Report of the Canada - United States Working Group on Telemarketing Fraud

Department of Justice

2. THE OFFENCE

Telemarketing fraud has existed, in one form or another, for many years, but it has expanded significantly since the early 1980s. In recent years, authorities have observed concentrations of offenders in major metropolitan areas throughout North America, including Atlanta, Houston, Las Vegas, Los Angeles-Orange County, Miami-Fort Lauderdale, Montreal, Tampa-St.Petersburg, Toronto and Vancouver. Telemarketing fraud is a dynamic phenomenon: when authorities in one region crack down, offenders who are not caught often simply go elsewhere and start new schemes or in some cases, turn to other forms of crime.

2.1 CHARACTERISTICS OF TELEMARKETING FRAUD

Telemarketing fraud, like other frauds, depends on the offenders' use of deception to obtain money or property from their victims, but it has a number of unique characteristics.

Offenders require telecommunications facilities.

Telephones are an indispensable tool for offenders. They allow the offenders to limit and manipulate information, concealing information about themselves while passing on whatever will deceive the victim. They also permit offenders to reach large numbers of victims quickly and at long distances. Not all of the technological advantages fall to the offenders, however. The use of telephones creates opportunities to attack the problem. Calls can be intercepted, traced back to offenders, and recorded for use as evidence, for example.

Offenders use their ability to manipulate what victims hear to maximum advantage. The objective is to establish credibility and rapport while conveying the misinformation needed to persuade victims to part with funds, overcome objections or dissuade them from seeking information or advice elsewhere. As one telemarketer boasted:

What you're doing as a salesman . . . is painting a picture. Soon as they pick up the phone, and I get on the phone with them, my hand is on the way. . . . Two hands go through that phone. One hand goes up to the wall and starts painting pictures, the other hand is in their checKBook . . . and writing it out. They may use blatant lies or more subtle misrepresentations:

"One [of] my best, best lines . . . works great: 'Thelma, I can't tell you what you're getting but I sure hope you live long enough to enjoy it all.' "The lack of face-to-face contact allows offenders to impersonate government and corporate officials to increase credibility, and in some cases, to coerce reluctant victims. Offenders often use false names, and victims can only identify them by voice, if at all, creating a serious obstacle for investigators and prosecutions. Telephones also create economies of scale by allowing a single caller to target a large number of victims in a short time and at long distances. Offenders maximize proceeds by focusing on target-groups most easily victimized, and by making large numbers of calls quickly, focusing on those who appear susceptible and hanging up on those who resist.

A key to successful telemarketing fraud is convincing victims to pay quickly, so offenders receive the funds before victims can have second thoughts or seek advice. To get the money before victims can reconsider, offenders often use telephones to process credit-card transactions, or arrange for couriers to pick up cheques or money orders directly from victims' homes. Telephones are also used for follow-up calls where victims do not pay promptly. In some schemes, offenders have victims send payments to commercially-rented "drop boxes", which can make tracing funds more difficult.

Offenders do not have to be near victims.

Unlike other frauds, telemarketing offenders and operations do not have to be near their victims. This creates two major concerns: the dispersal of victims over wide areas complicates investigation and prosecution, and the victim-offender distance makes it possible for offenders to relocate when necessary to maximize benefits and/or minimize risks. Offenders know this and act accordingly: agencies cited cases where callers avoided near-by victims or had lists of "do not call" jurisdictions, where enforcement activities were rigorous or active at the time, posted prominently in their work areas.

The distances between offenders and victims raise other concerns:

Offenses can be committed across provincial, state, and national boundaries.

Cross-border telemarketing fraud generates many of the same problems associated with the dispersal of offenders and victims, but the problems are magnified by differences in legislation and by national sovereignty. Cooperation between agencies becomes more formal and complex when they are in different jurisdictions. Mutual legal assistance (MLAT) requirements sometimes apply to investigative procedures, and international extradition is necessary to bring offenders into victim-jurisdictions for trial. This adds to costs and creates significant delay, a major concern when victims are elderly. Legislative discrepancies may also complicate getting evidence gathered in one jurisdiction before a court in another.

Telemarketing fraud is a form of organized criminal activity.

Telemarketing fraud usually involves the organization, pre-planning and coordination of individual offenders which is characteristic of organized criminal activity. In some cases, the high profits have also attracted members and associates of traditional criminal organizations. To operate a large telemarketing scheme, it is necessary to set up a "boiler room" equipped with a large number of telephone lines, employ callers to contact victims, provide callers with lists of information about prospective victims (called "mooch lists" or "sucker lists"), set up means to collect proceeds and, often, to set up safe "drop boxes" to make tracing proceeds difficult.

Schemes are often crafted to make them appear legitimate or to make elements of the offense difficult to prove. Such schemes are difficult to shut down completely unless all key members are identified, caught, convicted, incarcerated or incapacitated and stripped of their illegal gains. Offenders have used proceeds to fund defence litigation or fight prosecution or extradition. One telemarketer recently told a prosecutor:

I'd rather spend a million dollars fighting extradition than paying it back in restitution [to the victims].

Victims are chosen for certain characteristics, especially age.

Victims are not created at random or by accident. They are chosen by the offenders themselves because they are vulnerable in some way and because they have enough money or assets to be attractive. Victim-selection can be done directly, by researching specific information about victims or buying "mooch" or "sucker lists" from other offenders or list-brokers. It can also be done indirectly, by getting potential victims to come forward in response to some form of general solicitation such as a "prize promotion", or "cold- calling" large numbers of people at random with some offer to which those who are vulnerable are likely to respond. Those already on "mooch" or "sucker" lists are seen as willing to send money to similar schemes in the past and are more likely to be targeted again.

The Working Group noted one particularly striking characteristic of telemarketing fraud: those at the highest risk of being victimized are those who have already been victimized in the past. Once an individual has been identified as vulnerable, offenders will repeatedly target him or her until all assets are gone. Offenders not only re-use the victim information, they also commonly sell it to other offenders or brokers of such information.

Senior citizens in both countries are over-represented among victims, and offenders have admitted to targeting them specifically. The evidence indicates that offenders believe older people have more assets and are more susceptible to techniques such as excitement tactics or appeals to altruism. Agencies in both countries agreed that those who lost large amounts were more likely to be of retirement age or older, and that victimization tended to increase with age. A 1996 survey by the American Association of Retired Persons (AARP) showed that while 36 percent of the adult population is age 50 or older, 56 percent of the victims were 50 or older.

The elderly are not only more susceptible, they tend to be more seriously affected when they are victimized. Investigators reported many cases where victims had lost most or all of their life savings. Some had lost their homes or been forced to sell them to meet day-to-day living expenses. Unlike younger people who can work over a number of years to replace lost assets, the elderly usually are not in a position to do so. The loss of quality of life or standard of living can be physically and psychologically devastating and irreversible, and victims may become suicidal as a result. Families also feel the impact indirectly, if they are called upon to support a formerly self-sustaining senior citizen.

The Working Group noted the following problems associated with older victims of telemarketing fraud:

The Working Group is concerned that because fraud victims are induced to cooperate in their own losses, those who have never talked to victims or offenders personally may blame the victims or hold them partly responsible, suggesting that victims "brought it on themselves," were "just greedy," or should have been more prudent. The reality is more complex. Telemarketing fraud involves the victimization of innocent persons by dishonest or deceptive conduct. This is a crime in every jurisdiction in Canada and the United States, and it is important that it be clearly labelled as such. The Working Group recommends that the governments of both countries and their representative agencies clearly identify telemarketing fraud as a serious crime, and that public information and educational materials include this clear and unambiguous statement as a central theme.

2.2 THE REAL FACE OF TELEMARKETING FRAUD: HOW VICTIMS ARE DECEIVED

Evidence from fraud investigations shows that telemarketing schemes use a wide variety of influence techniques, ranging from friendly conversation to outright demands or even threats, to persuade victims to part with their money. Many calls include the following elements intended to mislead victims and secure their compliance.

Excitement.
Schemes often begin with statements to excite the victim, interfering with the ability to think clearly and calmly. In the words of the offenders themselves:
...if you sound excited about it, then they're gonna get excited about it.
[To victims:]...you were involved in a [promotional] campaign, you were promised to receive some very large corporate award, do [you] remember that? . . . Great. Sit down. They told ya the man in charge of the place would be callin' ya. Well, that's me. Take a deep breath and don't be nervous. [To interviewer:]...I just scare the [expletive] out of 'em right into it.
Claims of Authority.
Offenders often falsely claim that they hold a position of high authority in some organization or as a government official:
I make them understand the importance of my position, being the . . . promotional director. . . . And right off the bat they're excited . . . because when [it's] the owner, they think of you as the higher source.
Impersonating government officials can also serve as the basis for subtle or even brazen coercion. Offenders posing as tax or customs officials, for example, sometimes "remind" the victims that they are under legal obligation to pay taxes on the funds the offenders falsely state will be paid to the victims.
Pretence of Friendship.
Victims have described calls in which offenders ingratiated themselves as quickly as possible by convincing them that the offender was sincerely interested in them on a personal level. One woman told authorities that she did not agree to send money to one telemarketer until he had spoken with her eight or nine times. Another spoke of a telemarketer who pretended to share personal details with her about his own wife and children. Others have been sent modest gifts, such as flowers, to reinforce their belief that they were dealing with friends. Isolated and lonely victims are seen as particularly vulnerable to such tactics: offenders have told police their ideal "mark" is an elderly person, home alone, with no contact with family members.
Urgency.
Offenders routinely include an element of urgency in their pitches, stressing that the prize, investment, or other item being offered will not be available unless the victim sends the funds quickly. This puts pressure on the victim to react before thinking the proposal over. It also gives the offender an excuse for collecting the funds using couriers, wire-services or credit-card transactions before the victim has second thoughts or gets independent advice.
The ultimate purpose of these tactics is to persuade the victim, through false and deceptive means, to part with money or assets, either in return for some benefit or out of altruism. The following are some of the most common schemes considered by the Working Group.
Advance-fee Loan or Credit Schemes.
Telemarketers seek out people with bad credit and offer them loans or credit cards in exchange for fees. Victims offered loans never receive them. Victims offered credit cards usually only get a standard application form or generic information on how to apply.
Foreign Lottery Schemes.
Telemarketers offer victims the opportunity to "invest" in tickets in well-known foreign lotteries (e.g., Canada or Australia), or give them a "one in six" chance of winning a substantial prize. This is a common cross-border offence, since it plays upon the ignorance of victims of the rules (or even the existence) of foreign lotteries. If offenders purport to sell real lottery chances but deceive victims about their chances of winning, it may be both a gambling offence and fraud; if real chances are sold without deception, it may still be a gambling offence.
Investment Schemes.
Victims are sold "investments" in a wide range of merchandise or securities that appear to offer high profit-margins. The fraud lies in misrepresenting the true value (or actual existence) of what is being sold, and/or the true extent of the risk in buying it. Common "opportunities" have involved stocks or securities, investment-grade gemstones, precious or strategic metals or minerals, and business opportunities such as oil and gas ventures, pizza ovens, and ostrich farms. These schemes commonly defraud victims more than once (see "reloading", below). Once funds have been committed, the victim can be induced to make additional payments to increase the value of the "investment" or avoid its loss (e.g., "margin calls"). Since legitimate investments normally tie up assets for extended periods, victims often do not realize for some time that they have been defrauded.
"Prize-Promotion," "Gimme Gift," or "Cheap Gift" Schemes.
Telemarketers "guarantee" that the victims have won valuable prizes or gifts, such as vacations or automobiles, but require victims to submit one or more payments for non-existent shipping, taxes, customs or bonding fees, or anything else the offender thinks plausible. Some schemes never provide their victims with any prize or gift, while others provide inexpensive items, often called "gimme gifts" by U.S. telemarketers and "cheap gifts" by Canadian telemarketers.
"Telefunding" Schemes.
These prey on the charity of victims, soliciting donations for worthy causes, such as antidrug programs or victims of natural disasters. The pitch may simply ask for donations, or it may include other inducements, such as donor eligibility for valuable prizes which never materialize (see "prize promotion" schemes, above). Charitable donors do not usually expect something in return for their contribution, and may thus never become aware that they have been defrauded.
Travel-Related Schemes.
Fraudulent telemarketers purporting to be travel agencies offer substantial travel packages at comparatively low cost. The use of travel as a commodity makes the long-distance nature of the transaction plausible. The fraud usually involves lies, misrepresentations, or non-disclosure of information about the true value of travel and accommodations, limitations or restrictions on when or where purchasers may go, or what awaits them at the destination. In some cases, the travel proves to be a complete fabrication or has so many terms and conditions as to be completely unusable.
"Reloading" and "Recovery Room" Schemes.
These target the same victims again and again. Persons victimized once are most likely to be deceived repeatedly. Unfortunately, victims' understandable desires to recover their original losses make them more vulnerable to further schemes. This is known as "reloading" or "loading." Those who "invest" money are "reloaded" for more to protect or increase their investment, those asked for customs or shipping fees are "reloaded" for additional charges, and those who give to a spurious "worthy cause" are often "reloaded" for further donations.
"Recovery room" schemes exploit the victim's desire to recover losses from previous frauds. Offenders, often from the same organization which defrauded the victim in the first place, call with inside knowledge of the fraud and a promise to recover the losses if "taxes" or "fees" are paid. A common tactic of callers is to represent themselves as law-enforcement or other government or professional employees (e.g., bank or stock- exchange officials), using inside knowledge of the victim and the fraud to establish credibility. "Recovery room" operations frequently deprive victims of their last remaining funds.