U.S. Cracks Down on Telephone Con Artists’ ‘Draft Fraud’ Tactics
Calling attention to a troubling new front in consumer fraud, the Federal Trade Commission announced Tuesday a crackdown on telephone con artists who siphon funds from victims’ checking accounts after obtaining their account numbers over the phone.
The federal agency said it has filed charges against several large telemarketing firms involved in separate cases in Georgia and Oklahoma in which several million dollars was withdrawn from consumers’ checking accounts without their permission. The FTC said it expects to bring hundreds of additional cases in the next few years.
FTC officials said such instances of “draft fraud” have become more commonplace because of the exponential growth of telemarketing and direct debit payments.
Jodie Bernstein, director of the FTC’s bureau of consumer protection, said that unauthorized debiting costs its victims tens of millions of dollars annually and urged consumers to exercise extreme caution in divulging account information.
“Consumers should guard their checking account numbers with the same care they use in guarding their credit cards,” Bernstein said, adding that many people are unaware that a signature is not required to debit a checking account.
A “demand draft” bearing an individual’s checking account number and stating that the account holder has authorized direct debits is sufficient documentation for a bank to release funds, she said.
Demand drafts are legitimately used for thousands of checking transactions every day, covering such items as health club dues, mortgage payments and mail order shopping. FTC officials said widespread use of demand drafts began in 1991, eliminating the need for envelopes and stamps, providing almost instantaneous payments, and allowing individuals without credit cards to make purchases or payments by telephone.
An FTC regulation that took effect at the beginning of the year requires telemarketing firms to obtain specific, verifiable authorization for any checking account debits. It also requires callers to identify themselves as telemarketers, what they’re selling and who they represent.
If a consumer notices an unauthorized debit within 60 days after receiving a bank statement, he or she should contact bank officials. Under the new regulation, the bank will demand proof from the firm in question. In most cases, FTC officials said, consumers will receive their money back.
The FTC, in cooperation with the five largest automated payment system firms, announced plans to mail more than 1.5 million consumer protection tip sheets every month in an effort to combat debit payment fraud.
Eileen Harrington, the FTC’s assistant director for marketing practices, said consumers should suspect fraud any time a telemarketing company asks for their checking account number to verify their identity or confirm a prize it says they have won. The best defense is to hang up immediately, she said.
Consumers should refuse to divulge account information unless “you know the company you are dealing with, you initiated the call, or for a specific purchase,” Harrington said. As an extra precaution, consumers should clearly state to telemarketers that they do not want their checking accounts debited.
Unlike unauthorized credit card purchases, in which a cardholder’s maximum liability is limited by law to $50, checking account fraud victims had little recourse before the new regulation took effect.
Although Bernstein said more stringent requirements might be considered in the future, the FTC wants to first assess the effectiveness of this regulation. “At the present time, we really believe we have taken steps that will go a long way toward solving this very, very serious problem,” she said.
The automated payment industry is expected to grow from $1 billion annually to $5 billion by the end of the century, according to David Weiss, president of National Automated Payment Assn., which represents 90% of the industry.
Weiss said the potential number of fraud victims is huge, noting that there are four times as many checking accounts nationwide as credit card accounts.
Last week, the FTC charged Diversified Marketing Service Corp. of Oklahoma City and a group of Georgia telemarketing firms with misrepresentation and making unauthorized checking account debits ranging from $300 to $800. Both firms sell magazine subscriptions by telephone. Federal courts have issued temporary restraining orders and frozen the assets of the defendants in both cases.
The FTC advises victims of unauthorized checking account debits to contact the attorney general’s office in their state.
In California, complaints about telemarketing fraud can be sent to the Office of the Attorney General, Public Inquiry Unit, P.O. Box 944255, Sacramento, CA 94244. Expect four to six weeks for a written reply. The status of a complaint can be checked by calling (800) 952-5225.
A spokeswoman for the Direct Marketing Assn. said the trade group welcomes the new rules. “As an industry, we are just as concerned with getting rid of the fraudulent operators,” spokeswoman Donna Krampf said.
Times staff writer Denise Gellene contributed to this report.
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Protecting Yourself
Here are some consumer tips from the Federal Trade Commission to protect against fraudulent telemarketers and automatic debit scams.
* Hang up if you are asked to pay for a prize. Free means free.
* Don’t give out checking account information over the phone unless you know the company and understand why the information is necessary.
* Know the law. Telemarketers must obtain your verifiable authorization and your express permission to get payment from your bank account.
* Don’t be afraid to ask questions.
* Contact your state attorney general immediately if you believe you may have been a victim of telemarketing fraud. In California, complaints about telemarketing fraud can be sent to:
Office of the Attorney General
Public Inquiry Unit
P.O. Box 944255
Sacramento, CA 94244
Expect four to six weeks for a written reply. The status of a complaint can be checked by calling (800) 952-5225.
Associated Press, Denise Gellene
