UP to $15 billion a year is being swindled from the pockets of uninformed consumers by the growing number of illicit "boiler-room" operations around the United States and the world.
According to a recent two-year congressional study of telemarketing fraud, the problem is growing because federal and state law enforcement agencies have limited funds and manpower devoted to stopping fraud.
Nor have agencies coordinated prosecution efforts on a continuing basis. "The problems are complex and, like the drug problem, almost out of control," said a state government official from California.
One of the recommendations in the study is for Congress to establish a federal telemarketing clearinghouse for information on fraud cases and require all agencies to cooperate. The lure of the grand prize
At the heart of the problem are uninformed consumers. Swindlers often target the elderly, who are swayed by high pressure tactics over the phone and promised quick wealth or prizes.
In an economic recession, the lure is often hard to resist. While legitimate telemarketing companies will allow time to consider products or offers, swindlers promise the moon and badger consumers to act quickly.
"This is an age of lotteries and grand prizes," said Cleo Manuel, a spokesperson for the Alliance Against Fraud in Telemarketing in Washington, D.C., "and people want to believe it can happen to them. Everybody wants the magic bullet that is going to solve all their woes. They want to think they have been picked. But we tell consumers to cool off; if the offer sounds too good to be true, it usually is."
Operating in offices known as "boiler rooms," salespeople have computer lists of names to call to offer investments and goods. Boiler-room operations are heavily concentrated in Sun Belt states such as California, Arizona, Florida, and Texas.
Dozens of scams exist. One in use now is the "advance fee loan" scam. People respond to ads in the paper offering low interest loans regardless of credit history. They pay a "processing" fee of $200 or $300, then told several days later they didn't qualify, or they are sent standard bank loan application forms.
According to Alliance Against Fraud in Telemarketing, the Better Business Bureau in Phoenix, Ariz., received over 1,000 complaints in one month last year about advance fee loans.
Another scam is misuse of 900 numbers. A company in New Jersey recently collected over $650,000 in three months when consumers called one of several 900 numbers taken from a green postcard disclosing that an undelivered package was waiting for them. The cards looked like US Post Office cards. Those who called paid anywhere from $9.95 to $28 for a call of a few minutes. Some callers received cheap jewelry in the mail. The New Jersey district attorney has filed a civil lawsuit against the company.
A woman in Oklahoma responded to a postcard indicating she had won a prize. She called the number on the card and was persuaded to buy about $600 worth of vitamins with her credit card. She never received a prize.
"The thing that is frightening about all these cases," said Ted Limke, director of the Leviticus Project Association in Richmond, Va., "is the number of people who don't admit they have been taken. Many people are too embarrassed to come forward because they know they have made a mistake."
The Leviticus Project takes its name from Leviticus 19:13, "Thou shalt not defraud thy neighbour." The organization, funded by the US Department of Justice, provides money to help coordinate state efforts to stop fraud in oil, gas, coal and precious metals investments.
Mr. Limke said Leviticus is currently involved in 77 cases, and over the last 12 years has referred fraud cases to the Internal Revenue Service totaling a half a billion dollars. Fraud in other countries
Government officials are concerned about the trend over the last two years for "boiler rooms" to locate in other countries. "That literally puts them beyond the law," said Scott Stapf, an advisor to the North American Securities Administration Association (NASAA), an organization of state securities administrators.
In a NASAA report to a US House of Representatives subcommittee, "boiler-room" telephone operations in Panama and Costa Rica were cited.
"We have reports from states telling us boiler rooms are calling from the Caribbean, Taiwan, Singapore, South Africa and Liberia," said Mr. Stapf. Liberia is known among security regulators as the "regulators graveyard. It is one of the least cooperative countries in the world in assisting investigations and crackdowns on boiler-room activities."
In the US this year the National Consumers League (NCL) and the Reference Point Foundation will join together to create a Consumer Protection Network. Linda Golodner, president of NCL said in announcing the network, "We expect to be able to look back on 1992 as the year consumers and legitimate business started to take back the phones from the con artists."
The effort will include a national consumer complaint confidential "hotline" system to increase complaint reporting, a clearinghouse on phone-related swindles which will be available to all enforcement agencies, and a research program to identify and warn consumers about new and emerging swindles.
Initial support is being provided by MasterCard International, MCI Communications Corporation, and Citibank MasterCard/Visa.