it's an example of law enforcement working with private

17 industry. And the Postal Inspection Service is a federal

18 law enforcement branch of the Post Office. We're federal

19 law enforcement officers that investigate over 200

20 federal statutes. Obviously -- well, our salary is paid

21 by postage. We're not taxpayer dollars.

22 So with that said, we have a lot of major

23 mailers that are having problems in the arena of fraud. 

24 We were listening to what problems they had, and so we

25 put together what was called a confidence in the mail
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1 group, which were major mailers along with postal

2 inspectors in working through the issue of how can we

3 best combat their problems so that people are fulfilling

4 orders without being ripped off? That was one entity

5 that started in the early '90's.

6 There was another group that was a rebate fraud

7 task force, which basically was manufacturers,

8 fulfillment houses and retailers that offered rebates,

9 simply. They were a lot more progressive. In 1997 they

10 incorporated a nonprofit corporation. Their purpose was

11 for liability issues for these member companies. They

12 developed a database to put in data related to fraudulent

13 rebaters on that side, and that was fed in by fulfillment

14 houses, manufacturers or whoever was using that.

15 Now, they paid a fee of $5,000 to join. That

16 was basically to offset the cost of the database,

17 maintaining the database and anything along that line

18 that came in. It came in to the Postal Inspection

19 Service. We looked at it. And we can do either civil,

20 administrative or criminal actions as law enforcement for

21 the Postal Inspection Service. Sometimes it doesn't

22 reach the level that it's going to get prosecuted

23 criminally, either on the state or the federal level.

24 We have what's called a voluntary

25 discontinuance, which is basically a letter that is sent
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1 out to an individual saying, you're in violation of the

2 Mail Fraud Statute, basically knock it off, okay? And

3 what they were doing is, they were submitting, you know,

4 phoney cash register receipts, duplicating UPC labels or

5 anything to help perpetrate the fraud that was coming in

6 to these companies. Then that information was getting

7 showed to us.

8 Now, the purpose of the database is, if they're

9 ripping me off, they're probably ripping off the next

10 manufacturer and the next manufacturer. It is not unique

11 to just one company. So by putting data into this

12 database, it was helping us in law enforcement to be able

13 to go and develop a case to combat this fraud. Also, it

14 was giving a check for these member companies to pull up

15 on that database and say, okay, John Skoglund, 123 Main

16 Street, just had submitted, you know, a thousand dollars

17 of rebate fraud or whatever with me. You know, you might

18 not then fulfill it. You take additional actions that

19 you want to get from this individual maybe before you,

20 you know, pay a check to this company.

21 Now, on the mail order side, for lack of a

22 better term. I used to call them professional meeting

23 goers, because they would always get together. We had

24 meetings a couple times a year, and they talked about,

25 you know, getting a database. What can we do to combat
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1 fraud? But they never really got off the dime, so to

2 speak, in developing a database.

3 About two years ago, the rebate side and the

4 mail order side joined forces to now what we call the

5 Business Mailing Industry Task Force, and just very

6 recently, we started getting a database together for the

7 mail order side. Their issues were different than the

8 rebate side. They need more real time data which was

9 coming along.

10 Getting along the issue of data sharing, we put

11 forth a letter to the Department of Justice, Antitrust

12 Division, because of antitrust issues in sharing

13 information. We also had to have that letter then

14 reviewed by the Federal Trade Commission for -- help me

15 out with the term.

16 MALE SPEAKER: FCRA.

17 MR. SKOGLUND: FCRA issues. Because, I mean,

18 you have companies that are in competition here, and now

19 they're getting data, and they're looking at that and

20 it's like it could be an unfair competitive advantage. 

21 That's not what it said.

22 Now, on the mail order side, what's coming in -

23 - and it's just starting to get companies on-line,

24 because we had to put out for a contract and get, you

25 know, the database together for what their issues are. 
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1 It's going to be web-based a little bit, where they can

2 get information back, more real time if it's one on one. 

3 Depending on what their volume is, they're going to be

4 able to get information -- it could be daily. It could

5 be twice daily, weekly or monthly, depending on what

6 their volume is, to look at it.

7 Where if they have a questionable order, for

8 example, they can go into the database and pull it up and

9 see if there has been any activity with this name, this

10 address or something like that by any other company. If

11 they see that they can't make a decision on it -- it

12 cannot be a negative file. It's just another element in

13 their process to determine if they want to fulfill this

14 order, or go back to that customer and say we need

15 additional information before either they decide to

16 fulfill that order or not fulfill that order.

17 But it has been a big cooperative effort. It

18 has taken several years to get ultimately the mail order

19 side together to go forward with this. It is a huge

20 benefit to these companies, because they can save a lot

21 of money. I mean, you know, everybody thinks about a

22 rebate -- getting back to the rebate side, you think of,

23 you know, a dollar or two dollars. But when you start

24 talking computer equipment and you're into hundreds of

25 dollars, and now we have cases, you know, that we work 40
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1 to 100 to 150,000 dollars worth of rebate fraud, people

2 start taking a little bit more attention.

3 Yes, we have the mom and pop or the mom at

4 home. I hate to pick on just women. But we've had a lot

5 of cases with women where they go buy a cash register. 

6 They're in their basement and they're just kicking out

7 cash register receipts, because they have to submit those

8 with the rebate, okay? It's just all part of a fraud. 

9 What can we do to combat this? So it's been a good

10 cooperative effort on the law enforcement side -- the

11 postal inspectors -- with these companies on how we can

12 combat their fraud.

13 MR. STEVENSON: And, John, I think a part of

14 this involved -- the information is shared with the

15 industry? It goes out as well as coming in?

16 MR. SKOGLUND: As far as being able to access

17 the database, you can only have access to that if you are

18 a member company. And right now that fee is $5,000 that

19 the companies pay into the nonprofit.

20 MR. STEVENSON: All right. Well, thank you. 

21 Our last two panelists are representatives from parts of

22 the private sector: Susan Grant from the National

23 Consumers League, and Charlie Underhill from the Better

24 Business Bureau.

25 And, Susan, I'll turn to you, first, to talk
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1 about what -- both your practical experience, because

2 Susan has been heavily involved in the terrific project

3 that the National Consumers League -- the Internet Fraud

4 Watch and the National Fraud Information Center, but also

5 taking sort of the larger view of what you think works in

6 terms of these cooperative projects.

7 MS. GRANT: Thanks, Hugh. Well, there are a

8 couple of recurring themes that we've heard this morning. 

9 One is prevention and the other is getting information

10 about suspected fraud to law enforcement agencies so that

11 quick action can be taken. And we do both.

12 Back in the early '90's, as Barry said, when it

13 became obvious that telemarketing fraud was a huge

14 problem that was having a significant impact on the

15 social and economic well-being of consumers, we did a

16 survey -- a Harris Survey -- to find out what consumers'

17 experiences were and what they did if they thought that

18 they were being solicited by something that might be

19 fraudulent.

20 We found out that many people believed that

21 they had been victims of telemarketing fraud and that

22 they really didn't know where to go (a) to find

23 information to help them tell whether a company that was

24 soliciting them was legitimate or not, and (b) where to

25 report fraud. And at that time, there was no federal
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1 toll free number to call or a web site, obviously, so we

2 created the National Fraud Information Center, which was

3 and is a toll free hotline for consumers to call to get

4 advice from live people about the solicitations that they

5 received and to report suspected telemarketing fraud.

6 And then in 1996, as Internet fraud reared its

7 ugly head, we created the companion program, the Internet

8 Fraud Watch, and also a web site. It was another way to

9 give consumers educational information to prevent fraud

10 and also an on-line fraud reporting form. And the

11 program is unique for a consumer organization. I don't

12 know another that does this -- I'm thinking about the BBB

13 as more of a business association here -- and also in

14 terms of what we do with the information about suspected

15 telemarketing and Internet fraud when we receive it. 

16 Because we not only put it into Consumer

17 Sentinel, which is invaluable for law enforcement

18 agencies who are investigating something to get that rich

19 pool of information that they need about victims and how

20 problems are occurring. But also when we take things

21 into our database from consumers by telephone or on-line,

22 that information goes out automatically to the

23 appropriate law enforcement agencies by fax or by e-mail

24 at their preference. And it is matched to the criteria

25 that the agencies have preset. So, for instance, the
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1 Postal Inspection Service gets information from us where

2 the Postal Service has been involved. The Securities and

3 Exchange Commission only wants investment related

4 complaints. States AG's office would want a complaint

5 where either party appeared to be in its jurisdiction.

6 MR. STEVENSON: Susan, if I could ask you a

7 question. And you all had set this up, I think it was in

8 the early '90's?

9 MS. GRANT: 1992. Yes.

10 MR. STEVENSON: And have been sharing that data

11 with law enforcers for quite a long time. Could you

12 speak from the consumer perspective? Do you have

13 feedback as to what consumer reaction is to the sharing

14 of that information?

15 MS. GRANT: A little bit, just anecdotally. We

16 haven't really surveyed our users. But sometimes they

17 will get back to us to thank us, because they've heard

18 from an agency and because in some cases they wanted to

19 withdraw their complaints now because it has been

20 resolved.

21 We know that consumers really appreciate being

22 able to talk to somebody. It is really important to have

23 a phone line where people can get that kind of preventive

24 advice, and also just be reassured if they have a

25 problem, and get suggestions for other things that they
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1 can do, such as disputing fraudulent credit card charges. 

2 It is more efficient to take information on-line, but

3 having something that is just on-line kind of removes

4 that personal one on one advice function. We know that

5 consumers really just appreciate having somebody to turn

6 to.

7 And while now there are other places where

8 consumers can go, like the Federal Trade Commission's own

9 hotline, I think that consumer organizations are in a

10 unique position because they are very trusted by the

11 public. Sometimes people are hesitant to contact a

12 government agency, and sometimes people just don't have

13 any idea what government agency to contact. And as you

14 know, in Internet and telemarketing fraud there could be

15 multiple agencies that are interested in the information,

16 and we get that information out to multiple agencies.

17 I think our biggest challenge is really

18 providing what is our public service without taxpayer

19 dollar support. The Fraud Center was initially set up

20 with some major grants by banks and credit card

21 associations precisely for the reason that Barry talked

22 about, because at that time they were taking major hits

23 in chargebacks. Now, at least for telemarketing fraud,

24 it has really shifted where the primary method of payment

25 is by various kinds of debits from consumers' bank
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1 accounts. In fact, I just recently had a conversation

2 with somebody from the Automated Clearinghouse System

3 about whether there would be support possible for the

4 things that we do.

5 I should mention that in addition to

6 automatically transmitting information to law enforcement

7 agencies, we transmit it to Visa, MasterCard, American

8 Express, Western Union and Federal Express when they have

9 been used as --

10 (End of tape.)

11 MS. COONEY: Our focus today is on the

12 challenges of doing cross-border enforcement cases, and

13 in particular, the challenges that the FTC faces. With

14 us today, and I'll go down the line and then I'll let

15 them go ahead and speak.

16 Tara Flynn, who is an Assistant Director in our

17 Marketing Practices Division. Tom Schulz, who is with

18 the FDIC. Carmina Hughes, who is next to Tom. She is

19 with the Federal Reserve Board. Next is Jay Imbert, who

20 is with Citigroup and is a specialist in anti-money

21 laundering. Next to him, second to the left, is Robb

22 Evans. Robb is the CEO of Robb Evans & Company, and he

23 serves as a receiver on many of our largest and most

24 complex cross-border fraud cases. And finally, Ed

25 Mierzwinski, who is with U.S. PIRG.
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1 I would like to begin today by handing our

2 panel discussion off to my colleague, Tara Flynn. She

3 will describe for you a little bit about our efforts here

4 at the FTC on cross-border enforcement, and in

5 particular, our jurisdiction and challenges that we face

6 basically every day in doing our cases.

7 Tara?

8 MS. FLYNN: Thank you, Maureen. I thought that

9 I would initially just talk a little bit about the FTC --

10 who we are and what we do -- and then talk about some of

11 the challenges that we face when we're going forward with

12 a case in litigation.

13 First, I'm sure I may be covering some ground

14 that has already been covered. But the Bureau of

15 Consumer Protection is the federal government's principal

16 consumer protection agency. Its mission is to promote

17 the efficient running of the marketplace by taking action

18 against unfair or deceptive acts of practices. And our

19 authority to go after such deceptive or unfair practices

20 is the FTC Act, which prohibits unfair methods of

21 competition and unfair or deceptive acts of practices in

22 or affecting commerce.

23 A representation or practice is deceptive if

24 it's likely to mislead consumers acting reasonably under

25 the circumstances about a material fact. A practice is
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1 unfair if it is likely to cause substantial injury that

2 is not outweighed by countervailing benefits and is not

3 reasonably avoidable.

4 We also have authority to enforce various

5 statutes and regulations, including the Telemarketing

6 Sales Rule, the Pay Per Call Rule, also known as the 900

7 Number Rule, the Franchise Rule, the Mail Order Rule and

8 the list just goes on and on, some might say. We enforce

9 the FTC Act and the various statutes -- I'm sorry --

10 various trade regulation rules through federal court and

11 administrative litigation. Our goal is to stop offending

12 practices and preserve assets in order for there to be

13 monetary consumer redress or disgorgement of ill gotten

14 gains.

15 When enforcing the FTC Act, the FTC is

16 authorized to represent itself in federal court or

17 administratively. When solely seeking civil penalties,

18 the Department of Justice brings an action on our behalf

19 and can obtain civil penalties in the amount of $11,000

20 per violation of a trade regulation rule.

21 When we are investigating cases, we often need

22 to investigate them without letting -- without contacting

23 the perpetrator of the scam, or the suspected perpetrator

24 of a scam. In our experience, scam artists will

25 typically flee with their assets if they know about an
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1 impending law enforcement action. If they do so, it is

2 impossible for us to make consumers whole with recovered

3 assets.

4 When investigating Internet fraud cases, such

5 as spam scams or Internet auction fraud, we often need to

6 do a significant amount of investigation simply to

7 identify who the perpetrators are to identify them. The

8 Internet has made it much easier for such perpetrators to

9 hide their identities or their location. Often we find

10 the perpetrators of Internet scams are located outside

11 the United States, although they may often have many ties

12 to the United States, including financial ties.

13 We investigate our scams -- our scams. No. We

14 investigate scam artist scams through a variety of means. 

15 Talking to consumers. Posing as consumers. Database

16 searches. It runs the full gamut. But one of our most

17 powerful tools is a civil investigative demand or CID,

18 which is a form of compulsory process. When the

19 Commission issues a CID, it is seeking documents or

20 answers to questions or oral testimony. This tool is

21 especially helpful to us when we are seeking information

22 from third parties who may help us identify the

23 individuals responsible for defrauding consumers, or

24 identify injured consumers, or evaluate the scope of

25 injury to consumers.
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1 If it appears that a target of an investigation

2 is permeated by fraud, continuing to injure consumers or

3 very likely to dissipate assets, often the Commission

4 will authorize staff to file a complaint in Federal

5 District Court and seek immediate relief, such as a

6 temporary restraining order, an asset freeze and the

7 appointment of a receiver. These kinds of relief are

8 essential for preserving the status quo.

9 If the Court appoints a receiver, the Court

10 will often authorize him or her to marshal assets of the

11 corporation and determine whether or not the business can

12 operate legally. The asset freeze provisions in a

13 temporary restraining order require -- often require the

14 holder of assets, including financial institutions or

15 other payment method organizations, to keep the status

16 quo by not allowing the defendants to withdraw funds from

17 corporate, and in many cases, personal bank accounts. 

18 Such orders require the banks to provide information to

19 the receiver, if one is appointed, about the defendants'

20 bank accounts.

21 Now, there are some issues that come up in the

22 course of our investigating and litigating cases that I

23 thought would be helpful for us to talk about, and I

24 think some of the panelists are going to talk about, too. 

25 One is that when -- as I said earlier, when we serve a
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1 CID or a Civil Investigative Demand upon a financial

2 institution, we often request that the institution keep

3 our request confidential. Now, some financial

4 institutions have as a matter of policy -- as a matter of

5 their policy, they won't honor that request. They will

6 inform the target of our investigation that there is a

7 request. And I'm speaking, of course, about CIDs that

8 are consistent with any obligations the financial

9 institution may have under the RFPA or the Right to

10 Financial Privacy Act.

11 So this means that sometimes in the course of

12 investigating a scam, often a cross-border scam, we have

13 to forego getting useful information for fear that the

14 financial institution telling the defendant or a

15 potential defendant about our investigation will result

16 in the dissipation of assets and will ultimately mean

17 there is no money for consumers if we prevail.

18 Another issue that I wanted to talk about is

19 when we have been successful in court and gotten a

20 temporary restraining order -- and sometimes we seek

21 these ex parte without the other side receiving notice. 

22 Actually, when it is a serious scam permeated by fraud,

23 that is what we do. It is sometimes an issue for us in

24 terms of where we serve that order in terms of getting it

25 to the right person in a financial institution. 
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1 Sometimes we know of a bank account and we serve the

2 branch office and the main headquarters of a bank. But

3 it is not always clear that we've gotten it to the right

4 person, and that information and the obligations under

5 that order are going to be conveyed to the right people.

6 For example, in a recent case we served the

7 temporary restraining order upon a bank at the

8 headquarters level, and one of the provisions of the

9 asset freeze was to not allow -- required the banks not

10 to allow the defendant to open their safe deposit boxes. 

11 The existence of the TRO that had been served on

12 headquarters did not get passed along to the various

13 branches, and the defendant turned around, opened his

14 safe deposit boxes in violation of the order and, you

15 know, now he claims that there were drugs in there. No

16 money, just drugs. And it's a little difficult in the

17 context of safe deposit boxes for us to prove it either

18 way. So it is really a question of communication and

19 knowing who the right person is for us to serve these

20 orders.

21 And the last issue, I think, that we need to

22 talk about would be that financial institutions and

23 payment methods are often on the front line. They are

24 the ones who see where the scam artists -- or see how the

25 scam artists are attempting to get money, because they
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1 all want money. And so, for example, the payment method

2 of choice in the early '80's was a credit card, and that

3 was before the credit card system imposed chargeback

4 rules. But as I understand it, law enforcement really

5 didn't get involved in that, or wasn't working in

6 partnership with the credit card industry until after

7 some banks had failed as a result.

8 So earlier in the '90's it was -- the payment

9 method of choice appeared to be on people's phone bills. 

10 But the people who were aware of that were the ones who

11 were actually processing the bills. And currently, it

12 seems like, you know, a new trend may be a scam artist,

13 might be using the automated clearinghouse system in

14 order to process funds. So what I'm trying to convey is

15 that the people who know this, and who are aware of the

16 problem, are often the people who might be in this room,

17 and what's important is for us to keep communication

18 lines open.

19 MS. COONEY: Thank you, Tara. I would like to

20 follow up, if we might, on a few of the issues that Tara

21 raised. I think the first one that she raised -- and I

22 would be very interested to hear from our panelists -- is

23 the extent to which financial institutions are able to

24 keep confidential our civil investigative demands,

25 beginning with demands for information on commercial
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1 accounts.

2 And I don't know which one of you might want to

3 take that question.

4 MR. SCHULZ: I'll give it a shot.

5 MS. COONEY: Okay.

6 MR. SCHULZ: Well, the Right to Financial

7 Privacy Act applies to all banks in the United States,

8 and it seeks to protect customer account information. So

9 at the outset, you have a prohibition on a bank

10 disclosing information unless certain requirements are

11 met. One of those requirements is that the customer must

12 be notified in advance and given an opportunity to

13 challenge access to the information.

14 Now, there are some exceptions, but they are

15 not easy exceptions. There is a methodology under one

16 section of the statute whereby you can get a court to

17 authorize a delay in the notification. But to do that,

18 you have to meet a whole series of criteria which are

19 actually fairly difficult criteria.

20 And frankly, we've run into some of the same

21 issues in connection with some of our own investigations

22 where we're dealing with one particular bank, as

23 oftentimes you'll see funds flowing through a number of

24 different institutions. And we, like you, like to have

25 our investigations confidential until we've gotten to the
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1 bottom of what's going on. Some banks, just as a matter

2 of policy, refuse even to their regulators.

3 So I think the answer is that where it is a

4 non-supervised -- a nonfinancial supervisory agency,

5 there is a greater problem unless you jump through the

6 hoops of getting a court order.

7 MS. HUGHES: If I might just add to that. I'm

8 going to put a prosecutor's hat on here rather than the

9 regulator's hat. But my experience when I was in the

10 U.S. Attorney's Office, and even filing and issuing grand

11 jury subpoenas, was that we often had arguments with

12 general counsels from local banks who claimed either the

13 Right to Financial Privacy Act or local laws that

14 required disclosure to customers within a certain period

15 of time. Not always ahead of time, but within a certain

16 period of time, which, of course, could cause a problem

17 if it's a covert investigation.

18 We would sort of mouth the word supremacy

19 clause, but they really didn't much care, because they

20 were thinking lawsuit. So we would routinely get gag

21 orders in a grand jury situation, and that's what was

22 required of us until FCRA was passed and the federal

23 government made it very clear if you were investigating a

24 bank type of criminal offense, then essentially there

25 could be no disclosure no matter what the Right to
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1 Financial Privacy Act said or any state laws. And so we

2 have sort of a form letter.

3 But this is a very difficult problem, and it is

4 made more difficult by the fact that, as probably many of

5 you all know, banks do get sued. And even if the bank is

6 going to prevail, they oftentimes have to pay legal fees

7 in conjunction with the suit. So they are cautious and

8 probably cautious through experience.

9 MS. COONEY: Jay, what about your experience at

10 Citigroup? Have there been instances when your bank --

11 Citibank or the affiliates -- were able to keep CIDs

12 confidential?

13 MR. IMBERT: Well, I have to confess. I don't

14 recall any CIDs from your agency. Routinely, you know,

15 grand jury subpoenas. I mean, it's just a matter of

16 course. It's understood that if there is any disclosure

17 there, it's a criminal violation. So, you know,

18 obviously there is a requirement to ensure that that sort

19 of information regarding a grand jury subpoena concerning

20 a criminal investigation is not disclosed to the

21 customer.

22 And in terms of one of the other issues that

23 was raised to make sure -- how do you make sure you're

24 getting to the right person within the organization? I

25 guess some practical advice in that area is it's not
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1 uncommon that you have a form of law enforcement within

2 financial institutions. I was an Assistant U.S. Attorney

3 for eight years before joining Citibank, and we have, you

4 know, so many former prosecutors and agents.

5 You know, a friendly phone call to an

6 organization of some size to make sure you're getting to

7 the restraining order unit, or to the unit that handles

8 the freeze orders, or to make sure you're getting to the

9 right person, I think that's sort of practical common

10 sense on how to make sure you're getting the information

11 to the right people.

12 MS. COONEY: I would like to come back to that. 

13 But before we finish up the Right to Financial Privacy

14 Act question, Tom, what you described, and certainly the

15 FDIC has experienced similar impediments to what the FTC

16 does, does that apply to corporate accounts or only

17 personal accounts?

18 MR. SCHULZ: The Right to Financial Privacy Act

19 applies to “customer,” and “customer” is defined as

20 anyone who has an account relationship with the financial

21 institution. So it does -- it is not like the Privacy

22 Act, which applies only to individuals rather than

23 corporate entities.

24 There is one exception that I should mention to

25 the RFPA, and that is that -- and it happens to be the
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1 exception that allows banks to file suspicious activity

2 reports. And that is that the bank can report the name

3 of an individual, the type of an account and the type of

4 suspected illegal activity without running afoul of the

5 RFPA.

6 MS. COONEY: Tara, did you have a comment?

7 MS. FLYNN: My understanding is that there is

8 certain information, such as what you've just outlined,

9 that can be provided without notification to the

10 individual. In terms of war stories, we often come to --

11 come up with a situation where we are seeking information

12 that does not -- is not subject to the RFPA.

13 MR. SCHULZ: Right.

14 MS. FLYNN: And could be provided to us without

15 any problem with the RFPA, yet banks will not provide it

16 to us as a matter of their policy. And that is what

17 often creates a problem for us when we're just really

18 trying to identify whether they have a bank account at

19 that bank, and we're talking about a corporate entity

20 through which these bad actors are operating.

21 MR. SCHULZ: Right. Well, the RFPA would not

22 prohibit a bank from informing you that a particular

23 entity or even an individual has an account. The other

24 thing is, remember I said it protects individual customer

25 account information. If you're not seeking customer
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1 account information -- and oftentimes you're not. You're

2 seeking information that may relate to the institution

3 itself. That's not protected by the Right to Financial

4 Privacy Act.

5 And, of course, there are also exceptions for

6 criminal investigations. Of course, the exception

7 happens to apply to the Attorney General and not to the

8 FTC, but that's one exception. And it does not, in fact,

9 require that a subpoena be served. It can be a voluntary

10 request. It can be a grand jury subpoena. It can be a

11 judicial subpoena. The same is true in the course of

12 litigation. They can't cite the RFPA as a basis for not

13 complying with the Federal Rules of Civil Procedure or

14 Criminal Procedure. So you do have -- you do have some

15 limitations on the RFPA, but it is -- it is an

16 impediment. 

17 I think the biggest problem really is the one

18 that Carmina eluded to, and that is that banks do get

19 sued and they are a little bit gun shy, because even if

20 they ultimately prevail in those suits, it cost them time

21 and money and sometimes adverse publicity.

22 MS. COONEY: Ed, I saw you --

23 MR. MIERZWINSKI: Oh, I actually just wanted to

24 ask a question, if I could, of the FTC officials, the two

25 of you. The consumer groups have had notice that the
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1 bank regulators, particularly the OCC, have made it very

2 difficult, and have been putting out a lot of protections

3 against State Attorneys General or State officials

4 requesting information of banks.

5 Does that affect the criminal area as well, and

6 do the banks invoke OCC as their primary regulator if the

7 FTC tries to get information?

8 MS. FLYNN: I don't think that's been our

9 experience.

10 MR. MIERZWINSKI: I guess that's good.

11 MS. FLYNN: You know, we're a civil law

12 enforcement agency and generally -- I would say generally

13 banks are cooperative. I would pose the question whether

14 or not there are some banks that may make it their policy

15 to keep that information private, and that is a marketing

16 tool for them as well.

17 MS. COONEY: Robb?

18 MR. EVANS: Yeah, just one side point on this. 

19 For most of my adult life, I have been a banker until I

20 got into this business about a dozen years ago. The

21 banks desperately want to have the bad guys out of the

22 bank. Don't underestimate the value of the back

23 channels. I have had more than -- more than one occasion

24 where -- I mean, I've been in a bank president's office

25 and had them tell me, I can't give you that information. 
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1 I'm going to be out of the room for 20 minutes, and he

2 turns on his computer with the screen open to where it

3 is.

4 I've had calls from federal special agents

5 saying hey, can you find out for me from Bank X if this

6 account exists over there, because I don't have the time

7 to go through the subpoena process if it's not there. If

8 it's there, just give me -- you know, wink at me and then

9 I'll go get a subpoena.

10 So never underestimate the value of the back

11 channel if you've got people that have confidence in each

12 other. That is not going to lead to a lawsuit. That is

13 not going to lead to something embarrassing, because

14 everybody wants to get rid of the bad guys.

15 MS. COONEY: Thank you. That's very helpful. 

16 To move on to the second issue that Tara brought up,

17 which is really a risk management issue within a bank,

18 when an order has been served on a headquarters of a

19 financial institution, that there is an assets freeze in

20 place, how -- and I think Jay did try to answer this in

21 terms of, you know, who do you contact at a bank to make

22 sure that they have appropriate information?

23 But really Tara's point goes beyond that. It

24 is how do you make sure that financial institutions have

25 systems in place that appropriately communicate to their
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1 other offices that there are these very valid court

2 orders that need to be abided by in order to maintain the

3 status quo on accounts for which we might be seeking

4 consumer redress?

5 Could any of you speak to that, your knowledge

6 of systems within banks and communicating on litigation

7 risk types of issues?

8 MR. SCHULZ: I know it is a lot better now than

9 it used to be. It used to be, I mean, a real operational

10 problem, because systems weren't integrated. They

11 weren't automated. And unless you were dealing with a --

12 I mean, if you're dealing with a large multi office

13 organization with hundreds or even thousands of

14 accounting units, the task was -- you know, let's say 10

15 or 15 years ago it was formidable. Today it is much

16 easier, because now the large institutions have

17 consolidated databases. It's not always easy,

18 particularly for the very largest organizations. But for

19 a lot of them, it is a lot easier now than it used to be.

20 MR. IMBERT: But I think in general the larger

21 organizations are the ones that probably have the best

22 controls in place and have procedures already set up to

23 handle those kinds of situations. I would suspect that

24 it is the smaller organizations where you may have more

25 problems.
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1 But even so, that's supposed to be part of

2 their risk management process and they ought to be -- you

3 know, I think probably the bank regulators would like to

4 know if there are problems like that, because it affects

5 us as well as them. It affects the bank. It can have a

6 very negative impact.

7 MR. EVANS: The biggest problem, I think, today

8 in terms of this is the -- let's say the very top of --

9 well, not the top tier, but just below that. 

10 Organizations that have gone through recent mergers. I

11 mean, we've had one situation where we subpoenaed and

12 subpoenaed the bank for records, until we finally had to

13 report to the court that we couldn't produce the report

14 that I had been ordered to produce, because the bank

15 wouldn't supply us the information. 

16 So the judge simply ordered -- asked for the

17 name of the Chairman of the Board of the bank and ordered

18 him to appear in his courtroom every Monday morning until

19 the information came forward. And it came forward pretty

20 quickly. But they had a real operational problem,

21 because they had just gone through -- they had a series

22 of mergers and they really -- until it got to the

23 Chairman of the Board, nobody knew what button to push.

24 MS. COONEY: Carmina?

25 MS. HUGHES: Well, I was just going to say. 
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1 The other sort of part of this is risk management run

2 amok. I mean, we've seen situations, both on the

3 criminal side and also from where I sit now, where banks

4 have received subpoenas or banks have received orders,

5 and the first thing they do is, they close an account or

6 they do something that you might well not want to happen

7 in the course of your investigation. And it can really 

8 -- I know I had one case where I was chasing this

9 fraudulent check ring all over the country. And we had

10 finally gotten to them, and the problem was the bank had

11 received so many subpoenas, they finally got an SAR and

12 just closed the account.

13 So whoever is issuing the order or the

14 subpoena, it is really important, as Jay has already

15 said, to pick up the telephone to make sure that you have

16 some sort of local contact to make sure that this doesn't

17 happen, because it can be completely inadvertent. And as

18 I say, you could have someone saying gosh, you know, we

19 received this subpoena and we think that this is

20 suspicious. We're going to close the account. And

21 that's probably not what you want to happen.

22 MS. FLYNN: Can I ask a question? But how do

23 you prevent that? I mean, in my circumstance I don't

24 have a criminal subpoena. I have a civil investigative

25 demand. I've sent it to a bank. Well, I want to send it
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1 to a bank, but the bank has informed me that they're

2 going to notify the party. It's a corporate account. 

3 And also they say, well, and, you know, if you send this

4 to us and we see something suspicious, we're just going

5 to close the account. Please don't.

6 MS. HUGHES: Well, actually, I don't think that

7 you can prevent the disclosure under the authority that

8 you have based upon what we've talked about here today,

9 unless you can get a judicial gag order. But the advice

10 that we usually give our banks when they ask that

11 question is that -- and actually the same advice that we

12 give to law enforcement is that if law enforcement wants

13 to have a bank or any other financial institution keep an

14 account open, they need to put that in writing to the

15 bank. And if they do, then I think that most banks would

16 be cooperative.

17 But I think that it is a difficult position for

18 a financial institution to be in when there have been so

19 many recent cases on SAR filings and the hyper criticism

20 out there of financial institutions. So they are going

21 to be very vigilant in a way they probably weren't --

22 perhaps weren't before. I shouldn't say probably. But

23 may not have been before because they are concerned about

24 their exposure in keeping these accounts open.

25 MS. FLYNN: I just want to -- I'm going to be
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1 quiet in a second. But I just wanted to point out that

2 I'm not entirely sure, and I don't want this to become a

3 debate about the Right to Financial Privacy Act, because

4 I'm certainly not going to hold myself out as any expert.

5 But my understanding is that a customer means

6 any person or authorized representative of a person, and

7 a person is identified as an individual or a partnership

8 of five or fewer individuals. 

9 MALE SPEAKER: Oh, no.

10 MS. HUGHES: I'll defer to you on that one.

11 MALE SPEAKER: I don't have the definition.

12 MS. FLYNN: But you can move the discussion on.

13 MS. COONEY: That's separate from those issues

14 and it kind of follows up on what we've been talking

15 about. I guess from the FTC perspective, would there be

16 any benefit in our agency working through or with the

17 financial regulators when we approach a bank for which

18 your agencies are the primary regulators?

19 MS. HUGHES: Well, I received a telephone call

20 this year from some folks from the FTC -- some agents

21 from the FTC -- and I did my best to get the bank to

22 cooperate, because they wanted a dummy account and they

23 wanted to make certain transactions or to have it out

24 there. And I thought it was a very worthy goal and a

25 very worthy cause, and I called the General Counsel and I
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1 did my best. But the General Counsel said that in order

2 for the bank to participate in this, they wanted sort of

3 a hold harmless kind of agreement, which, of course, the

4 government can't give, or at least the folks I spoke to

5 didn't seem to think that the government could give.

6 So, yeah, I think that it -- I don't think it

7 hurts to contact the primary regulator, but I'm not

8 always sure that the primary regulator can do it for you. 

9 But we can certainly intercede, and we're willing to do

10 that.

11 MR. SCHULZ: There actually was a FBI sting

12 operation that we were involved in. The way the FBI got

13 the banks to cooperate was, they did, in fact, give them

14 hold harmless clauses. They did guarantee that they

15 would not be held liable, and if they were, that the

16 Department of Justice would defend them, number one, but

17 also would intervene in the action.

18 MS. COONEY: To shift just slightly to another

19 topic, to what extent are financial institutions able to

20 voluntarily partner with a non-bank regulatory agency,

21 like the Federal Trade Commission, in providing

22 information about suspicious activities directly to us?

23 MS. HUGHES: Well, they certainly can't share

24 the fact that they've filed a SAR on anyone with you. 

25 That can't be shared with anyone but through the database
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1 and with their primary regulator. In fact, the law is

2 pretty clear on that. There are circumstances, I would

3 think, however, in which they can share. Certainly under

4 -- I think under Gramm-Leach-Bliley banks share with each

5 other information about underlying criminal activities

6 that occur among banks. And they might be able to share

7 some of that with you.

8 But there are unfortunate -- to some extent

9 unfortunate restrictions as to exactly what they can

10 share. They cannot file -- they cannot share a SAR with

11 you, for sure, and they can't share the fact that they've

12 filed a SAR with you. But there may be circumstances

13 under which they could share the type of activities that

14 have been going on, and report to you the types of

15 activities with perhaps, you know, a redacted version, so

16 to speak.

17 MS. COONEY: So nonspecific to a particular

18 actor. Is that what you're saying?

19 MS. HUGHES: Yeah. I think that banks do that

20 now. I think that banks together, certainly on the local

21 level, have security -- sort of statewide security

22 meetings, where they talk to each other about the types

23 of trends that they're seeing in their institutions, and

24 frequently law enforcement plays a role in those

25 meetings. The FBI is typically part of the various state
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1 security groups.

2 When I say security, I don't mean securities as

3 in selling securities. I mean securities for banks. And

4 they certainly share that type of information to alert

5 law enforcement to the fact that they're seeing these

6 types of trends. So I don't know that they can -- I

7 don't know that it's because it's law enforcement they

8 can do that. I think it's they can do it because these

9 are sort of things that they're seeing out there.

10 MS. COONEY: And just one follow-up on that,

11 and then I would like to shift to asset recovery issues. 

12 But as a follow-up to that, are there any impediments to

13 the federal banking agencies in communicating directly

14 with the FTC on specific activities, where we might also

15 be investigating consumer fraud that involved -- you

16 know, the financial institution is used possibly

17 unwittingly to facilitate a fraud through their

18 institution? Are there any impediments to the financial

19 regulators sharing that information with the FTC?

20 MR. SCHULZ: Well, the Fed has one view and we

21 have another view. Our view is that we have regulations

22 that permit us to disclose information that we have

23 obtained in the course of an examination and that that is

24 authorized under the RFPA. The feds had a problem at one

25 time or another, and I think it takes a much more
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1 conservative view. 

2 MS. COONEY: If I understand you, the FDIC

3 would deem that it is within their appropriate

4 supervisory responsibilities to communicate information

5 to the FTC if it is in our area?

6 MR. SCHULZ: In an appropriate situation. And

7 we do that with the Department of Justice and the U.S.

8 Attorney's offices now.

9 MS. HUGHES: We, on the other hand -- our

10 regulations require that if we're going to disclose

11 confidential supervisory information, we can do so to

12 another regulatory agency or investigatory agency if we

13 get a request and it is upon the approval of our General

14 Counsel. Having said that, however, if it includes

15 customer information, then it becomes a lot trickier and

16 we may have to require under those circumstances a

17 subpoena as opposed to an access request. 

18 But we do share information with other

19 regulatory agencies. I think we have a much freer

20 sharing with other bank agencies. But other than the

21 banking agencies, with agencies such as the FTC and

22 others, we have access letters that we provide to each

23 other, and we're able to provide each other with

24 confidential supervisory information.

25 MS. COONEY: I would like to shift the rest of
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1 our discussion to another area. What we've been talking

2 about so far is really investigating cases and

3 particularly gathering information from financial

4 institutions. But what's very important to us on our

5 cross-border cases is actually recouping funds -- the

6 proceeds from fraudulent activities -- tracing the funds,

7 often which go offshore, and looking at what those

8 experiences have been and impediments there.

9 And, Robb Evans, could I -- could I ask you to

10 talk a little bit about some of the major cases that

11 you've done for the FTC?

12 MR. EVANS: Sure. Very briefly, I think

13 certainly the most interesting case that we've done for

14 the Federal Trade Commission is a company called JK

15 Publications. This was a case that Doug Wolfe here led

16 the FTC's action on. And I put back on the table a

17 little chronology of the case that we used in a court

18 hearing recently because the judge asked for it. But it

19 illustrates so many facets of international -- of a fraud

20 and the money laundering issues that it has become a

21 great case study.

22 In a nutshell, what happened was we had a

23 fraudster, who by the way was a professional fraudster. 

24 He had been convicted. Done time. Well known to be in

25 the public record. And in short what he did is, he
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1 nailed about a million consumers with $19.95 charges --

2 sometimes multiple charges several times -- to the tune

3 of roughly 40 million dollars. And he did this by simply

4 charging their credit cards. And he got the credit cards

5 through a variety of devices, including -- he had a 

6 so-called legitimate business, which generated some

7 credit card information. And the legitimate business was

8 running pornographic web sites, and he generated some

9 cards that way.

10 But the vast bulk of the credit cards, the

11 numbers that he got, he bought them. He bought them from

12 a bank as part of a -- the bank thought or claimed it was

13 a fraud prevention program. It was supposed to be a

14 positive database. And he just simply put through the

15 charges. He had banks of people that manually entered

16 the stuff, 19.95 each. He did it over a number of

17 months, 40 million dollars.

18 The money flowed from a couple of Merchant bank

19 accounts into a bank in Nevada, and from the bank in

20 Nevada to a bank in the Cayman Islands, and from the bank

21 in the Cayman Islands back to the United States, off to

22 Liechtenstein, off to Bermuda, off to Vanuatu to

23 different bank accounts. And a substantial amount came

24 right back to the United States where it bought real

25 estate, invested in stocks and bonds and did all the
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1 usual stuff.

2 The reason I thought the chronology was useful,

3 particularly for those of you that are with state

4 attorneys or others that will bring the charges, is to

5 understand the time elements that a receiver operates in. 

6 On one hand, we have to move extremely fast. Because the

7 money moves fast, we have to move very fast. It is

8 simply you couldn't do the recovery if you had to go

9 through the MLAT process or anything remotely approaching

10 that.

11 We can move as civil litigants, and we can move

12 as fast as we want -- as fast as we can. We don't have

13 to go through any bureaucracy. We report directly to the

14 court. We are agents of the court, not agents of the SEC

15 or the FTC or the Department of Justice or whoever

16 nominated us.

17 But while we're doing this on one hand, it

18 takes years. It can take many years to pursue all of

19 these pieces of litigation. In the case of JK, when Doug

20 and I were standing in a lonely parking lot in Malibu,

21 California, it was back on January 6, 1999. Is that

22 right? And we had no idea what we were going to find

23 when we served the orders on these folks, because it was

24 an ex parte thing. And as we went in the front door, all

25 the banks of telemarketers were literally diving out
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1 windows and heading for the hills. And it probably

2 wasn't because they even -- it was not probably because

3 it was the fraud they were doing. But it was because

4 they were wanted on other warrants and they just didn't

5 want to get caught.

6 But the point being, though, is that we -- in

7 these situations, you're going into it where there is no

8 data, or very limited data. There were no accounting

9 records on the premises, and the asset recovery became an

10 exercise in dumpster diving. Literally dumpster diving. 

11 Going through the garbage cans out back looking for

12 scraps of paper with notations that would have been

13 useful. And so with that, we eventually did find some

14 accounting records, a set of Quicken Books, with a remote

15 bookkeeping service and we were able to do the actual

16 physical tracing.

17 But by that time -- and of course we've got a

18 freeze order. Unfortunately, the bad guys often -- this

19 may shock you -- don't respect freeze orders. And so as

20 fast as we were moving, they were one step ahead of us in

21 spite of the freeze order, ordering the banks downstream

22 to move the money.

23 One of the lucky breaks we had in this case is

24 that one of the places they moved the money was back to

25 their lawyers' trust accounts. And, of course, the
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1 lawyers knew about the freeze order, so this resulted in

2 at least one lawyer getting disbarred and another one

3 going to jail. And that was another little tragedy, but

4 we won't go there.

5 But then it gets down to the long slog. Once

6 we traced the money to where it actually is, in some

7 cases it's pretty easy. When we found it had gone into

8 real estate, we had to litigate to get the right to

9 recover that real estate, and that took a little while. 

10 We found money, for example, in Liechtenstein. The

11 Liechtenstein authorities were pretty cooperative. I

12 won't say massively cooperative, but they were

13 cooperative. But it took time. And by the time we got

14 the information out of Liechtenstein, the money was gone.

15 In the case of the Cayman Islands, we got very

16 lucky. In that case, we provided the Cayman Islands

17 authorities the information about our tracing, and they

18 seized the bank and shut the bank down. Then we had to

19 litigate in the Cayman Islands, and we also litigated in

20 Vanuatu for the recovery of those funds.

21 Interestingly enough, in these situations our

22 adversary can often become government. It is not a

23 question -- at this point in time, everybody gets greedy. 

24 In the case of both the Cayman Islands and Vanuatu, the

25 government is sitting there and looking at an amount of
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1 money that is frozen. They've now got the bank -- we've

2 now got the bank accounts frozen. The question is, who

3 gets the money?

4 My job is to recover the money for consumer

5 redress. The government of the Cayman Islands and the

6 government of Vanuatu saw this as a chance to solve some

7 budgetary problems, so they wanted to confiscate the

8 funds as the proceeds of crime. And so in both cases, we

9 ended up in major disputes with both governments. We

10 successfully resolved that in the Cayman Islands, and we

11 have resolved it through litigation -- well, I hope we've

12 resolved it. We had our last piece of litigation on this

13 in Australia just two weeks ago, and we think we resolved

14 that satisfactorily in Vanuatu.

15 End of the day, we should get roughly 20

16 million dollars back for victim restitution. But it has

17 been a long process and you have to condition people,

18 particularly the courts, that it just doesn't happen

19 overnight.

20 MS. COONEY: Robb, in reviewing your

21 receivership report, it looked to me as though in JK

22 Publications there were 14 banks involved and some seven

23 countries. Can you speak a little bit to the

24 complications in handling those types of situations?

25 MR. EVANS: Well, the two Merchant banks in the
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1 United States, both of them I filed lawsuits against

2 basically for negligence in the way they handle their

3 accounts. Won one and lost one. The one we won, we got

4 a recovery from that bank, and the bank was forced into a

5 forced sale. The other bank won the lawsuit. I did not

6 prevail in the other one and so it kind of got off free.

7 In the Cayman Islands, that bank was shut down,

8 although there is a whole saga of what happened to that

9 bank. It led almost to the collapse of the government in

10 the Cayman Islands in January when the criminal case

11 against the bankers was thrown out because MI-5, which is

12 the British equivalent of the CIA, had their agent in the

13 bank and there were some records destroyed. And so they

14 threw out the criminal case against the bankers because

15 of the disruption of records by the MI-5 agent, and that

16 led to a request for the resignation of the Attorney

17 General and just a very messy situation down there. But

18 we got our money. And that's our job, is to get the

19 money. We got the money, and we're going to get more. 

20 The bankers got off in that case.

21 The bank in -- the clearing bank in Nevada, I

22 did not pursue. It was one of the largest U.S. banks,

23 which is certainly no reason for not pursuing them. I

24 think from a banker's standpoint, as a retired banker, I

25 was appalled at the lack of due diligence, but it didn't
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1 cross the line as it did in the other banks. I think if

2 they had been alert, they should have caught it, but they

3 didn't.

4 The other banks involved, I guess that's -- the

5 other bank -- well, there were a number of peripheral

6 banks that are just not important to it in Peru and other

7 places. Those banks may come back into the act when it

8 comes time to make the victim restitution, because we may

9 make the restitution through those banks.

10 MS. COONEY: Doug?

11 MR. WOLF: I'm not going to turn this into a

12 rehashing of this whole case, but there are a couple more

13 factors I think that should be pointed out and that play

14 right into what some of the panelists have talked about. 

15 When Robb spoke initially of not underestimating the back

16 channels, a lot of what he talked about in the successes

17 that the receiver had in that case were exactly due to

18 that -- the back channels and the relationships that Robb

19 had developed globally.

20 Because the way we found out that the lawyers

21 were being paid out of frozen funds, and the way that we

22 found out that the money had moved back to the United

23 States to buy the property -- a multimillion dollar

24 property in Malibu -- and the way that we found out that

25 the lawyers were helping them use code names to move
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1 monies in violation of the asset freeze, was that because

2 the Cayman government had seized the bank, they then

3 appointed Deloit & Touche as the liquidators of the bank. 

4 And Robb and his associates knew the liquidators

5 personally, and in essence were invited in the door as

6 the stand-in for the company.

7 And I think it bears pointing out that for all

8 the law enforcement agencies here, the reason why Robb

9 can -- or any receiver can move so much faster than we

10 can overseas as law enforcement is that rather than going

11 through the MLATs, what they say as receiver, assuming

12 that the court order gives them the powers is, I am now

13 JK Publications, or I am now the XYZ Corporation that

14 committed the fraud. I'm here to get my assets and my

15 records, which is a lot different than the federal

16 government saying we're here to get the records.

17 MR. EVANS: Oh, yeah, it's critical because of

18 the speed we can operate under. And in one aspect of the

19 case when we -- when I was literally in a courtroom in

20 Vanuatu, which is down -- you know, you go to Australia

21 and turn right a little bit and you're there. It's a

22 tiny little place. But we filed a lawsuit against the

23 bank in Vanuatu to recover the funds, and at the end of

24 the day, the bank declined to defend the case. But, I

25 mean, it was literally in court that day and they
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1 defaulted, but the government immediately seized the

2 funds as the proceeds of crime.

3 What we were able to do -- and this was

4 literally on a cocktail napkin nursing our wounds after

5 that defeat -- was to draft a letter to the correspondent

6 bank, the Vanuatu bank, and advise the correspondent bank

7 that we considered those funds held in trust for us for

8 the victims in the United States. Well, they did the

9 right thing and froze the account until they could sort

10 it out.

11 But the funds -- and again, we're talking about

12 eight million dollars here. The bank immediately ordered

13 the funds to be moved to yet a third country. And had we

14 not been able to do that, we would have lost it. At a

15 later stage, when that freeze -- we couldn't hold that

16 freeze while we were doing it. We were able to get the

17 policeman from the Australian -- at the Australian

18 Embassy, the regulatory -- or the law enforcement liaison

19 officer. I don't know what they call them at the embassy

20 here in Washington.

21 We were able to find the guy, because we knew

22 him -- knew him socially, really, from meetings like

23 this. We were able to find him at a cocktail party on a

24 Friday night here in Washington, telling that the freeze

25 order that we had the money frozen in Sidney was coming
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1 off on Monday, and help. And so we all got together here

2 in Washington and worked the weekend, him wearing the

3 formal dress from whatever embassy party he was at, and

4 on Monday morning when the bank opened and there was a

5 bonafide wire transfer order there, there was also a

6 freeze order from the New South Wales Crime Commissioner. 

7 And so the money was frozen there, again, long enough for

8 us to keep chasing and litigating it.

9 So there are a lot of nuances, but it is great

10 fun.

11 MS. COONEY: I have just one other area of

12 questions, and then I would like to open it up to

13 questions from the floor. In JK Publications in some of

14 the jurisdictions that you were in -- I think Caymans,

15 maybe Vanuatu and maybe one other -- there were money

16 laundering charges against some of the people who held

17 the accounts.

18 And I know, Jay Imbert, we had talked off line

19 before this conference about situations like that in

20 terms of international cooperation. If it would assist

21 the FTC or other regulatory agencies if money laundering

22 was defined in a common way, it might assist with

23 international cooperation on law enforcement efforts. 

24 Would you like to speak to that?

25 MR. IMBERT: Sure. The principal international
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1 body against money laundering, the Financial Action Task

2 Force, has for some time now, as one of their 40

3 recommendations, advised that throughout the globe we

4 should have a -- the government should have a common

5 definition of money laundering, so it would include not

6 just drug dealing, but the predicate offenses would

7 include such things as fraud. And financial

8 institutions, you know, in the United States and

9 elsewhere do view the suspicious activity reporting

10 mechanism as our way in which we can help keep the bad

11 guys out of their institutions and let law enforcement

12 know what's going on.

13 And if we receive a request from law

14 enforcement not to close an account, we'll honor that,

15 but it all presupposes that you are dealing with some

16 common terms and common understandings. But it would be,

17 I think, consistent with the Financial Action Task Force

18 recommendations to certainly have a money laundering

19 standard for suspicious activities that would make it

20 include more than just drug dealing, but include fraud.

21 MS. COONEY: Let me open it up to the floor. 

22 Are there any questions for our panelists? Gene?

23 GENE: Well, she asked me what do I think, I

24 guess, as the consumer curmudgeon on the panel? But I'll

25 be very brief, because I know we're running out of time. 
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1 But in regard to the last question -- I'm sorry. I got

2 here a little bit late because of the weather and I

3 missed Senator Collins' opening remarks by television, I

4 guess. But I would commend all of the people in the room

5 that they take a look at the Subcommittee on

6 Investigations report on money laundering that was

7 conducted primarily by Senator Levin's staff.

8 And Chairman Collins and Senator Levin held a

9 series of hearings in the last Congress, and basically it

10 was on the role of correspondent banking in money

11 laundering. Although this panel has spoken about banks

12 being concerned about litigation risks due to violating

13 the Right to Financial Privacy Act if they cooperate with

14 law enforcement, in fact, one of the key findings of the

15 Levin/Collins report was that when it comes to fee based

16 profit making from correspondent banking, which is

17 different from credit risk exposure, the banks looked the

18 other way and helped. In many ways, some of the biggest

19 banks in the country were involved with offshore, shell

20 banks that were basically really the fronts for a lot of

21 the money launderers. 

22 There is thousands and thousands of pages on

23 the Committee web site that I would urge people to take a

24 look at on that.

25 MALE SPEAKER: Of course, the Patriot Act did
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1 help a little bit with that, because no longer can you

2 have a correspondent account with a purely shell bank, at

3 least an American bank can't, and there are restrictions

4 under the Patriot Act on other correspondent accounts. 

5 So some of that has been dealt with, or is being dealt

6 with at this time, which is helpful.

7 MR. WHITELAW: Bob Whitelaw, Canadian Council

8 of Better Business Bureaus. As I sat here listening and

9 taking notes -- and this is just a 30 second comment --

10 at the end of January, all Canadian banks and financial

11 institutions must report daily cash transactions of

12 $10,000 and more to Fintrac, the new federal government

13 agency. They will be looking for anomalies and passing

14 the anomalies on to the CSIS and the RCMP. And effect as

15 of the end of March, any cross-border electronic funds

16 transfer of $10,000 or more must be reported to this

17 federal government agency. That is by law on all banks

18 and financial institutions.

19 And I only raise it here as I was trying to

20 find out where the legislative command and control is on

21 banks here. And the question then, is there a weakness

22 in that area?

23 MS. HUGHES: Well, actually we have a $10,000

24 requirement for cash transactions as well, and our wire

25 transfers are $3,000 or more.
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1 MS. COONEY: Could we just say, though -- and

2 this point was brought up this morning – while that's the

3 case and there is that reporting, there is a problem with

4 suspicious activity reports in that they can -- or some

5 might perceive that there is a problem, because they can

6 be filed and yet it is actually very hard for agencies

7 like the Federal Trade Commission to know what's been

8 filed. You know, to have notice of that and then act on

9 it in a quick and orderly manner. Steve Bartlett

10 addressed that issue this morning. And so there are

11 areas for improvement on that.

12 MS. WOODARD: Hi. My name is Gwendolyn

13 Woodard. With the evolution of virtual banks and the

14 evolution of technology, do you have any protocol or any

15 rules or regulations in place to deal with push/pull

16 technology when funds are transferred without any human

17 intervention over the Internet and it hops from one place

18 to the other?

19 MS. HUGHES: Well, actually if you're talking

20 about -- are you talking about ACH or bundling of

21 transactions?

22 MS. WOODARD: Yes.

23 MS. HUGHES: Okay. My understanding is that

24 the ACH systems in the United States are exempt from the

25 travel rule. The travel rule under the Wire Transfer
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1 Rule is this. I just said that for all transfers -- wire

2 transfers that are $3,000 or more, the bank who is the

3 originating bank has an obligation to maintain the name

4 and the address and whatever other information they have,

5 and verify that information before they affect the wire

6 transfer.

7 There is another rule that is actually a

8 Treasury Department rule. It's not a bank regulatory

9 rule. It's called the Travel Rule. And that requires

10 that this information travel with the wire to both

11 intermediary banks and also to the beneficiary bank. 

12 Automatic clearinghouse transactions are exempted from

13 these rules. And I think that -- I wasn't around. I

14 wasn't in this part of the government when those rules

15 were written. But my understanding, having consulted

16 with our payment systems people, is that one of the

17 reasons they were exempted is because they're generally

18 small dollar amounts that are bundled together.

19 There is certainly a risk of wrongdoing in ACH

20 transactions, I agree with you. The Travel Rule is there

21 primarily for anti-money laundering purposes, and the

22 idea is that with these small dollar amounts, the risk

23 isn't as great.

24 One of the issues that Jay was talking about

25 was the FATF, the Financial Action Task Force. They have
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1 just put out a wire transfer interpretive note that talks

2 about what is exempted and what's not, and why it is and

3 why it's not, and that was a very significant issue of

4 discussion, because there was a lot of concern as to

5 whether all of the possible criminality was being sort of

6 caught up in the ACH system. But at this point, they're

7 exempt as far as I know.

8 MS. COONEY: With that, we'll close this panel

9 just due to time. But I would like to thank all of the

10 panelists. Even in what we've heard, that there are some

11 impediments to information sharing, it's helpful to have

12 that on the record so that we can think about it and

13 assess whether appropriate changes could be made. And so

14 we thank you again, all of you. Thank you very much.

15 (Applause.)

16 (Whereupon, there was a brief recess in the

17 proceedings.)

18 MS. FEUER: Good afternoon and welcome to the

19 last panel of the day. I am Stacy Feuer, Legal Advisor

20 for International Consumer Protection at the FTC. This

21 last panel we're going to continue our focus on the

22 financial sector. Earlier today we heard a very

23 interesting discussion about emerging trends in the

24 financial services sector with respect to fraud, and we

25 also heard a lot about the challenges of pursuing –
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1 (End of tape.)

2 MS. FEUER: -- and the challenges of

3 investigation. Now we're going to focus on how various

4 payment systems providers can work with the FTC and other

5 law enforcement agencies in a systemic way to stop cross6 border fraud.

7 I'm delighted to have with me several

8 informative panelists from law enforcement, the private

9 sector and consumer groups. First, Jon Rusch from the

10 Department of Justice, Special Counsel for Fraud

11 Prevention in the Criminal Division, and the organizer

12 and initiator of several multinational and binational

13 task forces on mass marketing fraud.

14 Next to him is Elliot Burg, Assistant Attorney

15 General from Vermont, who is also very active with the

16 National Association of Attorneys General and has been

17 working on payment systems issues. David Ostertag, Field

18 Investigations Manager for Discover Financial Services,

19 and after yesterday's reported hacking of the credit card

20 system, a very busy man.

21 Next to him, Mark MacCarthy, Senior Vice

22 President for Public Policy at Visa, U.S.A., who also is

23 a very busy man. 

24 Jane Larimer, the General Counsel of NACHA, the

25 electronic payments system, which came up in the last
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1 question. I'm sure Jane will be able to explain where

2 NACHA fits in and what NACHA does with respect to the ACH

3 system.

4 And finally, Jean Ann Fox, a consumer advocate

5 with the Consumer Federation of America, who has done a

6 lot of work on payment systems, in particularly credit

7 card protection.

8 Unfortunately, at the last minute Mark Thompson

9 from Western Union was unable to join us because of a

10 family emergency. Not the blizzard. But I just want to

11 recognize Western Union, who I've spent a lot of time

12 with on the phone talking about these issues, since they

13 are very committed to stopping cross-border fraud. And I

14 want to acknowledge that there are several people from

15 Western Union in the audience today.

16 What I would like to do now is ask some opening

17 questions about current issues and trends involving the

18 use of these various payment systems in the cross-border

19 fraud arena, and then spend the rest of our time moving

20 on to possible mechanisms for enhanced cooperation. What

21 I thought I would do is throw out some questions

22 specifically to some of our panelists, and I thought in

23 order to make the end of the day discussion lively, ask

24 the various panelists to raise their table tents if they

25 want to weigh in on a question, and I'll make sure I call
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1 on you and include you in the discussion.

2 So I'm going to start with Jon, since he is

3 right next to me, and ask, Jon, what you see as the major

4 challenges and trends with respect to payment systems

5 from your position at DOJ and your knowledge of both the

6 U.S. -- and not just the Justice Department, but other

7 agencies' law enforcement efforts in this arena.

8 MR. RUSCH: Thanks, Stacy. I think there are

9 three main trends that we're focusing on these days that

10 in one way or another directly implicate the use of

11 electronic payments, mechanisms and more traditional

12 mechanisms like payment cards. First, I think I would

13 focus on what we're seeing is a general trend toward

14 increasing globalization of mass marketing fraud.

15 You may have heard today already about some of

16 the types of cross-border schemes that U.S. and Canadian

17 authorities are trying to combat. In simple terms, you

18 might think of that as sort of a north/south problem, or

19 at least within the same time zones. We're close

20 geographically. We have a close and long and honored

21 history of collaboration among law enforcement

22 authorities in dealing with crime of all types. So while

23 telemarketing, in particular, has been a headache for

24 North American law enforcement, we've been able to deal

25 increasingly effectively with that problem.
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1 However, as many of these larger fraud schemes

2 turn their attention beyond North America and start

3 targeting individuals in other continents -- places like

4 the United Kingdom, Australia, New Zealand -- or as

5 people start setting up boiler rooms well outside the

6 United States -- on the Asia continent or elsewhere in

7 the Pacific rim -- and calling back to the United States,

8 that raises a whole host of new issues as to whom we deal

9 with. How effectively we can deal in terms of

10 establishing the same kinds of cooperation when you're

11 cutting across potentially 10 or 12 hours worth of time

12 zones and spanning continents or oceans to be able to

13 deal effectively with that kind of fraud.

14 A second trend that I think we're also very

15 attentive to increasingly is the involvement of organized

16 criminal groups in cross-border fraud. Clearly, some of

17 the larger schemes we've seen suggest that mass marketing

18 fraud can be the people at the top of the pyramid. The

19 ones who organize and operate the schemes, a tremendously

20 lucrative proposition. And that, I think, is one of the

21 things that has enticed some well recognized organized

22 criminal groups into the area of cross-border fraud.

23 Anybody who is involved in organized crime, who

24 wants to maximize their profits, wants to make sure that

25 they get money out of the victims' hands as quickly as
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1 possible, when they can minimize the potential for

2 chargebacks, and reduce the potential for recordkeeping

3 that might help to create audit trails for civil or

4 criminal law enforcement.

5 We also know there are instances in recent

6 months where organized criminal groups are directly

7 focusing on individuals who work with some of the

8 electronic payments mechanisms -- agents who work for

9 epayments companies -- and offer them the alternatives,

10 in some cases, of either bribery or intimidation through

11 the use of threatened or actual violence.

12 Finally, we see what I would regard as a

13 broader trend toward the use of mass victimization as a

14 conscious focal point for a large scale fraud scheme,

15 particularly made possible through the use of digital

16 technology. When I speak of mass victimization, it may

17 sound odd to say I'm not talking about only a few

18 thousand people. We know specific cases that we have

19 indicted and prosecuted where, for example, by using ACH

20 debiting as a mechanism for getting money from victims,

21 fraud schemes have been able to get tens of thousands of

22 people to make their bank accounts available.

23 In at least one case that I think both the FTC

24 and the Justice Department had involvement in at

25 different times, a single individual who got access to
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1 large volumes of credit card numbers was able by using a

2 billing aggregator to hit the bank accounts -- or, sorry

3 -- credit card accounts of some 800,000 credit card

4 holders and at least for some period of time to gross on

5 the order of 37 million dollars.

6 It is this kind of leveraging of technology and

7 the use of epayments mechanisms that I think makes

8 possible this growing trend. Now, I don't know that

9 there is any one type of epayments mechanism that major

10 fraud schemes are trying to single out. Different people

11 may use different mechanisms for the different types of

12 schemes they have. But I think it is fair to say that

13 with all of these major trends going on, there is

14 increasing pressure -- if I can put it that way -- on the

15 credit card sector, on ACH debiting mechanisms, on

16 epayments systems like Western Union and similar

17 companies, that they will become the vehicles for large

18 scale fraud, especially on a binational or sometimes

19 multinational basis.

20 MS. FEUER: Thanks, Jon. I'm going to stay

21 with this focus first on trends, and ask Elliot Burg if

22 you agree with what Jon is saying in terms of whether

23 from your perspective in the states you are seeing the

24 same kinds of pressures and the same kinds of trends with

25 respect to payment systems?
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1 MR. BURG: Certainly what we've seen in the

2 last couple of years has been a shift, particularly to

3 automated clearinghouse debits, these electronic

4 transfers out of consumers' accounts, and wire transfers

5 of money. Western Union or Travelers Express' Money Gram

6 program are the companies that come to mind. And the

7 information that we have is in part anecdotal. We're

8 seeing complaints both from our state and other states

9 where consumers have in one way or another either been

10 talked into going to an independent agent of Western

11 Union or Money Gram and transferred money that arrives

12 almost instantaneously in Canada, for example, or another

13 country. It can be picked up almost anywhere in the

14 world, in fact, by almost anybody that has the right

15 information obtained from the telemarketing call.

16 Or situations where consumers have been lured

17 in some way into sharing bank account information,

18 routing and account numbers, and the next thing they

19 know, they have money transferred out of their account. 

20 And one of the issues related to that that I hope we'll

21 have a chance to either talk about on this panel, or I'm

22 hoping this will be an ongoing conversation that will

23 come out of the workshop and people will continue meeting

24 and working together into the future, is ways of alerting

25 consumers to the need to protect themselves in effective
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1 ways.

2 I'm not convinced that the consumer education

3 efforts that have been undertaken by state offices of

4 Attorney General and federal agencies and private groups

5 have been effective in penetrating down to the local

6 level. So when you go to a local senior center, or have

7 an open meeting in a local community in northern New

8 England, I think most people don't know that money can be

9 electronically debited from their bank account. They

10 don't know that they should be looking at their credit

11 card statements every month and checking to see if there

12 are unauthorized charges.

13 So the kind of massive fraud trends that Jon

14 has been referring to, I think, are reflected not so much

15 in the complaint levels, although those are high, but in

16 the fact that behind each complaint, there may be 10 or

17 20 or 100 other victims that don't know they're victims

18 and are not aware of the fact that they've had two or

19 four hundred dollars or a thousand dollars taken out of

20 an account or a credit card account.

21 So in general, I would say, yes, that's what

22 we're seeing.

23 MS. FEUER: Thanks. And let me turn now and

24 get the perspective of our representatives from the

25 private sector. I want to ask Mark MacCarthy first,
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1 since I know -- I don't know if I'm putting you on the

2 spot here, Mark. But I would like to ask what Visa is

3 seeing in terms of trends for cross-border fraud,

4 particularly cross-border frauds that harm consumers? 

5 And I know that Visa has done some work on debit card

6 fraud, is my understanding, and I'm just wondering if you

7 can touch on that in your response.

8 MR. MACCARTHY: I may take a pass on the debit

9 card one, but on the cross-border fraud our fraud levels,

10 as you know, are pretty low. Over the last 15 to 20

11 years they've dropped pretty dramatically. In the early,

12 oh, 1980's or so, fraud was about 20 cents for every $100

13 worth of our transactions. It dropped to about 15 cents

14 in the early '90's. Now it's down to around seven cents

15 for each $100 worth of our transactions.

16 That's fraud in general. We're seeing that

17 trend continue to drop. It goes up or down, you know,

18 every quarter or so. But the trend is generally down. 

19 At the end of the last quarter, it was down just below

20 seven cents per $100. We're finding that among the areas

21 of fraud which have not declined the way fraud generally

22 has is cross-border fraud. And so we perceive that to be

23 an area which deserves greater attention, and for that

24 reason, we're pleased that this kind of program is up and

25 going.
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1 In terms of where the fraud is coming from for

2 U.S. banks and U.S. cardholders, for those who are

3 victims of fraud, 80 percent of the problem comes from

4 within the United States. The remaining 20 percent comes

5 from outside of the United States. The top fraud regions

6 for those 20 percent, the European Union is the top one,

7 Latin America is the second, Asia Pacific is the third

8 and Canada is the fourth. The Central European and

9 Middle Eastern area is the last.

10 We have fraud offices throughout the whole

11 world to sort of handle these kind of difficulties and a

12 bunch of programs. We try to keep track of the level of

13 fraud and the number of high risk merchants through a

14 special high risk merchant monitoring program. And we

15 have a global merchant chargeback mechanism, whereby if

16 there is a problem with a merchant and a customer has not

17 made a particular transaction, but the merchant has tried

18 to put it through the system, there is a mechanism for

19 charging that back to make sure that the customer is not

20 responsible for it.

21 Our zero liability program -- by the way, on

22 the debit question, our zero liability program is

23 designed to protect cardholders from bearing the

24 liability in the case of unauthorized use. It applies to

25 debit cards as well as to credit cards. Legal rules and
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1 regulations about the two different cards differ, but as

2 a practical matter, both credit and debit have the same

3 level of practical protection within the Visa system.

4 Let me stop there and get back to other

5 questions later.

6 MS. FEUER: Great. Great. Dave, maybe you

7 could weigh in on what you're seeing at Discover. I know

8 you and I had talked a little bit anecdotally about what

9 is keeping you busy these days. So I'm wondering if you

10 can fill us in on the cross-border trends that you're

11 seeing at Discover Financial Services.

12 MR. OSTERTAG: Some of the cross-border trends

13 that we see involve organized crime groups, again. It's

14 our biggest problem, the international organized crime

15 groups, using the Internet and using electronic means to

16 accomplish a fraud. And we've seen within the industry a

17 trend within the past two or three years where credit

18 card accounts are used via balance transfers into

19 checking accounts that have debit cards attached to those

20 checking accounts. So the funds are transferred from the

21 credit card company into the checking account, and then

22 the debit card is the instrument used to obtain the

23 funds.

24 More and more we're seeing that type of fraud

25 happen. In a lot of instances, the debit cards are then
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1 used to go into the United States and to the Post Office

2 to buy postal money orders. Just putting another level

3 of money laundering between when they get the money from

4 the credit card company and they get the cash in their

5 hands.

6 MS. FEUER: And, Dave, if I understood you

7 correctly from conversations we've had, a lot of times in

8 this process the consumer -- an unwitting consumer's bank

9 account or bank card information is being used and

10 thereby subjecting them to the whole identity theft

11 issue.

12 MR. OSTERTAG: That's correct, on the end of

13 the credit card company. A lot of times the accounts are

14 account takeovers, where the organized crime group will

15 find an account number, and will access that account

16 number to do the balance transfer into the checking

17 account. Many times the checking accounts that the money

18 is deposited into, or transferred into, is an innocent

19 victim that has no idea that this money is being

20 transferred into their account and then being transferred

21 out into cash or money orders. So you have multiple

22 victims throughout the path.

23 MS. FEUER: Thanks. And let me turn now to

24 Jane Larimer, since I know we've also been having

25 discussions about the rise of fraud in the ACH systems. 
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1 I'm wondering if you can maybe explain to people a little

2 bit about how the ACH system works, since that is, I

3 think, least familiar to most of us, and explain what

4 trends you have been seeing in the last year or so.

5 MS. LARIMER: Okay. The automated

6 clearinghouse is a bit different from the card systems or

7 the wire systems. It is a batch payment system. It is

8 what we think of traditionally as your direct deposit, so

9 it's a happy thing, or direct payment. So you pay your

10 mortgage, you pay, not so happy sometimes, your gym bill

11 or things like that on a monthly basis.

12 What we're seeing -- I guess pointing out

13 another difference between the ACH as a payment system is

14 we at NACHA -- which is the National Automated

15 Clearinghouse Association. We write the rules that

16 govern the ACH, and every financial institution

17 participant in the ACH, whether they originate payments

18 into the system or receive payments -- i.e., the direct

19 deposits -- all agree through multilateral contracts to

20 abide by the rules.

21 The difference, though, for us is that we don't

22 run the actual switch, okay? We don't run what you would

23 think of as the payment system, the mechanics that run

24 the payments through the payment systems, as opposed to

25 most of the card systems, where they not only write the
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1 rules, but they also monitor and run the transactions

2 themselves. And I think for us that presents a few more

3 challenges to the payment system. There are two ACH

4 operators, the largest being the Federal Reserve. They

5 are the public sector operator. And then there is a

6 private sector operator, called EPN, through the

7 clearinghouse up in New York.

8 So that presents some challenges to us from

9 both a rules enforcement perspective and a fraud control

10 perspective, because what we see happening through the

11 ACH and through the trends and through the rules, we then

12 have to speak with folks at the operator level to try to

13 put changes and controls into place and to monitor for

14 fraudulent transactions. So I think it adds a little bit

15 more of a challenge for us.

16 What we've been seeing -- the trend we've been

17 seeing through the ACH is two years ago our rules were

18 amended following a report that came out from Vice

19 Chairman Rivlin talking about access to the payment

20 systems, and said that the ACH needed to have an easier

21 access. That it was very difficult to gain access to the

22 payment system for spontaneous payments, because, you

23 know, it was the old direct deposit, direct payment

24 network. So we were looking at more kind of spontaneous

25 or single entry transactions at that time.
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1 And two years ago -- two and a half, actually

2 '99, we started a pilot looking at telephone initiated or

3 orally authorized ACH payments, where you would read your

4 routing and transit number into the phone giving somebody

5 an authorization orally to debit their account. That

6 pilot went on for about 18 months. We monitored the

7 returns. So if a consumer went into their financial

8 institution and said that something was unauthorized, we

9 monitored the rate of the returns coming back. And if

10 they were too high, we were going to obviously not move

11 from a pilot into a full implementation.

12 Well, it was supposed to be a six month pilot. 

13 And we watched it and the returns were very low, and we

14 still didn't feel -- you know, we wanted to see. So we

15 actually ended up having the pilot run on for 18 months

16 and had absolutely no problems with it whatsoever. It

17 went into full implementation, which meant a change to

18 our rules, in September of 2001.

19 And since then what we've found is although the

20 main users -- 90 -- you know, 99 percent of the

21 transactions are generally card issuers. If you've ever

22 called American Express to make a -- or Visa or somebody

23 else. I'm sure all of other card issuers. To make a

24 payment over the phone -- make a phone payment -- or

25 through GEICO or somebody. You need to make your
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1 mortgage payment. You need to make a payment really

2 quickly. It is generally the ACH, and obviously the

3 fraud rates with those are extremely low.

4 But within probably the last 11 months, we

5 started seeing that the telemarketer had found out about

6 this application with an oral authorization, and they

7 started using it. And some of our financial institutions

8 -- generally speaking, they are the less sophisticated

9 financial institutions -- are not or were not at the time

10 screening the transactions coming through and were

11 allowing -- I don't know if I can say fraudulent. But

12 they had high unauthorized return rates coming back, so I

13 would say indicative of fraudulent transactions.

14 So we have been working over the past year with

15 the FTC and the FBI and everybody else to try to find out

16 -- find the very small handful of financial institutions

17 that were processing these and try to talk to them and

18 talk to their regulators in shutting those -- the

19 processors or the originators down and getting them off

20 the system. So that's what we've been wrestling with.

21 MS. FEUER: And, Jane, can you explain the role

22 of how people outside the United States are gaining an

23 entry point into the ACH system?

24 MS. LARIMER: What we've been seeing from

25 Canada, especially, is not what we would call an ACH or
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1 cross-border transaction, so the payment isn't coming

2 through the payment systems across the border. What's

3 happening is Canadian companies are telemarketing across

4 into the United States and then bringing up those batches

5 of payments and putting them into the United States

6 payment systems. So, you know, if they have a bank in

7 Michigan, they're just going right through and

8 depositing, or going in and running their electronic

9 files through the financial institution. So that's how

10 they're gaining access. It's just through the financial

11 institutions in the U.S.

12 MS. FEUER: Thanks. And, Jean Ann, from the

13 consumer perspective, are the complaints you're hearing

14 and the issues that you are working on -- do they reflect

15 some of what we've heard raised by the law enforcement

16 and business folks here at the table?

17 MS. FOX: Yes. CFA doesn't handle individual

18 complaints, but we do talk to a lot of folks about

19 financial issues and consumer protections in the payment

20 arena. And the things we hear about are whether or not

21 the protections are keeping pace with the changes in the

22 payment mechanisms. We've had a convergence of plastic. 

23 We have not had a convergence of consumer protections to

24 go with them. So you can use a card through both the

25 credit card and the debit card system, but your
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1 protections are different depending on what kind of card

2 it really is.

3 So we hear from folks that, for example, they

4 wouldn't think of using a debit card on-line, because

5 they know that if someone steals their account

6 information, their checking account will be wiped out and

7 then they have to argue with the bank about getting their

8 own money back, whereas if someone steals your credit

9 card, you don't pay the bill while you argue about the

10 fact that it is an unauthorized transaction. So

11 consumers are very aware of the fact that their

12 protections vary widely depending on what kind of payment

13 mechanism there is. We have absolutely no federal laws

14 on store value cards, for example.

15 We also hear that consumers are a bit confused

16 about the new forms of electronic payment. The

17 electronic truncation of checks at the point of sale. 

18 You know, how do you prove whether or not you signed it?

19 You don't get a return check back after it has gone

20 through the payment system. You get it there on the

21 spot. 

22 So we think that there is a problem that comes

23 about when protections don't keep up with developments in

24 the payment technology, and when new things are

25 introduced and consumers don't understand what their
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1 rights or protections are with them, and when these

2 payment methods are used to defraud consumers and they

3 aren't sure how to go about getting themselves made

4 whole.

5 I will point out that consumer groups on both

6 sides of the Atlantic are concerned about payment card

7 protections. We're part of the Transatlantic Consumer

8 Dialogue, as are 64 other European and United States

9 consumer organizations, and we do have resolutions and

10 reports on credit card and debit card and other forms of

11 payment card protections that are available at our web

12 site, pacd.org. That's my commercial for the day. 

13 MS. FEUER: Thanks. I think what I would like

14 to do now is turn from reporting on the trends and

15 talking a little bit about what can be done by law

16 enforcement and payment systems operators working

17 together to detect, stop and deter cross-border fraud. 

18 And I thought I would just throw this out and see who

19 raises their table tent first. I think Elliot.

20 MR. BURG: I would like to share a few ideas

21 about moving to a system of cooperation and partnership

22 which is maybe more systematic and proactive than it has

23 been in the past, which is not to say that there hasn't

24 been cooperation on a case by case basis or on an as

25 requested or as demanded basis.
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1 But one of the problems is despite the numerous

2 successes that law enforcement agencies have had -- Robb

3 Evans' story of pursuing assets through seven countries,

4 for example -- it is just an enormous ocean out there of

5 telemarketing fraud. It sometimes feels like we're

6 actors in a re-creation of the sorcerers or apprentices

7 with waves of organized crime affiliated fraudulent

8 telemarketers calling numerous people -- massive numbers

9 of people -- in the United States and elsewhere, and we

10 end up running after this company or that company, but

11 the phenomenon continues.

12 And it seems to me that there is a need for, as

13 I was saying, systematic and proactive approaches. And I

14 would suggest that that could be in three different

15 areas. And there is no -- I mean, these are familiar

16 categories to everybody, but I think we need to push the

17 envelope, is what I'm getting at.

18 The first is in the area of consumer education. 

19 And as I mentioned before, with respect to payment

20 systems that allow people to get a chargeback or a 

21 re-credit -- namely, the credit card system and the

22 banking system -- people need to be educated as to what

23 they should be doing. I don't think most consumers know

24 that. And we need to figure out effective ways of doing

25 it. I don't think that posters work. PSAs on local
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1 access TV have some effectiveness.

2 But if we were to take a small fraction of all

3 of the money that is lost by everybody who is a

4 telemarketing victim and plow it into a few well

5 produced, prime time TV commercials with, I don't know,

6 Tom Cruise and Meryl Streep or somebody like that, people

7 would remember it. Maybe not for a real long time, but

8 long enough to make a dent, and it would permeate the

9 consciousness of a culture that is bombarded with other

10 messages.

11 That works for credit cards and bank debits. 

12 It doesn't work for money transfers. The system of

13 consumer education for wire transfers, for example,

14 through Western Union, has to be different, because when

15 the consumer goes in with a cashier's check or cash to

16 the independent agent, the money is gone and you can't

17 call it back. But there are ways, we believe, of

18 changing the system internally so that there are some

19 education oriented protections.

20 For example, the consumer comes in to the

21 independent agent. Says I would like to send $500 to

22 Montreal. On the screen of the independent agent -- a

23 screen that is tied into the wire transmitting company's

24 mainframe -- is a pop up that says Montreal, give the

25 consumer a placard. And there is a coded placard that
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1 has in plain English, are you sending this money because

2 somebody you didn't know called you on the phone? If so,

3 don't do it unless you have a good reason. And you've

4 got to figuratively grab people by the shoulders, but you

5 look for a way of doing it. And I think that kind of

6 approach might work in the wire transmission area.

7 The second area is better substantive

8 protections for consumers. The credit card chargeback

9 system is a model in this area, frankly, although it

10 would be helpful to have at least informally -- and maybe

11 this occurs already -- some commitment to relaxing the

12 obligations on consumers in cases where there is a clear

13 pattern of fraud involving a particular business. So

14 regardless of the fact that the consumer didn't file a

15 so-called claim or defense before he or she actually paid

16 the bill, because then you're out of luck. Regardless of

17 the fact that the consumer waited more than 60 days,

18 because he or she didn't look at the credit card

19 statement, but maybe talked to somebody who told the

20 consumer about this scam that was going on and then comes

21 back into the system later.

22 If the system knows that this particular

23 merchant has been scamming people across the world, then

24 it seems to me that the obligations imposed on consumers

25 should be relaxed in a way. The onus should be put
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1 further back in the stream where it belongs. Not on the

2 card issuing bank, but on the merchant. Or if the

3 merchant is not around, on the merchant's bank which

4 should have investigated the company that it was doing

5 business with.

6 Bank debits in terms of substantive

7 protections, we've got the standards that NACHA has right

8 now in place, but those don't have the force of law. And

9 it is difficult without a strong law enforcement

10 component to really put teeth in them. Those standards

11 are very rigorous right now. There are a limited number

12 of categories where an automated debit can be taken out

13 of your bank account based on oral authorization over the

14 phone to a telemarketer. If it's an inbound call from

15 the consumer to the telemarketer, they can do it. If

16 it's a call to a telemarketer that you've done business

17 with before, or you have a written agreement to allow a

18 debit, that's okay. Otherwise, it is not allowed,

19 according to the private rules of the game, within the

20 automated clearinghouse system.

21 But there needs to be some way of formalizing

22 those rules so that consumers have remedies under them on

23 a class wide basis. Not just the consumers that come in

24 with an affidavit within 15 days saying I got scammed,

25 but consumers across the board, because most people don't
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1 complain.

2 The third area is information sharing. And

3 there was some discussion about that in the second panel

4 that almost didn't happen this morning, but there was

5 some potential there for exploring systematic sharing of

6 information. For example, if you have a high rate of

7 return for lack of authorization in the case of automated

8 clearinghouse debits -- so you have a bunch of people

9 coming in and filing affidavits saying I never agreed to

10 have this money taken out of my account -- and it is the

11 same originator -- the same telemarketer -- in a certain

12 number of cases -- you have a percentage threshold -- it

13 should be -- there should be a system for making that

14 information automatically available to law enforcement.

15 The same way with credit card chargebacks. If

16 a merchant exceeds a certain rate, the information should

17 be available on a secure web site. You figure out ways

18 of dealing with consumer privacy. Those issues were

19 talked about in the last panel, to some extent. But you

20 don't leave the system to sort of the needle in a

21 haystack approach where law enforcement, at least at the

22 state level, ends up responding to a group of complaints

23 that came in against this company over here, and a group

24 of complaints that came in against this company over

25 here.
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1 You have a systematic approach so that law

2 enforcement agencies can take a step back and say, where

3 should we put our resources? Where are the largest

4 number of people being taken? Where is the highest

5 chargeback level, the highest return rate? Again, money

6 transmission systems present a different problem. But

7 it's possible, it seems to me, for information to be

8 aggregated within companies like Western Union and

9 Travelers Express, so that if you have multiple

10 complaints against the same payee, then that information

11 goes into a data bank that is available to law

12 enforcement so we can see the trends.

13 And all of this will allow a quicker movement,

14 quicker marshaling of law enforcement resources. Right

15 now, by the time we figure out which complaints we're

16 going to act on at the local level, and then direct a

17 subpoena to a financial institution or a merchant or a

18 credit card issuer, the money may be long gone. So we're

19 looking for a system, and we're looking for proaction.

20 Thanks.

21 MS. FEUER: Great. I think Elliot has thrown

22 out some interesting kernels, and I wanted to turn to our

23 private sector participants and get their thoughts on

24 what Elliot has thrown out. And I see that Mark has

25 already put up his table tent, so if you could comment,
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1 please.

2 MR. MACCARTHY: Yes. In no particular order,

3 several responses. First of all, thank you for the kind

4 words about the credit card chargeback mechanism. It is

5 something we're proud of, and we think it is the kind of

6 system that can function effectively as a consumer

7 protection mechanism.

8 I do think your suggestion, that if there is a

9 known fraudulent merchant who has been victimizing people

10 for a substantial period of time and he's sort of

11 generally known, the normal obligations on consumers to

12 report matters and so on and so forth in order to get

13 their refund, I think, might be something that is worth

14 pursuing a little bit more strongly.

15 The one thing I would draw to the attention of

16 consumers at this point, though, is that if there is that

17 kind of problem, where you find out after the fact -- you

18 know, you've paid the bill and the 60 day time limit is

19 gone. But you now find out that the person that you were

20 dealing with is one of these recognized fraudulent

21 actors. You should contact your issuing bank and explain

22 what's going on, as you were suggesting, in many cases

23 informally. The official rules and requirements for

24 going through a series of hurdles might be waived in

25 those particular cases.
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1 If there was a problem, if you didn't actually

2 make the transaction, you should, at this point, still

3 contact your issuing bank rather than throwing up your

4 hands and saying I didn't live up to the responsibility,

5 so there is nothing to be done.

6 On the information sharing point, I think there

7 is some merit to the idea of fuller information sharing. 

8 As most of you in the audience know, and certainly Stacy

9 and Hugh know, Visa, MasterCard and the other issuing

10 banks in this area work closely with the FTC and with

11 other law enforcement agencies. The question that you

12 have to look at in terms of further information sharing

13 is the extent to which an automatic -- the way of

14 forwarding information to law enforcement people is

15 really the best way to go.

16 In our circumstance, obviously, you know, there

17 are lots of reasons for a merchant to experience a short

18 term or temporary chargeback problem. One of the

19 consequences of, you know, sort of making a back office

20 mistake over a couple of months is that your name appears

21 in law enforcement records all over the country. That

22 can be a problem that you wouldn't want to deal with as a

23 law enforcement agency, because it wouldn't be the kind

24 of information that would ultimately be useful to focus

25 your attention on the real bad guys.
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1 So there may be a way of moving forward on

2 this, but we've got to be careful about how we structure

3 it. And the idea that there be sort of automatic

4 triggers which move information out of private sector

5 data files into public sector data files is something

6 that I think we have to examine with great care.

7 On consumer education, I think that that is an

8 area that is worth pursuing, and in some areas I think

9 the advice that people get, I think, could be amplified. 

10 For example, one of the recommendations for consumers

11 that Visa puts on its on-line web site is if you did not

12 initiate the telephone transaction, or if you did not

13 initiate the Internet transaction, don't give out your

14 credit card number or your debit card number. A similar

15 sort of recommendation I just heard from you guys, I

16 think in other -- in some FTC publications, but not all

17 of them, to give similar advice. I think those kinds of

18 recommendations can be put out a little bit further.

19 I think in the area of debit cards, just to go

20 back to that, and then this is my last comment. Jean

21 Ann, you know, is concerned about the use of debit cards

22 because of the possibility that if there is a problem,

23 then the fraudster gets hold of your debit card and

24 empties your account and you're stuck there, you know,

25 with an empty bank account. The fraudster has all your
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1 money, and you've got to go through all these hassles

2 with the bank.

3 I think that idea, you know, reflects the

4 reality of the legal circumstances that we're in right

5 now. It does not reflect the reality of people's

6 business practice or private sector obligations. The

7 Visa system requires that if there is a dispute about a

8 transaction involving a debit card, they require that

9 within a few days -- I think it's five days -- the money

10 go back into the account of the person who has

11 complained. And most of our issuers, in fact, get the

12 money back in there within 24 hours. And at that point,

13 you have a discussion about who is at fault, but you're

14 not in a situation where you have lost your entire bank

15 account and then you have the discussion.

16 So let me stop there. There will be more

17 opportunity, I think, for discussions like this.

18 MS. FEUER: Thanks, Mark. I want to turn to

19 Dave and Jane and pick up on -- well, one, ask them if

20 they have anything to say to respond to Elliot's ideas. 

21 But also, to just throw out a few more, while we're

22 talking about this, in terms of systematic information

23 sharing and in terms of consumer education, because I

24 know some of this has come up in my conversations.

25 I know, Dave, first, that we were talking about
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1 the credit card fraud alerts and conference calls that

2 the industry has that includes some other types of

3 criminal law enforcement agents now -- agencies now. Is

4 that something that -- you know, is that an idea that

5 could be expanded to include the FTC, and are there any

6 other either ideas that you would have for systematic

7 information sharing, or any issues, as Mark has raised,

8 that would limit you from doing so?

9 MR. OSTERTAG: I think regionally and

10 nationally there are -- number one, the International

11 Association of Financial Crimes Investigators has

12 meetings and has an Internet based secure web site where

13 fraud alerts are transmitted to members on specific

14 frauds -- who is doing the fraud, the addresses and how

15 they are occurring. Within the Visa system, and also

16 MasterCard, there is a fraud alert system that goes out

17 to, I believe, the 22,000 member banks on particular

18 scams. The fraud alerts do go to all the banks. 

19 American Express and Discover Card are also included in

20 these fraud alerts. I think that some local members of

21 the FTC are involved in these fraud alerts.

22 And that's one system that could be used to

23 transfer the information. One problem that could arise

24 from that is that a lot of times there is information

25 regarding specific individuals in these fraud alerts, and
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1 if it were used in the wrong way, there could be some

2 privacy issues involved in those.

3 Another area that we're really lacking in in

4 the United States and internationally is the creation of

5 a national database on who these people are. There has

6 been attempts over the years to establish a national

7 database. Some of the federal agencies -- the Secret

8 Service, the FBI and the Postal Inspection Service --

9 have their own databases, either regionally or

10 nationally, but the other agencies and the industry

11 really don't have access to it.

12 I think there is a great need in this area for

13 a national database that could be accessed by all the

14 federal agencies and the industry on different levels of

15 access, depending on what you need and depending on what

16 the regulations are. We always seem to have a problem

17 when we have meetings talking about this, about everybody

18 sharing information. Unfortunately, everybody wants to

19 be in the lead and no one wants to follow.

20 So I think that there really should be a

21 gathering of the different federal agencies and private

22 industry looking at establishing this national database

23 and possibly even expanding it into an international

24 database. The fraudsters, the organized crime groups,

25 use boundaries against us. They use boundaries within
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1 the United States, both state and local boundaries,

2 knowing that there is jurisdictional issues, knowing that

3 there is regional investigative issues. And more

4 recently, they've gone into transnational fraud using

5 international boundaries. So we not only have the

6 problem of the lack of communication and exchange of

7 information within the United States, now we have it

8 globally.

9 So I think we need to look at that, that that

10 is a weakness in our system that they are exploiting and

11 we need to address that.

12 MS. FEUER: Thanks. And, Jane, just again,

13 picking up on some of Elliot's comments and some of the

14 things I know we've discussed. Elliot was talking about

15 the problem with the fact that the NACHA rules are not

16 incorporated into state laws. He has also talked about

17 the fact that consumer education may not be getting to

18 the right places. And I know that you have some

19 thoughts, and I was hoping you could share them.

20 MS. LARIMER: Yeah, definitely. One thing I

21 would like to say is with the database. I agree 100

22 percent. One of the things that we noticed from an ACH

23 perspective is we would see that there is a problem, or

24 we would hear there is a problem. A financial

25 institution would call us and say, we're seeing a lot of
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1 suspicious activity from this bank. We give that bank or

2 financial institution a call. They would look into it. 

3 They would shut somebody down. They would go to another

4 processor, and then another financial institution, and

5 they're hopscotching. And we would hear from different

6 places where they were going, and they would just keep

7 hitting financial institutions until they found somebody

8 who would give them access into the payment system --

9 into our payment system.

10 And I think that is one of the biggest things

11 that we're wrestling with. If we have this information,

12 how do we get it out? How do we let folks know? And

13 obviously, it is a liability issue, as well, because we

14 don't want to be defaming somebody. So we're trying to

15 wrestle with that, and we've been looking into the

16 different databases and how we can get names in or how --

17 you know, can the industry -- the financial institutions

18 -- access it? Could they find out who fraudulent

19 originators or fraudulent merchants are? So I think that

20 there is definitely a need there. 

21 One of the interesting things with the payment

22 systems, at least domestically, is that most, if not all,

23 are private sector. They are not given the force of law. 

24 They are done through multilateral contracts. The card

25 systems -- I mean, it's all private law and they don't --
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1 you know, it's contract based law. So I don't -- the ACH

2 is not different than the other payments systems. 

3 They're done by agreement. The check clearinghouses all

4 have agreements. The debit cards. The credit card

5 networks. It is all through their financial

6 institutions. They all agreed to abide by the rules of

7 that. So that is one of the things that doesn't make the

8 ACH unique from any other of the payment systems.

9 But something that is interesting, I think, and

10 a trend that we've seen, again domestically, is that at

11 least in Minnesota, the Attorney General for the State of

12 Minnesota went active against a financial institution. 

13 And one of the counts that they brought up was saying

14 look, you agreed to follow the NACHA rules. They are

15 industry standards. And by not following them, by

16 breaking them, you actually engaged in unfair and

17 deceptive trade practice.

18 And from what I understand, States Attorneys

19 General are acting more in a watchdog capacity. 

20 Anecdotally, I haven't found a case yet that this has

21 happened in California -- I guess not surprisingly -- as

22 well. So I think that this is happening, saying look, if

23 there are industry standards that you said are rules that

24 you agreed to abide by and you're not doing it, you could

25 have some other problems. So I think that maybe folks
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1 are getting around that, law enforcement or the states,

2 which gives me hope.

3 MS. FEUER: And I see Jean Ann.

4 MS. FOX: Also, there are the contractual

5 arrangements in industry, trade group agreements or what

6 have you. We believe that there needs to be a

7 fundamental body of consumer protection law that codifies

8 protections so that consumers have recourse. So that you

9 have a private right of action, so that it's not just a

10 matter of looking at an industry group and saying, please

11 protect me out of the goodness of your heart.

12 And if you look at the different kinds of

13 payment mechanisms, the protections seem to be in direct

14 proportion to how affluent the customers tend to be. The

15 protections for the payment mechanism used by low income

16 consumers are likely to be the weakest involved. You

17 know, check cashing rules, money orders and wire transfer

18 protections are at the end of the scale. We think it

19 would be helpful to have a major upgrading of consumer

20 protections that applies to payment cards and all the

21 payment mechanisms so that consumers are confident in

22 using them, and they're less likely to be misused for

23 fraudulent purposes.

24 MS. FEUER: Thanks. Jane?

25 MS. LARIMER: Just to say that consumer
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1 protection laws apply to the card networks and to ACH. 

2 The wire transfer, which is the biggest dollar amount --

3 I mean, there are rules for tracking that, but there is

4 no consumer protection, because consumers -- I mean, by

5 and large through UCC-4A they've waited out the

6 responsibilities and the balances. And where I would

7 say, it's through the card systems and through the ACH

8 that are actually the strongest consumer protections.

9 The check -- on the check side, you have the

10 Uniform Commercial Code and you have your check

11 clearinghouse rules, and you can vary most of that by

12 agreement -- through your depositor's agreement -- and

13 that is through the goodness of maybe the financial

14 institution's heart. 

15 But the ACH on the consumer side, we have done

16 more than -- regulation E is the consumer protection reg. 

17 On the credit card side, you have Reg Z and Reg E, I

18 guess, for your debit card. And we've taken Regulation E

19 and said okay, this talks about your responsibilities to

20 the consumer, but through the payment system is (a) how 

21 you make the consumer whole and (b) how you make --

22 through Regulation E, how you make the financial

23 institution that just passed through a payment that has

24 no responsibility for that payment, how you make them

25 whole as well.
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1 So I think the Reg E and Reg Z responses -- I

2 think it's a little bit confusing. They are different

3 and there are different responsibilities there. But I

4 think, at least on the electronic side, that there are

5 some -- I mean, on this side, the small value payments,

6 which are really the consumer payments, by and large,

7 that there are protections.

8 MS. FEUER: Thanks. I want to bring this back

9 now to leave off where Elliot brought us in terms of

10 ideas for what can be done on a systemic basis, and ask

11 Jon Rusch, our other law enforcement representative,

12 whether you have any ideas in terms of the work that

13 you've done with the various payment systems' operators.

14 MR. RUSCH: I guess my first thought in this

15 regard is that there are some things that Elliot had

16 thrown out as initial propositions that I think we

17 probably are underestimating how much effort we need to

18 undertake. Let me start with consumer education. I

19 agree with Elliot that there -- we have found by trial

20 and error that there are just some things that don't

21 connect well with consumers. It doesn't cause the

22 message to sink in very well.

23 But I think for a number of the types of fraud

24 schemes that we're seeing now, we may be underestimating

25 how intensive an effort it is going to take to get
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1 through to people. I can think back to times in the

2 early to mid '90's where the kinds of pitches that people

3 used to hear were relatively unsophisticated, and in a

4 sense, relatively modest compared to the brazenness of

5 some of the schemes you see now. 

6 You know, when we tell people, for example, you

7 know, be suspicious, be cautious, and then the people

8 call you and say I'm Jon Rusch. I'm with the FBI. I'm

9 with the U.S. Customs Service. I'm with IRS. And they

10 maintain a demeanor and attitude, and to some degree an

11 understanding of how law enforcement does its business,

12 that makes their pitch all the more plausible. We have a

13 whole new level to which we have to go in getting through

14 to consumers just who they are dealing with on the other

15 end of the line. 

16 And that's not the fault of any part of the

17 private sector. I think we have to gear up collectively

18 and really say to ourselves, the threat that is being

19 directed by fraudsters from within Canada and the United

20 States and beyond is very different from what we were

21 looking at even five or 10 years ago. Therefore, if you

22 want to have a really meaningful consumer education

23 effort, we have to start pooling data about how we, from

24 the private sector and government, perceive consumers to

25 be behaving in a real world environment.
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1 That is, if we see this is what's happening

2 with consumers, we need to be thinking more about, how do

3 we change the message? How do we change the media

4 through which we reach people? And can we do it through

5 more targeted approaches, as Elliot is suggesting, but

6 maybe with different kinds of messaging, different

7 approaches and maybe a more concerted, more consistent

8 group of messages as between the private sector, in which

9 I include both the profit making and the nonprofit

10 organizations?

11 You know, everybody is out to some degree with

12 their own individual programs and messages, and nobody

13 has really sat down recently to say, is this stuff

14 working? You know, we don't need the next generation of

15 new posters or even new PSAs on TV if we don't know that

16 they're being effective. So I think we need to do more

17 in terms of looking collectively at how we get a message

18 across to people in a way that is going to hit home.

19 And believe me, that's more complex the more

20 types of payment mechanisms that criminals are using to

21 exploit. You know, it was fine in the old days when you

22 could say, you know, watch out for people pitching you

23 with magazines. Watch out for people pitching you on

24 guaranteed prizes. When people are willing to ratch it

25 up to the level of sophistication where they run the
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1 schemes, and to make those vastly more plausible, we've

2 got a lot more work to do, quite frankly.

3 As for the information sharing, again, I'll

4 agree with Elliot. We ought to be doing more to try to

5 exploit what could be done on a systematic basis for

6 information sharing, but I think, again, we need to take

7 it another step. As good as some of our mechanisms are 

8 -- you know, IFCC's efforts to zap out alerts, or

9 information from within individual companies to sensitize

10 their field people, or within law enforcement to

11 sensitize our field people -- there is still this kind of

12 atomized effort where we're talking within our little

13 networks, with specific focus data about a specific focus

14 crime or fraud, and we're not doing enough to step up, I

15 think, to another level and say, what do we need to do to

16 analyze the data we're getting?

17 I don't care how sophisticated a database we

18 might be able to put together. If we get aggregate data

19 from ACH payment, from the payment card sector or from

20 wire transfers, if you don't have a concerted effort to

21 figure out what we're seeing from a strategic level down,

22 then even a national database of some kind is going to be

23 of only limited utility. In other words, I think we need

24 to have more top down, as well as bottom up, kind of

25 analysis actually looking at the data to take Elliot's
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1 concept of more systematic information sharing and make

2 it really effective.

3 So, you know, with genuine understanding about

4 sensitivities that may exist about the private sector

5 being asked to pass vast new quantities of data into the

6 hands of law enforcement, I think you need to think about

7 this more as a dynamic situation. What do you need to

8 do, not only for individual cases, but strategically to

9 say how can we, you know, within legal limits -- within

10 limits of propriety and appropriate protections for

11 privacy, how can we push the envelope, if possible, to

12 have more information sharing from law enforcement to the

13 private sector, and the other way, on something closer to

14 a real time basis and have it impact across industry

15 sectors, not just for one individual company or even

16 group of companies?

17 MS. FEUER: Let me -- let me just -- I see that

18 Dave is raising his card. But before I turn it over to

19 you, let me just raise a few issues that I think -- we're

20 getting closer to the end of the session, and I would

21 like to have audience participation. Let me follow on

22 with a few questions, and I'm sure, Dave, you can address

23 them all.

24 I want to bring it around to one question that

25 I previewed with the panelists, which is, you know, to
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1 some extent we're sitting here with our FTC hats on and

2 saying what more can the private sector do to help us

3 prosecute cross-border fraud? The flip side of that,

4 obviously, is what more can we do to help you? Jon was

5 just talking about, I think, one element of that, which

6 is when you share information, how are we going to then

7 analyze it? We do some of that here through Consumer

8 Sentinel. But how are we going to make it useful?

9 And I want to throw out a few more issues that

10 I would like everyone to comment on. And that is, some

11 ideas have been raised about training between the

12 government and the private sector, whether it's telling

13 us how you want our subpoenas and CIDs to be couched. 

14 Issues about suspension of services. Telling us, you

15 know, what it is that you need to shut down an account

16 and do we need to wait for a court order?

17 So I know that Mark Thompson from Western

18 Union, who couldn't be here, talked about some of the

19 confusion in multiplicity of agencies and not knowing

20 exactly where to go. So I just want to throw these out

21 as Dave begins to answer Jon's comments.

22 MR. OSTERTAG: Okay. Jon, you brought up a

23 point that in the meetings I've had, both with the heads

24 of security of the credit card companies and with

25 representatives of the federal agencies -- investigative
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1 agencies -- the best of all worlds solution that we came

2 up with are the heads of security for the different

3 credit card companies are willing to provide analysts --

4 to provide industry experts in their area to act as

5 analysts -- on a national basis in a group comprised of

6 law enforcement analysts and agents and industry analysts

7 and investigators to take a look at that huge database of

8 information, to look at the trends and to identify those

9 organized crime groups that are responsible for a

10 majority of the fraud that we see in the country.

11 You know, what we do now is take a look at it

12 regionally. Even within the different federal agencies,

13 one field division will look at a particular crime

14 happening in their area. In another part of the country,

15 another field office will take a look at that. We're not

16 taking a look at it on a national basis to tie those two

17 groups together to realize that it is the same group

18 doing the crime across the country.

19 So that was our idea as we talked about this --

20 when we brainstormed about this -- is to have a national

21 database and to have a national group, comprised of

22 private industry analysts and investigators and law

23 enforcement analysts and investigators, to take a look at

24 all of the data coming in from both sides and to put

25 together composite cases on these major international
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1 organized crime groups. And then go after the leaders. 

2 Don't go after the runners that we have time and time

3 again. Go after the leaders.

4 MS. FEUER: Elliot?

5 MR. BURG: Yeah. That suggests to me that

6 hopefully before tomorrow's session is over, or as kind

7 of a kudos to people being here, there can be some

8 consensus reached or some proposals put out for 

9 post-workshop process. And in addition to what Dave has

10 just said, it seems to me that there is a place, if the

11 FTC were willing to sponsor these for regional trainings

12 involving people from credit card companies and banks and

13 law enforcement at various levels, so that people can

14 pool their information. I don't mean specific data. But

15 the systems that exist and the kinds of informal

16 decision-making that occur all the time.

17 There are lots of things that I've heard this

18 morning about BITS and, you know, different data systems

19 that my office -- I don't think anybody in my office

20 knows about. So it would be useful to have that kind of

21 training, and it would go both ways so that local -- that

22 is to say, state and federal law enforcement people can

23 share with the private sector what our priorities are and

24 what kinds of procedural issues we have to grapple with

25 in making requests for information.
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1 Secondly, there may be a place for some kind of

2 task force with subcommittees, because there are lots of

3 different sectors of the financial industry represented

4 here and implicated in payment to telemarketers. But

5 there needs to be a forum for this. It needs to be a

6 continuing forum. If people are going to be talking

7 about the possibility of creating some kind of targeted

8 national privacy-respecting database, then that means

9 people have to sit down and begin talking about what that

10 would look and how it would be done.

11 Or if the private and public sectors are

12 interested in some research on consumer education, it has

13 probably been done before, but I don't know if people

14 know what works at this point in trying to come up with a

15 national strategy that is well funded. That requires

16 people to come together on an ongoing basis. So there

17 needs to be some discussion -- some thought given to

18 structure and process once we leave here.

19 MS. LARIMER: Yeah. I think I agree with both

20 of your points, Dave. I think one of the things I would

21 want to include in that group of folks getting together

22 and talking is also regulators from the banking side,

23 because I think there are a couple of problems. The

24 first one is, especially for the smaller financial

25 institutions, they're inundated with, you know, privacy
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1 laws coming out, and they're scared. They're scared to

2 give any information to anybody because they're under the

3 gun.

4 And so between, you know, gee, I'll be in the

5 legislation and the Patriot Act and, you know, the old --

6 you know, you know your customer, but then you have, you

7 know, banking privacy laws and everything. They're

8 nervous. So having the regulators there, I think, would

9 -- if there are significant issues with the financial

10 institutions giving certain information, I think having

11 that perspective would be very helpful. I think it would

12 also be calming to some of the financial institutions who

13 knew that this passed some kind of sniff test.

14 But the second thing is also from the ACH

15 perspective. What we've seen getting into the ACH -- not

16 100 percent – but primarily has been coming through

17 smaller, less sophisticated financial institutions that

18 do not understand the liability that they're holding. 

19 And the ACH and the originating bank pushing a payment

20 out -- you know, pulling a debit, when they put that into

21 the system, they say I am guaranteeing. I am promising

22 you -- the bank that I'm taking this money from -- that

23 this is authorized. The person says it is okay and I can

24 take that. And they promise, and that promise lasts a

25 lot longer than the 60 days that they can return the
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1 payment for, so that's out there for a long time.

2 So financial institutions are pushing out some

3 of these fraudulent payments, or some of these

4 questionable payments. They don't understand how long

5 they're on the hook for. And I think there are some

6 safety -- at least questions. We have spoken to

7 regulators saying, hey, there is a problem over here or

8 there's a problem over there. Just please check it out. 

9 And I don't know really what happens after that point.

10 But I think having the regulators there and

11 saying these are posing some significant risks and we

12 need to take care of it, I think that would be helpful,

13 as well, to kind of cut through everything and make

14 things happen.

15 MS. FEUER: Great. What I want to do now is

16 open up for questions. Tara has the microphone, and if

17 you could recognize first Barry Elliot. It takes a

18 moment to warm up.

19 MR. ELLIOT: A couple of questions.

20 MS. FEUER: If you could identify yourself?

21 MR. ELLIOT: Barry Elliot with PhoneBusters

22 OPP. Chargebacks. Is there really a time delay on

23 chargebacks for fraud? Is it 60 days or is it forever?

24 MS. FEUER: Does anyone want to take that

25 question?
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1 MR. ELLIOT: I know there is a chargeback rule

2 for normal transactions. But when you're dealing with a

3 fraudulent transaction, is there really a time limit?

4 MS. LARIMER: Through the card system?

5 MR. ELLIOT: Yeah, credit card.

6 MR.MACCARTHY:Yeah.

7 MR. ELLIOT: What is it?

8 MR. MACCARTHY: We've topped it at 60 days. I

9 mean, it's there. It's standard. If you don't do

10 certain things within that period of time, then according

11 to the rules, even if it was a fraudster, you know,

12 you're stuck with it. Now, the point was that, you know,

13 that doesn't make a whole lot of sense in some

14 circumstances and so maybe there should be some change in

15 that.

16 MR. ELLIOT: Okay. Well --

17 MR. MACCARTHY: You're probably getting at

18 something else.

19 MR. ELLIOT: Right. My second question is,

20 there is time delayed frauds. You've won a cruise for

21 two, and you don't know for eight months to a year that

22 you've been scammed. And the criminals know that they go

23 beyond the 60 days, then there is no chargeback allowed. 

24 So there is no protection for the consumer.

25 MR. MACCARTHY: I mean, that's a little bit more
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1 complicated. I mean, there's a requirement that, you

2 know, if you're going to pay for a particular piece of

3 goods, you know, you've got to deliver the goods within a

4 certain period of time unless there is a disclosure

5 notice that accompanies it. So if they said give us the

6 money now and two years from now you can go on a cruise,

7 and they said that's what we're doing and they paid it,

8 then that's the circumstance that they're in.

9 MR. ELLIOT: Usually what happens, though, is

10 you get some unvaluable product sent to you -- a video --

11 within the 60 day period which meets that criteria, but

12 the consumer doesn't know that he has been scammed for,

13 say, six months or a year.

14 MR. MACCARTHY: Wait a minute. He got

15 something within 60 days?

16 UNIDENTIFIED FEMALE SPEAKER: A nominal thing.

17 MR. ELLIOT: Yeah, like a video of, you know, a

18 cruise line in Florida. 

19 MR. MACCARTHY:: An introductory package.

20 MR. ELLIOT: Right.

21 MR. MACCARTHY: I mean -- I thought you were

22 talking about, you know, he got a video and then six

23 months later it blew up or something.

24 MR. ELLIOT: No, no, no, no. No.

25 MR. MACCARTHY: Yeah.
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1 UNIDENTIFIED FEMALE SPEAKER: The ship blew up.

2 MR. MACCARTHY: Yeah. I mean, in those kind of

3 circumstances, I do think you've got to go talk to your

4 issuing bank, and you've got to say to the issuing bank,

5 this is what happened. And in those kind of

6 circumstances, you will be able to deal with them as an

7 extraordinary circumstance.

8 If you're willing to put your money down for an

9 extended period of time, you know, and then discover

10 after that extended period of time that it was

11 fraudulent, then there is nothing that really will

12 protect you. I mean, if they didn't tell you. You know,

13 there are some circumstances where they charge the

14 account and then don't send the goods, and then that

15 period of time extends for, you know, a period. In that

16 circumstance, because they broke another requirement,

17 that they either deliver the goods in a particular period

18 of time or not charge the account, you know, then in

19 those circumstances it is easy enough to get the

20 chargeback. In this other circumstance, I think you

21 would have to go directly to the issuing bank, though. 

22 MR. ELLIOT: Thank you.

23 MR. KANE: Thank you. My name is Paul Kane,

24 ICB, coming from the U.K. And I'm afraid to say, Mark,

25 my question is in part for you as well. But just before
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1 I get to that question, I very much favor the gentleman

2 proposing additional PR, trying to inform the customer. 

3 But as always, there are the good and bad. There are

4 good and bad customers and there are good and bad

5 retailers.

6 Unfortunately, the chargeback mechanism can be

7 used to defraud the merchant. What mechanisms do you

8 have in place to protect the merchant? I'll give you a

9 specific case in point. A credit card -- I came to the

10 U.S. I was here for a matter of days. My credit card

11 was used in the U.S. for about two weeks after I had left

12 the country, and I was in the U.K. spending money on my

13 credit card in the U.K. Now the problem is, you, the

14 banks or the banking network, the Visa/MasterCard

15 network, should be able to reconcile the fact that

16 fraudulent transactions are taking place and suspend the

17 card. So the chargeback mechanism must offer some

18 protection to consumers, and that indeed is very welcome.

19 Similarly, I was wondering what mechanisms

20 there are in place to protect the merchant, particularly

21 where it is electronic. In other words, a cardholder,

22 not present transaction.

23 MR. MACCARTHY: In the merchant circumstance

24 where, you know, they might be the victim of unauthorized

25 use, there are a couple of things that we encourage
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1 merchants to do, especially on-line merchants. There are

2 a number of anti-fraud techniques that are available for

3 them to use. Some are provided by Visa. Some are

4 provided by third party independent providers. For the

5 Visa ones, there is the number that is on the back of the

6 card. It's a algorithmic function of the card number. 

7 If someone has gotten the card number but not the card,

8 they won't have that number. So in the course of a

9 transaction where the card isn't present, the merchant

10 says, can you give me that three or four digit number on

11 the back of the card? And if nothing shows up, that's a

12 pretty good indication that the person doesn't have the

13 card.

14 The other is address verification, where, you

15 know, the merchant will say, you know, thank you for your

16 order. What is the billing address here? I mean, not

17 just the shipping address, but the billing address? And

18 then you can check with the Visa system to find out if

19 that's the right billing address.

20 The third party services, you know,

21 incorporate, you know, a large number of fraud

22 techniques, one of which is they will look at the URO or

23 the IP address from which the request is coming, and

24 they'll take that into account with large numbers of

25 other pieces of information and would give the merchant
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1 sort of a risk score. We'll say to them, this is a risky

2 transaction. If you want to do it, go ahead, but it's a

3 risky transaction.

4 So there are a number of fraud prevention

5 mechanisms that the merchant has available to him. To

6 the extent that the merchant makes use of them, to that

7 extent he will be better protected.

8 MS. FEUER: Thanks, Mark. What I would like to

9 do, since we don't have that much time, is give as many

10 people as have questions about the public/private

11 partnership to combat cross-border fraud in the context

12 of payment systems a chance to ask their questions. And

13 I see Don Mercer has been trying to raise his hand.

14 MR. MERCER: Thanks. I just want to revert

15 back to the reference I made this morning to the mass

16 marketing fraud forum, which is something we're getting

17 going in Canada. We've had some discussions with the

18 Federal Trade Commission and other people. I think,

19 Jonathan Rusch, you were involved in this discussion. If

20 you're going to get into public education, I think

21 everybody is right on the panel who says you have to

22 really explore what the messages are and how you're

23 getting those messages out.

24 The work we've done to date confirming some of

25 the research by the American Association of Retired
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1 Persons -- and not confirming all of it -- would indicate

2 that we have to find new mechanisms for getting the

3 message out. That the cards -- that putting up posters

4 doesn't work, that being paternalistic doesn't work, and

5 that part of the messaging depends on who you're giving

6 the message to. There is also a certain group of people

7 who apparently don't respond to any messages. That's

8 what part of the research shows. They're about 9 to 10

9 percent.

10 The other part of this goes, I guess, to a

11 question, ultimately, when we do this research? We have

12 a steering committee which has private plus law

13 enforcement on it, and then we're going to go to a

14 plenary session, under which we're hoping to get funds. 

15 What we're finding is some considerable resistance in the

16 private sector to coming up with funds. There are two

17 ways to come up with funds, of course. One is in kind,

18 like using mailing systems -- mass mailing systems like

19 inserts into bills and so forth. The other one is cash. 

20 We're finding some reluctance there and I guess there is

21 a lot of work to be done on that.

22 But I wouldn't mind your comments on what is

23 the resistence in the private sector to doing this

24 funding. Is part of it not knowing who is doing what, or

25 thinking there are too many different competing
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1 organizations looking for funds? What would you say?

2 MS. FEUER: Is anyone here who has been

3 involved in public/private sector consumer education

4 partnerships? 

5 MS. FOX: Susan has.

6 MS. FEUER: Susan has. Well, I mean, I know

7 that here at the FTC we have done that in a number of

8 cases with, you know, different kinds of private sector

9 participants. I guess the broader question is less a

10 question about resistence, but more to frame it in terms

11 of what we can do? Whether the private sector

12 participants here think it would be likely that the

13 organizations that they represent would be willing to

14 commit funds to do the kind of targeted public education

15 that Elliot was talking about -- and I'm sure that your

16 budgetary people won't be happy if you jump up and down. 

17 But I'm just wondering whether that is something you're

18 willing to contemplate.

19 MS. LARIMER: I think from NACHA's perspective,

20 we've done some and we're looking at doing more. 

21 Especially for the check truncation products or the

22 conversion products we're trying to get out there. We

23 did some with the point of sale, and we're trying to do

24 more for lock box. We're looking at -- we've also sort

25 of looked at direct deposit/direct payment. We've
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1 partnered with the fed to do consumer education there.

2 So, I mean, for a little nonprofit, we don't have all

3 that much money, but we try to do what we can. We would

4 definitely be open to doing what we could. 

5 MS. FEUER: Great. And Robin Landis in the

6 back of the room.

7 MS. LANDIS: Robin Landis with U.S. Customs. I

8 would just like to let you know that we do have a public

9 education program that goes -- that's going on with

10 Project Colt up in Montreal. Using our border authority

11 seizure, we intercept funds coming into Canada. Leaving

12 the United States victims going to the telemarketers. We

13 seize those funds along with the Canadian authorities and

14 U.S. Customs. Last year U.S. Customs seized over a

15 million dollars in cash and returned it back to victims.

16 Along with that program, we have two U.S.

17 Customs agents that will go to the victim's house,

18 present the check or cash back to the victim, interview

19 that victim and say, why did you become a victim of

20 telemarketing fraud? We try to educate that person not

21 to send money again. Also, to get background information

22 of who solicited the information for our agent in

23 Montreal. And also make an evaluation of the person at

24 the time. If we feel -- or the agents feel that the

25 victim does not have the mental capacity to understand
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1 what's going on, our agents are told to contact a

2 relative or go to a public source to make them understand

3 so they not become a victim again.

4 So our program just of last year was over a

5 million dollars in cash. That's just what we intercepted

6 through the express mail couriers and through the U.S.

7 mail. We do also have a program working with the express

8 money companies where we kind of target or look at high

9 risk money payouts, where we either execute search

10 warrants or we just work with the companies and shut them

11 down.

12 So we do have a program going in Montreal that

13 has been going on since '99 working with the RCMP, Canada

14 Customs and Canada Post, and I think it's very effective. 

15 We have a lot of people and their families coming back

16 and saying thank you. Thank you for returning the money. 

17 Thank you for educating us. And we also try to get the

18 information out through out public affairs office, making

19 press releases to get the word out to other people, also.

20 MS. FEUER: Thanks, Robin. I think that is an

21 important point. That would be something that obviously

22 to the extent that it could be expanded here in the

23 United States, it would be helpful, particularly since

24 the premise, I guess, underlying this is that many of the

25 people who are victimized, we find are victimized
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1 repeatedly and they get on to what are known as sucker

2 lists and get billed again and again and again. So

3 that's an important component of any consumer education.

4 Let me recognize Jean Ann and then our time has

5 elapsed. We'll take a few more questions.

6 MS. FOX: On the question of how you educate

7 consumers and try to put a stop to some of this abuse

8 further upstream, as the FTC implements your do not call

9 list, as you look into your spam inquiry, we need to

10 figure out ways to put a stop to this further ahead

11 before people lose their money. And I don't know whether

12 you can build educational messages into why people should

13 put their relatives on the do not call list to protect

14 them from however much of this you can control that way. 

15 That would be helpful.

16 MS. FEUER: Agreed. Our Office of Consumer and

17 Business Education, I know, is busily working in

18 anticipation of the do not call list going into effect. 

19 Are there any more questions? Susan and then -- I'm

20 sorry. I don't know your name.

21 MR. WESTON: My name is Rick.

22 MS. FEUER: Okay. Tara, can you bring the mic? 

23 Can you identify yourself, please?

24 MR. WESTON: My name is Rick Weston. I'm the

25 CTO of the Registrars Constituency.
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1 MS. FEUER: Thanks.

2 MR. WESTON: Today we have had a number of

3 panelists and panels all use the word data and wanting to

4 share data. The one thing that I haven't heard discussed

5 is the meta-data. And meta-data is information about the

6 data: what data you have to share, what are the

7 conditions that that data would be shared, and whom would

8 you share that with? Will you only share it with public

9 sector or private sector and under what conditions?

10 I think one of the things that the FTC -- the

11 real value that you could add here would be to

12 disseminate the information about the various parties

13 here. What data they have. Who they would share it

14 with. Will it only be law enforcement, or can private

15 sector use some of that data? I believe that would

16 facilitate the ability to create these relationships

17 understanding what's on the table.

18 MS. FEUER: Thanks. Susan? And if you can,

19 again, identify yourself for the videotape.

20 MS. GRANT: Susan Grant, National Consumers

21 League. I agree that that would be really helpful to

22 show us where we're at now, but not necessarily where

23 we're going to be in the future, because we're talking

24 about making changes based on where we are now. One

25 really important thing that we've learned in sharing
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1 information with Consumer Sentinel and PhoneBusters is

2 that you have to categorize things the same way for the

3 data to be useful. And that will be a big challenge

4 going forward, I think.

5 On consumer education, there has been a lot of

6 work on older telemarketing fraud victims, and AARP has

7 done further studies about the hardest to penetrate

8 victims, which I think it's going to be announcing the

9 results of in March. But there really hasn't been, that

10 I know of, extensive research about telemarketing or

11 Internet fraud victims of other age groups. And we're

12 seeing the age groups shift over time, anyway, so I

13 really think that that needs to be done in order to do

14 targeted messages that are effective with different

15 groups.

16 We would be really interested in doing that and

17 collaborating with other people that are working on those

18 kinds of projects. We think that's really important. 

19 With a grant from the Department of Justice last year, we

20 created a web based kit of educational materials about

21 telemarketing fraud, which was specifically created for

22 use by government consumer protection agencies and law

23 enforcement agencies, nonprofit consumer groups and

24 nonprofit community organizations and unions and

25 cooperative extension services.
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1 It is not for use by for profit entities,

2 although as we go forward with enhancing it -- which we

3 hope we will in the future, not only to be for that more

4 about different kinds of telemarketing frauds and have

5 those materials in different formats, but also in regard

6 to Internet fraud -- I can see the potential for coming

7 up with materials might also be able to be used by the

8 private sector and the for profit sector.

9 And the idea of these materials is that they

10 can be customized. So that everything that is there now,

11 which is mat releases, scripts for oral presentations,

12 Power Point presentations and tips that you can use in

13 different formats, can be customized by the users to put

14 their names on it, to put the relevant contact

15 information, where consumers would go in that area if

16 they have those kinds of problems, and information about

17 the relevant laws. If, for instance, a state had a

18 particular law that was applicable to the subject matter.

19 We already have it. We're going to be

20 surveying the users this year to find out how they're

21 using it, what new materials they would like and what

22 changes in the existing materials they would like. And I

23 can foresee this as perhaps something that we could build

24 on in the future for use by all sorts of people doing

25 consumer education, so that with similar groups of
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1 consumers, different demographics and so on, and for

2 different kinds of scams, we are all using the same

3 consumer education methods which hopefully we have

4 confirmed are effective.

5 MS. FEUER: Great. Thanks, Susan. I think

6 that we're going to have to cut the questions now. What

7 I want to do is first thank everybody on this panel for

8 coming despite the blizzard, and thank the audience for

9 listening.

10 I just want to make a few points about what I

11 think we all heard on this panel, which seems like with

12 respect to payment systems, that everyone sitting at the

13 table, from the public sector and the private sector,

14 including the nonprofit and for profit parts, agree that

15 we need to do more consumer education. Generally about

16 telemarketing fraud and Internet fraud and all types of

17 cross-border fraud, but that there is a particular need

18 for consumer education about payment systems. About how

19 they work and about how they're being misused by people

20 to defraud consumers out of their money. And that that

21 might need to be very, very targeted. So I appreciate,

22 Susan, the idea of using a lot of the same materials

23 across all sectors, but I think, also, there may be a

24 need for some very targeted education.

25 I think we also heard that there is a real need
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1 for working groups to continue after this. I know there

2 already are discussions underway between various of the

3 payment systems operators and the FTC, the Department of

4 Justice and the States. I think perhaps one thing that

5 can come out of this workshop is that we can all

6 coordinate those discussions.

7 And the other point that I heard is that on

8 information sharing there is perhaps more that can be

9 done in a systemic way, and that there is a lot to think

10 about as we go forward to make sure that we do that

11 consistent with other regulations that affect all of us

12 as federal government and the private sector subject to

13 all the laws and regulations that you're subject to.

14 So I just want to end by thanking everyone and

15 turn it back to Hugh now. 

16 MR. STEVENSON: We'll see all of you,

17 hopefully, tomorrow morning. We'll start again at 9:00.

18 MS. FEUER: 9:00.

19 MR. STEVENSON: Thank you.

20 (Whereupon, at 5:30 p.m., the workshop was

21 adjourned.)