Industries the FTC Proudly Prosecutes
Charles Carreon
JUNE 2008 NOTICE: This portion of the Primer is under revision. There have been a number of important developments in the field, with CANSPAM Prosecutions leading the way in what appears to be a campaign against pornographers under a less content-focussed name. Additionally, the FTC has ratcheted up garden variety netfraud cases into money-laundering claims. Use of asset seizures is becoming more frequent as well, with offshore accounts being a lightning rod for judicial enforcement. END NOTICE.
Back in 1997, the FTC put out a report on its “1997 Experience With Fraud in Cyberspace: How it Occurs and How the Agency Has Refashioned the 'Tools' of Its Trade to Fight It.” The executive summary of the report tells us that the “Internet is quickly becoming the marketplace of choice for a host of deceitful pyramid schemers, bogus-work-at-home promoters, spurious health and weight-loss claims, and a new generation of fraud that uses increasingly sophisticated technology.”
The content of the report, and the fact that it's five years out of date as of this writing, gives you a pretty good idea of what the FTC goes after. They are looking for swindlers who look like swindlers, who appear in traditional garb, playing on the ignorance of traditional victims. We're talking egregious misstatements, blatant rip-offs, and straight-out lies. Offer something, deliver nothing, repeat that a few thousand times, and the FTC may very well sit up and take notice.
There are a number of types of scams to stay away from. Dialer scams, which are undoubtedly almost totally played out by now, in which Internet surfers were disconnected from their local ISP and routed through an offshore dial-up service at outrageous per-minute rates, are likely to attract negative attention. The egregiousness of this type of gouging invites its own demise. Get-rich-quick schemes, bogus home businesses, and pyramid schemes that fleece consumers of “investment capital” also attract negative FTC attention. Nutritional products, diet schemes, and other health products fall within the FTC's traditional enforcement authority over labeling of consumer products, and can attract enforcement activity.
In the last category, we single out for special attention online prescription medication sales, which are attracting not only FTC scrutiny but also attention from state prosecutors acting at the behest of state pharmaceutical boards. For example, in May 2002, the California State Board of Pharmacy fined a Los Angeles pharmacy and two pharmacists $88.7 Million dollars for violating state law by filling prescriptions over the Internet from doctors who were not licensed in California. The Internet prescription sales were primarily for Viagra, Propecia (for hair loss) and Xenical (for weight loss). I guess the lesson there is “hire the locals.”
Recently, in November, 2002, the FTC got even more aggressive in the area of diet ads, announcing that it would be looking at cable channels, newspapers and magazines that run diet and health ads making what it considers to be dubious claims. The agency even said it was considering enforcement action against media outlets that air misleading ads. This announcement followed upon the FTC's $10 Million settlement in April, 2000 with Enforma Natural Products settling FTC charges that Enforma used false claims about scientific testing in its diet products. No word yet on whether the FTC intends to subject websites selling advertising to dieting sites to the same sort of scrutiny.
The FTC is also attacking Internet auction fraud, primarily by mobilizing state prosecutors to commence criminal charges for theft and deception against persons acting fraudulently to manipulate the auction process. California has been one of the most active states in this field of prosecution. This is an area where traditional fraud investigation is not so difficult to conduct because the financial transactions involved in auctioning provide an electronic trail directly to the perpetrator's door. Once the scam is discovered, it can easily be unwound. This is one field of Internet fraud where, although the likelihood of discovery may be small, if the fraud is discovered, an adverse result for the perpetrator is probable.
Although you might expect the FTC to be cracking down on spam, no such luck. Only “misleading spam” attracts the attention of the agency, so there is effectively no federal regulation of spam. If you took note of what it takes to avoid making misleading statements on your website, just apply those same rules to bulk email, and you won't run afoul of the FTC.
CONCLUSION
The FTC has a great deal of unused authority to regulate Internet commerce, but has not expanded much beyond its mission to cut down on garden-variety consumer fraud. Its current initiatives to remedy problems of identity theft, misuse of credit information and consumer data, are at best inadequate, and at worst, designed to fail.
JUNE 2008 NOTICE: This portion of the Primer is under revision. There have been a number of important developments in the field, with CANSPAM Prosecutions leading the way in what appears to be a campaign against pornographers under a less content-focussed name. Additionally, the FTC has ratcheted up garden variety netfraud cases into money-laundering claims. Use of asset seizures is becoming more frequent as well, with offshore accounts being a lightning rod for judicial enforcement. END NOTICE.
Back in 1997, the FTC put out a report on its “1997 Experience With Fraud in Cyberspace: How it Occurs and How the Agency Has Refashioned the 'Tools' of Its Trade to Fight It.” The executive summary of the report tells us that the “Internet is quickly becoming the marketplace of choice for a host of deceitful pyramid schemers, bogus-work-at-home promoters, spurious health and weight-loss claims, and a new generation of fraud that uses increasingly sophisticated technology.”
The content of the report, and the fact that it's five years out of date as of this writing, gives you a pretty good idea of what the FTC goes after. They are looking for swindlers who look like swindlers, who appear in traditional garb, playing on the ignorance of traditional victims. We're talking egregious misstatements, blatant rip-offs, and straight-out lies. Offer something, deliver nothing, repeat that a few thousand times, and the FTC may very well sit up and take notice.
There are a number of types of scams to stay away from. Dialer scams, which are undoubtedly almost totally played out by now, in which Internet surfers were disconnected from their local ISP and routed through an offshore dial-up service at outrageous per-minute rates, are likely to attract negative attention. The egregiousness of this type of gouging invites its own demise. Get-rich-quick schemes, bogus home businesses, and pyramid schemes that fleece consumers of “investment capital” also attract negative FTC attention. Nutritional products, diet schemes, and other health products fall within the FTC's traditional enforcement authority over labeling of consumer products, and can attract enforcement activity.
In the last category, we single out for special attention online prescription medication sales, which are attracting not only FTC scrutiny but also attention from state prosecutors acting at the behest of state pharmaceutical boards. For example, in May 2002, the California State Board of Pharmacy fined a Los Angeles pharmacy and two pharmacists $88.7 Million dollars for violating state law by filling prescriptions over the Internet from doctors who were not licensed in California. The Internet prescription sales were primarily for Viagra, Propecia (for hair loss) and Xenical (for weight loss). I guess the lesson there is “hire the locals.”
Recently, in November, 2002, the FTC got even more aggressive in the area of diet ads, announcing that it would be looking at cable channels, newspapers and magazines that run diet and health ads making what it considers to be dubious claims. The agency even said it was considering enforcement action against media outlets that air misleading ads. This announcement followed upon the FTC's $10 Million settlement in April, 2000 with Enforma Natural Products settling FTC charges that Enforma used false claims about scientific testing in its diet products. No word yet on whether the FTC intends to subject websites selling advertising to dieting sites to the same sort of scrutiny.
The FTC is also attacking Internet auction fraud, primarily by mobilizing state prosecutors to commence criminal charges for theft and deception against persons acting fraudulently to manipulate the auction process. California has been one of the most active states in this field of prosecution. This is an area where traditional fraud investigation is not so difficult to conduct because the financial transactions involved in auctioning provide an electronic trail directly to the perpetrator's door. Once the scam is discovered, it can easily be unwound. This is one field of Internet fraud where, although the likelihood of discovery may be small, if the fraud is discovered, an adverse result for the perpetrator is probable.
Although you might expect the FTC to be cracking down on spam, no such luck. Only “misleading spam” attracts the attention of the agency, so there is effectively no federal regulation of spam. If you took note of what it takes to avoid making misleading statements on your website, just apply those same rules to bulk email, and you won't run afoul of the FTC.
CONCLUSION
The FTC has a great deal of unused authority to regulate Internet commerce, but has not expanded much beyond its mission to cut down on garden-variety consumer fraud. Its current initiatives to remedy problems of identity theft, misuse of credit information and consumer data, are at best inadequate, and at worst, designed to fail.