Fraud Examination, 4E
Chapter 15:
Consumer Fraud
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
Define what consumer fraud is and understand its
seriousness.
Understand identity theft.
Classify the various types of investment and
consumer frauds.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer Fraud
Definition
 Any fraud where consumers are victims.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer Fraud
Two Primary Types of Consumer Fraud
1. Identity Theft – most common type of consumer
fraud, affecting thousands of people everyday.
2. Consumer Scams – fraudsters use various
schemes to earn consumer’s confidence and then
use that confidence to get the consumer to pay or
invest money or provide personal information.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer Fraud
Seriousness of the Problem
The US Federal Trade Commission released a statistical
survey in October 2007 with the following findings:
 Nearly 30 million adults—13.5% of the adult population—
were victims of fraud during 2005.
 20% of African American were victims
 18% of Hispanics were victims
 12 % of non-Hispanic whites were victims
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer Fraud
Numbers of Victims in the Top 10 Frauds
1. Fraudulent weight-loss products – 4.8 million
2. Foreign lottery scams – 3.2 million
3. Unauthorized billing-buyers’ clubs – 3.2 million
4. Prize Promotions – 2.1 million
5. Work-at-home programs – 2.4 million
6. Credit card insurance – 2.1 million
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer Fraud
7. Unauthorized billing-Internet
services – 1.8 million
8. Advanced free-loan scams – 1.2
million
9.Credit repair scams 1.2 million
10.Business opportunities—0.8
million
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer Fraud
US FTC’s Response to Consumer Fraud
Consumer Sentinel – a complaint database
developed by the US Federal Trade Commission
that tracks information about consumer fraud and
identity theft and makes it available to law
enforcement partners across the US and
throughout the world.
www.sentinel.gov
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identity Theft
 Identity theft is used describe those circumstances when someone
uses another person’s name, address, Social Security number
(SSN), bank or credit card account number, or other identifying
information to commit fraud or other crimes.
 40% of the frauds reported to the FTC over the last few
years have involved some type of identity theft.
Albrecht, Albrecht, Albrecht, Zimbelman
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Identity Theft Cycle
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identity Theft
How Identity Theft Occurs
Stage 1: Discovery
Gain Information Phase:


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Searching trash
Stealing mail
Phishing
Scanning credit card information
Information Verification Phase:
 Telephone scams (Pretexting)
 Trash searches
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identity Theft
Stage 2: Action
Accumulating Documentation Phase:
 Perpetrator gets the tools to commit the fraud (applying for
credit cards, a driver’s license, or fake check in the victim’s
name)
Cover-up or Concealment Actions Phase:
 Perpetrator takes steps to cover or hide the financial footprints
left throughout the identity theft process.
 Example: Changing the billing address on a credit card so that
the statements go to the fraudster’s address.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identity Theft
Stage 3: Trial
1st Dimensional Actions Phase:
 First attempts to test the stolen information.
 If the test works, the fraudster attempts more
2nd Dimensional Actions Phase:
 Actions taken after the tests are successful
 The fraudster usually attempts face-to-face transactions
3rd Dimensional Actions Phase:
 Fraudster opens bank accounts, establishes phone
accounts, secures auto loans, etc.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identity Theft
Personal Information  Financial Gain
The perpetrator may…


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
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Buy large-ticket items
Take out car, home, or other loans
Establish phone or wireless services
Use counterfeit checks or debit cards
Open new bank accounts
File for bankruptcy
Report victim’s name to police
Open new credit card accounts
Change victim’s mailing address
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identity Theft
Stealing a Victim’s Identity
 Dumpster diving
 Skimming
 Social engineering
 Stealing wallets/purses
 Sneak into a victim’s home and steal information
 Shoulder surfing
 Phishing
 Steal mail
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identity Theft
Minimizing the Risk
 Guard your mail from theft
 Opt out of preapproved credit cards
 Check you personal credit information at least
annually
 Guard Social Security card and number
 Safeguard all personal information
 Guard trash from theft
 Protect wallet and other valuables
 Protect the home, computer, passwords
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identity Theft
 Prosecution of Identity
Theft
 When identity theft is
committed, the perpetrator
can be prosecuted criminally
and/or civilly.
 For prosecution, it is
necessary to show the
perpetrator acted with intent
to defraud—usually easy to
prove if evidence of the fake
identity used to purchase an
item, open an account, or
obtain a credit card is
collected.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Identity Theft
Once Identity Theft Occurs
Victims should…
 Contact the Federal Trade Commission
 Contact local FBI and/or US Secret Service agencies
 Contact the credit reporting agencies
 Contact the local Postal Inspection Service
 Contact the Internal Revenue Service
 Contact the Social Security Administration
 Contact personal financial institutions
 Change personal identification information
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer &Investment Scams
Foreign Advance-Fee Scams
 Nigerian Money Offers
 Clearinghouse Scam
 Purchase of Real Estate Scam
 Sale of Crude Oil at below market price
 Disbursement of money from wills
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer & Investment Scams
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Consumer & Investment Scams
Work-at-Home Schemes
 Multilevel Marketing
 Pyramid Scheme
 Chain Letter, Mail Stuffing,
Product Testing, and Craft
Assembly
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer & Investment Scams
Bogus Mystery Shopping Scams
 Perpetrators promise victims a job to stroll through stores,
enjoy the displays, shop for merchandise, and file reports
about their experiences.
 Fraudsters promise victims compensation ranging from
$10–$40 an hour, plus the opportunity to keep all products
evaluated.
 Although some mystery shoppers’ advertisements are
legitimate, the majority are not. Usually victims are conned
out of “application charge”.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer & Investment Scams
Telemarketing Frauds
 Fraudsters set up giant rooms (referred to as boiler rooms)
in rented offices where they train salespeople to find and
defraud victims
 Move from city to city using different names
 Unwary investors lose about $1 million every hour to
investment fraud promoted over the telephone
 Elderly are more susceptible to telemarketing fraud than
almost and other type of fraud.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Consumer & Investment Scams
 Safeguards Against
Telemarketing Frauds
 Never give a Social
Security, credit card, or
other information over the
phone unless you initiate the
call.
 Put your information on the
“do not call” registry
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
Investment/Consumer Scams
Investment Scams
 Unreasonable promised rates of return
 Investments that do not make sound business sense
 Pressure to get in early on the investment
 Use of a special tax loophole or a tax avoidance scheme
 A business with a history of bankruptcy or scandals
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license